Вы находитесь на странице: 1из 27

Contracts Outline

Goals of Contract Damages

• To create an incentive for people to keep their promises because our economy runs on exchanges of promises.

Remedies for a Breach of Contract

• Specific performance
• Monetary Damages (see below)
• Quasi-Contract/Quantum Merit (payment for work performed)
• Restitution of benefit conferred on breaching party

There are three damages recoverable for a breach of contract:


• Restitution: interest of a party in recovering values conferred on the other party through efforts to perform a contract
• Reliance: place promisee in as good a position as he was in before the promise was made
• Expectation: place the promisee in the same position he would have been in had the promisor performed - P phrase. This is the
general rule for contracts.

Expectation Damages:

• Section 347 of the Restatement (Second) provides that the measure of damages is:
(a) the loss in the value to him of the other party's performance caused by its failure or deficiency, PLUS
(b) any other loss, including incidental or consequential loss, caused by the breach, LESS
(c) any cost or other loss that he has avoided by not having to perform.
• UCC 2-708 (2)
• The amount in clause (a) of § 347 is the value of the performance which was not given.
• Farnsworth has the following to say about incidental and consequential damages (terms used in clause (b) of § 347):
o Incidental damages include additional costs incurred after the breach in a reasonable attempt to avoid loss, even if the
attempt is unsuccessful. If, for example, the injured party who has not received the promised performance pays a fee to a
broker in a reasonable but unsuccessful attempt to obtain a substitute, that expense is recoverable.
o Consequential damages include such items as injury to person or property caused by the breach. If, for example, services
furnished to the injured party are defective and cause damage to his property, that loss is recoverable. The terms used to
characterize the loss are not, however, critical, for the general principle is that loss, however characterized, is recoverable.
• Hawkins v McGee (1929): measure damages as the difference between the value of what P would have received if the contract
had been carried out and the value P actually got after breach.
a. There are no punitive damages in contract cases
b. The purpose of damage awards is to restore the plaintiff to the position he would have occupied had the contract been
fulfilled.

• Groves v. John Wunder: cost of completion awarded - bad faith breach.


a. Cost of completion: based on the expense incurred by the party not in breach to finish the project or remedy the defect
b. Diminution-in-value method (market diff.): based on a reduction in market value that is caused by the breach
c. The subjective value of the land is important in determining which to use (high subjective, use cost of performance;
low subjective, market diff)
d. Peevyhouse v. Garland: decided on market differential, but subjective value is likely high as the Ps lived on their
farm land - awarded difference in market value between the property as left and the property as it should have been
left according to the contract.
e. Groves: decided on cost of repair, but this is industrial land with no subjective value
f. Theme: whether the courts should define expectations “objectively” (generally, by reference to markets) or
“subjectively” (by reference to the plaintiff’s perhaps idiosyncratic and unique preferences and needs).
g. Restatement (§346): either measure sufficient (if cost of repair does not result in economic waste)
h. Coase Theorem: if transactions are costless the initial assignment of property rights will not effect the ultimate use of
the property?
i. If the owner breaches after the builder completed performance, builder should recover the contract price.

• Acme Mills & Elevator v. Johnson: expectancy based on harm to P, not gain to D, damages not allowed when contract price
(1.03) exceed market price on day of delivery (.97).
a. Market value at time and place of delivery - the contract price = standard measure of damages for breach of contract
in sale of goods

1
b. Laurin v. DeCarolis: case about market imperfections - looking at the market differential in property value doesn’t
work because the market doesn’t properly measure damages in this case…so they were awarded restitution b/c D’s
breach was willful and deliberate.
c. As a general matter, don’t look at the state of mind of breacher – a willful breach is irrelevant
d. U.C.C. § 2-713 BUYER’S DAMAGES FOR NON-DELIVERY OR REPUDIATION
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 any incidental and
consequential damages… but LESS expenses saved in consequence of the seller’s breach.

• Missouri Furnace Co. v. Cochran: when a contract with serial delivery dates is broken, the measure of damages is based on the
difference in market prices for each of the scheduled delivery dates - not allowed to mitigate until breach (overruled by UCC
buyers remedies 2-711, 712, 713)
a. When enter an installment contract, even if anticipatory breach, you can’t enter new forward contract (or you can at
your own risk. Forward contract: an agreement to buy or sell a particular non-standardized asset (usually
currencies) at a fixed price on a future date.)
b. Remedy in this case is market value on each delivery date less contract price.
c. This result of this case is wrong (and it is later changed by UCC) – you should be able to ensure certainty of delivery
through cover contract at time of anticipatory breach.
d. Anticipatory Repudiation: Repudiation of a contractual duty before the time for performance, giving the injured
party an immediate right to damages for total breach, as well as discharging the injured party’s remaining duties of
performance.
e. MAJORITY VIEW TODAY – the injured party has a duty to mitigate damages as much as reasonably possible
when a contract for sale is repudiated
f. MINORITY VIEW TODAY – injured party must be compensated regardless of cost to the repudiating party
g. §2-711 Buyer’s Remedies in General. Buyer’s Security Interest in Rejected Goods
 1. Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or justifiably revokes
acceptance then with respect to any goods involved, and with respect to them hole if the breach goes to the
whole contract (§2-612), the buyer may cancel and whether or not he has done so may addition to recovering so
much of the price as has been paid
 a) “cover” and have damages under the next § as to all goods affected whether or not they have been
identified to the contract; or
 b) recover damages for non-delivery as provided by §2-713
 Where the seller fails to deliver or repudiates, the buyer may also
 a) if the goods have been identified recover them as provided in §2-502
 b) in a proper case obtain specific performance or replevy the goods as provided in §2-716
§2-712: “Cover”; Buyer’s Procurement of Substitute Goods
 1. After a breach within the preceding section the buyer may cover by making in good faith and without
unreasonable delay any reasonable purchaser or contract to purchase goods in substitution for those due
from the seller.
 2. 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 as hereinafter defined (§2-715) but LESS expenses
saved in the consequence of the seller’s breach.
 3. Failure of the buyer to effect cover within this section does not bar him from any other remedy
§2-713 Buyer’s Damages for Non-Delivery or Repudiations
 1. Subject to the provisions of this Article with respect to proof of Market price (§2-723), 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 any incidental and consequential
damages provided in [§2-715] but LESS expenses saved in consequence of the seller’s breach.
 2. Market price to be determined as of the place for tender or, in cases of rejection after arrival or revocation of
acceptance, as of the place of arrival.

• Neri v. Retail Marine Corp: P repudiates on a contract to buy a boat from D. D ends up selling that boat to another customer. P
sues for return of deposit. D is a large volume seller and claims that P’s repudiation cost him the sale of a second boat. Where
dealer has unlimited supply, even if he resells item, breach means 1 sale instead of 2, therefore Neri is entitled to lost profit on
2nd sale, plus incidental damages of buyer breaching.
a. According to U.C.C. § 2-708 (2), even though the seller is usually entitled to only the difference between market price
and contract price if the seller can’t recover the contract price on his/her own, if this would not place the seller in as good a
position as he would have been in had the buyer not breached, the seller is entitled to recover lost profits and incidental
damages.
• Market-based damages alone (as in 2-708(1)) are “with mathematical certainty” never adequate in cases
like these when the retail seller could have made multiple sales
• In cases of MULTIPLE SALE POSSIBILITIES the seller must establish

2
• That it could have sold more of the breached unit
• That it would have been profitable for the seller to have
produced and sold the breached unit as well as other units
(there is a point where producing extra becomes unprofitable)

SELLER’S REMEDIES IN U.C.C., §§2-708,09,10


§2-708 Seller’s Damages for Non-Acceptance or Repudiation
 1. Subject to subsection 2 and to the provisions of this Article with respect to proof of market price (§2-723), the
measure of damages for non-acceptance or repudiation by the buyer is the difference between the market price at
the tine and place for tender and the unpaid contract price together with any incidental damages provided in this
Article (§2-710), but LESS expenses saved in consequence of the buyer’s breach.
 2. If the measure of damages in 1) is inadequate to put the seller in as good a position as performance would have
done then the measure of damages is the profit (including reasonable overhead) which the seller would have
made from full performance by the buyer, together with any incidental damages…. , due allowance for costs
reasonably incurred and due credit for payments or proceeds of resale.
§2-709 Action for the Price (when the seller is unable to resell under §2-708)
 1. When the buyer fails to pay the price as it becomes due the seller may recover, together with any incidental
damages under the next section, the price
• a) of goods accepted or of conforming goods lost or damaged within commercially reasonable
time after risk of their loss has passed to the buyer
• b) of goods identified in the contract if the seller is unable after reasonable effort to resell them at a
reasonable price or the circumstances reasonably indicate that such effort will be unavailing.
 2. Where the seller sues for the price he must hold for the buyer any goods which have been identified to the
contract and are still in his control except that if resale becomes possible he may resell them at any time prior to
the collection of the judgment. The net proceeds of any such resale must be credited to the buyer and payment
of the judgment entitles him to any goods not resold.
 3. After the buyer has wrongfully rejected or revoked acceptance of the goods or has failed to make a payment
due or has repudiated (§2-610), a seller who is held not entitled to the price under this section shall nevertheless
be awarded damages for non-acceptance under the preceding section.
§2-710 Seller’s Incidental Damages – Incidental damages to an aggrieved seller include any commercially reasonable
charges, expenses or commissions incurred in stopping delivery, in the transportation, care and custody of goods after the
buyer’s breach, in connection with the return or resale for he goods or otherwise resulting from the breach.

• Illinois Central R.R. v. Crail: To calculate the market price of a fungible good, you must use the market price from the market
where the injured party typically buys. There are typically two markets: retail and wholesale. You use the price from the market
where the injured party typically buys. Gets actual damages-not higher price of coal b/c he paid the lower price.

• Watt: WHEN AN AGGRIEVED MERCHANT BUYER DOES NOT SUFFER LOSS OF SALES, AWARD IS THE
DIFFERENCE BETWEEN THE WHOLESALE PRICE AND THE CONTRACT PRICE, NOT THE TEST OF THE MARKET
VALUE. Court awarded market value of lost hay, less expenses to go get the hay on the market.

Reliance Damages: generally appropriate in certain situations when expectation damages are not suitable, such as
indeterminate/speculative lost profits or an unenforceable contract.

• Chicago Coliseum Club v. Dempsey: if difficult to prove lost profits with sufficient certainty under expectation, use reliance
a. Pre-contract expenses are not recoverable under a reliance measure of damages (later changed by restatement)
b. Just because lost profits, doesn’t necessarily mean expectancy interest
i. Reliance could have lost profits – the opportunity to enter into other contracts
b. Preliminary injunction – freezes status quo until permanent injunction (trial) - no full faith in credit in courts of equity.
c. So why go for reliance?
i. You were shut out from expectancy because you can’t prove it, because Dempsey was one of a kind.
d. 2nd Restatement - Section 349 – Reliance Interest Damages
• Reliance interest includes expenditures made in preparation for performance (before contract) or in performance, less
any loss that the party in breach can prove the injured party would have suffered had the contract been performed.

e. Can’t force him to fight someone else, would be like forcing him to work with someone else.

Effort to collect pre-K expenditures in reliance that were successful:

• Security Stove- pre contract expenses recoverable - critical package not delivered on time. Couldn’t prove would
have sold goods at show, so expectations uncertain. Get reliance. Had told shipping company of special needs so
reliance damages ok. Surrogate for lost profits.

3
• Anglia Television v. Reed (1971) Pre-K expenditures ok. D agreed to star in play; D double-booked so couldn’t
perform. P couldn’t find replacement. P seeks reliance damages equal to expenses incurred prior to and subsequent
to making of K.
o Holding: D knew that a lot of money had already been spent which would be wasted if he breached. If D
hadn’t entered into K then P could have hired someone else. Reliance damages supposed to put P back in
position it was in when K was entered; they were in position to hire someone else.

