CONTRACTS OUTLINE

CHAPTER 1: INTRODUCTION

What types of promises do we enforce and why do we enforce them? How?

CONSIDERATION: bargained-for-exchange
 established when the promisor gives the promise in exchange for the return
promise given by the promisee

bargain + detriment = consideration

bargain: “bargained for and given in exchange for the promise”

 process

There is bargain if the performance or return promise is “sought by the promisor in

exchange for his promise and is given by the promisee in exchange for that promise”

detriment: must be either

 an act
 a forbearance
 creation, modification or destruction of a legal relation, OR
 a return promise

gifts? promise with NO consideration. generally NO bargain, NO detriment.

 no claim for contract remedy
 A offers B gift. B says “that’s nice, I’ll get you a gift too.” NO consideration
because NO bargain.
 C offers D a car if he will come get it. D arrives and car is gone. NO
consideration because NO detriment. Showing up for car was a condition of
the gift rather than detriment.

a promise requires a commitment to act or to refrain from acting

 if a person makes a statement that does not commit him to do or refrain from
doing anything, there is no promise: it is an illusory promise

REMEDIES
-usually monetary and consist of either
  lost expectancy (make it as if contract had been performed)
 reliance (make it as if contract never happened)
 restitution (return benefit conferred upon breaching party)

Sullivan v. O’Connor
Supreme Judicial Court of Massachusetts, 1973
-plaintiff patient/actress, defendant plastic surgeon
-MD did not perform as promised
-damages? ideal solution would be cost of completion/substitution but nose was beyond
repair. expectancy? lost profits?
 restitution of what was paid + compensation for pain/suffering
Contracts OUTLINE
CHAPTER 2: GENERAL THEORIES OF OBLIGATION

OBLIGATION ARISING FROM AN AGREEMENT WITH

CONSIDERATION

Hardesty v. Smith
Supreme Court of Indiana, 1851
-plaintiff sought to collect payment for rights to an invention that defendant agreed to
buy; defendant did not want to pay because invention was apparently worthless
-court: plaintiff had right to fix price, defendant had right to decide whether or not to pay
price; there was consideration before defendant entered contract

-private autonomy, freedom of contract (even if bad decisions were made)

-court does not inquire into adequacy of the consideration (only that there was)

Dougherty v. Salt
NY Court of Appeals, 1919
-aunt promises 8 year old $$ as a gift (rather than a debt)
-“for having been a good boy” = past detriment (not a bargain, no consideration)
-no recoverable damage when a promise for a gift is not kept; no worse off than before
promise was made

Restatement § 75
Definition of Consideration
(1) Consideration for a promise is
(a) an act other than a promise, or
(b) forbearance, or
(c) the creation, modification, or destruction of a legal relation, or
(d) a return promise,
bargained for an given in exchange for the promise

Williston: rules with no explanation for simplicity (net results of discussion)

Fuller: meaning of rules lies in the purposes or reasons for the rule
 substantive: private autonomy, reliance of promisee, unjust enrichment of
promisor, morality
  form: evidentiary, cautionary, channeling

Maughs v. Porter
Virginia Supreme Court of Appeals, 1931
-plaintiff attended auction to enter raffle and won; defendant would not pay
-contract or gift? consideration? detriment was showing up for auction, defendant’s
benefit was public’s attendance; YES consideration

Hamer v. Sidway
Court of Appeals of New York, 1891
-uncle promises $ to nephew for good behavior
-consideration? detriment: forbearance “restricted his lawful freedom,” does not
matter if uncle benefitted
 lack of clear benefit to the uncle not problematic when there was a clear
detriment to the nephew to give up legal right to certain behaviors

Springstead v. Nees
Supreme Court of NY, 1908
-defendant to siblings: “give your our share in S if you don’t bother us about A”
-no bargain; sibs did not threaten to sue, make any proposals, etc.
-forbearance not detriment; did not give anything up
-no consideration

Wood v. Lucy Lady Duff Gordon

Court of Appeals of New York, 1917
-parties entered into contract where plaintiff would endorse defendant’s designs and
parties would split profits 50/50
 defendant breaches by selling designs on her own and keeping profits
 argues she did not breach because there was no mutuality of obligation
o was plaintiff bound by promise?
o Cardozo says promise to make good effort to endorse designs was
implied and there was consideration

mutuality of obligation: in order for one party to be bound, both parties have to be
bound
UCC §1-304 Obligation of Good Faith
“Every contract or duty within [UCC] imposes an obligation of good faith in its
performance and enforcement.”

UCC §2-306(2)
“A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of
goods concerned imposes unless otherwise agreed an obligation by the seller to use
best efforts to supply the goods and buy the buyer to use best efforts to promote their
sale.”

Weiner v. McGraw Hill, Inc.

Court of Appeals of New York, 1982
-plaintiff left job for new job with defendant; verbally assured job security but no written
employment contract
- mutual obligation NOT a requirement for consideration of employment at-will
 plaintiff surrendered something of value (i.e. other job, opportunities)
-unilateral contract: promise for performance

Mattei v. Hooper
Supreme Court of California, 1958
-satisfaction clause included in contract to purchase land; defendant reneges, claiming it
was “only an offer”
-mutuality of obligation? defendant argues agreement was only an offer because she
did not have same option to back out that plaintiff does
-S.Ct. finds in favor of plaintiff; clause stands and there is consideration as long as
plaintiff acts in good faith

pre-existing duty doctrine: neither the performance of duty nor the promise to render
a performance already required by duty is a sufficient consideration for a return
promise

Restatement §73 Performance of a Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject
of honest dispute is not consideration but a similar performance is consideration if it
differs from what was required in a way that reflects more than a pretense of bargain.
OBLIGATION ARISING FROM JUSTIFIED RELIANCE: PROMISSORY
ESTOPPEL

Restatement § 90 Promissory Estoppel

(1) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of
the promise. The remedy granted for breach may be limited as justice requires.

compared to classic consideration:

-detriment need not be “bargained for” (but must be induced/expected)
-promissory estoppel has no application to purely executory bilateral contract
-detriment drives promissory estoppel so we should expect greater degree of harm
-since harm is the focus, expect greater use of reliance damages

Kirksey v. Kirskey
Supreme Court of Alabama, 1845
-plaintiff’s family offered opportunity to live on defendant’s land (promise); plaintiff
abandons current home (detriment) and brings family to defendant’s home
-NO bargain
-two years later defendant forces plaintiff to leave
-S.Ct. finds for plaintiff; holds that defendant’s offer was “mere gratuity” and the
plaintiffs actions did not constitute consideration, but instead a condition of the
promise

Ryerss v. Trustees of Presbyterian Congregation of Blossburg

Supreme Court of Pennsylvania, 1859
-Ryerss promises money for construction of church, later refuses.
-Court holds promise is enforceable; detriment = church’s actions to prepare for
construction of church

