Peter Wu
Rules governing contracts !
4
Types of Damages!
4
Limitations on Damages!
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Foreseeability!
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Certainty!
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Avoidability – duty to mitigate damages!
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Liquidated Damages!
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Specific Performance!
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Contracts for Land!
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Contracts for Goods!
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Contracts for Personal Services
I. Affirmative specific performance never enforced!
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II.Negative Injunctions sometimes enforced!
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REACHING AN AGREEMENT!
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Preliminary Negotiations!
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Written Memorial Contemplated!
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Revoking an Offer!
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ACCEPTANCE!
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Acceptance That Varies Terms: The Mirror Image Rule !
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Acceptance by Correspondence - Mailbox Rule!
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Acceptance by Performance - Unilateral Contracts!
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Acceptance by Silence!
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E-Commerce and Mutual Assent!
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Peter Wu
DISCERNING THE AGREEMENT!
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Interpreting the Meaning of the Terms!
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I. AMBIGUOUS TERMS - when words have more than one meaning!
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II. VAGUE TERMS - edges of the word are blurry but core meaning is
definite.!
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HIERARCHY OF EVIDENCE!
Filling Gaps in the Terms!
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I. AGREEMENTS TO AGREE.!
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II. ILLUSORY PROMISES (Requirements Contracts)!
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IDENTIFYING THE TERMS OF THE AGREEMENT!
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Form Contracts or “Contracts of Adhesion!
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Battle of the Forms !
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WRITTEN MANIFESTATIONS OF ASSENT!
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The Parol Evidence Rule!
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The Statute of Frauds - Requiring a Writing!
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Consideration!
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PAST CONSIDERATION!
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MORAL CONSIDERATION!
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Contract Modification and the Preexisting Duty Rule!
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The intention to be legally bound!
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Promissory Estoppel!
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1. FAMILY PROMISES!
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2. PROMISES TO CONVEY LAND!
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PROMISE OF A PENSION!
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Peter Wu
4. CONSTRUCTION BIDS!
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PROMISSORY ESTOPPEL AS AN ALTERNATIVE TO BREACH OF
CONTRACT!
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ELEMENTS OF PROMISSORY ESTOPPEL: THE PROMISE!
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Implied Duty of Good Faith!
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Prospective Nonperformance!
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ANTICIPATORY REPUDIATION!
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ADEQUATE ASSURANCES OF PERFORMANCE!
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MATERIAL BREACH!
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Defenses!
MISREPRESENTATION!
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Peter Wu
Major elements of a contract:
Offer, acceptance, consideration.
Rules governing contracts
1) Immutable rules that will not change and are not waivable
a) e.g., U.C.C. requirement to act in good faith; criminal law
b) e.g., adoption rules that cannot be contracted around; (argument:) 13th Amendment prohibits
the exchange of any consideration for the obtaining of a child, Baby M
2) Default rules that can be contracted around
c) Default rules can operate in two ways:
d) Majoritarian: rule that the majority of contracting parties want; minimizes transaction costs
where parties might otherwise not want to deal/negotiate if the transaction costs were too
high
e) Penalty: rule that people don’t want; incentivizes contracting around – one party might want;
but elicits parties’ explicit contract rules
i) (Theory: when you have information asymmetry, put the burden on the party who would
have the lower cost of contracting around the rule – e.g., on FedEx, a repeat player, as
opposed to the one-shot user)
3) Special Contracts
f) e.g. Hawkins v. McGee. Doctor entered into a special contract with patient (beyond normal
doctor/patient relationship) since Doctor promised “a hundred per cent perfect hand,” as the
doctor was trying to convince (sell the patient) on letting him do the surgery
4) Policy implications; Shaheen, baby M.
g) Courts may refuse to enforce contracts that they hold void or overruled as a matter of public
policy
i) Shaheen v. Knight non-example: contract to sterilize not invalid vis-à-vis public policy:
public sentiment must be “universal,” “well-defined,” and “deeply integrated in the
customs and beliefs of the people,” as well as “so obviously for or against the public
health, safety, morals, or welfare that there is a virtual unanimity of opinion”
(1) Against public policy for ∆ doctor to pay for ∏’s child, Shaheen v. Knight
ii) In the Matter of Baby “M” – NJ Chancery (equity) courts need to consider best
interests of the child regardless of contracts; parties cannot contract around the
adoption statutes
Types of Damages
EXPECTATION Damages - put in the position if the contract had gone through, if it had worked out as
promised. Typical in the U.S. Not what the non-breaching party expected to get; subjective expectation
doesn’t matter. It’s what the non-breaching party would have gotten if the contract had gone through.
1) FORMULA: lost value of performance + incidental damages – cost avoided – losses
avoided = expectation damages
a. Incidental Damages: reasonable cost of cover – costs incurred in a reasonable effort to
avoid loss, UCC §2-710. Seller’s Incidental Damages: 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 return or resale
of the goods or otherwise resulting from the breach
b. Consequential damages: aka indirect or special damages include loss of product and
loss of profit or revenue and may be recovered if it is determined such damages were
reasonably foreseeable or "within the contemplation of the parties" at the time of
contract formation.
Peter Wu
c. Cover: UCC §2-712. “Cover”; Buyer’s Procurement of Substitute Goods: buyer may
2)
3)
4)
5)
“cover” by purchasing or contracting to purchase goods as a substitute (in good faith
and without unreasonable delay), and 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
Purpose: “benefit of the bargain” – put the promisee in the position in which he would have
been had the contract been performed
Policy reasons
a. Expectation damages should always encourage people to enter contracts because even
with a high likelihood of breach, you still get the money value of what you wanted.
UCC
a. 1-106 (Expectation Damages) remedies provided...aggrieved party may be put in as
good a position as if the other party had fully performed
b. 2-713: market price - contract price.
Case Law
a. Hawkins v. Mcgee (hairy hand): damages can be awarded based on expectation value,
calculated as the difference between care promised and care received.
b. Tongish v. Thomas: statutory damages awarded were market price minus contract
price by UCC provision (instead of expected profits, which for ∏ Coop would have just
been the handling fees)
i. Reasoning: discourages breach of contract; irrelevant that the ∏ protected itself
– prevents party from taking advantage when it knows that the other party has
laid off its market risk, and encourages honoring of contracts
RELIANCE Damages - put the promisee back to where he was before the promise
1) Measurement: RSC §349. Damages Based on Reliance Interest as alternative to §347
expectation damages – includes expenditures made in preparation for performance or in
performance, less any loss that the party in breach can prove with reasonable certainty hat
the injured party would have suffered had the contract been performed.
2) Circumstances for awarding reliance damages: in cases of
a. Promissory estoppel where P.E. is substituting for breach, not consideration
b. Where justice requires; see Riley v. Capital Airlines, in Statute of Frauds (quasipromissory estoppel)
c. Unforeseeability
d. Uncertainty
i. Awarded post-contractually (normal, U.S. majority rule) in Dempsey
1. expenses incurred after the signing of the agreement and prior to the
breach are recoverable “if in furtherance of the general scheme”
ii. As awarded pre-contractually in Anglia TV (minority British rule)
1. What makes this different than Dempsey, was that in Dempsey, the
money used to hire the other boxer would have been wasted anyway,
not just because of the breach. In Anglia, they could have hired another
actor if Reed had just said no at the outset, but now because of the
breach, the preparation money is wasted.
2. HYPO: But what if the court is really using expectation damages? Court
assumes 0 profit since Anglia wouldn’t do this for a loss. Why include
pre-contractual reliance? So he would have expected to be at zero. But
now, he’s lost money on these pre-contractual costs. So to break even,
Anglia would have to be paid back for those expenses. So this could be
seen as a very conservative form of expectation damages.
3. In contract law, very strong preference towards expectation damages.
Peter Wu
RESTITUTION – put the promisor back in the position in which the promise would have been had the
promise not been made – disgorge the profit
Often seen in losing contracts where the breaching party kept the gain – not in winning contracts, where
expectation damages would be sought
RSC §371. Measure of Restitution Interest
If a sum of money is awarded to protect a party’s restitution interest, it may as justice requires be
measured by either:
1) the reasonable value to the other party of what he received in terms of what it would have cost
him to obtain it from a person in the claimant’s position [like cover? Give me back the value of
what you gained by your breach, as determined by cover price], or
2) the extent to which the other party’s property has been increased in value or his other interests
advanced [give back the value accrued to you from your breach]
RSC §373. Restitution When Other Party is in Breach:
- Subject to the rule stated in Subsection (2), on a breach by non-performance that gives rise to a
claim for damages for total breach or on a repudiation, the injured party is entitled to
restitution for any benefit that he has conferred on the other party by way of part
performance or reliance.
- The injured party has no right to restitution if he has performed all of his duties under the
contract and no performance by the other party remains due other than payment of a
definite sum of money for that performance.
RSC §374. Restitution in Favor of Party in Breach:
- Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on the ground
that his remaining duties of performance have been discharged by the other party’s breach [this
is the non-breaching ∆ in Britton v. Turner], the party in breach is entitled to restitution for any
benefit that he has conferred by way of part performance or reliance in excess of the loss that he
has caused by his own breach. [Britton v. Turner ∏ breached and got restitution]
- To the extent that, under the manifested assent of the parties, a party’s performance is to be
retained ifforen the case of breach, that party is not entitled to restitution if the value of the
performance as liquidated damages is reasonable in the light of the anticipated or actual loss
caused by the breach and the difficulties of proof of loss. [it seems that here the value of the
damages would counterbalance the value of the performance, and so no net restitution
claim results]
1) Quantum meruit – “as much as he deserved”; a count in assumpsit to recover payment for
services rendered – cause of action in quasi-contract
a. Britton v. Turner (∏ contracted to perform work for ∆ but breached by leaving contract
earlier, p. 256) – in favor of the breaching party
i. Rule: where non-breaching party receives a benefit from the breaching party (in
excess of the damages consequential to the breach), it must pay by restitution if
it chooses to retain those benefits (in the case of labor, it must pay, because it
cannot return the benefits)
1. The “reasonable worth” of the labor/goods
ii. Reasoning: prevents unjust enrichment
b. Parties can contract around if they require only the whole; so quantum meruit is really for
benefits conferred not under contract (and minus damages for breach of contract)
2) Quasi-contract – a constructive theory of contract – parties would have made this deal if they
could have
Peter Wu
a. Cotnam v. Wisdom (∏ doctor helps streetcar victim, who dies, and wants
compensation, p. 265) – in favor of the nonbreaching party
i. Contract implied by law; quasi-contract – legal fiction
ii. There was a benefit – the chance of life – ∆ pays for services, not result
iii. Held: need to look at reasonable compensation (not going to deal with
idiosyncrasies here; just whatever the going price is as restitution to the ∏
doctor)
iv. Policy: want to encourage trying to help others on the street
3) There can be no recovery when there is no contract and services were offered voluntarily
-- no unjust enrichment
a. Martin v. Little, Brown and Co. (∏ found ∆’s book plagiarized and sent info, then
wanted compensation for his services, p. 269)
i. Held: no contract (K must exist for breach thereof)
ii. Rule/held: no quasi-contract will be implied, for that is a remedy at law created
for justice (RSC §5, cmt. b), and does not apply to people volunteering goods or
services –
iii. a contract will only be implied when an agreement can be inferred from the
intention of both parties; no intention to pay can be inferred here
Limitations on Damages
FORESEEABILITY
§ 351. Unforeseeability and related limitations on damages
1) Damages are not recoverable for loss that the party in breach did not have reason to foresee as
a probable result of the breach when the contract was made.