• Armstrong Rubber. (1949): P to buy 4 machines from D for reconditioning old rubber during WWII. 2 of them not
delivered until after war over. Buyer wants to recover $3000 in reliance damages = cost of preparing foundations for
machines. Can P recover reliance damages even if his venture was not profitable?
o Holding: Where venture would’ve been unprofitable, injured party can recover expenses but promisor can
reduce amount by showing and subtracting amount promisee would’ve lost had the K been performed.
Otherwise risk of promisee’s venture is imposed on promisor.

a. Why don’t we always use reliance? Because of the overreliance problem, an expectation
damages scheme is unambiguously better than a reliance damages scheme. Expectation
damages force you to internalize the costs of breaking your promise, and although incur
inefficient expenses as a result of having your promise, I do not incur as many as I do in
a reliance-based regime.

i. Hard to measure

ii. Creates weird incentives – going to rely like crazy if only get reliance
damages

iii. Encourages more breaching; will have non-pareto superior breaches. This is
bad.

Limitations on the Compensation Principle or Damages:

Duty to Mitigate: Non-breaching party is not permitted to recover damages that he could have avoided by reasonable efforts (once informed of
breach, he must mitigate).

Rockingham County v. Luten Bridge: D must mitigate damages after they are informed of breach of contract.
• Can’t receive contract price unless the whole project was done.

Allocation of Overhead: The cost of overhead (fixed) may not be deducted from the contract price as part of P’s cost of completion. In a
service contract, issue of fixed costs v. variable costs.

• Fixed cost NOT subtracted to get to profits


• Variable costs ARE subtracted to get to profits

• Leingang v Weed Board. The city breached in not giving P more lots to cut weeds. A business that has fixed costs
would have them regardless of the contract.

• Kearsarge Computer v Acme Staple. Breach of a computer contract. The court held that this is like a construction
contract. It’s an infinitely expandable business. Income of new business doesn’t mitigate damages if the business is
infinitely expandable.

Employment contracts and Duty to Mitigate: Where an employer breaches, the employee is under a duty to use reasonable care in finding a
position of same kind.

• Parker v. Twentieth Century-Fox Film Corp: employees must mitigate by looking for replacement work that is not inferior
a. General Rule: remedy of employer breach is contract price less the amount employee earned (or could have earned) as proved by
the employer
 Caveat: other employment must not be inferior
b. Billetter v. Posell: to mitigate, don’t have to take the same job for less money (if offered by the same employer). I think you do
have to take if another employer.

Consequential Damages/Damages Under Special Circumstances: added to standard damages, the breaching party is liable for all the losses
resulting from the breach which the parties should have reasonable foreseen at the time of contract as likely to flow from the breach.
• Special Circumstances: damages unique to the plaintiff are only recoverable if the breacher was specifically aware of the special
circumstances.

4
• Hadley v. Baxendale: damages must be foreseeable at the time of contract - where 2 parties have made a contract which one has
broken, the damages which the other party ought to receive in respect of such a breach of contract should be such as may fairly and
reasonably be considered either arising naturally or such that may reasonably be supposed to have been in contemplation of both
parties at the time they made the contract as a probably result of the breach.
• 2 kinds of damages:
 1) Naturally arising (recoverable) and
 2) Special circumstances / consequential damages - to recover, must show special circumstances within
contemplation of parties at the time of the contract
a. Extremely important that it must be at the time of the contract!!!!
b. If P tells D about circumstance mid way through, even if D racks up more damages, not recoverable
c. Hadley boils down to foreseeability – did the seller have reason to know about special circumstances?
d. Two questions to pose about the special circumstances
 How explicit was the agreement to assume the risk or how explicit was the communication?
• Range of opinions on this issue
• One End: Holmes’ view: tacit agreement: a promisor’s liability in contract cases should be presumed to
have been within the promisor’s contemplation at the time that he made the contract (“tacit
agreement”); therefore, if the liability is so large that reasonable person cognizant of that liability
would probably have not entered into such a risky contract, we can assume that the promisor was not
cognizant of that liability, and made no sort of “tacit agreement” to be held liable for more than ordinary
damages.
• Other End: UCC – rejects tacit agreement, just have to have a reason to know (Prutch, UCC 2-715(2))
 How certain was that risk to occur?

• Globe Refining v. Landa: It depends on what liability the defendant fairly may be supposed to have assumed consciously, or to have
warranted the plaintiff reasonably to suppose that it assumed, WHEN THE CONTRACT WAS MADE.
a. The court says that knowledge is not enough…it has to be stated in the bargain itself. The plaintiff wants to collect expenses that
he was willing to incur for performance…so we should conclude that his costs were included in the profits. Allowing him his
expectation damages plus these transport costs would effectively be making the D pay 2x…he was already "paying" for the
transport costs in the contract price…it was accounted for there.

• Lamkins v. Int. Harvester.. Arkansas 1944 - P contracted to by a tractor with lights on it; when the lights took more than a year to arrive, P
sued for lost profits incurred by not being able to plow at night.
a. The lost profits don’t pass the “tacit agreement test”  it is not “reasonable…to believe that the dealer at the time tacitly
consented to be bound for more than ordinary damages in case of default on his part” – if D had known that exorbitant lost
profits damages could result, he never would have taken on the liability for such a contract.

• VICTORIA LAUNDRY LTD. V. NEWMAN INDUS. LTD: P were launderers and dyers and had contracted with D to buy a large boiler
machine; D knew that Ps were launderers and needed to use the boiler for their business as soon as possible; the boiler accidentally broke
and was delivered late.
a. P could recover for regular lost laundry business profits, because those would have been “within the promisor’s contemplation”,
but P could not recover for especially “lucrative” dyeing contracts, because D could not have been expected to know of those
special circumstances

• HECTOR MARTINEZ V. SOUTHERN PACIFIC TRANSP. 5th Cir. 1980: D was late in delivering a dragline to P; a dragline is a machine
that has uses on its own (as opposed to a machine part, like a crankshaft), and it can be considered foreseeable that P needed it for business
uses and would lose business profits because of delay in delivery
a. “A plaintiff need not show that a harm was ‘the most foreseeable of possible harms’”, but rather, that the harm is not
unforeseeable to a reasonable person at the time of the contract.”

§2-715 BUYER’S INCIDENTAL AND CONSEQUENTIAL DMAGES


♦ 1. Incidental damages resulting from the seller’s breach include expenses reasonably incurred in inspection, receipt,
transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or
commissions in connection with effecting cover and any other reasonable expense incident to the delay or other
breach.
♦ 2. Consequential damages resulting from the seller’s breach
 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; and
 b) injury to person or property proximately resulting from any breach of warranty
 RESTATEMENT OF CONTRACTS 2ND §351 - limits this by adding that “court may limit damages
for foreseeable loss by excluding recovery for loss of profits, by allowing recovery only for loss

5
incurred in reliance, or otherwise if it concludes that in the circumstances justice so requires in
order to avoid disproportionate compensation.
 UCC § 2-715(2)(a) sort of codifies Hadley. Consequential damages resulting from breach include loss
resulting from requirements the seller had reason to know about that couldn’t be prevented by the buyer
(with cover, for example).

No Mental Distress Damages in Contracts:

• Valentine v. General American Credit: general disallowance of recovery for emotional distress damages
a. Principle: no breach of contract by firing employee (unless specific contract)
b. Some cases emotional distress is recoverable (marriage, death), in cases where there is not market based way of
figuring out damages.
c. We have this rule b/c if not pp will hesitate to enter into K b/c they don’t want to get hit w/ a huge lawsuit. The main
reason though is b/c we have market price remedy, even though it s/t over /under compensates.

Proof of Profits:

RESTATEMENT 2ND §352, Comment B (1981). “Proof of Profits”: “Damages are not recoverable for loss beyond an amount that the
evidence permits to be established with reasonable certainty.”
• It’s easy to prove the value of a lost sale to an aggrieved seller; more difficult to prove the value of resultant lost profits to an
aggrieved buyer.
• With established businesses, lost future profits are fairly easily based on previous profit records; with new businesses, speculative lost
profits are more difficult to prove, but can be done with the aid of expert testimony.

• Mindgames v. Western Publishing (7th Circuit 2000) - Mindgames sues for lack of marketing. Expectation damages argument - if
Western had marketed, would have had x$ in royalties. Why don't they get expectation damages? Doubts are resolved against
breaching party. But Mindgames didn't have any explanation of damages they were asking for.

o New business rule: If you're new business, you can't get lost profits. Problem - both under and over-inclusive. Courts need
to figure out what's speculative, what's reasonable. Modern trend is looser on certainty.

• Freund v. Washing Square Press (NY 1974) -D refused to publish P’s book after D paid an advance of $2000 to P. P wants to recover
damages measureable by the costs of hardcover publishing to the D.
o Damages should not be measured by the cost to perform but “by the natural and probable consequences of the breach to the
plaintiff. In this case, P would recover for lost royalties and damaged reputation, but the first was too speculative and the
second he waived. The only damages available are nominal.
o NOMINAL DAMAGES: Where a right of action for breach exists but no monetary harm has been done or is provable,
the plaintiff may get a judgment for nominal damages (small some in acknowledgement of harm)

• Fera (MI 1976) - Ps had contracted to open a “book and bottle” shop in D’s proposed shopping center; D delayed the building, and
gave P’s space to another tenant; D offered an alternative space, but P found the new space unsuitable to their business’s needs; P
seeks damages as measured by their lost profits.
o P doesn’t need to prove lost profits damages for its new business with “certainty” but only needs to “lay a basis for a
reasonable estimate of the extent of [harm], measured in money” (which the court believes that P did in this case.)
o Most judges prefer to use standards of reasonability rather than a rule when looking at lost profits of new businesses,
because standards allow for flexibility, and govern by their reasoning rather than by their exact terms.

Alternative Interest – Restitution: Putting together some of these cases, we see that expectancy damages are all about the plaintiff’s loss and
restitution awards are all about the defendant’s gain.
o Restitution damages are appropriate when one party has performed to the benefit of the other party who
gave nothing in return. The performing party may recover in quantum merit for the value of his services,
which had generated a quasi contract or implied contract when no explicit original contract existed.

• Boone v Coe: P may not recover for restitution damages merely for its own loss, the D must have gained something (or been unjustly
enriched)…would this change with promissory estoppel - 90?
o RESTITUTION-SUE OFF THE K TO RECOVER A BENEFIT THAT THEY GOT B/C IT WOULD BE UNJUST FOR
THEM TO RETAIN THE BENEFIT.
o Traveled to TX to live and then said no, so suing for travel damages.
o This case introduces us to the Statute of Frauds which says certain Ks have to be in writing.
o SOF says that some K cannot be enforced if they are not memorialized in writing:
• 1. sale of an interest in land

6
• 2. sale of goods for a price exceeding a certain amount (UCC-$500)
• 3. promise to answer debt, default, or miscarriage of another-suretyship
• 4. if the K can’t be performed w/in a year
• 5. in consideration of marriage

• U.S. v. Algernon Blair: Court gives restitution in quantum merit (off contract) even though contract was a loser
because if they did not then P would be unjustly enriched. A party suffering a loss under a contract will not recover damages in a suit on the
contract, but may always forego a suit on the contract and claim only the reasonable value of the performance rendered.
• Quantum meruit is getting the value of the service you performed, even if you did not complete performance b/c of the other
party’s breach.
• Quantum valebat is the reasonable value of goods.
• Valid and enforceable K, but it’s a loser, but other party breaches in middle of performance. Algernon Blair case – substantive
“material breach” by other party gives you right to terminate your performance, sue on K. Get your value of services.
• This only applies if K has not been completed. Once K completed, you get expectation or reliance. If material breach, you can
ask for restitution.
• Kearns v. Andree: work done at specific request of the defendant constitutes value conferred (can recover in restitution)
• Olive v. Campbell: when P has finished or almost finished and then D repudiates, at that point P is limited to suing on the
contract (limitation on when to use restitution)

Stark v. Parker: Old View …no recovery for deliberate breach. Britton New view.