Seavey v. Drake
Supreme Court of New Hampshire, 1882
-defendant promises land to plaintiff; plaintiff spends time and money improving land
(induced by promise); plaintiff sues for deed
J. Pomeroy’s Equity Jurisprudence, 1886
-6 elements to promissory estoppel: conduct, known to the party estopped, unknown
to other party claiming benefit, expectation it will be acted on by other party, reliance,
put in a position for the worse

Wheeler v. White
Supreme Court of Texas, 1965
-plaintiff alleges defendant breached written contract to secure a loan or furnish money
to finance construction
-plaintiff went through with plans as agreed, defendant did not furnish money
-even if contract was not enforceable, there is an estoppel argument; plaintiff awarded
damages because he relied on the promise made

Hoffman v. Red Owl Stores

Supreme Court of Wisconsin, 1965
-negotiations between plaintiff and defendant to open a new store (bargain); promise =
estimated price of store; plaintiff moves family, sells other store (detriment)
-price changes at last minute and deal falls through; sues and is granted relief

Elvin Associates v. Franklin

-Franklin agrees to participate in Broadway show; arrangements made; she backs out
-reliance damages: plaintiff reimbursed for any expenditures that have already been
made
 impossible to calculate what expectancy remedy would be

United Steel Workers v. United States Steel Corp.

United States Court of Appeals, Sixth Circuit, 1980
-plaintiffs (labor organization) allege that defendants (US Steel) breached promise to
keep the plants open
-Courts hold defendant’s statements did not constitute a definite promise and although it
may have induced action, the conditions of the alleged promise were not met
 employees only did work they were already paid to do

OBLIGATION ARISING FROM UNJUST ENRICHMENT

UNJUST ENRICHMENT: Independent theory of obligation

  no promise made
 contract failed for some reason
 breaching party seeking return of value conferred on non-breaching party
 BASIC ELEMENTS
o enrichment of/benefit to the defendant; sometimes difficult
measurement issues
o injustice if the defendant retains the benefit;
 benefit conferred with an expectation of payment or at least
not gratuitously
 benefit was not thrust upon the defendant with no opportunity
to refuse it

-restitution
-quasi-contract (as if there were a contract)
-implied in law (as opposed to implied in fact/express contract by conduct)

Bloomgarden v. Coyer
United States Court of Appeals, District of Columbia Circuit, 1973
-plaintiff (Bloomgarden) introduced appellees, real estate developers; sue for a finder’s
fee after development began
-not unjust enrichment: no expectation for compensation at time of actions
 defendants did have opportunity to say no
 defendants were enriched but it is not unjust for then to retain it

Sparks v. Gustafson
Supreme Court of Alaska, 1988
-long-time friends, colleagues; plaintiff managed business for defendant; never
requested compensation
-sues to collect compensation
-benefit to defendant? yes, substantial services in management of agreement
-expectation to be compensated? court: actions too entrenched in business to not
expect compensation
 friendship an issue, but extent of business is such that would not be normally
be given gratuitously

Gay v. Mooney
Supreme Court of New Jersey, 1901
-defendant housed by plaintiff’s family under his death in return for promise of house
-agreement was not gratuitous; compensation was expected. unjust enrichment

Kelley v. Hance
Supreme Court of Errors of Connecticut, 1928
-plaintiff contracted to construct sidewalk for defendant; defendant cancels agreement
-plaintiff wishes to recover for work performed (digging up dirt)
-court holds that the digging up of the dirt was an added benefit for separate from the
terms of the contract; no unjust enrichment

DeLeon v. Aldrete
Texas Court of Appeals, 1965
-plaintiff defaulted on a sale of land after already having paid $1070 out of $1500
-defendant sells to another buyer for $1300; plaintiff seeks recovery of $1070
-plaintiff award $870 ($200 to compensate plaintiff for loss on the sale; NOT punitive)
-POLICY: not awarding damages would most harshly punish those who were closest to
actually performing
 breaching party can still file under unjust enrichment (less whatever
damages they caused to the nonbreaching party)

Moral Obligation or Promissory Restitution (a weak unjust enrichment case with a

promise to bolster it)
BENEFITS CONFERRED:
 how definite?
 how substantial?
 does the promise help to support the reality, nature, and extent of the benefit?
 is the benefit proportionate to the promise?
 SUMMARY: how definite and substantial is the promisor’s benefit and
promisee’s detriment?
SUBSEQUENT PROMISE TO PAY FOR IT:
 how formal?
 how much time for deliberation between the benefit and the promise?
 has any significant part of the promise been performed?
 has the promisee relied on the promise?
SUMMARY: how clear, solid, and reflective is the promise?
Watts v. Watts
Supreme Court of Wisconsin, 1987
-plaintiff met defendant; quit her job to move in with apartment defendant paid for
 relationship was “marriage-like”; plaintiff performed various business related
duties for husband
 relationship ended and plaintiff was barred from the business
-intention of relationship to be in the “nature of a joint enterprise”; unjust enrichment

past detriment
 not bargained for; no exchange
 recipient promises to pay after the fact
 no classic consideration
 not promissory estoppel (no reliance based on promise)
 not unjust enrichment (no opportunity to say no)

OBLIGATION ARISING FROM PROMISES FOR BENEFIT RECEIVED

 often referred to as past consideration
 fails because it was not bargained for

Mills v. Wyman
Supreme Judicial Court of Massachusetts, 1825
-plaintiff took care of son of defendant, defendant later promised to pay plaintiff
-NO unjust enrichment: defendant himself did not receive benefit, not given opportunity
to say no
-NO promissory estoppel: promise to pay did not induce rendering of services
-nothing paid or promised in return, no benefit or detriment to parties; no consideration
-NO LEGAL OBLIGATION

Restatement §82(1)
A promise to pay all or part of an antecedent contractual or quasi-contractual
indebtedness owed by the promisor is binding if the indebtedness is still enforceable or
would be except for the effect of a statute of limitations.

Webb v. McGowin
Court of Appeals of Alabama, 1935
-plaintiff prevented defendant from sustaining serious injuries; injured himself
-defendant promised money until his death as payment for injury
-plaintiff brought suit to recover unpaid installments
 defendant received material benefit, bound by moral obligation, expressly
agreed to pay plaintiff, not gratuitous
-RULE: “Where the promisee cares for, improves, and preserves the property of the
promisor, though done without his request, it is sufficient consideration for the
promisor’s subsequent agreement to pay for the service, because of the material
benefit received.”
 moral obligation is sufficient consideration to support a subsequent
promise to pay where the promisor has received a material benefit,
although there was no original duty or liability resting on the promisor.
-potential issue for plaintiff: defendant’s promise made during excitement of
circumstances (could pose problem for consideration; deliberation, thought)

Harrington v. Taylor
Supreme Court of North Carolina, 1945
-plaintiff saved defendant from attack, defendant promised to compensate plaintiff and
then later refused
-consideration? NO. “humanitarian act of this kind, voluntarily performed, is not such
consideration as would entitle her to recover at law.”