2) Loss may be foreseeable as a probable result of a breach because it follows from the breach
a. in the ordinary course of events, or
b. as a result of special circumstances, beyond the ordinary course of events, that the
party in breach had reason to know.
3) A court may limit damages for foreseeable loss by excluding recovery for loss of profits, by
allowing recovery only for loss incurred in reliance, or otherwise if it concludes that in the
circumstances justice so requires in order to avoid disproportionate compensation.
UCC §2-715. Buyer’s Incidental and Consequential Damages on unforeseeability
Consequential damages resulting form the seller’s breach include any loss resulting from general or
particular requirements and needs of which seller at the time of contracting had reason to know and
which could not reasonably be prevented by cover or otherwise.
Hadley v. Baxendale (mill crank shaft)
Damages need to have been foreseeable at time of contract.
Loss may be foreseeable if a) ordinary, b) specific circumstances, put on notice.
Hector Martinez and Co. v. Southern Pacific Transportation Co. (drag line damaged in delayed
transport, p. 104):
If a reasonable man at the time of contracting could have foreseen a harm as a result of breach of
contract (and the ∏ can so prove), the ∆ is liable for that harm.
Holding: the ∆ is liable for lost rental value due to delay, because he could have foreseen (did not have to
be the most foreseeable consequence) loss of profit as a result of loss of use of a capital good
Peter Wu
Reasoning behind unforeseeability rules
a. Objective standard: what the parties “should have known” at the time of contracting;
b. What was consented to at the time of contract was what was foreseeable
c. We only impose liability on parties because they agreed to assume it – they only consented to as
much liability as they foresaw
d. You can’t make someone infinitely liable. Fear of liability/litigation would be paralyzing to
commerce.
e. Incentivizes information sharing – no recovery without notice
f. Incentivizes efficient breach, and disincentivizes breach where damages are known to be
extensive
g. Agency problem – can a clerk speak for a company? That’s why FedEx makes you sign
h. Parties can contract around, and are free to limit liability/damages in the contract; they can
assume limited liability in return for lower cost, e.g., FedEx airbill disclaimer [cf. liquidated
damages]; alternatively
i. Party can request more money to act as insurer for less foreseeable damages (special contract);
notice is required to expand liability
CERTAINTY
RSC §352. Uncertainty as a Limitation on Damages: Damages are not recoverable for loss beyond an
amount that the evidence permits to be established with reasonable certainty.
Chicago Coliseum Club v. Dempsey
Cannot recover damages that cannot be established/assessed with substantial certainty: so ∏ did not
recover lost profits from boxing match, because these could only be established by speculation.
Anglia Television v. Reed (U.S. majority doesn’t follow pre-contractual reliance)
Cannot collect loss of uncertain profits; rather, gets reliance damages, even for arrangements made
before contract, because these expenses were in the reasonable contemplation of both parties
What makes this different than Dempsey, was that in Dempsey, the money used to hire the other boxer
would have been wasted anyway, not just because of the breach. In Anglia, they could have hired
another actor if Reed had just said no at the outset, but now because of the breach, the preparation
money is wasted.
Parties can always cope with this by including a liquidated damages clause.
AVOIDABILITY – DUTY TO MITIGATE DAMAGES
Restatement §350 AVOIDABILITY AS A LIMITATION ON DAMAGES
1) Except as stated in subsection (2), damages are not recoverable for loss that the injured party could
have avoided without undue risk, burden, or humiliation.
i.e. Luten Bridge Co. could and should have avoided piling up additional damages after the
County resolved not the build the bridge. But it didn’t and those avoidable damages were not
recoverable.
2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the extent that
he has made reasonable but unsuccessful efforts to avoid loss.
Rockingham County v. Luten Bridge Co.
π (Luten Bridge) awarded reliance before repudiation (but not after) plus lost profits, because ∏ can’t
hold ∆(county) liable for damages that didn’t need to occur
Peter Wu
-
Sometimes you have to make a reasonable effort to keep damages from getting too high. Like if
in Hadley, mill could have rented another crankshaft. They would not be able to recoup cost of
mill closing
Policy reasons
o an extra useless bridge is wasteful, against point of contracts
o we want to maximize utility for both sides
Breaching party should only be liable for losses caused by breach. The bridge co’s actions break
chain of causation. There is no rational basis for doing it. Their further work is not caused by the
county’s actions or wishes.
Shirley Maclaine Parker v. Twentieth Century Fox Film Corp.
1) General rule: “the measure of recovery by a wrongfully discharged employee is the amount of salary
agreed upon for a period of service, less the amount which the employer affirmatively proves the
employee has earned or with reasonable effort might have earned from other employment”
a) In other words, they have to pay an employee so discharged the amount stipulated to in the
contract, minus any money that person earns during the stipulated employment period or, could
have.
2) To apply this mitigation, the employer must show that the other employment was
“comparable, or substantially similar” to the employment the employee was deprived of.
a) In precedent, the π has the right to reject employment that is different or inferior
b) Court held that BCBM was both different and inferior.
3) Dissent: This is an issue of fact, should go to jury.
Neri v. Retail Marine Corp. [boat, buyer rescinds, seller resells]
Liquidated Damages
Most contract rules are default rules and can be contracted around by explicit, express clauses in the
contract.
Penalty damages = unenforceable, Kemble v. Farren
1) UCC §2-718. Liquidation or Limitation of Damages; Deposits
a. Damages for breach by either party may be liquidated in the agreement, but only for an
amount reasonable in light of the anticipated or actual harm
i. If unreasonably large amount -> void
b. Limitations on damages – where seller withholds delivery because of buyer’s breach,
seller gets offset from buyer’s restitution of:
i. Liquidated damages, or
ii. If liquidated damages were not stipulated, 20% of value of total performance of
contract, or $500, whichever is smaller
c. Can not contract around bodily injury (UCC §2-719)
2) R2 §356. Liquidated Damages and Penalties
a. damage may be liquidated at outset, but only in an amount that is reasonable in light of
anticipated or actual loss, and the difficulties of proof of loss; a term fixing unreasonable
large damages is unenforceable “on the grounds of public policy as a penalty”
b. a term in a bond for an amount of money as penalty for non-occurrence of the condition
of the bond is unenforceable to the extent that the amount exceeds the loss caused by
such non-occurrence
3) How can liquidated damages clauses be struck down?
Peter Wu
a. amount too unreasonable
b. whether damages are difficult to calculate. if yes they are, more likely to accept
liquidated damages clause.
Benefits of Liquidated Damages
(1) Allow parties to control exposure to risk
(2) increase in information shared between parties
(3) easier to settle
(4) encourages contracts, predictability
(5) certainty, not relying on courts to decide how much to pay
(6) fewer transaction costs
(7) parties more able to calculate damages than courts are after the fact
Especially for idiosyncratic damages
(8) Allows evaluation of efficient breach and incorporation of that amount
Drawbacks
(1) exploitative
(2) can be unfair
(3) could encourage breach
(4) If liquidated damages clauses are too high, it might deter breaches that could have been
efficient.
(5) Risk of hindsight bias in assessment of whether the liquidated damages were reasonable
(6) Private performance of judicial function
THREE FACTOR TEST
Wassenaar v. Towne Hotel (π employee suing ∆ Hotel for breach of employment contract; ∆ terminated
3-yr contract early; π obtained other employment; stipulated liquidated damages were for the remainder
of the full three years, p. 165)
1)
Rule: how to decide whether a stipulated damages clause is valid:
a) Whether the clause is reasonable under the totality of the circumstances (cf. §356(1),
Restatement) – the reasonableness test
b)When ruling on the reasonableness of stipulated damages, the trial judge must take into
account 3 factors, plus the policies for the reasonableness test
(1)Did the parties intend to provide for damages or for a penalty [not so important]
(2)Is the injury caused by the breach one that is difficult or incapable of accurate estimation
at time of contract? [difficulty of ascertainment test]
(a) The greater the difficulty of estimating or proving damages, the more likely the
stipulated damages will appear reasonable. If damages are easily calculable, there
should be no LD.
(3)Whether the stipulated damages provision is a reasonable forecast of compensatory
damages
c) (2) and (3) are intertwined; need to use a prospective-retrospective approach with regard to (2)
and (3)
2)
Reasoning: the black-letter approach might not consider the consequential damages an
employee suffers, such as injury to professional reputation, loss of career development
opportunities, and emotional stress
3)
Held: the stipulated damages clause is valid as liquidated damages, not a penalty, because the
employer did not meet its burden to establish why the clause should be set aside
Specific Performance
Injunctions and specific performance for things that are difficult to value
Peter Wu
a) Land
b) Unique goods
c) Non-competition agreements
CONTRACTS FOR LAND
Loveless v. Diehl.
Presumption of uniqueness of land in breach of contract cases; the normal course of action is to award
specific performance and convey the land to the purchaser as a matter of course; “affords complete and
perfect relief”; this relief does not depend on the adequacy of the legal remedy (money damages)
Dicta:
“To refuse specific relief on account of the proposed resale would establish an unsound precedent,
diminishing the transferability of property, since in similar situations prospective buyers would be
reluctant to bind themselves to a purchase contract, for fear that it might prove to be unenforceable”
CONTRACTS FOR GOODS
Cumbest v. Harris (unique stereo equipment)
General rule is that specific performance will not be decreed; except
(1) when there is no adequate remedy at law
(2) where the specific articles of property are of a peculiar, sentimental or unique value
(3) where due to scarcity the chattel is not readily attainable
Uniqueness test: While specific performance is usually denied in cases involving personal property, there
are exceptions with regard to uniqueness and irreplaceability that can compel courts to consider
specific performance for π
Scholl v. Hartzell (π sought replevin for corvette from newspaper ad)
Replevin as a buyer’s remedy is a narrow cause of action that depends on the goods being unique as by
§2-716, and, logically consistently, the buyer being unable to cover, pursuant to §2-716.
Sedmak v. Charlie’s Chevrolet Inc. (π contracted for purchase of a limited edition corvette)
Specific performance ordered.