Britton v. Turner: breaching party is entitled to restitution less non-breaching party’s damages caused by the breach.
• P in default is still entitled to the reasonable value of his services for benefits conferred on D, less any expenses he caused D, but
the value cannot exceed the contract price.
• Where P is not the breacher, we do allow the price to exceed the contract price.

Thach v. Durham: A down payment by a breaching buyer isn’t recoverable as restitution b/c it is held to be an estimate of the seller’s damages;
Unless it’s shown that damages given to the seller are disproportionately higher than actual damages incurred. See Vines v Orchard.

Pinches v Church. P in default. WHERE THE DEVIATION WAS NOT WILLFUL AND THE STRUCTURE AS BUILT IS REASONABLY
ADAPTABLE TO THE DESIRED PURPOSE, THE P MAY RECOVER FOR THE WORK PERFORMED LESS ITS DIMINISHED VALUE.
• Willfully defaulting contractor could not recover (Kelley).
• When a builder completes a building in good faith and the defects that result cannot be remedied without destroying the whole
structure and rebuilding, as long as the building is usable to the benefit of the aggrieved party, the builder is only responsible for
paying the diminution of value between the building as planned and the building as resulted (or for the cost of fixing the building, if it
is reasonable)
• Basically, the court is awarding P restitution damages for the building work P had done, offset by diminution of value or cost of
repair.
• If the issue is on the quality of performance, then good faith matters, when the issue is one of abandonment (Britton) then
good faith doesn’t matter.

SUMMARY:
1. IF ARE DEFAULTER-CAN GET IN RESTITUTION THE VALUE OF BENEFIT
RECEIVED BY THE OTHER (CONFERRED)
2. IF YOU ARE NOT THE DEFAULTER-CAN GO OFF K AND GET THE MARKET
VALUE OF YOUR SERVICES

Vines v. Orchard Hills: remedies for breach are intended to compensate for loss, so the injured party should not be allowed to keep money in
excess of actual loss
a. Claim for restitution of deposit (contract says can’t have it back): court will not enforce provision if buyer can show that seller
didn’t suffer damages in the amount of the deposit
b. Since restitution is an equitable remedy, it may be relevant whether the promisor had a good reason to breach or was “willful”
c. What is the definition of willful?
i. Opportunistic – done on purpose by breaching party at the expense of the non-breaching party (assumes this hurts
non-breaching party)
ii. If you opportunistically breach, you will not get restitution
iii. Who bears the burden of proof?
The breaching party has the burden of proving that the other party was not damaged
A NON-WILLFUL DEFAULTER CAN GET RESTITUTION IF THE DEPOSIT EXCEEDS THE ACTUAL DAMAGES.

Liquidation damages clause will be enforced as damages in the event of default by one party unless:
a. The buyer can show there was zero damages.
b. Damages are hard to ascertain.

7
c. If the stipulated damages are substantially different than the liquidation damages clause, then won’t enforce the clause but will
allow restitution.

Restitution is a law claim even though it is equity in nature.


a. P phrase is damages based on the law but restitution looks at equity.
The plaintiff in a claim of restitution does not have to show that the parties had a contract. The premise of the restitution claim, is
unjust enrichment. That is to say, there is an asset which somehow got into your pocket when in justice it should be in mine and for it
to remain in your pocket would unjustly enrich you, that asset could come from me, but could also come from a third party. Unjustly
enriched allows the plaintiff to use a restitution claim to correct an unjust enrichment.

De Leon v Aldrete - This case was here to show that the court said that this is equity and we’re not going to have a fixed rule that
awards a defaulting P or a fixed rule that doesn’t we’re going to look at equity!

Contractual Controls on the Damage Remedy – Liquidation Damages, Down Payments, Deposits

• Liquidated damages: in the event of breach, these are what the damages are.
• Proportionality rule for evaluating liquidated damages clauses and the fact that courts are less likely to scrutinize limitations of liability of
clauses than they are to scrutinize liquidated damages clauses.
• Black Letter Rules
o Test of enforceability of liquidated damage clause:
 1. Reasonable in light of anticipated or actual loss
 2. Difficulty of proof (of actual damages)
 3. Unreasonably large is unenforceable as public policy
o UCC adds additional factor – the more difficult it is to obtain adequate remedy, more likely to enforce clause

• Wilt v. Waterfield and Muldoon v. Lynch: A liquidated damages clause is unenforceable as a penalty if it is arbitrarily made.
Liquidated damages clauses must be a reasonable forecast of likely damages.
Undifferentiated damage clauses are suspect (clause does not differentiate between gravity of breach and damages owed)
Contract law is not punitive

• Yockey v. Horn: The amount of stipulated or liquidated damages is reasonable as judged at the time contract was made or in light of
the actual contract damages incurred. (UCC 2-718 and Rest 356)

a. Samson Sale v. Honeywell: An agreement limiting the amount of damages recoverable for breach is not an agreement to pay
either liquidated damages or a penalty, as long as it does not purort to make an estimate of possible harms caused by breach, or
operate to induce performance through fear.
o How do you distinguish between liquidated damages and limited damages clauses?
Liquidated damages clause specifies damages while limitation clauses caps the damages

Section 5: Enforcement in Equity - Injunctions/Specific Performance


Contract has to be definite and certain, for example spells out the duties of P and D so the court can enforce.
SP denied if there is an adequate remedy at law; court would much rather make you pay money.
• Black Letter Rule
o Where there is an adequate remedy at law, courts will not award specific performance
• Specific performance normal for contracts involving sale of land
o Land is unique, can’t measure subjective value
• Other factors that may defeat a request for an injunction, even where the plaintiff lacks an adequate legal remedy, include:
(1) Disproportionate burden on D
(2) Personal services contract
(3) Public interest in fostering competition (covenants not to compete)
(4) Judicial difficulty in administering compliance with injunction.

• Van Wagner Advertising Corp. v. S&M Enterprises: specific performance of a contract to lease real property is unavailable when damages
are an adequate remedy to compensate the tenant and specific performance would impose a disproportionate burden on the landlord.
• Must weigh burdens in courts of equity (balancing of the equities)
• Restatement, §360: Factors Affecting Adequacy of Damages
• When are damages likely to be inadequate (and specific perf. awarded)
• Difficulty of proving damages with reasonable certainty
• Difficulty of procuring a suitable substitute performance by means of money awarded as damages (Curtis
Bros.)
• The likelihood that an award of damage could not be collected
• UCC §2-716

8
• Specific performance where goods unique
• Or other proper circumstance: goes beyond common law and tries to favor specific performance when goods are hard
to cover
• No cover possible, specific performance (Pingley v. Brunson)
• But, don’t order impossible (if sold to someone else)
• Specific performance will not be granted if compliance would be impossible – practicability.

• Laclede Gas Co. v. Amoco Oil Co.: a party may obtain specific performance when money cannot purchase a substitute for the contracted-
for-performance

• Fitzpatrick v. Michael: courts will not grant specific performance of personal services
• First limitation: courts unwilling to order specific performance compelling personal services
• Don’t put together again bad marriages
• Peonage
• Supervisory relationship
• Unwilling to order negative where they won’t order positive (there is no written covenant not to compete in this case)
• Exception is where employee has unique or exceptional skills (Lumley v. Wagner, court forbid her from
singing anywhere else.)
• Second limitation: courts won’t enforce covenants not to compete
• Courts may say overbroad
• Geography – where prohibited from other employment (Data Management Inc. v. Greene)
• Time – how long prohibited (Fullerton Lumber v. Torborg)
• Scope of employment – what types prohibited
• If overbroad covenant, what do they do?
• Divided – 1) Throw out or 2) Change - blue penciling
• Majority say that if clause was reasonable, court will cut down to size and make it reasonable
• Generally, neither the employer nor the employee may specifically enforce an employment contract

Chapter 2: Grounds for Enforcement

• General Rule for this section is that contracts should be enforced when they are either:
o Supported by consideration; or
o Supported by reliance on the promise (promissory estoppel).

• Congregation Kadimah Toras-Moshe v. DeLeo: a) promises won’t be enforced unless there is consideration or reliance and b) consideration
is defined as a benefit to the promisor or a detriment to the promisee
• Moral obligation does not equal consideration
• Reliance requires that promisee has changed their position because of promise (wouldn’t have had built without promise)
• A promise to give a gift is unenforceable.
• If serious about giving them a gift, he should have put it in writing - a gratuitous promise can be overcome by a writing
• Had they started building a library, they would have gotten the money

Section 2: Bargained for Exchange

• Hamer v. Sidway: the detriment to the promisee prong of the consideration doctrine is defined as a detriment in law (giving up a legal
right), so, forbearance of a right is sufficient legal detriment to satisfy the requirement of consideration.
• If you give up a legal right (regardless if you wouldn’t have done it anyway), this is a detriment

Restatement §71: Requirement of Exchange; Types of Exchange


1. To constitute consideration, a 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
a. Performance - “I’ll give you $100 to paint my house”; you can then just go paint it without saying
that you accept the promise
b. Promise - “I will promise you $100 if you promise to paint my house.”
3. The performance may consist of
a. The act other than a promise, or
b. A forbearance (the act of refraining from enforcing a right, obligation or debt), or
c. The creation, modification, or destruction of a legal relationship

9
Restatement 81. Consideration as Motive or Inducing Cause
1. The fact that what is bargained for does not of itself induce that making of a promise does not prevent it from
being consideration for the promise
a. Motivations with respect to performance doesn’t matter – if you had another motivation, if promise
was bargained for, motive doesn’t matter
b. Ex.: A promises B that B can use A’s car if B pays A $10. A’s real motivation is to get B out of the
house. Motivation doesn’t matter here, if on the surface there was a promise, that’s all that matters.
2. The fact that a promise does not itself induce a performance or return promise does not prevent it from being
consideration for the promise
a. A promises an award to one who finds and returns his lost cat. B finds the cat the returns it.
However, he would have returned it anyway. The fact that B wasn’t induced doesn’t matter.

• Fischer v. Union Trust Co.: Consideration must be bargained for. Nominal consideration and gifts are evidence that the promise was not
bargained over. (Love and affection is not considered sufficient consideration to bind a promise.)
• The second restatement and modern view is that we care about whether there was true bargain
• Schnell v. Nell
• Don’t want people to avoid true test of consideration by creating sham transactions (thus, no nominal consideration)
• Contrast this with Batsakis v. Demotsis: mere inadequacy of consideration will not void a contract .

• Duncan v. Black: forbearance of a legal claim does not constitute consideration unless legal claim is made in good faith and is based on a
reasonable ground (modern view changed to or)
• Consideration is the forbearance – giving up a legal claim ($ for forbearance)
• Consideration ferrets out coercive dealings (extortion) – don’t want settlements and threats of lawsuits based on unenforceable
claims
• There can be consideration even if there is no bargaining, in order to prevent extortion
• The 2nd restatement §74:
• Objective merit of claim (reasonable) or belief in validity (good faith)
• Modern trend is more permissive of settlement agreements

Section 3: Promises Grounded in the Past

• Mills v. Wyman: promise to pay based on a moral obligation arising from a non-material benefit to promisor is not enforceable.
• Consideration of past obligations is for legal obligations only
 For example: statute of limitations, bankruptcy, minor
• Rationale: obligation never expired, but law imposed barrier, and subsequent promise raises barrier

• Webb v. McGowin: (This seems to be a minority rule) promise to pay based on moral but not legal obligation arising from a tangible benefit
to promisor may be enforceable to the extent necessary to prevent injustice
• Supported if promisor has been paying some consideration before repudiating
• Webb really stretches the past promise doctrine of moral consideration – general view is that past moral consideration does not
constitute consideration
• Restatement 86: New Promise for Benefits Received – A new promise for benefits received will sometimes be enforceable
without consideration on grounds of moral obligation to prevent injustice.