Edson v. Poppe
South Dakota Supreme Court, 1910
-plaintiff (at request of defendant) dug a well; was then promised compensation, was not
-RULE: “past services are not a sufficient consideration for a promise to pay
therefore, made at a subsequent time…” but in this case “a moral obligation, founded
on previous benefits…will support a promise by him”
 unjust enrichment
 binding, sufficient consideration

Restatement §86 Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor from
the promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons if the
promisor has not been unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
CONTRACTS OUTLINE
CHAPTER 3: REMEDIES

Expectancy: puts injured party in as good a position as performance would have

put them
 primary contract remedy
 forward looking
 cost of completion, cost of substitution

Reliance: puts injured party in as good a position as if they had not been in
agreement
 backward looking
 back to the start
 any cost/waste of injured party

Restitution: makes breaching party return whatever they gained from injured
party
 almost always part of reliance
 looks backward from standpoint of defendant
 reliance by the promisee and resultant gain to the promisor

EXPECTANCY DAMAGES FOR BREACH OF AGREEMENT WITH

CONSIDERATION

Expectancy: puts injured party in as good a position as performance would have

put them

Groves v. John Wunder Co.

Supreme Court of Minnesota, 1939
-defendant agrees to remove sand, breaches; trial court awards plaintiff diminished
value (value as promised – value as delivered); plaintiff argues for cost of completion
-“not the difference between the iron and the lead pipes, but the cost of laying a lead
pipe as provided in the agreement”
-expectancy damages

Peevyhouse v. Garland Coal & Mining Co.

United States Supreme Court, 1963
-defendants did not do work they promised to do; estimated to cost $29k (what plaintiffs
seek); change in property value only $300 (what defendants argue damages should be
if they are held liable)
-court awards $300 (diminished value); dissent believes proper damages were $29k
(cost of completion)

diminished value: value as promised – value as delivered

cost of completion: what it would cost injured party to acquire performance

 issue: what if plaintiff takes award and rather than using it to complete what
was promised, buys something else, invests, etc.? unjust enrichment?

Restatement of Contracts § 347 Comment B

 expectancy damages: “loss in the value to the injured party of the other’s
performance”
 “requires a determination of the value of that performance to the injured
party himself”
 measured in reference to plaintiff’s particular circumstances

Thorne v. White
District of Columbia Court of Appeals, 1954
-defendant breaches contract to put new roof on plaintiff’s house; plaintiff finds a third
party to put a more expensive roof
-expectancy damages only apply if two roofs are the same
RULE: injured party should not be put in a better position than if there had been no
breach (would result in unjust enrichment)
-damages should be market price of an roof identical to the one contracted for minus
the price originally contracted for

Freund v. Washington Square Press, NY 1974

-defendant breaches contract to publish plaintiff’s books; contract required defendant to
pay plaintiff royalties based on sales
-damages are NOT cost of publication (value to the defendant); rather should be
percentage of sales (value to the plaintiff)
-royalties cannot be calculated; nominal damages only
Handicapped Children’s Education Board v. Lukaszewski
Supreme Court of Wisconsin, 1983
-defendant argues no damages because the more expensive teacher the plaintiff got
was also more highly qualified
 court rejects this argument; plaintiff is entitled to damages measured by their
expectation
 damages = excess amount plaintiff must pay to replacement teacher (still less
than defendant’s gain from new job, efficient breach)

efficient breach: when profit from breach would exceed expected profit from
completion, and exceed expected profit of other party for completion

Cooper v. Clute
Supreme Court of North Carolina, 1917
-plaintiff enters agreement to purchase cotton from defendant at market value;
defendant did not deliver
-measure of damage: difference between contract price and actual/market value
-no damages

Buyer (Paying Plaintiff) Seller (Performing Plaintiff)

1. Substitute Transaction
a. Actual 2-712 cover. B obtains more
expensive substitute and recovers
additional $ plus incidental and
consequentials
b. Hypothetical 2-713 Market B obtains $
necessary to purchase a substitute plus
incidentals and consequentials
2. No substitute
a. B accepts defective and recovers
difference in value between promised and
received 2-714(2)
b. substitute performance under 2-716
1. Substitute Transaction
a. Actual 2-706 Resale S sells to another
for less and recovers difference
b. Hypothetical 2-708(1) Market S receives
$ necessary to make up difference
between contract price and market price
2. No substitute
a. seller loses a sale- lost volume 2-708(2)
b. B keeps goods or S can’t reasonably
resell so S gets price 2-709

UCC § 1-305(a) Remedies to be Liberally Administrated

UCC § 2-713. Buyers Damage for Non-Delivery or Repudiation
difference between market value and contract price at the time of breach

UCC § 2-712 “Cover”

after breach, buyer may make substitution purchase
damages: difference between price of replacement goods and contract price

UCC § 2-708 Seller’s Damages for Non-Acceptance or Repudiation

measure of damages is the profit which the seller would have made from full
performance

UCC § 2-714 Buyer’s Damages for Breach in Regard to Accepted Goods

difference in the value of goods accepted and value they would have had if they had
been as warranted

Neri v. Retail Marine Corp.

Court of Appeals of New York, 1972
-plaintiff agrees to purchase new boat from defendant; makes deposit and later
becomes unable to make purchase
-boat sold to another buyer for same price
-plaintiff sues for deposit, defendant counterclaims for lost profit and incidental damages
-UCC § 2-718: “buyer, despite his breach, may have restitution of the amount by which
his payment exceeds”
 plaintiffs entitled to restitution, less defendant’s lost profit and incidental
damages

lost volume seller requirements:

 customer would have been solicited—normal market, normal customer, seller
not at capacity
 sale would have occurred
 seller had ample supply

general damages: those which flowed naturally

special/consequential: ex: stove buyer loses profits because she needed stove her
hamburger restaurant
LOST EXPECTANCY DAMAGES: QUALIFICATIONS AND LIMITS

Hadley v. Baxendale
Court of Exchequer, 1854
-plaintiffs were millers, discovered a fracture in a shaft, sent it to defendants for repair
 plaintiffs had to shut down business
 next day delivery was promised, delivery was delayed
-damages: plaintiffs wanted compensation for lost profits (consequential damages)
for days mill closed
 these did not “arise naturally” from breach; were not foreseeable
 special circumstances were not communicated to defendant, damages were
not reasonable expected
-communicating special need would have likely prevented delay, but would have
resulted in higher shipping cost

Armstrong v. Bangor Mill Supply Corp. (1929)

-defendant’s breached caused plaintiffs mill to shut down for 6 days; Hadley not
followed and plaintiff awarded damages for lost profits

UCC § 2-715(2)(a) Consequential damages resulting from a seller’s breach include

(a) any loss resulting from general or particular requirements and needs of which the
seller at the time of contracting had reason to know and which could not reasonably
be prevented by cover or otherwise.

duty to mitigate: “when a contract is breached, the nonbreaching party has an

affirmative duty to take reasonable steps to mitigate his damages” (Schiavi Mobile
Homes v. Gironsa, 1983)
 Parker v. Twentieth Century-Fox Film Corp., In Re Worldcom, Inc. (MJ)

Restatement § 350 Avoidability as a Limitation on Damages

1) Except as stated in subsection (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 subsection (1)
to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Restatement §352 Uncertainty as a Limitation on Damages
-Damages are not recoverable for loss beyond an amount that the evidence permits to
be established with reasonable certainty.