Rule: narrow discretion; “when the relevant equitable principles have been met and the contract is fair
and plain, ‘specific performance goes as a matter of right’”
For breach of contract and failure to deliver goods, when specific performance is requested, the court
has to ask if specific performance is justified. It is justified when there is not an adequate remedy at
law – i.e., when money damages are inadequate. There was no adequate remedy at law, because it
would be “difficult, if not impossible, to obtain [the] replication [of this car] without considerable expense,
delay and inconvenience”
UCC: Sales Contracts: §2-716. Buyer’s Right to Specific Performance or Replevin
1. Specific performance may be ordered where the goods are unique or in other proper circumstances.
2. The judgment (decree) for specific performance may include such terms and conditions as to
payment of the price, damages, or other relief as the court may deem just.
3. The buyer has a right to replevin for goods identified to the contract if after reasonable effort he is
unable to effect cover for such goods or the circumstances reasonably indicate that such effort will
be unavailing or if the goods have been shipped under reservation and the satisfaction of the
security interest in them has been made or tendered. In the case of goods bought for personal,
family, or other household purposes, the buyer’s right of replevin vests upon acquisition of a special
property, even if the seller had not then repudiated or failed to deliver.
Peter Wu
Contracts for Personal Services
I. AFFIRMATIVE SPECIFIC PERFORMANCE NEVER ENFORCED
Court cannot ensure quality of performance
May be involuntary servitude violating civil right
Bailey v. State of Alabama (Alabama law making contracts essentially indentured servitude. If you
breach, you go to jail. So P is forced to work there for a year; signed away his freedom.)
Court holds that a person may not be compelled to perform “service to secure the payment of a
debt,” as such coercion would cause involuntary servitude; no laws making non-service or non-refund a
crime can indirectly compel service, either.
A court can never order specific performance of labor under the 14th Amendment and the 1867 Act of
Congress furthering it – all state laws null and void if they attempt to “establish, maintain, or enforce,
directly or indirectly, the voluntary or involuntary service of labor of any persons as peons, in liquidation
of any debt or obligation, or otherwise”
Personal autonomy is inalienable – cannot contract self away
State can not use power of criminal law to do what they can not do in civil law.
II.NEGATIVE INJUNCTIONS SOMETIMES ENFORCED
Lumley v. Wagner (UK) (non-competition clause at Majesty’s theatre. Wagner made another
commitment to perform somewhere else)
∆ enjoined from other performances (injunction upheld); Even in the absence of such a negative
stipulation, “she would have broken the spirit and true meaning of the contract” by attempting to
perform elsewhere
So while the Court cannot compel her to perform, it can compel her not to perform and break the
contract.
Ford v. Jermon (∆ contracted to act for specific period for ∏, then refused to perform, p. 222)
Rule: one cannot accomplish indirectly what one cannot accomplish directly
Held: no injunction;
Reasoning: would be indirect compulsion; enjoining the ∆ from other performance/employment would
do an unfairness by prohibiting her/him from making her/his livelihood; mitigated slavery (refusal would
lead to contempt; obedience through imprisonment; court cannot enforce the quality of performance;
declined to follow Lumley v. Wagner
Duff v. Russell (singer refused to perform in ∏’s opera; ∆ agreed to perform as actress and singer at
Casino, rival and competitor with ∏’s theater; parties agreed to liquidated damages clause if π was
entitled to an injunction; no specific negative stipulation in contract preventing ∆ from performing
elsewhere)
Rule: Daly v. Smith, the court is bound to look at the substance, and not form, of the contract,
when determining jurisdiction for injunctions. Regardless of a negative stipulation, the substance of
the contract prevented ∆ from other work, because she “had agreed to appear in seven performances in
each week,” and thus performing elsewhere was not possible.
Peter Wu
Here, it was clear that ∏ could not find a replacement for the actress; her breach of contract was
unjustified and could only be made right by specific performance, which, as we have seen, is not
possible to compel in such cases. However, the court could enjoin her from performing elsewhere for
that period, even without a specific negative stipulation in the contract, because such performance
would hurt the performance the ∏ had a right to by contract which still upholds the best they can the
substance of the contract.
Negative stipulations/damages cannot be such that their enforcement would compel performance –
must be related to competition, and within this limited scope, designed to compel performance
(cannot be penalties)
In other words, the negative stipulations/pledges must be limited in scope to be enforceable.
REACHING AN AGREEMENT
Restatement (Second) of Contracts
§17. Requirement of a Bargain
1. Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a
manifestation of mutual assent to the exchange and a consideration.
2. Whether or not there is a bargain a contract may be formed under special rules applicable to formal
contracts or under the rules stated in §§82-94.
§18. Manifestation of Mutual Assent
Manifestation of mutual assent to an exchange requires that each party either make a promise or begin
to render a performance.
§19. Conduct as a Manifestation of Assent
1. The manifestation of assent may be made wholly or partly by written or spoken words or by other
acts or by failure to act.
2. The conduct of a party is not effective as a manifestation of his assent unless he intends to engage
in the conduct and knows or has reason to know that the other party may infer from his conduct that
he assents.
3. The conduct of a party may manifest assent even though he does not in fact assent. In such cases a
resulting contract may be voidable because of fraud, duress, mistake, or other invalidating cause.
Embry v. Hargadine, McKittrick Dry Goods Co. (Embry’s contract was over but he was still working so
he went to McKittrick to demand a new contract. ∆ said “Go ahead, you’re alright. get your men out and
don’t let that worry you” π kept working until Feb when he was discharged.)
• Rule: meeting of the minds not required – what counts is manifested assent by both parties to each
other – embodied in words and conduct, not secret intention – subjective belief does not matter
• Rule: EMBRY TEST
• What is the objective manifestation of the promisor? (subjective belief of promisor does not matter)
• What is the subjective belief of the promisee? S/he must believe the promisor, and rely on
promisor’s conduct (reasoning: if he didn’t think there was a contract, he shouldn’t get damages
because he wasn’t expecting anything and shouldn’t have relied on it)
Peter Wu
Lucy v. Zehmer (farm sale in restaurant while drinking)
subjective belief of promisor does not matter in this test, doesn’t matter of ∆ says he was joking. Rule:
(1) the outward expression is to be read as manifesting intent, rather than secret or unexpressed
intention; mental assent is not requisite if the words or acts have but one reasonable meaning to them,
(2) except when the other party knows the undisclosed intention (the promisee must believe in the offer/
contract)
Preliminary Negotiations
“The mere statement of the price at which property is held cannot be understood as an offer to sell,” Not
an offer, just a request for bids. (May be different with repeat players.) --Nebraska Seed v. Harsh.
(farmer sent letter and samples to buyers with price and approx quantity. π took as offer)
Leonard v. Pepsico. [pepsi-drinking moron]
Advertisements are not offers unless it is open and explicit, leaving nothing to negotiation (ex: “Saturday
9AM Sharp, 3 Brand New Fur Coats, First Come First Served $1 Each”)
• Rule: advertisements not ordinarily understood as offers to sell – would have to have some language
of commitment or invitation to take action without further communication
• RSC §26. Preliminary Negotiations: A manifestation of willingness to enter into a bargain is not an
offer if the person to whom it is addressed knows or has reason to know that the person making
it does not intend to conclude a bargain until he has made a further manifestation of assent.
• Court ignoring subjective part of Embry test. Rule: objective reasonable person standard: subjective
intent of either party is immaterial; the issue is what an objective, reasonable person would have
understood the commercial to convey
Restatement (Second) of Contracts
§22. Mode of Assent: Offer and Acceptance
1. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or
proposal by one party followed by an acceptance by the other party or parties.
2. A manifestation of mutual assent may be made even though neither offer nor acceptance can be
identified and even though the moment of formation cannot be determined.
§24. Offer Defined
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.
§26. Preliminary Negotiations
A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed
knows or has reason to know that the person making it does not intend to conclude a bargain until he
has made a further manifestation of assent.
§29. To Whom an Offer is Addressed
1. The manifested intention of the offeror determines the person or persons in whom is created a
power of acceptance.
2. An offer may create a power of acceptance in a specified person or in one or more of a specified
group or class of persons, acting separately or together, or in anyone or everyone who makes a
specified promise or renders a specified performance.
33. Certainty
1. Even though a manifestation of intention is intended to be understood as an offer, it cannot be
accepted so as to form a contract unless the terms of the contract are reasonably certain.
Peter Wu
2. The terms of a contract are reasonably certain if they provide a basis for determining the
existence 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.
Sales Contracts: The Uniform Commercial Code
§ 2-204. Formation in General.
1. A contract for sale of goods may be made in any manner sufficient to show agreement, including
offer and acceptance, conduct by both parties which recognizes the existence of a contract, the
interaction of electronic agents, and the interaction of an electronic agent and an individual.
2. An agreement sufficient to constitute a contract for sale may be found even if the moment of its
making is undetermined.
3. Even if one or more terms are left open, a contract for sale does not fail for indefiniteness if the
parties have intended to make a contract and there is a reasonably certain basis for giving an
appropriate remedy.
§ 2-206. Offer and Acceptance in Formation of Contract.
A. Unless otherwise unambiguously indicated by the language or circumstances
1. an offer to make a contract shall be construed as inviting acceptance in any manner and by
any medium reasonable in the circumstances:
2. an order or other offer to buy goods for prompt or current shipment shall be construed as
inviting acceptance either by a prompt promise to ship or by the prompt or current shipment
of conforming or nonconforming goods, but the shipment of nonconforming goods is not an
acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an
accommodation to the buyer.
B. If the beginning of a requested performance is a reasonable mode of acceptance, an offeror that
is not notified of acceptance within a reasonable time may treat the offer as having lapsed before
acceptance.
C. A definite and seasonable expression of acceptance in a record operates as an acceptance even
if it contains terms additional to or different from the offer.
§ 2-305. Open Price Term.
1. The parties if they so intend may conclude a contract for sale even if the price is not settled. In
such a case the price is a reasonable price at the time for delivery if:
1. nothing is said as to price;
2. the price is left to be agreed by the parties and they fail to agree; or
3. the price is to be fixed in terms of some agreed market or other standard as set or recorded
by a third person or agency and it is not so set or recorded.
2. A price to be fixed by the seller or by the buyer means a price to be fixed in good faith.
3. If a price left to be fixed otherwise than by agreement of the parties fails to be fixed through fault
of one party the other may at the party's option treat the contract as cancelled or the party may
fix a reasonable price.
4. If, however, the parties intend not to be bound unless the price is fixed or agreed and it is not
fixed or agreed there is no contract. In such a case the buyer must return any goods already
received or if unable to do so must pay their reasonable value at the time of delivery and the
seller must return any portion of the price paid on account.
§ 2-308. Absence of Specified Place for Delivery.
Unless otherwise agreed
A. the place for delivery of goods is the seller's place of business or if none, the seller's residence;
but
Peter Wu
B. in a contract for sale of identified goods which to the knowledge of the parties at the time of
contracting are in some other place, that place is the place for their delivery; and
C. documents of title may be delivered through customary banking channels
§ 2-309. Absence of Specific Time Provisions; Notice of Termination.