Section 4: Reliance on a Promise


• Alternative grounds for enforcing a promise: promissory estoppel
• Promissory estoppel: reliance on a promise to one’s detriment may operate as a substitute for legally sufficient consideration, making a
promise enforceable that otherwise would not be.
• D is barred (estopped) from claiming lack of consideration.

• Seavey v. Drake: a.) a parol contract to convey land will be enforced in favor of the promisee if the failure of refusal to convey land would
be unjust b.) you can use promissory estoppel to overcome a statute of frauds defense, but there must have been part performance of the
contract, the bar of the statute of frauds was removed in this case upon the grounds that injustice could be avoided by enforcement and it
was fraud for the promisor to insist upon the lack of written document after he has allowed partial performance of the contract.
• Most courts say that entry onto the land is critical

10
• If you confront a statute of frauds problem and want to sue promissory estoppel to get around, go Section 139, not section 90 of
the restatement
• There is more criteria that weed out false claims in 139
• §139: Use of Promissory Estoppel to Get out of Statute of Frauds
• First prong same as 90
• Second prong adds obstacles to sue:
o Restitution must not be available
o Reliance is substantial
o Reliance strengthens existence of promise
o Reasonableness of reliance
o Reliance foreseeable

• Kirksey v. Kirksey: case shows why (injustice) another doctrine other than consideration is necessary to enforce promises. Acts, in this
case moving costs, that are required before fulfillment of a promoise are preconditions , not valid consideration.
• Ricketts v. Scothorn: shows way out of Kirksey trap. There is no consideration, but Scothorn altered his position in reliance.
This is promissory estoppel - stop denying the existence of consideration.
• Future cases hold that the expectancy interest is the proper measure of damages in promissory estoppel
• Prescott v. Jones: shows difference between promissory and equitable estoppel
• Equitable estoppel: reliance on a fact (you are insured)
• Promissory estoppel: reliance on a promise (we will insure you)

• Allegheny College v. National Chautauqua County Bank (Cardozo): wants to make charity commitments legally binding-expanding nature
of claims for liability in contracts – the acceptance of a charitable subscription is an implied promise by a college to comply with the wishes
of the donor which in turn constitutes valid consideration to bind the donor. (She make a partial payment for a special fund to be named
after her.)
• This case was not decided well by Cardozo and doesn’t hold true for future law (Cardozo’s way of showing he didn’t think
promissory estoppel was necessary – he could find consideration anywhere)
• Modern view of charitable subscriptions (section 90 of restatement) is that they are enforceable without any bargain or reliance –
enforceable simply on a promise
• Most courts haven’t necessarily adopted 90, but almost always just find reliance in such cases
• Misfeasance v. Nonfeasance
• Misfeasance: I promise to drive you to the airport, but I do so carelessly and I get lost and you miss your plane
• Nonfeasance: same facts, but don’t even show up to give ride
• At common law, there was a distinction in torts, in contract it was harder
• Sommers v. Federal Signal: modern view of contract v. tort is that misfeasance v. nonfeasance is unhelpful.
• Better question is where did the duty come from?
• If the duty arose by operation of law, that is for torts
• If the duty arose due to contractual undertaking, it for contracts

Promissory estoppel - showing the change of position becomes critical – there must be reasonable reliance on the promise.
• Section 90 test of promissory estoppel:
• Was there actual reliance on the contract or promise?
• Was the reliance foreseeable by the breaching party?
• Was the reliance clearly detrimental?
• Can injustice be avoided only by enforcement?
• Exemplary situations: promises to make gift, charitable subscriptions, bids by subcontractors.

• First National Bank v. Logan Mfg.: An example of not a gift but a promise of a loan. Bank kept encouraging Garret and Moore. They
were spending in reliance. It was reasonable for them to believe…basically an offer from the bank. Expanded promissory estoppel to
future acts (future acts being promise or an offer). This is a promise for a loan, this is not a gift.
-Promissory estoppel recognizes promises that are made but are not enforceable as a contract. Not a full contract, no offer and
acceptance.

• Stearns v. Emery-Waterhouse: Promissory estoppel may not be used to avoid the statute of frauds where there is an oral employment
contract that requires longer than one year to complete, unless the employer engages in fraudulent conduct. In the absence of a wriiten
contract or proof of fraud, a multi-year employment contract is unenforceable.
• Detrimental reliance on an oral promise for continued employment that is normally barred by statute of frauds only escapes
statute of frauds if actual fraud by the employer is proven.

• Normally , there would be a claim for restitution here – employee could recover for his services rendered
• Possibility of a tort theory

11
• Equitable estoppel: misrepresentation
• Court says difference between equitable and promissory estoppel is that if a that the time the employer made the
promise it did not intend to fulfill the promise – this is fraud and is actionable
• Policy: employment at will would be seriously undermined if employees could use promissory estoppel to make alleged oral
contracts enforceable

Section 5: Precontractual Obligation


• Thomason v. Bescher: An option contract is a binding agreement and irrevocable within the time designated as long as the terms of the
contract are fair and equitable. The use of the seal has been abolished in most states (as well as under UCC 2-203) but under traditional
usage, no consideration was required to support a contract under seal.

Modern Views of Offers – An offeror can general terminate his offer even if he promised not to do so however, offers can’t be revoked if:
• Detrimental Reliance: A general contractor relies on a subcontractor’s offer in determining costs of the
overall job. Offers are irrevocable for a reasonable time period if the offeree relied to his detriment on the
offer being held open, and it is reasonably foreseeable to the offeror that the offeree would so rely.
(Drennan)
• Options: A gives B 20 bucks not to revoke his promise for two weeks. If the offeree gave consideration
for the promise that the offer would be kept open, it must be. Section 87 of the Restatement (2) holds an
option contract valid even if there is no actual consideration.
• Partial Performance of a Unilateral Contract: The offeror can’t revoke revoke once performance has
started (provided that performance is completed within a reasonable time). §45: acceptance through
performance only - offeree begins performance, then option contract exists (but preparations of
performance and non requested work don’t constitute a beginning).
• Firm Offers (UCC 2-205): A signed writing by a merchant to buy or sell goods that has firm terms and
assures that the offer will be held open is enforceable, even without consideration. Only applies to signed
offers by merchants.

• James Baird v. Gimble Bros: subcontractor can’t be bound because neither acceptance of the offer nor promissory estoppel on offers
• This view is old and rejected in Drennan.

• Drennan v. Star Paving: subcontractors bid becomes binding via promissory estoppels - If an offeror should reasonably expect that his offer
will induce justifiable reliance by the offeree of a substantial and definite nature, the offer is enforceable even if the reliance occurs prior to
a formal acceptance of the offer.
• This is the prevalent view
• Restatement §87(2): offers can give rise to promissory estoppel claims

• Goodman v. Dicker: lost profits (expectancy) are not awarded on promissory estoppel claims - only can recover expenses made in reliance
• Actually a torts case, estoppel was equitable estoppel – D says that Emerson will give him a franchise – this is a statement of
fact, not a promise (negligent misrepresentation)

• Hoffman v. Red Owl Stores: in certain situations where pre-contractual dealings contain promises, that aren’t offers because they lack
material/definite terms, promissory estoppel can still apply to these promises
• Note: remedies are limited to reliance damages (no contract exists)
• Requirements for the promissory estoppel: definite and substantial promises that actually induce the action, and injustice can
only be avoided through enforcement
• This is the use of §90, not §87(2) since there was no offer (missing material term)
• Thus, even if no offer than can give rise to a claim of acceptance, we may still have a sufficient promise to give rise to a claim of
promissory estoppel (§90)

Chapter 3: When and How Promises Become Enforceable


Section 1: Mutual Assent
• For a contract to be formed, the parties must reach “mutual assent” or a “meeting of the minds”
• Objective theory of contracts – modern view
o In determining whether the parties have reached mutual assent, what matters is not what each party subjectively intended.
o Instead, a party’s intentions are measured by what a reasonable person in the position of the other party would have thought the
first party intended.

12
• Raffles v. Wichelhaus: (Peerless) similar view as restatement: parties won’t be found to enter into a contract if they use words that have
multiple objective meanings and the parties in fact subjectively mean different things and the parties don’t, or don’t have reason, to know of
the meaning assigned by the other party
o Although contracts is generally objectivist, there are situations where subjective intent is important
o Restatement, §20 – Effect of misunderstanding
 No contract is formed if parties unknowingly assign different subjective meanings to an important contract term
because there was no meeting of the minds.
o Flower City Painting v. Gumina Cont.
 Industry standard is not assumed to be understood for purposes of a binding contract
 So a person only “has reason to know” things someone in their position should know
 Chicken case: tells us that there can be two or more objective meanings of the same word

• Embry v. Hargadinem McKittrick: case explores objective v. subjective intent and the reasonable person standard of objective intent
• Court adopts objective view – inner meaning unimportant - one’s state of mind is immaterial if that party outwardly manifests
assent to the contract
• But, who decides this objective meaning?
• Written contract – question for the court
• Where unambiguous words are spoken – question for the court
• If ambiguous words are spoken – question for jury

• Kabil Development v. Mignot: courts use the objective theory of contracts, but what the parties understood (subjective intent) is relevant
evidence of the objective intent
• Subjective intent is not inadmissible
• Subjective intent could be evidence of objective meaning - Courts allow more information (better information usually = better/more
complete decisions)
• Who is the reasonable person – UCC says the contextual person, but this isn’t universal – it is problem determining the
reasonable person

• Wheeler v. White: the terms of the contract left the amount of the monthly installments and interest on the loan indefinite … so no contract
but…
• Court suggests that there are reliance interests that attach to the pre-contractual moment (when parties are in active negotiation)
• No contract but promissory estoppel because P relied on contract and destroyed building
 Note: without a legally sufficient contract, plaintiff’s recovery will be limited to reliance damages measured by
the detriment sustained.

Section 2: offer and acceptance

• Morrison v. Thoelke: introduction to the mailbox rule – acceptance becomes binding when it is put in the mail
• Mailbox Rules
1. An offer is effective upon receipt (not on mailing)
2. Acceptance is effective upon dispatch (even if it never arrives - but can be cancelled if it would place hardship
on offeror) (§63)
3. Revocation following dispatch of acceptance that has been mailed is ineffective (unless specifically stated in
offer)
4. Rejection is effective upon receipt
5. Rejection is sent first, then acceptance – whichever arrives first controls
6. Acceptance under an option contract is not operative until received
7. Notices are typically only effective when received
• Mailbox rule does not apply to a notice that performance will occur
8. §64 – exchange by electronic transmission follows the same rules as if the parties were in each other’s physical
presence
• Only applies to two way transmissions (phones, not faxes – if timing is critical, email is more like
phone, maybe)

• Moulton v. Kershaw: The letter was a notice of a willingness to entertain an offer, not a K b/c lacking material term of quantity. The
response was an offer, names a price, quantity, do not know payment terms but now the UCC would imply a payment term where
parties are silent. The word “answer” clearly indicates that the buyer did not regard this as an offer since he was required an answer.
o Ads and general circulars are not offers.

• Petterson v. Pattberg: offeror has the ability to revoke the offer at any moment before it is accepted by performance

13
1. What triggers acceptance – tender of performance
2. Restatement §45
• In a unilateral contract, by beginning performance, offeree creates option right to complete performance, and the
offeror loses the power to revoke the offer
• This is considered an option contract
• Note there is a reasonable time limitation on the offer
• The offeree, however, still has the right not to complete performance
• The notes to §45 distinguish between preparations to performance and performance itself

Carlill v. Carbolic Smoke: If an advertisement is sufficiently specific as to the requirements for getting the reward (what the plaintiff can or
cannot do) then its “offer” can be “accepted” by any person who fulfills the conditions of the advertisement and there is no need to notify the
company before using the product.