Spectrum of Judicial Treatment

 prove amount of loss with reasonable certainty (pro-defendant)
 less than mathematical certainty
 whatever facts permit
 at least approximate
 doubts resolved against breaching party
 prove fact of loss with certainty. (latitude with proof of extent) (pro-plaintiff)

Evergreen Amusement Corp. v. Milstead

Court of Appeals of Maryland, 1855
-plaintiff seeks balance due on written contract LESS cost of completing work and
damages for delay in opening drive-in theater
-defendant counterclaims for loss of profits during period of delay
-rule: loss of profit damages allowed when applied to “an established business
which has been operating for a sufficient length of time to afford a basis of estimation
with some degree of certainty as to the probable loss of profits”
-“new business rule” in decline today; some courts find it unfair, encourages parties to
breach

lost profits test (from Lakota Girl Scout Council)

 proof that some loss has occurred
 flowed directly from agreement, foreseeable
 rational basis from which amount can be approximated

Restatement §353 Loss Due to Emotional Disturbance

 Recovery for emotional disturbance will be excluded unless the breach also
caused bodily harm or the contract or the breach is of such a kind that serious
emotional disturbance was a particularly likely result

Chrum v. Charles Heating and Cooling, Inc.: no emotional suffering damages allowed
unless there was also tortious conduct separate from the breach (plaintiff’s furnace
burns house down, allege defendant’s installation was negligent)
things to consider:
 is there a real loss?
 can any loss be adequately measured?
 would emotional distress damages open defendant to punishment or loss
disproportionate to consideration?
 emotional distress damages are only recoverable in rare cases

Restatement 2d. §355

 Punitive damages are not recoverable for a breach of contract unless the
conduct constituting the breach is also a tort for which punitive damages are
recoverable

Other Qualifications/Limits on Lost Expectancy Recovery

 denial of loss expectancy recovery in medical contexts (uncertainty)
 denial of recovery of loss of reputation or goodwill (unless there is a
reasonable basis from which to calculate)
o loss must have in fact occurred
o objective proof of loss
o loss caused by breach
 denial of attorney’s fees and interest (unless clause in contract specifies
winning party will get fees)
 denial of pre-judgment interest

REIMBURSEMENT OF RELIANCE COSTS AS A REMEDY

Reliance: puts injured party in as good a position as if they had not been in
agreement

Chicago Coliseum Club v. Dempsey

Appellate Court of Illinois, 1932
-defendant Boxer entered into agreement with plaintiff for boxing match; breaches
-plaintiff is able to collect expenses incurred after signing of agreement and before
breach
-cannot recovery expectancy (too speculative) or expenses incurred prior to agreement
(did not flow from breach)
Incidental Reliance (normally of paying party)
 owner might seek lost profits (expectancy) but may have difficulty proving
 alternatively owner might seek recovery of losses from advertising, holiday
menus, spoiled food, etc.
 foreseeable by contractor?
 can contractor show owner would not have recouped?

Essential reliance (normally of performing party)

 garden shed: 10 contract price, 6 work done
 If contractor can prove job would have cost 9 to complete then should get
expectancy of 7 (10 contract price – 3 saved; or 6 done +1 profit)

CLAUSES PROVIDING FOR A SPECIFIC MONETARY REMEDY

Tests re: liquidated (agreed) damages clauses

Standard:
 Are anticipated damages uncertain in amount or difficult to prove?
 Is the stipulated dollar amount reasonable in light of the anticipated or actual
harm?
Newell variation:
 Is there a legitimate reason to have the clause?
 Is the dollar amount reasonable under all the circumstances?

Restatement § 339 “an agreement, made in advance of breach, fixing the damages
therefor, is not enforceable as a contract and does not affect the damages recoverable
for the breach, unless
(a) the amount so fixed is a reasonable forecast of just compensation for the harm
that is caused by the breach, and
(b) the harm that is caused by the breach is one that is incapable or very difficult of
accurate estimation.

UCC §2-718(1)
Damages for breach by either party may be liquidated in the agreement but only at an
amount which is reasonable in the light of the anticipated or actual harm caused by the
breach, and, in a consumer contract, in addition to the difficulties of proof of loss and the
inconvenience or non-feasibility of otherwise obtaining an adequate remedy.

-some courts will enforce such clauses even when no actual damages are suffered
 rationale: each party took a calculated risk; still bound by contract
-will not enforce if court believes clause was meant as a penalty

Vanderbilt v. DiNardo
United States Court of Appeals, Sixth Circuit, 1999
-5 year coaching contract; later add 2 years
-4 years in, DiNardo leaves for LSU; Vandy sues for 3 years of net salary (as agreed
upon in contract)
-penalizing non-compete provision? specified damages actually related to actual
damage suffered? (difficult to calculate)
-reasonableness of liquidated damage provision should be measured at time the
parties entered the contract, not when the breach occurred

-courts rarely infringe upon people’s freedom to make contracts, EXCEPT in cases of
liquidated damages. Why?
 contract remedies were designed to compensate injured party for loss, not
coerce breaching party into performance
 “illusion of hope” that parties will follow through with contract prevents real
contemplation and bargaining; “limits of cognition” prevent parties from fully
comprehending scenarios of breach and application of provision to these
scenarios (consideration)
 promisors susceptible to being coerced into agreeing to penalty provisions?

MONETARY REMEDIES FOR PROMISSORY ESTOPPEL

Restatement §90: Promise Reasonably Inducing Action or Forbearance

“…remedy granted for breach may be limited as justice requires.”