1. The time for shipment or delivery or any other action under a contract if not provided in this
Article or agreed upon shall be a reasonable time.
2. If the contract provides for successive performances but is indefinite in duration, it is valid for a
reasonable time but unless otherwise agreed may be terminated at any time by either party.
3. Termination of a contract by one party except on the happening of an agreed event requires that
reasonable notification be received by the other party and an agreement dispensing with
notification is invalid if its operation would be unconscionable. A term specifying standards for
the nature and timing of notice is enforceable if the standards are not manifestly unreasonable.
§ 2-310. Open Time for Payment or Running of Credit; Authority to Ship Under Reservation.
Unless otherwise agreed
1. payment is due at the time and place at which the buyer is to receive the goods even though the
place of shipment is the place of delivery;
2. if the seller is required or authorized to send the goods, the seller may ship them under
reservation, and may tender the documents of title, but the buyer may inspect the goods after
their arrival before payment is due unless the inspection is inconsistent with the terms of the
contract (Section 2-513);
3. if tender of delivery is agreed to be made by way of documents of title otherwise than by
paragraph (b), then payment is due regardless of where the goods are to be received (i) at the
time and place at which the buyer is to receive delivery of the tangible documents, or (ii) at the
time the buyer is to receive delivery of the electronic documents and at the seller's place of
business or if none, the seller's residence; and
4. if the seller is required or authorized to ship the goods on credit the credit period runs from the
time of shipment but postdating the invoice or delaying its dispatch will correspondingly delay
the starting of the credit period.
Written Memorial Contemplated
If the party changes his/her mind before the writing is executed -> no binding contract.
Empro Manufacturing Co. v. Ball-Co. Manufacturing, Inc. ((∆ valve company floated assets on
market, ∏ showed interest and the two began negotiations)
• Parties can decide to bind themselves in preliminary negotiations, but the words have to indicate this
intent.
• A letter of intent would be enforceable “if the full agreement showed that the formal contract was to be
nothing but a memorial of an agreement already reached” - totality of the circumstances test
• Letters of intent generally considered tools of negotiation to reduce confusions, but not contracts per
se;
Restatement (Second) of Contracts
§27. Existence of Contract Where Written Memorial is Contemplated
Peter Wu
Manifestations of assent that are in themselves sufficient to conclude a contract will not be prevented
from so operating by the fact that the parties also manifest an intention to prepare and adopt a written
memorial thereof; but the circumstances may show that the agreements are preliminary negotiations.
Revoking an Offer
Dickinson v. Dodds (Dodds gave Dickinson a signed offer to sell his house saying offer would be left
over until Friday at 9am, retracted offer by selling house to another first. Dickinson found out but tried to
accept anyways)
• Rule: “a mere offer to sell property, which can be withdrawn at any time, and which is made dependent
on the acceptance of the person to whom it is made, is a mere nudum pactum” – a bare or naked
promise – not binding – a promise not enforceable for want of consideration
• A contract requires a meeting of the minds.
• An offer can be retracted by offeror at any time prior to acceptance
• The offeree can learn of this retraction directly from offeror, or when offeror takes definite action
inconsistent with an intention to enter into the proposed contract, and the offeree learns of this action
• Had the case involved the sale of goods rather than land, it probably would have been decided
differently today, as an options contract, under the doctrine of consideration
Restatement (Second) of Contracts
§22. Mode of Assent: Offer and Acceptance
1. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer or
proposal by one party followed by an acceptance by the other party or parties.
2. A manifestation of mutual assent may be made even though neither offer nor acceptance can be
identified and even though the moment of formation cannot be determined.
§24. Offer Defined
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.
§25. Option Contracts
An option contract is a promise which meets the requirements for the formation of a contract and limits
the promisor’s power to revoke an offer.
§35. The Offeree’s Power of Acceptance
1. An offer gives to the offeree a continuing power to complete the manifestation of mutual assent
by acceptance of the offer.
2. A contract cannot be created by acceptance of an offer after the power of acceptance has been
terminated in one of the ways listed in §36.
Peter Wu
§36. Methods of Termination of the Power of Acceptance.
1) An offeree’s power of acceptance may be terminated by
a. rejection or counter-offer by the offeree, or
b. lapse of time, or
c. revocation by the offeror, or
d. death or incapacity of the offeror or offeree
2) In addition, an offeree’s power of acceptance is terminated by the non-occurrence of any
condition of acceptance under the terms of the offer.
§ 377. Termination of Power of Acceptance Under Option Contract
Notwithstanding §§38-49, the power of acceptance under an option contract is not terminated by
rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the requirements
are met for the discharge of a contractual duty.
§42. Revocation by Communication from Offeror Received by Offeree
An offeree’s power of acceptance is terminated when the offeree receives from the offeror a
manifestation of an intention not to enter into the proposed contract.
§43. Indirect Communication of Revocation
An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent with
an intention to enter into the proposed contract and the offeree acquires reliable information to that
effect.
Sales Contracts: The Uniform Commercial Code
§2-205. Firm Offers
An offer by a merchant to buy or sell goods in a signed writing by which its terms gives assurance that it
will be held open and is not revocable, for lack of consideration, during the time stated or if no time is
stated for a reasonable time, but in no event may such period of irrevocability exceed 3 months; but any
such term of assurance on a form supplied by the offeree must be separately signed by the offeror.
[seems to go against Dickinson]
ACCEPTANCE
Acceptance That Varies Terms: The Mirror Image Rule
Before performance, there can’t be any variation between offeror’s proposal and what offeree agrees to.
Any change implies rejection or counteroffer.
Mirror image rule does not apply when performance indicates a contract exists.
However, the Mirror Image Rule is used to determine whether a contract was formed in the first place.
This is a common law problem. Statutory UCC differs
• UCC treats the problem as one of contract interpretation, not formation.
Peter Wu
Ardente v. Horan [real estate acceptance letter had terms for furniture, fixtures, etc...]
The Mirror Image Rule applies when no performance has begun – in order for a contract to arise, there
needs to be (a) an offer; (b) an acceptance; and (c) the acceptance needs to be effective on the grounds
that it is absolute, and not qualified. Qualification means imposing additional conditions on the offer, or
adding limitations. In this case, the “acceptance” actually becomes a counter-offer that the original
offeror would need to accept before a contract would become binding.
§61. Acceptance Which Requests Change of Terms
An acceptance which requests a change or addition to the terms of the offer is not thereby invalidated
unless the acceptance is made to depend on an assent to the changed or added items.
Comment: a. Interpretation of Acceptance. An acceptance must be unequivocal. But the mere inclusion
of words requesting a modification of the proposed terms does not prevent a purported acceptance
from closing the contract unless, if fairly interpreted, the offeree’s assent depends on the offeror’s further
acquiescence in the modification. See Uniform Commercial Code §2-207(1).
Acceptance by Correspondence - Mailbox Rule
The Mailbox Rule: an acceptance is effective upon dispatch
• Reason for throwing hardship on offeror: the offeree is already relying on the deal.
• Meant to protect offeree from offeror revoking during transit period
When an offer is in the form of an option, however, the general rule is that acceptance is operative upon
receipt (opposite of the Mailbox Rule)
Mailbox rule is rule of acceptance, not rule of revocation.
§63. Time When Acceptance Takes Effect
Unless the offer provides otherwise,
• an acceptance made in a manner and by a medium invited by an offer is operative and
completes the manifestation of mutual assent as soon as put out of the offeree’s possession,
without regard to whether it ever reaches the offeror [Mailbox Rule]; but
• an acceptance under an option contract is not operative until received by the offeror.
§64. Acceptance by Telephone or Teletype
Acceptance given by telephone or other medium of substantially instantaneous two-way communication
is governed by the principles applicable to acceptances where the parties are in the presence of each
other.
§65. Reasonableness of Medium of Acceptance
Unless circumstances known to the offeree indicate otherwise, a medium of acceptance is reasonable if
it is the one used by the offeror or one customary in similar transactions at the time and place the offer is
received.
§66. Acceptance Must be Properly Dispatched
An acceptance sent by mail or otherwise from a distance is not operative when dispatched, unless it is
properly addressed and such other precautions taken as are ordinarily observed to insure safe
transmission of similar messages.
Acceptance by Performance - Unilateral Contracts
Offerors can specify that acceptance may take the form of “performing or refraining from performing a
specified act” (Restatement §30)
Peter Wu
Bilateral contracts: agreements that result from acceptance by a promise
Unilateral contracts: acceptance by performance
Carlill v. Carbolic Smoke Ball
Should a promisor be so silly or extravagant, he can open an offer to the public that the public can then
accept, and the promisor will be liable for the promise.
Notification is not necessary if the promise either states or intimates, including through its context/
circumstances, that notification is unnecessary, or, alternatively, the situation can be conceived of as
notification being given when the act is performed.
The offer/promise exists in such a case with clear terms as to what the potential offeree would have to
do to accept the promise.
On performance of this act, a binding contract is formed.
HYPO: I say. I’ll pay you to walk over the Brooklyn Bridge. You agree and walk halfway across when I
drive up and revoke. What happens next?
Under common law, complete performance is required. Otherwise in Carlill, anyone who’s halfway used
the smoke ball would sue.
But it’s trumped by the Restatement 45:
When offeree starts performing, an option contract is established. Offeror can’t revoke but offeree can’t
collect until completion.
Option contract created on start. Contract created upon completion.
Acceptance by Silence
Hobbs v. Massasoit Whip [if you didn’t want eelskins, why’d you keep em?]
When the offeree fails to reply to an offer, and yet takes the benefit of the goods/services, and knows
they were offered with the expectation of compensation, his actions operate as an acceptance.
E-Commerce and Mutual Assent
Sprect v. Netscape [hidden terms in download page]
Rule: an offeree, regardless of apparent manifestation of consent, is not bound by inconspicuous
contractual provisions of he was unaware, in a document whose contractual nature was not obvious.
A contract/license agreement cannot be something that is entered into by accident by the reasonable
offeree – the offeree clearly needs to be on notice that s/he is entering into a binding contract; the offeror
cannot ‘trick’ offeree into a contract. The offeree needs to intentionally assent to contractual provisions
of it is aware, not accidentally assent to contractual provisions that are not obvious.
Register.com v. Verio [WHOIS queries to market register.com customers]
Rule: where a benefit is offered subject to stated conditions, and the offeree, knowing the conditions,
decides to take the benefit, it accepts the terms and is bound to them.
Reasoning: cannot analogize to Specht, where πs went on the site once and downloaded, and didn’t
even see the license agreement; here, the ∆s went on the site multiple times and were fully aware of the
terms
Peter Wu
DISCERNING THE AGREEMENT
Interpreting the Meaning of the Terms
I. AMBIGUOUS TERMS - WHEN WORDS HAVE MORE THAN ONE MEANING
Raffles v. Wichelhaus [Peerless]
Rule: no consensus ad idem (no meeting of the minds) -> no contract (the terms would have to be
agreed to by both sides)
Reasoning: the Peerlesses were different ships, so the parties never agreed to the same terms -> no
contract
SUBJECTIVE INTENT OF PARTIES - Restatement §201: Where parties have attached same meaning to
a promise, it is interpreted in accordance with that meaning. THIS IS DIFFERENT FROM EMBRY TEST.