• Cobaugh v. Klick-Lewis, Inc.: in actual fact, if you are aware of the offer at time of performance, you are entitled to recover – the apparent
intent of the offeror – not his subjective intent – determines the power of acceptance. The promoter of a contest is bound to perform his
promise if a person acts on it before the offer is withdrawn. In this case, the act of shooting for the hole-in-one constituted acceptance of the
offer.
a. There are two ways to accept an offer – through performance or a return promise
b. Distinction between unilateral and bilateral contracts
i. Bilateral contract: promised exchanged for another promise
ii. Unilateral contract: A promises B if B does something, B performs to accept…promise for an act.
c. The offeror is master of the offer
i. The offeror need not be reasonable in specifying the terms of acceptance - acceptance can be arbitrary
d. Black Letter: What is an Offer?
i. An offer is a manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it. (§24)
e. An open offer is presumed to be over after a reasonable period of time

• Allied Steel & Conveyers v. Ford Motor Co.: when the offer does not specify an exclusive means of acceptance, the offer can be accepted
in any reasonable way (including performance)
• True in both common law and UCC §2-206
• This rule is because we prefer to contractual based rules, not default rules

• Davis v. Jacoby: if it is unclear whether the contract is bilateral or unilateral, the law assumes it is bilateral
• This was modified by Restatement §32 – if unclear, the offeree has the option to perform via performance or promise
• If the offeror leaves us in doubt about whether to be returned by promise of performance, than either can be
acceptance
• Jordan v. Dobbins: offeror’s death automatically terminates the offer
• Restatement §36 – ways that an offer can become closed
• Counteroffer
• Time passing
• Revocation
• Death of offeror or offeree

• Brackenbury v. Hodgkin: when an offer invites either performance or promise, partial performance constitutes a promise to render
complete performance (restatement §62).

Section 3: Limited and Indefinite Promises


• Kinds of questions:
o Is the contract illusory (empty promise) because nothing is really promised
o Is the contract void because of lack of mutuality of obligation (one party free not to perform)
• Mutuality of obligation: both parties must make a promise that somehow binds them
• Davis v. General Foods: absolute discretion whether to pay or not rendered promise to pay illusory-neither party has any real obligation so
no contract - promise is too indefinite to be legally enforceable.

• Obering v. Swain-Roach Lumber: conditional promises can become an enforceable promise through future action (condition fulfilled)
• Basic rule (§77) – A promise that allows the promisor to choose among several alternative promises will satify mutality only if
each alternative has valid consideration. For example, A promises to give B either 1,000 or his car in exchange for B’s car. The
promise is enforceable because both alternatives embody valid consideration.
• If clause that says:
• Cancelable at any time – no consideration
• If right to terminate is completely unrestricted, no mutuality of obligation
• Cancelable on 30 days notice – consideration
• This is a legal obligation upon promisor that is consideration

14
• Wood v. Lucy, Lady Duff-Gordon: Cardozo - Don’t need explicit words to find promise - An enforceable
contract may be construed through an implied promise of one of the parties; Cardozo finds that there is an implicit promise on the part of
Wood to try to put Lucy's endorsements on stuff and sell it.
• 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/reasonable efforts to supply the goods and by the buyer to use best
efforts to promote their sale.
• Contract may still be upheld if the surrounding facts and the nature of the agreement fairly imply a promise of performance

Omni Group v. Seattle First Nat’l Bank: A promise for a promise is sufficient consideration to support a contract….If, however, a promise is
illusory, and there is no consideration and therefore no enforceable contract between the parties. However, a promise dependent on a condition
precedent [the promisor's "satisfaction" or the quality of the promise's performance] is not illusory.
• The fact that a feasibility report was required is consideration, but report must be in good faith
• Conditions of satisfaction
• Subjective: satisfaction based on an individual’s perceptions, feelings or intentions
• Types for subjective: personal taste, paintings
• Objective: condition is satisfied reasonably based on externally verifiable phenomenon
• Courts should prefer because easy to get hands around

• Feld v. Henry Levy & Sons: a party to an output contract is obligated to act in good faith and may cease production as long as it is acting in
good faith.
• UCC 2-306 – output contracts…
• Buyer has good faith duty to: maintain reasonable requirement levels, buy exclusively from seller, not take
advantage of the seller by increasing demand to benefit from fluctuating market prices
• Seller has a good faith duty to maintain certain level of output (unless economically impossible).
- NOTE: K's with adequate "notice to terminate provisions", despite an indefinite duration, are valid!
• Corensweet v. Amana Refrigeration: courts are reluctant to second guess business judgments, scrutinize reasonableness of good
faith
• Court holds UCC general obligation of good faith is trumped by UCC 2-309 that says a contract of indefinite term
can be terminable with notice
• You can terminate any indefinite contract without court’s 2nd guessing your judgment
• Caveats to this rule:
• Missouri Doctrine: franchisee should be given reasonable time to recoup investment. This protects
franchisee’s reliance interest.
• When contracts governed by statute
• Violation of public policy (3rd person at table)

• Sun Printing and Publishing Association v. Remington Paper & Power Co., Inc. - Under the common law, NOT THE UCC, If two parties
attempt to contract together, with the contract involving two key elements of (1) price, and (2) time, and one of those elements is not
specified sufficiently in the contract, then no agreement is reached, and neither party is bound.

• Empro Mfg. Co. v. Ball-Co Mfg., Inc.: Letters of intent are not binding. They are agreement in stages and part of K negotiations. THEY
ARE NOT BINDING CONTRACTS. (If ambiguities w/o ability to cure no contract.)
• Rest 33 - §33. CERTAINTY- Jives with UCC 2-207
(1) Even though a manifestation of intention is intended to be understood as an offer (i.e. letter of intent), it cannot be accepted
so as to form a contract unless the terms of the contract are reasonably certain.
(2) The terms of a contract are reasonably certain if they provide a basis for determining the existence of a breach and for giving
an appropriate remedy
(3) The fact that one or more terms of a proposed bargain are left open or uncertain may show that a manifestation of intention is
not intended to be understood as an offer or as an acceptance.

• Sale of Goods (UCC 2-204). Liberalizes rigid offer/acceptance machinery. GAP FILLING IN K.
Omission of one or more terms does not make an offer invalid as long as parties intended to make K and there is a reasonably
certain basis for giving appropriate remedy.
a. If PRICE is missing… infer “reasonable price at time of delivery” (UCC 2-305)
b. If PLACE is missing… infer “seller’s place of business” (UCC 2-308)
c. If TIME is missing… infer “reasonable time” (UCC 2-309)
d. If TIME of payment is missing… infer “when buyer gets goods” (UCC 2-310)

Chapter 4.
Section1: The Effects of Adopting a Writing
• What is the Parol Evidence Rule?

15
a. Where an agreement has been reduced to a writing that the parties intend as the final and complete expression of their agreement
(integration), evidence of any earlier expressions (oral or written) is not admissible to vary the terms of the writing.
• What are the exceptions to the Parol Evidence Rule?
a. Evidence of prior agreements or negotiations may supplement a partially integrated agreement, provided this evidence does not
contradict a term of the writing.
b. When an agreement is completely integrated, not even evidence of a consistent additional term is admissible to explain or
supplement it (Rest. 216).
c. Some courts treat contemporaneous oral agreements as prior oral agreements, others assert that the existence of a
contemporaneous oral agreement automatically proves that the writing is only partially integrated.
d. Parol testimony is admissible to prove a condition precedent to the legal effectiveness of a written contract if the consition does
not contradict the express terms of such written agreement.
e. Even if the writing is a complete integration, parol evidence is admissible to show fraud, mistake or duress.
f. The UCC version
i. 2-202: a writing intended to be a final expression may not be contradicted by evidence of prior written or oral
agreement or of a contemporaneous oral agreement.
ii. 2-202 (1): the writing may be explained or supplemented by course of dealing of usage of trade even if it is a
complete integration, unless the course of dealing or trade usage is carefully canceled by the contracts terms.
iii. 2-202 (2): the writing may be explained or supplemented by evidence of consistent additional terms unless the court
finds the writing to be complete and exclusive.

• Mitchill v. Lath: If a writing is seemingly complete on its face, evidence of a prior oral agreement is admissible only if it is one that the
parties would not ordinarily be expected to embody in writing.
• Written agreements takes precedence over oral agreements
• What are the functions of the parol evidence rule?
• Instrumental – get people to put things in writing
• Evidentiary – easier for courts to sort out breaches
• Preventative – prevent frauds and uncertainty over contracts
• If an oral agreement is to vary the terms of a written contract, three conditions must be satisfied
• 1. Collateral
• 2. No contradiction of express or implied terms
• 3. One would not ordinarily expect the term to be embodied in the agreement (not the type of term expected to be
in the agreement)

• Hatley v. Stafford: to determine whether an oral agreement is inconsistent with written contract, it must contradict an express provision of
the contract
• Three questions of substance asked by the Hatley court:
• Was contract completely integrated (represents a full and final embodiment of the parties’ understanding)?
• Question for the court
• If it is completely integrated, the written contract bars all prior evidence
• If it wasn’t complete, does the alleged term here contradict the written contract?
• Question for the court
• What does inconsistent mean?
o Hatley: contradicts an express provision in the contract
o Michell: said express or implied
o Hayden: law implies default term of reasonable time – but this has to be wrong because
whenever there is silence, an implied term would contract the oral term, thus no parol evidence
ever
• If no, was the alleged oral term actually agreed on? – jury question
• What is the parol evidence rule? Two propositions thus far:
• Where a writing is a complete integration of the parties agreement, no extrinsic evidence of contractual terms is
admissible as to what the terms of the contract are
• Where a writing is a partial integration of the parties agreement, no extrinsic evidence is admissible to contradict the
partial integration
• Different conceptions between courts over scope of parole evidence rule
• Williston / Corbin Debate
• Williston was a formalist; Corbin was a realist – intentions important
• Williston’s View
o When there is a writing, we prefer that as the contract as compared to whatever the parties say
was there agreement.
• Corbin’s View
o Nothing sacred about a writing per se.
o What’s important is the parties actual intentions.
• Corbin’s view wins out more in the modern context.

16
• Extrinsic evidence is helpful in construing the contracts.

• The Restatement provides a roadmap about how to approach these issues:


o §209 – Integrated Agreements
1. An integrated agreement is a writing constituting a final expression of one or more terms to be determined by the
court.
2. Whether integrated determined by court in the absence of a merger clause.
3. When appearance is integrated writing, the writing gets preference. Unless, other extrinsic evidence indicates that
writing is not integrated.
• Thus, just having a writing is automatically an integration.
o §213 – Parol Evidence Rule
 Integrated agreement discharges prior agreements that are either inconsistent or even within its scope (complete
integrations discharges all)
 What does it mean to be within the scope?
• In Hatley, a written provision of time of buyback provision
• And then Hatley says an additional clause excluding Sunday’s, this is within the scope and barred
o §214 – Evidence of Prior or Contemporaneous Agreements
 Admissible when determining
• whether writing is integrated
• completely or partially integrated agreement
• meaning of the writing (controversial)
• Invalidate causes (fraud, duress, etc.)
o §216 – Consistent Additional Terms
 Consistent additional terms admissible, unless contract is completely integrated
o The UCC’s Parol Evidence Rule (§2-202)
 Tried to simplify complexities of integration
 Preserve basic parol evidence rule, however, even if the writing is a complete integration, supplementation is allowed
for “usage of trade” or “course of dealing”
• However, consistent additional terms cannot be admitted if the writings were intended as a “complete and
exclusive statement of the terms”
 Much harder to get exclusion of evidence on meaning of contract or supply additional terms under the UCC

• Long Island Trust v. International Institute for Packaging: one way to get around the parol evidence rule is to argue that the delivery of the
writing itself was conditional upon a condition precedent to the formation of the contract
• Thus although the writing is completely integrated, the document was never a contract because the condition precedent was
never fulfilled
• Although the conditional delivery idea is a way to get around parol evidence rule, not that the Willistonian tendency has some
transaction in this area
• If the writing expressly/explicitly disclaims a condition precedent, the writing will take precedence over the condition

• Lipsit v. Leonard: parol evidence rule does not bar a claim for fraudulent inducement

• Hoffman v. Chapman: parol evidence admissible to reform a written instrument where mutual mistake exists
• Reformation only applies when parties intended to put down something different on paper than was actually put down
• A unilateral mistake is not enough to reform/rescind a contract
• evidence is admissible to show the intentions of the parties, not to vary the term

Section 2: Interpreting the Promise

W.W.W. Associates, Inc. v. Giancontieri: Look to the K first, only consider extrinsic evidence if it's really unclear.
• A court will use parol evidence to interpret the writing when the writing is ambiguous. If the writing is not ambiguous on its
face, then no introduction of parol evidence.