-remedies measured by extent of reliance, not the extent of the promise

ex: Johnny’s uncle promises $1000 to go towards purchase of Buick. Buick only costs
$500. Fair for Johnny to get $1000?
  Williston: it’s either an enforceable contract or it’s not

Goodman v. Dicker (1948): plaintiff made arrangements to open a franchise to sell

radios, defendant (distributor) breached, plaintiffs awarded damages in amount of
money spent

Walters v. Marathon Oil Co. (1981): plaintiff was in negotiations to open a new gas
station and receive oil from defendant; defendant breaches
-plaintiff relied on defendant’s promise, had forgone the opportunity to invest elsewhere
 lost opportunity reliance
-awarded expectancy award for lost profits for one year (easiest way to measure, no
other alternatives can be proven)

Reliance recovery when agreement has been disrupted: sometimes even when a
party has rightfully ceased performance, they are still liable for reliance expenses

RESTITUTIONARY RELIEF

Restitution: makes breaching party return whatever they gained from injured
party

-refers to monetary remedies and certain forms of specific relief

-requires A to pay B the monetary value of any benefit B conferred on A
-courts sometimes award B its full outlay even if this exceeds A’s gain
-reliance generally includes (and often exceeds) restitution

Restatement § 371 Measure of Restitution Interest

If a sum of money is awarded to protect a party’s restitution interest, it may as justice
requires be measured by either:
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 advanced

-usually based on market price of a substitute

-court has considerable discretion in choosing between these remedies; party is
commonly allowed the more generous measure of reasonable value
-often depends on purposes of recipient of the benefit

from Realmark Developments, Inc. v. Ranson (2003):

 “there may be cases where the enhancement of the defendant’s property will
be far less than the quantum meruit of the plaintiff’s efforts”
 “conversely, there may be cases where the value of the enhancement greatly
exceeds the cost of the improvement”
 proper measure of damages in unjust enrichment should be the greater of
the two measures

-many different remedial measures that could be called restitution

 ex: homeowner repudiates when builder is half done. several options:
o increase in market value of land
o price homeowner would have to pay to complete the house
o half the originally agreed price
o whatever builder has already spent on first half
 courts tend to be influenced by how well or badly breaching party behaved
when choosing which way to calculate remedies

NON-BREACHING PLAINTIFF CONFERRED A BENEFIT AND ELECTS

RESTITUTIONARY RECOVERY
-focus: problem of measurement of the benefit conferred when an injured party seeks
restitutionary relief for breach under theory of unjust enrichment

Susi v. Zara Contracting Co. (1944)

-plaintiffs agree to construction contract; discover unexpected conditions which require
extra work, asks defendants for more money; mutual claims of breach
-defendants take over work using plaintiff’s equipment
-“promisee upon breach has the option to forego any suit on the contract and claim
only the reasonable value of his performance”
-recovery based on expenditures in performance, rental value of equipment

-essence of quantum meruit is an allegation of indebtedness for the labor and services
of the plaintiff
-relief outside the bargain: generally on the grounds that defendant’s conduct has
resulted in enjoyment of gain which is the product of plaintiff’s loss

Oliver v. Campbell (1954): remedy of restitution is not available to one who has fully
performed his part of a contract if the only part of the agreed exchange for such
performance that has not been rendered by the defendant is a sum of money
constituting a liquidated debt
 limits Susi v. Zara; can only rescind and seek restitution before
performance has been completed (in losing contract, plaintiff may be better
off if he hasn’t completed)

WHERE NONBREACHING PLAINTIFF CONFERRED A BENEFIT BUT HAD

NEGATIVE EXPECTANCY (LOSING CONTRACT)

Restatement §373 comment d: injured party who performed in part will usually seek
expectancy rather than restitution, as this will give him a larger reward (net profit)
 even if net profit cannot be proven, will usually seek reliance
 in case of losing contract, restitution would give party larger damages than
would expectancy or reliance

City of Philadelphia v. Tripple (1911): plaintiff was delayed but defendant wanted
plaintiff to continue working; eventually asked plaintiff to cease
 plaintiff seeks relief under theory of “indebitatus assumpsit” to recover actual
cost of work/materials
 defendant breached! plaintiff can recover full cost even though number
exceeds price of contract; he “expended the money in good faith and in the
course of attempted performance”

Johnson v. Bovee (1978): less generous measure of recovery than Tripple:

 Contract Price + Net value of extras – payments made – cost to plaintiff had
he completed

Childres & Garamela: no justification for not abiding by terms of contract to regulate
recovery of reliance damages
-quantum meruit really just a type of reliance
WHERE A NONBREACHING PLAINTIFF CONFERRED A BENEFIT BUT CANNOT
PROVE LOST EXPECTANCY

Bausch & Lomb, Inc. v. Bressler

United States Court of Appeals, Second Circuit, 1992
-B&L was supposed to have exclusive selling rights, prepaid defendant royalties
 argue lost profits based on amount defendant made from wrongful sales;
could not provide evidence to show this is what plaintiff would have made
-restitution appropriate measure of damages; breaching party must return to plaintiff
reasonable value of any benefit conferred (regardless of if plaintiff would have lost
money on full performance of contract)

WHERE THE PLAINTIFF HAS CONFERRED A BENEFIT BUT THE CONTRACT IS

INVALID, FRUSTRATED, OR OTHERWISE UNENFORCEABLE
-restitution may be granted to a party whose agreement is unenforceable
 unjust enrichment grounds
 other grounds of disruption often work too

WHERE THE PLAINTIFF HAS MATERIALLY BROKEN THE CONTRACT AFTER

CONFERRING A BENEFIT
 plaintiff who committed uncured breach cannot recover on contract theory
 plaintiff who conferred benefit may recover under theory of unjust enrichment

SPECIFIC PERFORMANCE

Kitchen v. Herring (1851): a vendee of land is entitled to specific performance

 reasoning: land is inherently unique and thus other forms of damages cannot
be an adequate remedy

Curran v. Barefoot (2007): lake house and various other property; “jurisdiction to
enforce specific performance rests…on the ground that damages at law will not
afford a complete remedy”

UCC §2-716 Buyer’s Right to Specific Performance or Replevin

(1) Specific performance may be decreed where the goods are unique or in other
proper circumstances.
(2) The degree for specific performance may include such terms and conditions as to
payment of the price, damages, or other relief as the court may deem just.

In Re Dorsey Trailer Co., Inc. (2009):

 uniqueness not the sole basis of the specific performance remedy; other
proper circumstances apply too
 scarcity of a chattel often a factor
 whether goods are “replaceable as a practical matter; for example, whether it
would be difficult to obtain similar goods on the open market”

enforcement of specific damages: different than enforcement of a judgment

 judgment: if the defendant refuses to pay, sheriff can seize and auction
property to apply to damages
 specific: threat of imprisonment or fine for contempt (coercive, not punitive);
defendant may have to appear in a “show-cause” hearing

Laclede Gas Co. v. Amoco Oil Co. (1975): defendant breaches long-term written
agreement to provide gas; specific performance is the proper remedy because
plaintiffs cannot reasonably cover (no guarantee plaintiff would be able to extend
current contracts or find another long-term contract)

Farnsworth, Contracts:
 approach to determine if specific performance should be awarded:
compare remedies and see which is more effective in affording suitable
protection to injured party’s interest (usually expectation interest)