• HYPO: Say objectively Peerless means December. But both parties subjectively meant October.
• Under Embry, No contract. Since objective person would not have meant that.
• But here, yes contract!
• HYPO: Buyer thinks Oct. Seller thinks Dec. Before setting sail, seller mentions Dec. date to buyer.
Buyer hears it and recognizes that there’s a difference, that seller thinks Dec, but doesn’t mention it.
• Court would hold to Dec since buyer knew what the seller meant. Seller had no reason to rely on
any other definition.
Oswald v. Allen [swiss dude loves coins; mistranslation: all coins vs one collection of coins]
When there is ambiguity in the terms, and the two parties think they are agreeing to two different things,
the court will not enforce the contract – there is no contract. Parties need to actually have the same
understanding.
II. VAGUE TERMS - EDGES OF THE WORD ARE BLURRY BUT CORE MEANING IS DEFINITE.
Weinberg v. Edelstein [first, one must ask, what is a dress? more importantly, wtf is a girdle]
Rule: to interpret the term in the contract, the judge must look to the “practices and customs of the
trade.” int:
The judge had to look at the standard industry practice and custom to determine what articles of
clothing were covered by the term “dress,” and also at the leases together, in totality of the context, to
determine exactly what the parties intended the ∆ to be barred from selling.
Note: If the word “dress” was ambiguous and not just vague, ∆ wins under “Peerless.” K would be
unenforceable.
Frigaliment v. BNS [stewing chicken vs real chicken]
In interpreting a vague term, subjective intent does not matter per se; in other words, it matters only in
that the disagreeing parties must actually be able to point to differences in objective meanings of the
word.
The party bringing the complaint has the burden of proving that its (narrower) definition is the one that
was intended by both parties; otherwise, the ∆ can show that it was entitled to interpret the term
according to other standard, custom/industry usage.
In this case, we might either consider the contract fulfilled (as here, in Frigaliment), or as never having
been formed because the minds never met (as in Peerless). The argument for considering the contract
fulfilled here is that, while the minds never met, the objective assent met, but not the subjective
understandings.
Peter Wu
HIERARCHY OF EVIDENCE
1. Establish if both parties subjectively attached same meaning to the term. If both parties
subjectively agreed, no problem. Both parties assented to the same thing
1.1.
Recall Embry test: reasonable to interpret that there was a K + offeree did interpret it that way
1.2.
The Embry case is not about what happens if you take Embry to logical ends
1.2.1.
Court would not have extended the test to the extreme.
1.2.2.
Embry test is intended to protect people like Embry’s ability to rely on their contracts.
2. If both parties attached different meanings...
If one party knows or ought to know what the other person meant, burden is on the person
who knows/recognizes the mistake to speak up or else the meaning goes with the other
party’s understanding.
3. If that doesn’t apply...Look at the objective meanings of the word, trade customs/meanings,
etc...
3.1.
i.e. If word was “dress.” One interpreted as bathing suit. Person who went w/ usual meaning
wins.
4. If there is no objective meaning -- no way to choose. No contract.
Filling Gaps in the Terms
•
•
•
Issue here is for courts to supply terms when contracts are silent on a particular issue
Distinction between terms that are implied in fact and terms that are implied in law
o Terms that are implied in fact are terms that the parties actually, albeit implicitly, have
agreed to
o Terms that are implied in law are terms that the court imposes upon the parties without
their consent
There are two types of gap-fillers: default rules and immutable rules
o Default rules are ones that parties can contract around
o Immutable rules cannot be varied by consent and will override any express clause to the
contrary
I. AGREEMENTS TO AGREE.
Sun Printing v. Remington Paper [terms of price and duration after initial period left open, but price no
higher than contract price to large newpapers; no understanding on length of price terms]
When the contract is an agreement to agree, the parties are free not to agree without being liable for
breach.
Held: failure of contract.
Reasoning: no agreement as to time; the time and the price are in fluctuation, and the court reads the
document as an agreement to agree and since an agreement was not reached, ∆ not bound -> failure to
comply cannot lead to a cause of action
There’s just too many different options/scenarios for court to choose from in enforcement.
Notes:
How agreement to agree could be enforceable
• Parties agreed to agree, agreed to negotiate. But here won’t even negotiate. Breach is failure to try to
negotiate.
• But the issue is (same as issue with enforcing specific performance). How can we tell that ∆ negotiated
in good faith?
UCC §2-305 differs here. It asks court to fill gaps. Assumes parties’ intent is to be bound. But ∆ could try
to argue that they did not intend to be bound.
Peter Wu
• Other Approaches
• You can look at what the parties would have done.
• Or give seller benefit of the doubt. If ∆ had 100% of bargaining power, in light of K’s constraints,
what would they do? Could set the price at the highest price per month, etc... That would be the
best possible outcome for seller under K and keep K active. Remember: we know that these
parties agreed to enter into this K.
• HYPO: landlord leases space to store for 5 years. Store can renew at annual rents to be agreed upon.
Landlord says at the end of 5 years...rent is now $2000 when it was previously $650.
• Court doesn’t enforce the contract. Problem of indefiniteness.
• Courts don’t want to enforce unintended Ks and don’t want to write Ks for parties.
• Ks are voluntary! We should only hold parties to what they intended.
• All Ks are essentially incomplete. Can’t possibly account for every possible contingency.
• It sort of doesn’t matter what the rule is. If parties have clearly expressed they intended to be
bound by a K, it’s hard to give too much weight to Cardozo’s issue of freedom from contract.
• UCC tries to deal with this head on.
• If there’s a K, gives court power to fill gap as long as there is a reasonable basis for the
additional term the court is adding.
II. ILLUSORY PROMISES (REQUIREMENTS CONTRACTS)
Issue: whether the promise of one of the parties is ‘illusory” because it leaves complete discretion to
perform or not in the hands of the purported promisor.
Seller instead of saying..I promise you this is exchange for that, is just promising something. No return
consideration. Return consideration is in form of...exclusivity?
These are agreements where say...the buyer has full discretion on how to fill that term.
Requirements Contract
New York Central Iron Works v. US Radiator [iron works contracted w ∆ to furnish it with entire radiator
needs at terms and prices specified; but ordered more than it had ever ordered before. ∆ refused to fill.]
Holding: ∆ was liable to continue carrying out the contract. If a party contracts for goods upon a rising
market, he is entitled to such profits as may accrue.
Point: The court determined that the ∆ was obligated to continue to fulfill the contract as long as the π
was acting in good faith (the court determined it was) in increasing its demands for its “needs.” The rule
here is that if a party contracts for goods on a rising market, he is entitled to such profits as he may
earn by reason of this favorable contract, and both parties are bound to carry out the contract in a
reasonable way, with good faith dealing, and without breach.
Requirements Contract
Eastern Airlines v. Gulf Oil
A requirements contract does not lack mutuality of obligation – the party who will determine quantity (in
this case, the π) is required to operate his plant or conduct his business in good faith pursuant to the
standards of fair dealing in the trade, so his requirements will approximate a reasonably foreseeable
figure.
Test is whether the party is acting in good faith;
Test of good faith: ending K would be fine if π was facing lack of demand. but ending the K just to curtail
losses would be in bad faith.
• HYPO: If π in previous case quit the radiator business.
Peter Wu
• Could conceivably be bad faith if he’s losing a lot of money so he wants to sell stuffed animals
instead.
• The test is: is the problem inherent in the market (i.e. you’re selling Betamax in a DVD world) or did
you make a bad bet and now you want out.
Exclusive Dealings Contracts are “best efforts” contracts.
Wood v. Lucy [wood contracted for lucy’s EXCLUSIVE endorsement on fabrics and fashion; she was to
receive half of all profits or revenues that he made, but he didn’t HAVE to do anything or make $]
Issue: May a promise to use reasonable efforts be implied from the entire circumstances of a contract?
Rule: There is a contract, even if a promise seems to be lacking, if the whole writing gives rise to the
inference of a promise – it can be implied.
The promise has value – the π had some duties – his promise to pay the ∆ ½ profits and revenues
was a promise to use reasonable efforts to bring about these profits and revenues – this promise
was implied so there was mutuality.
Summary:
• Even if a contract lacks an explicit promise to further its goals, the context of the contract as a whole
can be used by the court to insert value/consideration to that promise.
• Here, it was clear that ∆ Lucy’s promise to give π an exclusive endorsement had value, and it was met
by the implied duty of the π to use his best efforts to promote and sell the product. Thus, there was
mutuality of agreement.
• An exclusive dealings contract is a “best efforts” contract – the distributor’s right to sell the
product is exclusive (the consideration received from the manufacturer/seller [here, Lucy]), while the
distributor in exchange agrees to use its “best efforts or “reasonable efforts” to make sales/profit.
IDENTIFYING THE TERMS OF THE AGREEMENT
Form Contracts or “Contracts of Adhesion
§211. STANDARDIZED AGREEMENTS
(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise manifests
assent to a writing and has reason to believe that like writings are regularly used to embody terms of
agreements of the same type, he adopts the writing as an integrated agreement with respect to the
terms included in the writing.
(2) Such a writing is interpreted whereever reasonable as treating alike all those similarly situated,
without regard to their knowledge or understanding of the standard terms of the writing.
(3) Where the other party has reason to believe that the party manifesting such assent would not do so if
he knew that the writing contained a particular term, the term is not part of the agreement.
Comment:
Assent to unknown terms: Trust good faith. Terms should be regular, expected.
Carnival Cruise Lines v. Shute [form contract on back of ticket w/ forum selection clause]
SCOTUS does not adopt COA’s determination that a non-negotiated forum-selection clause is never
enforceable because of lack of bargaining.
Forum-selection clauses in form contracts are subject to judicial scrutiny for fundamental fairness. No
indication that Carnival set FL as forum in bad faith, as means of discouraging legitimate claims since
its principal place of business and home of ships was in FL.
Dissent
Only the most meticulous passenger is likely to be aware of the forum-selection provision.
Peter Wu
Many passengers will not have an opportunity to read that paragraph until they’ve already purchased
their tickets and accepted the conditions.
2 strands of contract law that qualify the general rule that courts should interpret Ks as written:
• Courts have generally reviewed contracts of adhesion with greater scrutiny
• Contractual provisions which seek to limit the place or court in which an action may be brought
are invalid as contrary to public policy
Prevailing rule is still that forum-selection clauses are not enforceable if they were not freely
bargained for.
Battle of the Forms
• Two distinct legal issues
• Is there any contract at all?
• If so, what are the terms? Original or counteroffer?
• Traditionally, terms are the last terms both parties agreed to. (Last shot rule)
• What happens when offeror instead of explicitly accepting a counteroffer, simply starts performing?