PG&E v. GW Thomas Drayage: The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether the
instrument appears 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 instrument is reasonably susceptible.
• The issue is whether words spoken during negotiations are admissible to explain the meaning of a term in the contract
• Most court’s don’t use Traynor’s view
• Majority View
• The determination of whether a contract is ambiguous is made in the four corners of the document. Court can’t use
extrinsic evidence to create the ambiguity.
• Only time you can use extrinsic evidence is if the contract is ambiguous on its face.
• The one kind of evidence that should not be excluded is testimony about the industry practice or custom

17
• UCC §2-202 expands evidence allowed to include previous dealing between the parties, and course of performance under the
present contract
• Under the UCC, the custom and trade usage will always be admissible
• Restatement §212 – Interpretation of Integrated Agreement
• Suggests presumptive rule is that juries decided the meaning, but that is only true among ambiguities – the judge is
still the gatekeeper as to the meaning of a contract

Frigaliment Importing: The court will apply the most reasonable interpretation in light of all the circumstances. It is harder to prove a more
narrow definition is used because you will have to show the other party knows the narrow interpretation.
• Where one party knows or has reason to know what the other party means by certain language and the other party does not know or
have reason to know of the meaning attached to the disputed language by the first party, the court will enforce the contract in
accordance with the innocent party's meaning.
• The party that seeks to have the contract term interpreted in a narrower sense that is more favorable to him bears a substantial burden
of proof.
• Prevents stronger party from taking advantage of the weaker party.

Section 3: Contracts Without Bargaining

Livingstone v. Evans: teaches about the common law mirror image rule
• Mirror Image Rule of Common Law
• Suggests that a deviant acceptance (purports acceptance, but has different terms), is actually a rejection and a
counteroffer
• To accept, you must say exactly what the offeror says to you
• Mere inquiry do not count as rejection counteroffers

• The UCC says that we often can’t identify offer and acceptance and mirror image rule is too simple
• The UCC says that (context of battle of forms) we don’t care about moment of contract formation, but from the
course of dealing what terms the parties agreed to
• The UCC and common–law have thus undergone a substantial change
• There is a greater tolerance of incomplete agreements

• UCC §2-207 (Battle of the Forms) – UCC rejects mirror image rule
• 1) Rejects the mirror-image rule – there can be acceptance even if acceptance has different terms unless acceptance is
expressly made conditional on assent to the different terms (under the common law, the “last shot” prevailed)
• 2) The additional terms are treated as proposals
• If the parties are not merchants, then if the proposals are not agreed to, they are rejected
• Between merchants, the proposals become part of the contract, unless:
o (a) the offer limits acceptance to its own terms,
o (b) the additional terms materially alter the contract
o (c) the additional terms are objected to by the offeror (if objected, then there is still a
contract, with the terms knocked out)
• 3) If conduct suggests formation of a contract, whatever you agreed on is contract and the rest is governed by UCC
default rules - The Knockout Rule: where a contract is formed with conflicting terms, conflicting terms knock each
other out and the codes default rules takeover (majority rule)

• UCC §2-204 Formation in General (Lefkowitz) a court can enforce a contract that has some missing terms if the essential terms
are present and the parties intended to enter into a contract. Missing terms can be applied by the court. (see 2-309 etc for the
substitute for missing terms.)
• Don’t need to identify offer and acceptance to find a contract
• Possible to find a contract in a course of dealing
• 2-204(3) says use gap fillers which are in 2-310 etc.
• Similar to Restatement §22: ordinarily offer and acceptance, but mutual assent may be made even if we can’t pinpoint
moment of offer and acceptance

ProCD v. Zeidenberg: cases (also Gateway) are about flexibility in locating offer and acceptance (shrinkwrap cases)
• UCC §2-204(1): Contracts can be found in lots of different ways
• What counts is that manufacturer has given notice to the consumer that there are other terms that need to be agreed
upon (in the box, in the software, etc.)
• If don’t return, counts as acceptance of terms
• Notice and expectations are important
• On exam, might be good to talk about offer and acceptance and how it can be flexible and talk about notice and
expectations
• A vendor may invite acceptance by conduct (keeping product past 30 days)

18
Hobbs v. Massasoit Whip (EEL): §69 – based on previous course of dealings can lead to silence as acceptance
• Silence can act as acceptance in certain situations
• When an offeree fails to reply to an offer the following cases constitute acceptance:
a. Has an opportunity to reject and does not (PRO-CD)
b. Offeror gives you reason to understand that silence will constitute acceptance
c. Past dealings (Hobbs)

Martin v. Little, Brown & Co.: teaches about implied contracts in law and fact; in this case a volunteer does not have right to claim contract in
law or in fact as they don’t usually charge for services
• In the voluntary giving of services, an inference of payment does not arise
• Contract implied-in-fact
• Real bargain, actual contract made through silence, lack of conduct, as opposed to explicit agreement
• Reasonable person would find implied promise, non-explicit dealings between parties
• Example: painter starts painting house and you don’t stop him
• Contract implied in law
• Not a contract, no agreement, but situation that requires restitutionary payment to resolve unjust enrichment
• Parties would have agreed to contract if there hadn’t been transaction costs or time to do so

Monroe v. Monroe: no implied marriage contract

Section 4: Mistake, Misrepresentation, Warranty and Nondisclosure


• Laidlaw v. Organ: There is no duty to disclose when merchants bargain at arm's length and the extrinsic information is equally
accessible to both parties.
- Caveat emptor- buyer beware
- Caveat vendor- seller beware
- Courts will impose a duty to speak whenever silence would be tantamount to a lie.
- Preserve the equity of both parties.

• Jackson v. Seymour: court imposes a higher standard on fiduciary and confidential relationships because they are difficulty to police (duty
to disclose).
• Court in this case actually relied on constructive fraud due to a fiduciary relationship to vitiate the contract
• The fiduciary must disclose the full extent of the interest to the other party
• Constructive fraud is indicated by a combination of the following factors:
A confidential relation between the parties
Reliance of the plaintiff on the advice of the defendant
Gross inadequacy of the contract price
An offer by the plaintiff to return the purchase price and rescind the contract
The rejection of the defendant of that offer
• There are 2 obligations in a Fiduciary relationship- 1) Duty of care – the trustee has to be careful 2) Duty of loyalty- the
trustee may not take his/her own interests into account when the fiduciary is working on behalf of the beneficiary.
o Rule- When there is mutual mistake; rescission is allowed when constructive fraud
is present.
o Inadequacy of the bargain must shock the conscience.

• Sherwood v. Walker: Rescission is usually only allowed if the mistake goes to the basis of the K (what the K was all about) and a
contract may be rescinded if it was made in reliance upon a mutual mistake of substantive fact.

• Restatement §152
• Mistaken belief must relate to a basic assumption of the parties and which materially affects the
performance
o Caveat: rescission is not available to relieve a party who has assumed the risk of loss in
connection with mistake
 Restatement §154
• The risk can be allocated by agreement
• Party aware that the thing is not true but says that is ok
• The risk is allocated by court if reasonable under the circumstances

• Unilateral Mistake from the Restatement (understanding of other party’s error)


• If one party is aware of the other party’s mistake then the courts are likely not going to enforce the
contract even though there’s unilateral mistake
• But if one party is not aware of other person’s mistake, then court will enforce the contract

19
• Elisnore Union Elementary v. Kastorff: a unilateral mistake can be grounds for rescission; courts will
generally grant relief for errors which are clerical or mathematical, not protect bidders who make mistakes in judgment; you can't snap up
an offer that you know is mistaken…that's acting in bad faith.
• Courts will generally grant relief for errors which are clerical or mathematical.

When is a unilateral mistake a grounds for rescission – three factors


• 1. Absence of fault or negligence by the mistaken party (mathematical / clerical errors)
• 2. Absence of detrimental reliance on the contract
• 3. Party seeking to enforce might have been aware of the mistake
• One important caveat, is that unilateral mistakes must be ones of fact, not ones of judgment
• Courts want to avoid awarding a windfall, nobody get a ridiculously good deal at the expense of somebody else.

Tribe v. Peterson: In order for a seller to make an express warranty, they must make a statement of fact that relates to the goods and becomes part
of the bargain. A seller's opinion, belief or judgment does not constitute an express warranty.

• UCC Warranties for Sale of Goods – Traditional Remedies


• 2-313- It’s possible to create an express warranty without using the word warranty
o Buy describing the goods (skis made by certain brand)
o Buy a sample or model (must be same skis as in sample)
o But a statement of the seller’s opinion doesn’t create a warranty
• 2-314- There is always an implied warranty of merchantability
o The goods must be of fair, average quality within their description and fit for ordinary purposes of
how such goods are used
• 2-315- Implied Warranty: Fitness for Particular Purpose
o Created when the seller knows that the buyer is relying on the seller’s judgment in picking out
suitable goods
• 2-316- ways to disclaim or exclude certain kinds of warranties
a. Damages for breach of warranty governed by 2-718, 2-719

• Hinson v. Jefferson: All land purchases have an implied warranty of habitability. Seller of the land bears the risk if the land cannot be
used by buyer for the purpose for which it was purchased. Courts assume that the seller has more information than buyers/consumers.
• Restrictive covenants on property lead to an implied warranty for that use
• Generally, courts will find an implied warranty where there is a sale of a new home by the builder- there is an implied warranty
for large fundamental defects running with the deed to subsequent owners
• Caveat emptor – principle has been relaxed to home sales – as a general proposition, a new builder warrants that a new home is
free from structural defects

• Johnson v. Healy: contracts can be rescinded for a innocent misrepresentation - The builder is liable for his innocent
misrepresentation [implied warranty] when said misrepresentation induces the buyer to make a purchase.