Defenses to and Limitations on Specific Performance

 unfairness: unfair advantage, non-disclosure, post-contractual
unconscionability, inadequacy of consideration, mistake, misrepresentation,
duress, undue influence, fraud
 lack of mutuality of performance
 indefiniteness of agreement; may still be adequate contract but too
ambiguous to provide for performance
 impracticability of performance/difficulty in enforcement of supervision
 personal services (although breaching party may sometimes be enjoined
from providing “unique” services to a third party)
 employee/employer context unique; labor law statutes, cases, collective
bargaining agreements
 “unclean hands”: when the court doesn’t like the plaintiff
 public policy: bad contract or clause
 unconscionability
Contracts OUTLINE
POLICING AGREEMENTS AND PROMISES

Defenses: Boundaries of Freedom of Contract and Private Autonomy

 duress: overpowering
 undue influence: over-persuading
 fraud: misleading
 public policy: bad contract or clause
 unconscionability:
o procedural: 1-3
o substantive: 4

party with a duty may have defenses to lessen or eliminate duty; two broad categories
 policing doctrines: grossly unfair terms or overreaching (must be
reconciled/balanced with freedom of contract)
o assent (ex: duress, misrepresentation, nondisclosure) can show lack
of valid agreement/promise
o substantive content of agreement (inequality of exchange, public
policy, mutuality of obligation, substantive unconscionability
 other full/partial defenses such as changed circumstances

duty to read: party can be bound by terms of a contract they agreed to even if they did
not read or understand the terms
 exception: fraud, unfair inducement, terms truly not understandable

Machinery Hauling, Inc. v. Steel of West Virginia (1989): plaintiff contracted to transport
defendant’s steel to third party, who rejected it for defects
-defendant told plaintiff to pay price of undelivered product or they would cease to do
business with plaintiff
-no duress; defendants did not terminate an existing contract; plaintiff does not have
protected interest in future contracts

Restatement § 175 Duress

Assent to contract was
(1) Induced (caused by)
(2) Improper threat (see §176)
(3) That leaves victims no reasonable alternative.
Newell short version: duress
 necessitous circumstances
 nasty conduct
 crummy resulting deal

duress issues: need to balance freedom of contract, parties’ rights to use their
economic pressure to their advantage

S.P. Dunham & Company v. Kudra (1957): plaintiff needed defendant to turn over fur
coats to return to their customers, would not unless plaintiff paid third party’s debts
 court offers duress test: Has the person complaining been constrained to
do what he otherwise would not have done?
 restitution best measure of damages: places no undue burden on defendant,
merely asks him to return what he forced from his victim

Restatement § 176 When a threat is improper

(1) A threat is improper if
(a) what is threatened is a crime or a tort, and the threat itself would be a
crime or a tort if it resulted in obtaining property
(b) what is threatened is a criminal prosecution
(c) what is threatened is the use of civil process and the threat is made in
bad faith OR
(d) the threat is a breach of the duty of good faith and fair dealing under a
contract with the recipient
(2) A threat is improper if the resulting exchange is not on fair terms, and
(a) the threatened act would harm the recipient and would not significantly
benefit the party making the threat
(b) the effectiveness of the threat in inducing the manifestation of assent is
significantly increased by prior unfair dealing by the party making the threat,
OR
(c) what is threatened is otherwise a use of power for illegitimate ends.

price gouging statutes: generally only applicable when state of emergency has been
declared and vendor charges “unconscionable” or “excessive and unjustified price”
undue influence: “undue susceptibility of one party and “excessive pressure” placed on
that party
 when parties have a special relationship
 several factors: unusual time/place/speed of agreement, dominant side vs.
single party, “no time” to think about agreement or consult other advisers

POLICING CONTRACT MODIFICATIONS

-parties free to enter into contracts; should have some freedom to modify them as well
-want to be able to rely on terms of contract for future planning, but denying all ability to
modify may deter parties from entering at all

Alaska Packers Association v. Domenico (1902): fishermen enter contract for fishing
season, upon arrival ceased work and demanded higher price
 had no other options for fishermen, superintendent drafted new contract to
meet fishermen’s demands
 upon return fishermen demand payment under terms of new contract
-court: no consideration because new agreement only involved a promise to render
services they were already obliged to do (pre-existing duty rule)
-no voluntary waiver of original contract

Schwartzreich v. Bauman-Basch, Inc. (1921)

 any change in a contract requires new consideration
 this case was not a change; express mutual rescission and new contract:
enforceable!

-rescission vs. modification: must be a period of time when parties are no longer
obligated to each other in order for there to be a complete rescission and consideration
of a new obligation [in order to beat the pre-existing duty rule]

UCC §2-209 Modification, Rescission, and Waiver

(1) An agreement modifying a contract within this Article needs no consideration to
be binding.

Official comment (paraphrased)

  seeks to protect modifications without regard to technicalities that hamper
such adjustments
 still must meet test of good faith
 technical consideration alone does not support modification made in bad
faith

from US v. Stump Home Specialties (1990)

-reasons consideration does not apply in context of a written modification
 danger of mistaking promissory language slight
 fabrication of a promise in a written document harder
 inadequate safeguard against duress
-purpose of consideration requirement: prevent coercive modifications
-there is often an interval of time in a long-term contract where one party is at the mercy
of the other
 legal remedies costly and uncertain; leaves room for duress of more powerful
party
 solution: enforce modifications regardless of consideration and rely on
defense of duress to prevent abuse

MISREPRESENTATION, CONCEALMENT, DUTY TO DISCLOSE

from Bates v. Cashman (1918):

 “a person reasonably may rescind a contract to which he has been induced
to become a party in reliance upon false though innocent
misrepresentations respecting a cognizable material fact”
 when just trying to void a contract, do not need to know that the
misrepresentation was knowingly or recklessly made
o as long it is wrong, and material, the contract can be voided [material
misrepresentation as opposed to fraudulent]

Restatement §552C Misrepresentation in Sale, Rental, or Exchange Transaction

(1) One who, in a sale, rental, or exchange transaction with another, makes a
misrepresentation of a material fact for the purpose of inducing the other to act or to
refrain from acting in reliance upon it, is subject to liability to the other for pecuniary
loss caused to him by his justifiable reliance upon the misrepresentation, even
though it is not made fraudulently or negligently.
(2) Damages recoverable under the rule stated in this section are limited to the
difference between the value of what the other has parted with and the value of what
he has received in the transaction.