• In those cases, much more likely to say there was a contract.
• If both parties are acting on the contract, hard to invalidate.
• When one starts performing, that’s an acceptance of the counteroffer. Not hard to take it as a
unilateral contract (acceptance by performance.) This is how the UCC handles it.
Sales Contracts: The Uniform Commercial Code
§ 2-207. Additional Terms in Acceptance or Confirmation. [rejects mirror image rule]
1. A definite and seasonable expression of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states terms additional to or different from
those offered or agreed upon, unless acceptance is expressly made conditional on assent to the
additional or different terms.
2. The additional terms are to be construed as proposals for addition to the contract. Between
merchants such terms become part of the contract unless:
1. the offer expressly limits acceptance to the terms of the offer;
2. they materially alter it; or
3. notification of objection to them has already been given or is given within a reasonable
time after notice of them is received.
3. Conduct by both parties which recognizes the existence of a contract is sufficient to establish a
contract for sale although the writings of the parties do not otherwise establish a contract. In such
case the terms of the particular contract consist of those terms on which the writings of the parties
agree, together with any supplementary terms incorporated under any other provisions of this Act.
Comments:
A proposed deal that has been performed on is recognized as a contract. Therefore, any additional
matter contained int he confirmation or in the acceptance falls within subsection (2) - proposal for an
added term.
• additions can’t materially alter the contract
• if no answer is received within a reasonable time after additional terms are proposed, it’s fair to
assume their inclusion has been assented to
• UCC approach discourages disgruntled parties from bailing on the contract.
• Mirror image rule says if there’s discrepancy, no contract!
• But UCC says, you agreed there was a contract, just decide the terms.
Peter Wu
Step-Saver Data Systems v. Wyse [box-top license saying opening = acceptance of terms including a
disclaimer of warranties; step-saver (buyer) wins]
• §2-207 governs.
• Parties’ performance demonstrates the existence of a K. Dispute not over existence of a K, but the
nature of its terms.
• Offeree must demonstrate an unwillingness to proceed with the transaction unless the additional or
different terms are included.
• “consent by opening” language not sufficient to render acceptance conditional. no indication TSL is
willing to abandon transaction if additional language not added.
• One of the terms on the box was “don’t transfer the software” but both parties knew Step-Saver
would transfer the software. So it can’t be that the box top license was the final deal.
• So we can’t say TSL was willing to abandon the transaction if additional language was not added
since there was something on the box they did not agree to and they still assented to the contract.
• Thus box top can’t be a conditional acceptance.
Union Carbide v. Oscar Mayer [sales tax chicago; back taxes needed to be paid; Oscar Mayer agreed to
indemnify Union Carbide for all sale tax liability. The back of the invoices and the pricebook read “In
addition to the purchase price, Buyer shall pay Seller the amount of all governmental taxes that Seller
may be required to pay.”]
• RULE: additional terms become part of the contract unless they materially alter it.
• If new term does not effect a material alteration, silence is consent.
• But if it does effect a material alteration, the party who proposed it must present additional
evidence, beyond the term itself, to show he was reasonable to infer consent if the other party was
silent.
• Adding back taxes is a material alteration to which Oscar Mayer did not consent. To assume
responsibility for taxes shown on an invoice is quite different from assuming an open-ended, indeed
incalculable, liability for back taxes. AFFIRMED.
Notes
You can’t say the tax would have been tacked on anyways since it’s not a requirements contract. There
was no exclusivity. Oscar Mayer could have avoided the tax by moving to a competitor.
If it was a requirements contract
• Union Carbide providing plastic casings as needed
• Consent would probably be presumed.
WRITTEN MANIFESTATIONS OF ASSENT
THE PAROL EVIDENCE RULE
Issue of how a written manifestation of assent should be interpreted when other extrinsic oral or written
evidence may contradict (or otherwise modify) it.
Thompson v. Libbey
RULE: No parol evidence can be admitted.
Circularity argument. Would have to admit parol evidence to look at whether to admit parol evidence.
§214. Evidence of Prior or Contemporaneous Agreements and Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are admissible
in evidence to establish
• that the writing is or is not an integrated agreement;
• that the integrated agreement, if any, is completely or partially integrated;
Peter Wu
• the meaning of the writing, whether or not integrated;
• illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
• ground for granting or denying rescission, reformation, specific performance, or other remedy
Brown v. Oliver [written contract for real estate, ∆ wanted the furniture too]
What to do when a certain part of a transaction has been embodied in a single written contract, but
another part has been left in some other form (perhaps not written)
• General test:
• Judge uses parol evidence to look for whether parties intended to cover a particular subject in the
writing.
• If document deals with extrinsic evidence or negotiating topic at all, presumption is that writing
was complete.
• If the document doesn’t cover the alleged issue, it may be susceptible to parol evidence; extrinsic
evidence goes to jury to decide if the negotiations took place.
Notes
HYPO: contract a complete integrated agreement. But afterwards, had open negotiations on
maintenance, mowing lawn, etc..
• If negotiations had been before K, would be subject to parole evidence rule.
• Parol evidence only applies to extrinsic evidence of prior or contemporaneous negotiations.
You can add an integration clause saying this written agreement is final.
Pacific Gas and Electric v. G.W. Thomas [very permissive, ca supreme ct, words have no meaning]
Rule: the test of admissibility of parol evidence to explain the meaning of a written instrument is simply
whether the offered parol evidence is relevant to prove a meaning to which the language of the
instrument is reasonably susceptible.
Court examines “totality of the circumstances” including parol evidence to see if it is relevant. If the
language of the contract is reasonably susceptible to either interpretation, then parol evidence is
admissible to prove the clause on the part of the respective party.
Trident Center v. Connecticut General [Kazinski goes too far; sophisticated parties, giant deal]
Kazinski goes overboard, interprets Pacific Gas to mean all words have no meaning.
IMPORTANT
• If agreement is unintegrated (not intended to be a final expression), then extrinsic evidence that
contradicts or is inconsistent is admissible.
• If agreement is integrated (intended to be a final expression), extrinsic evidence that is consistent is
allowed.
• Partial integration occurs when a contract contains some, but not all, terms of agreement for a
contract.
• If agreement is integrated, complete, and exclusive, then extrinsic evidence can’t even be used to
show evidence of additional terms that are consistent.
• You can’t ever use extrinsic evidence to contradict a term in the contract.
• plain meaning rule: on its face, objectively, there’s an ambiguity
• liberal rule: contract doesn’t look ambiguous but we’ll allow the party to introduce evidence to
explain why it is ambiguous.
THE STATUTE OF FRAUDS - REQUIRING A WRITING
Peter Wu
The following classes of contracts are subject to a statute, commonly called the Statute of Frauds,
forbidding enforcement unless there is a written memorandum or an applicable exception:
• (a) a contract of an executor or administrator to answer for a duty of his decedent (the executoradministrator provision);
• (b) a contract to answer for the duty of another (the suretyship provision);
• (c) a contract made upon consideration of marriage (prenup);
• (d) a contract for the sale of an interest in land (the land contract provision);
• (e) a contract that is not to be performed within one year from the making thereof (the one-year
provision)
Boone v. Coe [sadness, tennessee to texas, court’s being a dick]
No expectation damages since contract not enforceable. Court also doesn’t give reliance damages for
erroneous reasons. We enforce Ks with expectation damages. Reliance can still be paid.
π’s action may still be maintained on quantum meruit (restitution), but under that doctrine, the action
proceeds under the theory that the ∆ has actually received some benefit from the acts of part
performance which ∆ did not.
HYPO: Embry situation:
• Assume new contract was for that day. Dec 23 to following Dec 23
• No statute of frauds requirement
• Assume on Dec 23, they agree to Jan 1 to Jan 1 contract.
• Statute of frauds does apply since completion date is over 1 year away
• Assume contract for rest of Embry’s life
• No statute of frauds since Embry COULD conceivably die within the next year. Even if he doesn’t,
statute of frauds does not apply.
Riley v. Capital Airlines [oral 5 year contract for water methanol, ∆ denies 5 year contract]
Statute of Frauds applies but π will get [reliance] damages, following United States v. Behan, because
the π should “be made whole for his losses and expenditures,” so long as the ∆ cannot prove that “they
were foolishly or unreasonably incurred”
Exceptions to Statute of Frauds
• Specially manufactured goods will only help the seller if there’s evidence that parties had mutual
assent (that buyer assented)
• Not good enough on its own. You can’t just start making specially manufactured crap.
• Part performance
• exception only available for sales of goods under the UCC (2-201(c)) and land transfers
(Restatement 129)
• Parol Evidence and Statute of Frauds Summary
• are when we might disregard evidence that parties assented to a contract.
• While parol evidence rule is justifiable since we’re disregarding unreliable evidence...Statute of frauds
is harder.
• Juries could have heard the evidence.
• Even if jury would come to a decision, still not going to let evidence in.
• Causes problem of underenforcement while trying to avoid overenforcement.
• Though underenforcement can be mitigated with reliance/restitution damages
TWO APPROACHES
• Reliance/Restitution damages
• have a basis outside contracts.
Peter Wu
• We say yes, there clearly was a contract. But can’t enforce. Just not going to award expectation
damages.
• we need to promote writing it down, follow rules
• But the underlying assent still matters.
• Courts care that there was almost a contract. But we don’t want to award full damages
because the statute of fraud still applies.
§139. Enforcement by Virtue of an Action in Reliance
A promise which the promisor should reasonably expect to induce action or forbearance on the part of
the promisee or a third person and which does induce the action or forbearance is enforceable
notwithstanding the Statute of Frauds if injustice can be avoided only by enforcement of the promise.
The remedy granted for breach is to be limited as justice requires.
§143. Unenforceable Contract still valid as as Evidence
§131. General Requisites of a Memorandum
Unless additional requirements are prescribed by the particular statute, a contract within the Statute of
Frauds is enforceable if it is evidenced by any writing, signed by or on behalf of the party to be charged,
which reasonably identifies the subject matter of the contract, is sufficient to indicate that a contract with
respect thereto has been made between the parties or offered by the signer to the other party, and
states with reasonable certainty the essential terms of the unperformed promises in the contract.
§133. Memorandum Not Made as Such
Except in the case of a writing evidencing a contract upon consideration of marriage, the Statute may be
satisfied by a signed writing not made as a memorandum of a contract.
Communication, delivery: not required that the memorandum be communicated or delivered to the
other party, not that it is even known to anyone but the signer – could be an entry into a diary, etc.; but
where a written offer serves as a memorandum to charge the offeror, a communication of the offer is
essential; written instructions to an agent to make the offer do not suffice
Consideration
§71. Requirement of Exchange; Types of Exchange
(1) To constitute consideration, a performance or return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for
his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person. It
may be given by the promisee or by some other person
Consideration refers to an element of exchange sufficient to satisfy the legal requirement.