• Cushman v. Kirby: you could be liable if you are aware of material information that cannot be found through casual inspection
• Sellers don’t have to disclose everything (non-material facts)
• Omission to disclose where there is a duty to disclose
• But when does the duty arise – superior knowledge or representation by party that converts the failure to speak into
fraud

Section 5. Changed Circumstances Justifying Nonperformance


Freeing oneself from contractual obligation on conditions that occurred after the contract was formed
• Always ask yourself if the risk of thing happening was contractually allocated to one of the parties
• If foreseeable, reluctant to excuse
• Doctrines:
• Impossibility – the thing one party is supposed to do is impossible
• Impracticability – when does performance become so burdensome and expensive that is impractical
• Frustration of purpose – parties believed something true, find out not true, and though performance is possible, it is still
frustrating

• Taylor v. Caldwell: there must be a destruction of the subject matter or means of performing contract to relieve performance under the
doctrine of impossibility
• Doctrine of impossibility – it was impossible to make the building available because it was destroyed
• A party is not simply excused because it become impossible to perform
• This is the common law rule (narrow) that becomes extended in later cases
• What we really care about is who is in a better position to avoid the accident – that is who bear the loss

20
• Tompkins v. Dudly: the least cost avoider should bear the risk of the loss
• This case it is a new construction and the builder has complete control until they finished – so they bear the risk of bad things
since they are the best position to make sure the things don’t happen
• When the parties have specifically provided for a third party guarantee, the parties have anticipated that the parties may not
perform and the guarantor is insuring the risk

• Carroll v. Bowersock: when a discreet unit of work is completed, the party who has completed the work has conferred a benefit to owner,
and even if the work is destroyed the buyer will be liable
• We divide performance into discreet units
• Caroll breaks the work up into units and only makes liability for benefit actually occurred, not just done at specific request
• Taylor, Tompkins and Caroll at a functional level:
1. Contract itself is figuring where risk of loss should fall
2. Extent of performance actually tendered or completed
3. Control over the facility (putting the risk of loss on the party that is best able to prevent the loss from
occurring)
4. Insurability, insurance specifications in the contract, and actual insurance
o If someone is supposed to get insurance, this tells us something about who should bear the risk
o If there is insurance – tells us something about where the risk of loss should fall
• Courts often put the risk on the party better able to handle the risk (insure) - burden on the big guy
• UCC rule for Allocation of Risk
• 2-509: Risk of Loss in the Absence of Breach (when the goods are shipped)
• If the delivery is by common carrier, the seller’s obligation ends the moment he places the goods on a
common carrier
• OR if the seller is delivering the goods himself, he bears the risk until delivery

• Kel Kim v. Central Markets: modern explanation of impossibility – means of performance is destroyed
• Impossibility is construed narrowly and will only apply when the destruction of the subject matter (Taylor) or the means of
performance is destroyed and makes performance objectively impossible.
• This is a looser view than in Taylor
• Idea is that the way in which performance is supposed to be carried out is impossible, then impossibility might apply
• Courts tend to read force majeure clauses very narrowly
• If you have a force majure clause, courts will usually make these the only instances that will excuse performance under
impossibility

• Bunge Corp. v. Recker: identification of specific goods is necessary for the application of 2-613
• UCC 2-613 – Casualty to Identified Goods
• UCC 2-613 performance excused “if the loss is total the contract is avoided” to the identified goods
• Identification of specific goods is necessary for the application of 2-613
• What does identification mean? - point to particular goods and saying those goods

• American Trading v. Shell Marine: doctrine of impracticability: performance literally possible, but can only be done with extreme
difficulty, expense or loss – court found in this case that mere increase in cost alone is not sufficient to excuse performance – an increase in
less than 1/3 the contract price was not sufficient to constitute commercial impracticability.
• Vastly, unreasonably more difficult or expensive to perform
• It would have been so expensive that no one would have actually performed
• UCC 2-615: Excuse by Failure of Presupposed Conditions
• Unless seller assumed greater obligations, impracticability that results from the occurrence of contingencies the non-
occurrence of which was a basic assumption on which the contract was made excuses performance
• Two caveats:
o (b) where impracticability makes you unable to deliver all of your goods, you can’t
discriminate about which customers gets the goods say you deliver – can’t just favor preferred
customers
o (c) duty to give seasonable notification
• This is a narrow view of impracticability
• If the parties assumed that a non-occurrence of a condition was necessary for the contract to be completed and the
condition occurs:
• Then performance is impracticable so it’s excused
• This provision is usually tightly construed eg.- no recovery for plaintiff who must take a loss because of government
price increases (foreseeable) in milk

• Krell v. Henry: an old formulation for frustration of purpose

21
• A better formulation for frustration of purpose is:
1. What was the purpose of the contract?
2. Was the purpose of the parties frustrated?
3. Was the event in the anticipation of the parties (foreseeability)?
• Mutual purpose is required - both parties must understand that the entire foundation of the contract is this specific purpose
• The modern American position is that both restitution and reliance are available if some performance has already occurred b/f
the purpose is frustrated, the one thing we don’t do is enforce the expectancy position
• In thinking about frustration of purpose separately, it must be cabined – don’t want to lose certainty of commercial transactions

• Lloyd v. Murphy: frustration needs to be total or at least nearly total to hold the contract unenforceable

• Chase Precast v. John Paonessa: restatements view of frustration of purpose


• Restatement §265 – Where a party’s principal purpose 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, his remaining duties to render
performance are discharged.
• Sometimes, simply because the event might have been foreseeable, might not be a complete obstacle because of frustration of
purpose
• Parties must expressly or impliedly assume some risk.

Chapter 4: Policing the Bargain

Section 1: Competency to Contract


• Contacts entered into by children/mental incompetents are voidable unless the contract relates necessities like food or shelter

Section 2: Duress and Coercive Renegotiation


• Definitely contract, but parties amend the contract, and the question is should the court enforce the contract as modified or the original one.
• Preexisting legal duty rule – where you already have an obligation, agreeing to do something less or the same is not consideration for a
promise. We need to look for new, additional consideration
• UCC §2-209(1) changes the common law rule, getting rid of the need for consideration in the modification of the contract

• Batsakis v. Demotsis: Inadequacy does not void a contract, as long as the consideration had some value. A party that receives the benefit it
seeks will not be relieved from a bad bargain.

• Levine v. Blumenthal: Partial payment of a larger debt is not consideration for an agreement to excuse the full debt, because the debtor is
obligated to repay his debt anyway (pre-existing duty). The fact that a financially weaker debtor agreed not to breach is not adequate
consideration.
• Gift - must show a transfer and donative intent, burden of proof is on the donee.

• Alaska Packers’ Assoc. v. Domenico: A new promise to increase the compensation of one already contractually obligated to perform is
invalid if new consideration is not given (pre-existing duty rule).
• Modern view wouldn’t inquire that much into if the claim was valid b/c settlements are more likely to be viewed in a positive
light.
• Schwartzreich v. Bauman-Basch: way around legal duty rule - two steps:
• 1: rescind the first contract – consideration for terminating is giving up the rights
• 2: offer new contract with new consideration on both sides

• Austin Instrument v. Loral Corp.: contracts will not be enforced if entered into under duress - A contract is voidable if the party claiming
duress was forced to agree by means of a wrongful threat precluding the exercise of his free will. The existence of economic duress is
demonstrated by proof that immediate possession of needed goods is threatened and that the goods could not be obtained from another
source. Contract modification under economic duress is not enforceable.
• Duress as a matter of contract law is a circumstance where you enter into or modify a contract under a wrongful threat from the
other party
• What is a wrongful or improper threat?
• Baseline: if you have a legal right to do it, it will not be duress
• However, the exception (a threat to do thing you have a legal right to do) is that if the threat was made for purely
malicious motives to do harm, it can still give rise to duress

• Brian Construction v. Brighenti: (§89) a promise modifying a duty is binding in view of circumstances not anticipated by the parties
(another route to resisting legal duty rule)
• Unforeseen circumstance may lead to a contract revision so long as the resulting agreement seems fair
• §89 There are three ways to modify a promise not performed (don’t worry about pre-existing legal duty):
• 1) If the modification is fair and equitable in view of a circumstance not anticipated by the parties when the contract
was made

22
• 2) Provided by statute
• 3) If there is a material change in position in reliance on the promise.
• The policy rationale of §89 is that when there is substantial uncertainty of parties obligations in light of unforeseen
circumstances, we shouldn’t have to relitigate the merits of the underlying claim if the modification is fair and reasonable
• The modern view is that we don’t inquire to see if the underlying claim is valid

• Universal Builders v. Moon Motor Lodge: (§224) a contract can be modified by a separate agreement, we don’t privilege an earlier contract
just because it is in writing
• But statute of frauds could still be a problem
• If someone waives a condition in the contract, and the other party relies on this waiver to his detriment, we enforce and the
waiver need not be in writing
• UCC 2-209
 Deals with modifications, rescissions and waivers of contracts
1. Modifications needs no consideration
2. A signed writing that purports to bind parties to not modify contract orally, in order for this to be binding, the no oral
modification agreement must be separately signed by the consumer
3. Modifications are like any contract for statute of frauds purposes
4. Even if we can’t find new enforceable contract, the oral modification may act as a waiver for the parties to insistent
on things in the contract
5. The waiver can always be retracted unless the other side has materially changed his position in reliance
• Doctrine of Waiver
• §89(3) –Modification becomes enforceable based on reliance
• If another party changes position on modification, even if modification was without consideration, if it
was relied on, it will be enforced
• It should always be possible for the person who made the waiver to retract until it was relied upon

• Hackley v. Headley: idea of duress as a limited doctrine –duress created solely by the personal circumstances of one party will not
invalidate a contract, the duress must be created by the other party
• Duress must be confined to where a party made an improper threat
• Preserve the courts ability to police the bargain for extortionate dealing

• Marton Remodeling v. Jenson: by cashing a check with payment in full, you have a settlement agreement (accord and satisfaction)
• The other party can’t try to reserve rights by writing on check “not full payment”
• Two criteria for accord and satisfaction to apply:
• 1) Unliquidated claim or bona fide dispute over the amount due
• Unliquidated – amount due and owing is not specified in the contract
• 2) Payment must be tendered in full settlement of the entire dispute and not in satisfaction of a separate undisputed
obligation
• There must be real bargaining over the price- in Marton there’s no settlement/compromise
• Accord: an executory contract to discharge an existing contractual duty.
• Satisfaction: the performance of the accord agreement

• Denney v. Reppert: a bargain to obtain benefits for performing regular duties is unenforceable
• Policy: we want employees to do their jobs fully and not fish around for extra money

Section 3: Scrutiny of Limited Commitment


• Sheets v. Teddy Frosted Foods: Public Policy; Employee should not have to choose between risk of criminal sanctions or keeping his
job.

EMPLOYEE HANDBOOKS:  do they create contractual obligations?


• MCDONALD V. MOBIL COAL PRODUCING INC: Employee handbook provision can’t modify at will
employment unless disclaimers are obvious and explicit.

• KARI V. GENERAL MOTORS: D’s handbook had a conspicuous disclaimer in red ink and italicized emphasizing
that the handbook was not a contract - As a matter of law, the handbook’s disclaimer was conspicuous enough so as
to have not created a contract
 “handbook clearly evinced an intention not to create an offer capable of acceptance”
 the communication was “couched in disclaimers.”

Section 4: Standardized Terms—Whither Assent?