Gibb v. Citicorp Mortgage, Inc. (1994): defendant intentionally concealed termite

damage to home sold to plaintiff; argues not liable because of “as is” clause
-court: “an ‘as is’ clause does not necessarily bar a purchaser’s fraud-based claim”

fraudulent misrepresentation (damages: difference between received and purchased;

benefit of the bargain, consequential damages)
 representation was made
 representation was false [can include half-truths, concealment, duty to
disclose]
 was known to be false or made recklessly without knowledge of its truth
 made with intention that the plaintiff should rely upon it
 plaintiff reasonably did so rely [was induced]
 plaintiff suffered damage as a result

fraudulent concealment
 defendant concealed or suppressed a material fact
 defendant had knowledge of this material fact
 material fact was not within reasonably diligent attention, observation, and
judgment of the plaintiff
 defendant acted with intention that plaintiff be misled as to true condition
 plaintiff was reasonably so misled
 plaintiff suffered damage as a result

negligent misrepresentation (damages: difference between received and purchase

price; consequential damages)
 different duty: standard care, rather than honesty/good faith
 actor is liable to the extent the false information was relied upon
 recovery is more limited than cases of fraudulent misrepresentation

Holcomb v. Hoffschneider (1980): realtor is sued by purchasers for fraudulent

misrepresentation regarding number of acres of an irregularly shaped real estate
  damages: benefit-of-the-bargain rule; plaintiff is entitled to difference in value
of what the property as represented would have had and the value he actually
got
 no punitive damages: fraud not especially malicious, deliberate, wanton

Restatement § 73 Performance of a legal duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject
of honest dispute is not consideration but a similar performance is consideration if it
differs from what was required in a way that reflects more than pretense of bargain.

Restatement §159-164 When a Misrepresentation Makes a Contract Voidable

 If a party’s manifestation of assent is induced by either
o a fraudulent misrepresentation- knowingly false or recklessly made
or
o a material misrepresentation- likely to induce assent of reasonable
person or maker knows likely to induce assent of recipient
 misrepresentation by the other party
 upon which the recipient is justified in relying
 contract is voidable by recipient

POLICING AGREEMENTS: PUBLIC POLICY

examples of contracts the court will not enforce:

 gambling
 child custody
 restraint of trade
 exculpatory clauses

exculpatory clauses in general:

 trend against these clauses
 no good to free from liability for intentional or reckless conduct
 more difficult question with negligence (more vs. less enforceable)
o commercial deal vs. consumer deal
o negotiated contract vs. form contract
o optional activity vs. necessity
o adults vs. children
Restatement § 574
A bargain for exemption from liability for the consequences of negligence not falling
greatly below the standard established by law for the protection of others against
unreasonable risk of harm, is legal.

McCutcheon v. United Homes Corp.

Washington Supreme Court, 1971
-Court refuses to enforce exculpatory clause in a leasing agreement which stated
lessor would not be held liable for any injuries sustained on the premises
 would have destroyed duty of lessor to ensure safe common areas
 In terms of R. § 574: not only fell below standard, destroyed it

POLICY concern: refusal to enforce exculpatory clauses threatens sanctity of

contract; decision that a clause is unenforceable that is also based on insufficiency of
assent holds more weight

Molina v. Games Management Services, 1983: upholds exculpatory clause denying

liability for neglect or omission on back of lottery ticket

Dwyer v. Jung, 1975: non-compete covenant between partners in a law firm is

unenforceable; clients have right to choose their own counsel
 only ethical way to divide market of legal clients is through individual
performance

Restatement § 186-188
 those covenants that unreasonably restrain trade are unenforceable
 they restrain trade if either
o performance of promise would limit competition OR
o performance of promise restricts promisor in exercise of a gainful
occupation
 such restrain is unreasonable if either
o it is not ancillary to an otherwise valid transaction or relationship.
ancillary where promisee has interest worthy of protection to
balance hardship to promisor and injury to public (e.g., sale of
 business and protection of good will; employment and protection of
trade secrets or customer lists)
o it is ancillary but
 restraint is greater than necessary (time, scope of activity,
geographic limits) OR
 promisee’s need is outweighed by hardship to promisor or injury
to public

Karpinski v. Ingrasci (1971): court does not enforce terms non-compete clause which
prohibited defendant from ever practicing dentistry or oral surgery within plaintiff’s
geographic area
 not reasonable or enforceable because limitations of practice too broad, not
within reasonable time

Quandt’s Wholesale Distributors, Inc. v. Giardino, (1982): court does not enforce non-
compete clause when defendant leaves work for plaintiff and begins working for
competitor
 RULE: clauses only enforceable within time and geographic limits; even
then only enforceable “to the extent necessary to protect the employer from
the employee’s use or disclosure of trade secrets or confidential customer
lists”

positions of courts when restraint is too great:

 VOID the clause
 Blue pencil (remove portions that are not reasonable)
 rewrite (least preferable)

POLICING AGREEMENTS: UNCONSCIONABILITY

“Deciding the issue is substantially easier than explaining it.” Jones v. Star Credit
Corp. (NY 1969)

UCC § 2-302 Unconscionable Contract or Clause

 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 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.
 When it is claimed or appears to the court that the contract or any clause
thereof 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 the determination.

-matter of law for the judge

-legal “garbage can”
-policy battle

pro unconscionability defense:

 avoid hard cases that make bad law problem
 avoid setting precise standards which can be evaded by sneaky sorts

anti unconscionability defense:

 too much discretion to the judge
 too uncertain to allow for planning
 masks real problems and muddies analysis
 Hillman: courts can merely list factors influencing its decision and reach a
conclusion without any clear reasoning to weight and effect of individual
factors: which are essential, sufficient, superfluous?

test from Comment 1 of §2-302: prevent oppression and unfair surprise but not do
disturb allocation of risks because of superior bargaining power

unconscionability available as a defense in all sales of goods cases, as well as some

non-sales cases
 focuses on relationship between parties and effect of agreement (as
opposed to public policy, which considers society as a whole)

Ryan v. Weiner (1992): plaintiff was poor, uneducated, about to lose home; defendant
real estate broker arrived at plaintiff’s house and told him he could help him keep his
house, actually tricked him into signing deed over
 plaintiff signed several documents he did not read or understand; did not have
his own counsel
  court finds substance and process to constitute contract as unconscionable,
returns parties to status quo

rule: unfairness or inadequacy alone is not enough of a reason to rescind a contract

 can rescind when coupled with inequitable or oppressive conduct
 courts have approached contracts such as these with extreme reluctance

Industralease v. RME Enterprises (1977): disclaimers of warranties held to be

unconscionable when the equipment never operated
 party was rushed, at disadvantage for future bargaining due to business
need, not as savvy as other party, contract was one-sided

official comment of UCC § 2-302: “basic test is whether, in the 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 of the making of the contract”

original concept: “such as no man in his senses and not under delusion would make on
the one hand, and as no honest and fair man would accept on the other”
 “to include an absence of meaningful choice on the part of one of the
parties together with contract terms which are unreasonably favorable to the
other party” and characterized “by a gross inequality of bargaining power”

POLICY: eliminate deals that are grossly unfair (which often take advantage of illiterate
or poor) while still retaining freedom of contract
 “Principle is one of the prevention of oppression and unfair surprise”

distinction between procedural and substantive unconscionability

 procedural unconscionability: (bargaining naughtiness) contract
formulation process; focuses on
o high pressures exerted on parties
o fine print of contract
o misrepresentations
o unequal bargaining position
o assent
o unfair surprise
 o notice
o process akin to fraud, duress or undue influence
 substantive unconscionability: (grossly unfair terms) content of the
contract; including
o inflated prices (and limited resources of disadvantaged party)
o unfair disclaimers
o termination clauses
o result akin to public policy