The external manifestation is the concern, not the mental state – the promise must induce the conduct
of the promisee, and the conduct of the promisee must induce the making of the promise
A 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”
Each party’s promise is induced by the other’s. Each party is in it for himself.
Peter Wu
Consideration is based on the idea that the legal effect of promises ought to depend on what motivated
the promise.
Johnson v. Otterbein U. [promise to pay conditioned on using money to liquidate University debt]
The promise to use the money in a certain way is not a benefit to the ∆, nor a detriment to the ∏; it is not
sufficient to constitute a legal consideration
The college’s promise to pay debt is induced by Johnson’s promise.
The problem is...Johnson did not give his promise in order to induce college to make their promise.
Hamer v. Sidway [uncle/nephew drinking]
The suffering or forbearance of the promisee, especially of legal rights, when an inducement to the
promisor, suffices as consideration.
Here, the nephew abstained to get $5000; Uncle promised to give $5000 to get nephew to abstain. Both
in it for themselves. Thus, consideration.
HYPO: Uncle sees nephew on other side of the street and says, “if you cross the street and come over
here, I’ll give you $1000.”
• No consideration unless uncle just REALLY wanted nephew to cross the street.
HYPO: Say university didn’t want to pay debt and Johnson knew they didn’t want to pay debt but he
donated money and directed it to be used to pay debt.
• University promising to use the money to pay debt would be valid consideration.
• If Johnson had actually paid the university, now, ex post, saying there was no consideration does not
mean Johnson gets his money back. It just means there was no contract, but it was a gift.
The smaller the detriment, the less likely there was consideration.
Degree of detriment or evidence of benefit is evidence of consideration
HYPO: friend’s car breaks down, wants to borrow my family’s car. we use the car to drive our son to
preschool. I say sure, you can borrow the car if you drive my son to school.
• If I was giving the car because I wanted friend to relieve me of driving son to school, there would
be consideration.
• If I’m doing it to help friend and picking up son was just a perk, no consideration.
Kirksey v. Kirksey [douche brother, sister in law comes to land then kicks her off]
Gratuitous promise ≠ contract enforceable
• How could we argue that this was just a conditional gift? Look at R71(2).
• D is trying to help P. He wants to give her a gift. How? Rather than have a different person live on
land, I can give it to her to work. He’s not giving land SO she can work it.
• If primary motivation is giving gift, no consideration. Consideration is about bargains and a gift is not a
bargain.
• Bargain theory is about whether or not promises/return promises are induced by what each party is
getting.
Dahl v. Hem Phramaceuticals [FDA testing, submit to experiment, promised to keep providing drug]
In “unilateral” contracts, a promise can be exchanged for the performance of another; there is thus
sufficient consideration to constitute a binding contract. Performance is consideration in unilateral
contracts.
PAST CONSIDERATION
Moore v. Elmer [fortune teller] Past consideration not valid.
Peter Wu
MORAL CONSIDERATION
§86. Promise for Benefit Received
(1) A promise made in recognition of a benefit previously received by the promisor from the
promisee is binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been
unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
[In other words, the promise has consideration when it is made in recognition of a benefit previously
received from the promisee – but not when the promisee conferred the benefit as a gift.]
§86 is strictly restitutionary – compensation for a benefit previously received.
Mills v. Wyman [good samaritan took care of ∆’s son]
Rule: A moral obligation is only sufficient consideration when at some other time there was a good or
valuable consideration, such as a legal obligation
Here, father had no legal obligation to pay since son was an adult. If asking ∆ to pay and not father,
maybe.
Webb v. McGowin [guy promises to keep paying friend who saved his life but was crippled]
Rule: a moral obligation is sufficient consideration to support a subsequent (executory) promise to pay
where the promisor has received a material benefit.
Facts are different from Mills v. Wyman since here, promisor was the one saved where as there, it was
his son.
Contract Modification and the Preexisting Duty Rule
Stilk v. Myrick [ship captain agrees to redistribute wages to crew from two deserted sailors]
The sailors, including the ∏, had a preexisting duty to their job, including to bring the ship safely into
port; there was no additional consideration they supplied in return for the wages they desired.
Preexisting duty cannot serve as consideration for contractual modification
Alaska Packers’ Assn. v. Domenico [packers stopped working, demanded more $]
Contract modification is not enforceable without new, additional consideration.
Class notes:
BUT in some cases, company might want to pay more. If workers wanted to walk away so bad that
they’d rather breach and pay damages, company might find it worth it to pay $200 to keep them.
The point of this rule is to prevent contracts made under duress. But the preexisting duty rule isn’t based
on duress. Lots of times we want to modify contracts. Preexisting duty rule is a blunt instrument that
doesn’t distinguish between coercion/duress and cases in which the party would rather modify and pay
more.
Brian Construction v. Brighenti [unforeseen circumstances in excavation]
Theory of unforeseen circumstances is a modification/exception/carve-out to the preexisting duties
rule. There is consideration when contracts are renegotiated when new, burdensome conditions are
discovered during the execution of a contract, because these new conditions were not contemplated.
They were thus outside the scope of the original contract. Therefore, the increased compensation for
Peter Wu
dealing with the new burdens is additional pay for additional work, respectively – and thus there is
consideration, and thus a binding contract.
UCC abolishes preexisting duty rule.
Restatement (Second) of Contracts
§89. Modification of Executory Contract
A promise modifying a duty under a contract not fully performed on either side is binding
(a) if the modification is fair and equitable in view of circumstances not anticipated by the parties
when the contract was made; or [see Brian Construction]
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change of position in reliance
on the promise.
Illustration:
• A employed by B to design coats for $90/week. C offers A $115/week and A informs B. A and B agree
that A will be paid $100/week and write out a new contract. This is before any performance. That K is
valid and binding.
§2-209. Modification, Rescission, and Waiver
(1) An agreement modifying a contract within this Article needs no consideration to be binding…
[the UCC has abolished the preexisting duty rule!]
Official Comment – Purposes of Changes and New Matter
2. [Modifications must meet the “good faith” test – no use of bad faith to escape performance on the
original contract; extortion without legitimate commercial reason is a violation of good faith; between or
against merchants: “observance of reasonable standards of fair dealing in the trade”]
These comments to §2-209 reject the preexisting duty rule as a way of policing the coercion problem/
opportunistic behavior problem and instead favor a more direct approach.
Adequacy of Consideration - R§79
HYPO: Alaska packers could argue that there was no consideration on original K. Since $50 is too low
compared to typical wages. But...
IT DOESN’T MATTER WHETHER THE DEAL IS FAIR.
If you’re selling a book and I offer $2, it doesn’t matter if that’s fair as long as you’re still offering the
book.
The only problem is if the parties aren’t in it for what they say they’re in it for.
Policy: we don’t want courts rewriting contracts and getting it wrong and subjecting Ks to uncertainty of
being rewritten by courts. Better to defer to the parties. We care about the value of the promise to the
parties.
The intention to be legally bound
D. Issue: whether the parties need to intend to create legal relations; whether the parties need to
manifest an intention to create legal relations
1. The presence of consideration normally implies the existence of the legal intention to be
bound
Peter Wu
2. The intention is to be objectively ascertained
E. RST §21. Intention to Be Legally Bound:
1. Neither real nor apparent intention is required to make a promise legally binding [cf. manifest
assent]
2. However, a manifestation of intention to not be legally bound may prevent contract formation
Formalities that manifest an intention to be legally bound in lieu of consideration
Seals
• Ceremony and solemnity fixes attention of the parties -> fraud less likely
• Abolished in some jurisdictions, in others, raises a rebuttable presumption of consideration
• Where in lieu of consideration: can use failure, but not want, of consideration as a defense, In
re Conrad’s/Killeen’s Estate
• The seal bars arguing that there was no consideration
• The seal does not bar arguing that the purported consideration was never exchanged
• Rise in bargain theory of consideration -> decline in significance of the seal
Nominal consideration - “Sham” or “nominal” consideration is not consideration (unless we’re in the
world of options contracts)
• Schnell v. Nell (∆ promised to pay parties each $200 based on his wife’s will for a consideration of
1¢, p. 693) while courts do not ordinarily inquire whether consideration is adequate, “mere
exchange[s] of sums of money, whose value is exactly fixed” = nominal consideration, not valid
• Consideration and form. The firm offer serves a useful purpose – it is often a necessary step in
the making of the main bargain proposed
• Nominal consideration. Offers made in consideration of one dollar are often irrevocable under
Subsection (1)(a) – courts do not normally inquire into the adequacy of the consideration here
• [Gross disproportion between the payment and the value of the option usually indicates that
the payment was not in fact bargained for but was a mere formality or pretense; under §71,
there would be no consideration]
• [Here, however, the nominal consideration is held to be sufficient to support a short-time
option proposing an exchange on fair terms – the option is an appropriate preliminary step,
and thus there is a valid basis for enforcement]
Options Contracts - nominal consideration fine for option contracts
RSC §87. Option Contract. An offer is binding as an option contract if it (a) is in writing and signed by the
offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair
terms within a reasonable time
Class Notes:
A formality has to be something unusual. More bizarre the better.
Can’t be a toast, handshake. Traditionally, a peppercorn!
Smith v. Wheeler - recital.
w/ Option contract, consideration is different!
We don’t care about whether there’s not consideration for the option K but we do care for the
subsequent real K.
Adequacy of consideration/Nominal/Recital are all very open areas of law. Courts do different things
even though R/UCC seem straightforward. More willing to accept fake consideration from sophisticated
parties.
UCC §2-205: an offer by a merchant to buy or sell goods, signed in writing, giving assurances that it will
be held open – irrevocable during stated time period, up to three months
Peter Wu
RSC §87: option contracts reciting nominal consideration are valid, even if the recited consideration is
not in fact given
Promissory Estoppel
R §90: Promise Reasonably Inducing Definite and Substantial Action is Binding.
A promise which the promisor should reasonably expect to induce action or forbearance of a definite
and substantial character on the part of the promisee and which does induce such action or forbearance
is binding if injustice can be avoided only by enforcement of the promise.
1. FAMILY PROMISES
Ricketts v. Scothorn [grandfather tells gd she doesn’t have to work anymore]
She was not required to quit, in fact she got another job and he kept paying her. Thus, no consideration.
Rule: If a donor’s promise reasonably induces the donee to rely on it and thus put him/herself in a worse
position, and s/he does put her/himself in such a worse position, the donor is estopped from claiming
want of consideration
2. PROMISES TO CONVEY LAND
Greiner v. Greiner
∆ moved, made improvements on the land, made other expenditures, all in reliance on his mother’s
promise so the π should execute a deed to the ∆.
3. PROMISE OF A PENSION
Feinberg v. Pfeiffer Co. [retiring with pension]
4. CONSTRUCTION BIDS
James Baird v. Gimbel. [subcontractor mistake on bid, but contractor relied, used quoted price, won]
∆ argues bilateral contract. ∆ promises linoleum and π promises $. ∆ says π can’t accept until he wins
the bid and there was no K since ∆ revoked before π accepted.