• Trying to figure out if standardized form contract will be enforced

23
a. Two ways to hold unenforceable:
i. Traditional contract doctrine – no mutual assent
ii. Against public policy (unconscionability)
• These standardized forms are called contracts of adhesion (unilateral agreement to take our terms or walk away, no negotiation over terms)
• Example: P didn’t assent to terms the back of parking ticket; if there had been a huge sign- “parking subject to terms on ticket”, then driver
would have been on notice (a lot comes down to notice)

• Henningsen v. Bloomfield Motors: standardized forms can be held unenforceable because they violate public policy
• But is this to big an umbrella – should this be part of contract law or expresses some value that don’t belong in contract law
• Enforcing this disclaimer would allow dealers to limits their liability, which would lead to suboptimal amount of deterrence –
public policy concern
• The unequal bargaining power is a concern here as well

• Richards v. Richards: there are certain types of contracts that the court will not enforce- eg. broad and all-inclusive waivers of rights,
contracts that impose externalities on 3rd parties
• Judge cites three reasons not to enforce contract, but none is independently sufficient:
• Release not conspicuously labeled
• Release is too broad and all-inclusive
• No opportunity for negotiations

• Broemmer v. Abortion Services of Phoenix: majority holds that a term is excluded unless the party signing the contract would have
reasonably expected the inclusion of such a term
• Dissent: the term is included, unless a party would have rejected the term had they known it was included (this is the more
accepted version)
• Puts burden on P to show this
• Restatement §211
• (3) The term is enforceable, unless the party proffering the boilerplate has reason to know that she would have
rejected the clause had she known about
• Examples: 1) bizarre or oppressive, 2) eviscerates the terms agreed to, or 3) eliminates purpose of
transaction

• Woollums v. Horsley: unconscionable bargain will not be specifically enforced in equity


• Unconscionability originated in equity courts concerned with fairness: so a claim for specific performance might be analyzed
differently than one for damages
• Unconscionability is based on the time that the contract was made, not later on
• Equity hold contracts to a higher standard of fairness than courts of law; prevent injustice.
• “courts of equity will not proceed to decree a specific performance where the contract is founded in fraud, imposition, mistake,
undue advantage, or gross misapprehension; or where, from a change of circumstances or otherwise, it would be unconscientious
to enforce it”

• Waters v. Min: modern view is that unconscionability is not just an equity doctrine – faithless agent. -
• UCC §2-302 – it doesn’t matter which party is seeking the remedy – the court may refuse to enforce in whole or in a part on
ground of unconscionability
• §2 of §2-302, reminds us that in the commercial context, the court must give the proponent of the clause the opportunity to give
evidence about the commercial context
• Things to watch for unconscionability include: oppressiveness of K upon disadvantaged party, unfair surprise to disadvantaged
party, allocation of all risk to disadvantaged party, superior bargaining power, high-pressure sales tactics, gross disparity in
consideration, experience and education of parties, fine print and undue influence.

Unconscionability is generally considered a matter of law for the judge to decide (and not a matter for juries) because
unconscionability cases started out in equity, which doesn’t use juries.

• Two major strands for dissolving or not enforcing a contract for unconscionability (as explained in Brower):
• Procedural – problems with the procedure through which the contract was made, e.g.:
• Setting of the transaction
• Experience and education of the party claiming unconscionability
• Fine print involved?
• High-pressured tactics used?
• Disparity in the parties’ bargaining power

• Substantive – generally, when there is gross disparity in value, the substance of the contract is found to be
unconscionable

24
• Mere inadequacy of consideration won’t cancel a contract

• Adhesion contracts are not necessarily unconscionable; but the existence of an adhesion contract is generally
evidence of inequality of bargaining power

• Bowers v. Gateway 2000: for unconscionability to apply, there must have been procedural unconscionability as well as substantive
unconscionability
• The doctrine of unconscionability is divided into two aspects:
• Procedural – involves characteristics of a party or methods of contract formation that cast a pall over the agreement
process
• You identify procedural unconscionability by unfair surprise and/or absence of meaningful choice (take it
or leave it)
• Substantive – the harsh impact of the contract’s terms

• Market Street: there is a duty of good faith and fair dealing implied in every contract (UCC §1-304)
• The duty of good faith relates to the actual performance of the contract

Chapter 6: The Maturing and Breach of Contract Duties

Section 1: The Interdependence of Promises

There are three different types of covenants (Kingston v Preston)


1. Mutual and Independent: each side has an independent claim for damages regardless of if the other side has performed (Nicholas)
2. Conditional and Dependant: the performance of one party depends on the prior performance of the other party
3. Mutually Interdependent: the obligations are to be performed simultaneously
a. Dependent upon the other party’s performance at the same time
b. If one side doesn’t show up, the other party must show up to tender in order to sue for breach
c. If no one shows up, there is no breach

• Price v. Van Lint: it is a matter of looking at the context of the parties relationship and dealings to determine the type of covenant
• Restatement Principles on how to construe the order of performance
• §234 - where performance can be done simultaneously, presumption that is that performance is due simultaneously
• §238- where simultaneous performance is due, it is a condition precedent of each parties’ performance that the other
party tender performance
• UCC 2-507, 2-511 is the same rule

• Conley v. Pitney Bowes:

Anticipatory Repudiation
If there is an anticipatory repudiation, when do we have enough of a declaration from the repudiator that he will not perform?
• Wholesale Sand & Gravel v. Decker: Restatement § 250: anticipatory repudiation must be definite and unequivocal, but conduct can suffice

• K&G Constr. v. Harris: exploration of rules on interdependence of performance obligations when the payment and work proceed in
installments
• Restatement §240- Part Performance As Agreed Equivalents
• Where performance can be apportioned into corresponding pairs, so that each corresponding part is an agreed
equivalent, then a party’s performance of one part of such pair has the same effect on the other’s duties to perform as
if this equivalent is the entire contract
• 1) Must have agreed equivalents (can have agreed equivalent but not installment if there is a lump sum
payment at the end)
• 2) The right to insist upon payment is contingent for one performance is contingent on you having actually
performed
• UCC §2-612: Breach of Installment Contract
• Perfect tender rule (UCC 2-601) doesn’t apply to installment contracts
• An installment contract is separate lots to be separately accepted
• Where a contract specifies certain payment for each lot, you have an installment contract
• Only an installment contract if payment at same time of performance (no lump sum payments)
• Under perfect tender rule, buyer can reject for any non-conformity, but under 2-612 (2), a buyer can reject only if the
installment substantially impairs the value of the installment and can’t be cure

25
• BUT if the defect doesn’t impair the whole contract (part 3), and the seller gives assurances that he will
cure, then the buyer can’t reject
• Summary: can reject if substantial impairment to installment, but not if seller gives adequate assurance of
cure
• (3) If non-conformity substantially impairs value of contract as whole, then there is breach of contract as whole –
buyer can cancel contract and reject future performance
 So the UCC distinguishes non-conformity that impairs only an installment and one that impairs value of the whole
contract
o The rationale flexibility and saying where there is a long term relationship, let’ s try to prevent forfeiture where only a small
breach of one installment

• Ziehen v. Smith: if the defect is curable by the date of performance, then the buyer is still required to tender performance to put the seller in
breach
• If the defect is not curable, there is an exception to the rule, you don’t need to go through a futile gesture, and tender is not
required to put the seller in breach
• General principle: when performance due simultaneous, to recover for breach, you had have bettered tendered performance
• How do we know if a defect is curable? - “one that can be removed as a practical matter”

• Stewart v. Newbury: where a contract is made with no agreement for the time of payment, the work must be substantially performed before
payment can be demanded.
• Question of the order of performance where they can’t be simultaneously due
• Basic presumption: where performance due simultaneously, each parties tender becomes a condition precedent to the other
performance,
• Where performance could be tendered simultaneously, assume they should be tendered simultaneously
• But sometimes it can’t happen all at once
• What is really happening hear is that employers are more solvent
• Good sent in multiple lots – what is the rule now?
• Under §2-507, 11 – replicate simultaneity obligations – for a single lot transaction
• §UCC 2-307
• According to these provisions, each side has an obligation to enter performance to put the other party in
breach
• Where tender can be done simultaneously, it should be done so
 2-307- the seller generally must deliver in a single lot
• But if the circumstances give either party the right to demand delivery in lots, payment must be paid upon
delivery of each lot

• Tipton v. Feitner: buyer is obligated to pay for the delivery of separate lots as they arrive because they are apportionable into different lots
(this is consistent with §2-307)

Section 2: Interpreting Conditions


o Is it a condition precedent to performance that something must happen?
o What is often very tricky is distinguishing between covenants and conditions
 Covenant – promise to do something
 Condition – I do something, you do something
• A condition is an event which must occur before a party’s performance is due

• Howard v. FCIC: there is a policy against forfeiture – so when it is unclear whether the clause is a promise or a condition, it is construed as
a promise.
• Restatement §261: in the case of doubt, construe the words as creating a promise, not a condition
• Condition precedent – if a condition, and the condition precedent never occurs, the performance obligation never arises
• If a clause is a condition and not an obligation, then it may not be a breach of contract not to fulfill the condition (Merritt Hill)
• Insurance contracts are generally construed against the insurer in cases of ambiguity (contra preforentum – construe contract
against grantor).
• How can you tell whether something is a condition v. a covenant?
• Howard v. FCIC – distinguishes based on inaction v. action
• Covenant – specifies something to be done (affirmative)
• Condition – specifies something not to be done (negative) – I don’t have to “unless”
• But you can come up with all sorts of ways where this formulation won’t work
 So, there is no magical formula to tell the difference between a covenant and condition – it is murky about how to
figure this out
 Keep in mind – avoid contractual forfeiture and only construe as a condition if it is very clear that a condition is met

26
• Gray v. Gardner: distinguishes between condition precedent and condition subsequent
• A condition precedent – unless the condition happens, there is no obligation to perform
• A condition subsequent – if the condition happens, performance is excused
• A condition subsequent is an event which operates by agreement of the parties to discharge a duty of performance
after it has become absolute
• These are very rare – usually occur in insurance contracts which state that a suit on a claim must be brought within a
certain time, or the claim is discharged
• Why does it matter – affects who has the burden of the proof – the person who benefits must prove.
• How can we tell the difference:
• Condition precedent - “if, when” the following happens
• Condition subsequent - “unless” the following happens

• Parsons v. Bristol Dev.: specific fund doctrine: where a contract identifies a source of a payment, the failure of that source to be funded
relieves the obligation to pay
• Prevention doctrine: if you want to rely on a condition, you cannot actively hinder the occurrence of the condition

• Royal-Globe v. Craven: court holds that a prompt notice provision did not get obliterated by the non-occurrence of a condition
• Court suspends the prompt notice requirement because it’s more flexible and easier to revive but obliterates the 24 hour notice
requirement permanently.
• So, if the contract did not have a prompt notice requirement, what would the outcome of the case be?
• Probably the same – the court would just loosen up the 24 hour requirement and imply a prompt notice requirement
• Semmes v. Hartford: court holds that the condition became completely obliterated and could never come back to life again
(opposite of Royal-Globe)

• Gilbert v. Globe & Rutgers Fire: waiver of a condition precludes the revival of a condition; an estoppel only works to suspend the
application of a condition until proper notice is given.
• Waiver: the voluntary and intentional relinquishment or abandonment of a known existing right or privilege
• Once a waiver is made, it is irrevocable and can’t be revived
• Waiver can be retracted under UCC 2-209 (5) – with reasonable notice
• Estoppel: arises when one party has made a misleading representation to another party and the other has reasonably relied to his
detriment on that representation
• New element of excuse for non-compliance with a condition:
• The common law view was very strict about compliance with conditions and materiality of the condition was
irrelevant
• The modern view: materiality doctrine
• If a clause is not material to the contract, nonperformance of the condition can be excused
• Material is defined as: prejudice to other party from a failure to comply with the condition – if other party
is not worse off, then not material
• “Time is of the essence”- makes time a material condition to the contract

• Porter v. Harrington: waiver/estoppel can arise through conduct - by being lenient, you may waive your right to the conditions
• So what can your client to do?
• Try as much as possible to paper the record with letters and representations that by being lenient you are not giving
up your rights
• Could enter the contractual modifications in writing with additional consideration

• Clark v. West: two ideas to attack non-compliance with condition: waiver/estoppel or materiality/prejudcie
• Waiver/estoppel argument: focuses on acts of West saying it was ok for prof to drink
• Materiality/prejudice: the breach was so insignificant that it did not affect the quality of the work

• Aetna v. Murphy: if it can be shown that the insurer suffered no material prejudice from a delay, the nonoccurrence of the condition of
timely notice may be excused.
• The insured bears the burden of proving no prejudice.
• Rule: when interpreting insurance contract conditions which the insured has failed to comply with, the failure to comply with a
condition is not an absolute bar to recovery, but the insured bears the part of proving the absence of prejudice on the part of the
insurance company
• Prejudice v. materiality
• Materiality – quantum of deviation from the contractual stipulation
• Prejudice – not the quantum of deviation, but to the effect of deviation on the other party

27