UCC § 2-313 Express Warranties by Affirmation, Promise, Description, Sample

(1) Express warranties by the seller are created as follows:
(a) Any affirmation of fact or promise made by the seller to the buyer which
relates to the goods and becomes part of the basis of the bargain creates an
express warranty that the goods shall conform to the description.
(b) Any description of the goods which is made part of the basis of the
bargain creates an express warranty that the goods shall conform to the
description.
(c) Any sample or model which is made part of the basis of the bargain
creates an express warranty that the whole of the goods shall conform to the
sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal
words such as “warrant” or guarantee” or the he have a specific intention to make a
warranty, but an affirmation merely of the value of the goods or a statement purporting
to be merely the seller’s opinion or commendation of the goods does not create a
warranty.

UCC § 2-314 Implied Warranty: Merchantability; Usage of Trade

(1) Unless excluded or modified (§2-316), a warranty that the goods shall be
merchantable is implied in a contract for their sale if the seller is a merchant with
respect to goods of that kind.
(2) Good to be merchantable must be at least such as…
(c) are fit for the ordinary purposes for which such goods are used

UCC §2-316 Exclusion or Modification of Warranties

(1) Words or conduct relevant to the creation of an express warranty and words or
conduct tending to negate or limit warranty shall be construed wherever reasonable as
consistent with each other; but negation or limitation is inoperative to the extent that
such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty or
merchantability or any part of it the language must mention merchantability and in case
of a writing must be conspicuous, and to exclude or modify any implied warranty of
fitness is sufficient if it states, for example, that “There are no warranties which extend
beyond the description on the face hereof.”
(3) Notwithstanding subsection (2)
(a) unless the circumstances indicate otherwise, all implied warranties are
excluded by expressions like “as is,” “with faults” or other language which in
common understanding calls the buyer’s attention to the exclusion of
warranties and makes plain that there is not implied warranty; and
(b) when the buyer before entering into contract has examined the goods or
the sample or model as fully he desired or has refused to examine the goods
there is no implied warranty with regard to defects which an examination
ought in the circumstances to have revealed to him; and
(c) an implied warranty can also be excluded or modified by course of dealing
or course of performance or usage of trade.

Dillman & Associates, Inc. v. Capitol Leasing Co. (1982): plaintiff leased copy machined
from defendant that did not work; complained that disclaimer of warranty was
unconscionable
 equally sophisticated businessmen, disclaimers were conspicuous, defendant
performed obligations of delivering machine
rule: it is not the court’s place to fix what was merely a bad bargain

Davis v. Kolb (1978): contract was set aside as having no consideration and
unconscionability on basis that appellant misrepresented his knowledge and
experience

POLICING THE STANDARD FORM CONTRACT: ADHESION

CONTRACTS

Kessler, Contracts of Adhesion—Some Thoughts about Freedom of Contract

 prevalence of standardized mass contracts in modern production and
distribution
 o used in every bargain dealing with same product or service
o can be used to perfect clauses protecting rom risk
o typically used by enterprises with strong bargaining power
 weaker party’s contractual intention is subjection more or less
voluntary to terms dictated by the stronger party
 know as a contract of adhesion

Some general questions about adhesion contracts:

 Will clarity and conspicuousness fix these problems? Should parties be able
to draft around?
 How important is the substance of the particular provisions challenged?
 What is (should be) the effect of the “duty to read”?
 How important is it that the adhering party had some real choice?
 How important is relative bargaining power?
 How important is the adequacy of consideration? (i.e. what is paid vs. what
was received)
 Whose reasonable expectations matter? [person writing contract]

Fairfield Leasing Corp. v. TGI (1992): Court will not enforce clause in an adhesion
contract which waives right to trial by jury
 21st line in 23rd paragraph, characters 1/10 cm.; intent: document not to be
negotiated nor read
 right to jury can only be given up knowingly and intentionally; presumption
against its waiver; did parties negotiate? parties equal? advice from
counsel?

“Adhesion contract analysis teaches us not to enforce contracts until we look

behind that façade of the formalistic standardized agreement in order to determine
whether any inequality of bargaining power between the parties renders contractual
terms unconscionable, or causes the contract to be interpreted against the more
powerful party.” Steiner v. Mobil Oil Corp. (1977).

C&J Fertilizer Inc. v. Allied Mutual Insurance Co. (1975): Court does not enforce
liability-avoiding provision in insurance policy (put exceptions in definition section
instead of exceptions section)
  objective reasonable expectations of applicants and intended beneficiaries
regarding the terms of insurance contracts will be honored even though
painstaking study of the policy provisions would have negated those
expectations
 UCC § 208 Unconscionable Contract or Term allows courts to selectively
eliminate unconscionable provisions; “particularly in the case of standardized
agreements”; “gross inequality of bargaining power, together with terms
unreasonably favorable to the stronger party

Markline Co., Inc. v. Travelers Insurance Co. (1981): court does enforce exclusionary
term; court does not find any evidence that suggests terms were beyond range of
reasonable expectations

reasonable expectations standard: A has not assented if B has reason to believe A

would not have assented to agreement if he had known about term (can be shown by
prior negotiations or inferred from the circumstances if term is bizarre or oppressive)

Restatement § 211 Standardized Agreements

(1) Except as stated in subsection (3), where a party to an agreement signs or
otherwise manifests assent to a writing and has reason to believe that like writings are
regularly used to embody terms of agreements of the same type, he adopts the writing
as an integrated agreement with respect to the terms included in the writing.
(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly
situated, without regard to their knowledge or understanding of the standard terms of
the writing.
(3) Where 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 is not
part of the agreement.

reasonable expectations of the drafter about what a hypothetical signed might think
(as opposed to looking directly at the state of mind of the party manifesting assent)

Gladden v. Cadillac (1980): Court would not enforce a term of guarantee because it
was a “linguistic maze” of contradictory provisions inducing the purchaser into
believing that “he was obtaining a guarantee of performance.”
written agreements most enforceable when:
 written in a clear and coherent manner using words with common and
everyday meanings
 appropriately divided and captioned by its various sections

Capsi vs. MSN (1999): Court upholds enforceability of forum selection clause in online
subscriber agreement
 plaintiffs contend they did not receive notice; court holds no principles have
been violated as long as clause is clear and has been presented in a fair and
forthright fashion (had to click “I Agree” before completing registration)
o clause met standards of conspicuousness
 precedent: Carnival Cruise (S. Ct. 1991)
 in absence of fraud, party is bound by agreed upon terms even if they did not
read them (duty to read); sign-up process provided ample opportunity to
review and reject agreement