π says when π acted on the bid by using it, it created a conditional contract, which only comes into
effect if condition is met (π winning) so revoking is breach!
Court says: you could have written a conditional contract but you didn’t!
Difference between here and Ricketts:
Classic P.E. cases involve promises, not a bargain. But here’s there’s bargain and consideration.
Grandfather wanted granddaughter to rely. But here sub wants GC to accept, a return promise.
Offer for exchange not meant to be a promise until consideration has been received.
P.E. rejected because what’s sought is return promise, not reliance.
P.E. is supposed to be a sub for consideration but can’t be where consideration is already sought.
Drennan v. Star Paving Co.
Essentially same facts as last case.
BUT...court says that there’s a time when he’s bidding that he’s relying without being able to accept yet.
P.E. is not replacing Drennan’s promise to pay. It’s not subbing for that consideration.
Offer contained an implied subsidiary promise not to revoke (similar to unilateral contracts)
R45: we want to protect someone who reasonably relied on the offer by starting to perform.
But here, there isn’t really part performance bc it confers no benefit on Star Pavement.
Peter Wu
OFFER !!
!
!
UNILATERAL! !
HERE! !
!
!
!
!
ACCEPTANCE
PART PERFORMANCE
!
P.E. RELIANCE
But if you imply the subsidiary promise:
Reliance is hoped for by sub, since sub wants GC to rely on the for the bid and then accept.
If you analogize to R45, we want to protect offeree’s reliance. In a unilateral K, performance is
consideration so we look at P.E. to substitute for consideration in the subsidiary promise.
Sub’s offer included a subsidiary promise not to revoke until GC had at least an opportunity to
accept. Even though there’s no consideration for this option contract - GC paid nothing to sub in
exchange for his surrender of the right of revocation, where, the offeror’s aim is to induce reliance
on the part of the offeree and to make commitments on the basis of such reliance, R90 waives the
requirement of consideration and turns the offer into a binding promise.
HAND: not going to award $ since GC relied but had not accepted sub’s offer; ignores that the sub
wants reliance in the meantime before acceptance
TRAYNOR: P.E. isn’t substitute for consideration in main contract. It’s the substitute for consideration in
the option contract formed when sub makes offer and GC relies.
Court is enforcing the contract. Not reliance damages but EXPECTATION.
PROMISSORY ESTOPPEL AS AN ALTERNATIVE TO BREACH OF CONTRACT
In previous cases, very clear what the contract would have been. Here, it’s not clear bc of series of
misrepresentations, making very strong representations trying to get other party to rely.
R §526 OF TORTS
A misrepresentation can be fraudulent if the maker (a) knows or believes that the matter is not as he
represents it to be, (b) does not have the confidence in the accuracy of his representation that he states
or implies, or (c) knows that he does not have the basis for his representation that he states or implies.
Goodman v. Decker [franchise selling products, said app was good, but franchise never went through]
Enforcing representation not the contract. court thinks the terms of the franchise are not at issue; rather,
the issue is the ∆s’ promise that a franchise would be granted and radios supplied, and upon this
representation the ∏s relied and incurred expenses
Hoffman v. Red Owl [poor guy relied so hard, sunk so much money]
Here, would have been consideration if K had gone through - could have been a contract.
If Hoffman had wanted to sue for breach, there’s still essential terms missing, substituting P.E. for
consideration wouldn’t make a difference. We’re still at PRELIMINARY NEGOTIATIONS, no final terms,
so NO EXPECTATION DAMAGES.
In Embro and Agreement to agree cases, no promise that if you do X, you’ll be good, contract will
happen. Obviously promisors want promisee to rely.
Peter Wu
Why can’t we use precontractural reliance like Dempsey?
Here, reliance was after the promise.
In Dempsey, they relied before Dempsey was even aware.
Historically, P.E. was to make Ks enforceable. Substitute for missing element. But court says, just bc
there’s P.E. doesn’t mean this is breach.
Promissory estoppel does not require that an actual agreement on essential factors necessary to a
contract be reached – so promissory estoppel as substitute for breach of contract.
Promise enforceable in the interest of justice if (1) the promisor should reasonably expect to induce
action or forbearance of a definite and substantial character on the part of the promisee; (2) the promise
did induce such action; and (3) injustice can be avoided only by enforcement of the promise.
Damages should be awarded only inasmuch as necessary to prevent injustice – should not exceed any
actual loss sustained ([reliance])
ELEMENTS OF PROMISSORY ESTOPPEL: THE PROMISE
For promissory estoppel to apply, there must be a real promise to be enforced.
Promise must induce promisee to rely on the promise to his detriment in a definite and substantial
manner. In Blatt, law student didn’t rely to his detriment in working for Order of the Coif.
Promise can be illusory if 1) it’s so indefinite and can’t be enforced or 2) contains provisions which in
effect make its performance optional or discretionary on the part of the promisor. Spooner v. Reserve
Life Insurance Co. [agreements said that bonus was voluntary, may be withheld, discontinued, etc..]
In Ypsilanti v. General Motors, trial court went with regular definition of promise (promisor expected to
induce action, actually produced reliance or forbearance by promisee)
Appeals court held for a stricter definition of promise being an intention to be legally bound.
Implied Duty of Good Faith
Think back to Wood v. Lucy. A promise by Lady Duff-Gordon to give her designs exclusively to Wood
implied a duty on Wood to make a profit.
Here we know that clearly there’s a contract. Question is how to enforce the duty of good faith.
There’s an implied covenant of good faith in every contract.
Goldberg v. Levy [Levy directing customers to other store to avoid paying lessor % of profits]
Rule: if diversion is the sole purpose -> bad faith.
If Levy is diverting people to another store to promote the other store, bring in more business, etc..that’s
fine! Even building another store nearby is fine to increase profits, accommodate more customers
Mutual Life Insurance v. Tailored Woman [fifth floor selling fur coats]
Majority does not take up question of intent. Plenty of reasons for putting fur coats on 5.
Finds for Tailored Woman even though salespeople were paid commission for sending people to 5th
floor. But those commissions were subject to percentage rent. All that was bargained for was percentage
rent on lower three floors; if π wanted further restrictions, they could have bargained for them!
The leases in question did not prohibit ∆s from restructuring their business if not with the clear intention
of depriving ∏s of their contracted-for percentage rent
• If the parties wanted a term, put it in the contract!
Peter Wu
• As long as its an implied term, courts will be conservative - reluctant to call bad faith.
• Nowadays, companies tend to use “best efforts” clauses - serve as reminders of their moral
obligations.
Stop & Shop v. Ganem [stores in dying area, want to stop being stores, pay base rent, stop paying %]
Court focuses on sound business judgment. Ganem has substantial base rent. We’re less concerned
about good faith when party is profiting either way.
Rule: “Covenants will not be extended by implication unless the implication is clear and undoubted”; an
omission is evidence against an understanding
• Rule/reasoning: an omission to specify an agreement in a written lease is evidence that there was
no such understanding – probable intent governs construction of the lease
Rule: fixed rent significantly below the fair rental value of the property might justify the conclusion that
the parties intended that the lessors have the benefit of percentage rent
Rule: lessor free to make competitive business decisions if not in bad faith and not explicitly contracted
against in the lease; can close stores, open stores elsewhere if for good business reasons.
Prospective Nonperformance
What are the obligations of the nonbreaching party?
ANTICIPATORY REPUDIATION
repudiation before time of performance
There is an implied promise between contract and performance not to damage the future contract.
Renunciation is breach. Breach can occur before performance.
We believe in mitigation - so allow nonbreaching party to mitigate as soon as renunciation happens.
See Albert Hochster [courier canceled on]
Requests for cancellation ≠ repudiation.
Rule, 6 Corbin, Contracts, §973: in order to constitute anticipatory breach, there must be a definite and
unequivocal manifestation of intention on the part of the repudiator that he will not render the promised
performance (at time of contract)
HYPO: 3 possibilities here. based on Harrell v. Sea Colony (buyer didn’t breach, requests ≠ repudiation)
1. Buyer breached. - expectation damages to seller.
2. Sea Colony breached - expectation damages to buyer
a. Buyer gets deposit ($5000) back plus $7000 which is the value he would have gotten out of the
contract. He pays $78k. Apt worth $85k. So he expects to be up $7000.
3. Mutual rescission. Both say no contract so contract never existed. Restitution damages. Buyer gets
deposit back.
π sent a request for rescission that was explicitly conditional upon ∆’s full return of the deposit; ∆
“accepted” but kept deposit. Held: ∆ tried to unilaterally convert the ∏’s rescission into an anticipatory
breach or repudiation
ADEQUATE ASSURANCES OF PERFORMANCE
One party wants to withhold performance because he suspects the other party may not perform. Can he
suspend performance pending receipt of adequate assurances of performance?
In Sea Colony, Buyer’s cancellation request was a much stronger argument for withholding performance
than just suspicion and that didn’t fly.
Peter Wu
UCC §4-2-609: When reasonable grounds for insecurity arise with respect to the performance of either
party, the other may in writing demand adequate assurance of due performance and, until he
receives such assurance, may, if commercially reasonable, suspend any performance for which he has
not already received the agreed return.”
Must make written demand for assurance before suspending.
Scott v. Crown [awaiting payment on wheat, got cold feet]
Can overlook writing requirement. But there should be a clear pattern of interaction.
Seller did not communicate clearly that he was demanding assurances, simply told truck driver that he
wanted to settle some questions.
Court was wrong to admit buyer’s letters (like admitting diary entries) buyer could write/lie about
ANYTHING.
Can’t use demand for assurance to modify contract. Seller can’t say...pay me $ now as a matter of
assurance.
MATERIAL BREACH
Only if breach is material does it relieve the nonbreaching party of its duty of performance.
Intro: Time of performance has arrived. One party doesn’t do something they said they were going to do.
Don’t think of materiality in terms of primary or secondary.
The three concepts of anticipatory repudiation, adequate assurance, and material breach are about
when the nonbreaching party is right to think of the contract as over.
Look at: How does it affect nonbreaching party’s duty to perform? Is breach a big enough deal to
cause party to think the deal isn’t going to happen?
Lane v. Foster [lane supposed to coat bridge parts, couldn’t do it to spec, π owed ∆ $7000, wouldn’t
send money unless π assured of its commitment to next phase, π covered for $42k]
1) Foster not paying $7000 was breach but not material. If Foster not paying is material, Lane doesn’t
have to perform!
§251 explains: a statement by a party concerning its ability to perform may warrant the other party to
demand assurance of performance, the failure of which may be treated as repudiation.
Rationale: a reasonable belief that the other party will not or cannot perform permits the party to
demand adequate assurance – determined by the totality of the circumstances surrounding the
agreement – minor breaches can give reason to suspect more serious breaches, and ask for
assurances.
Rule applied: ∏ Foster had reason to suspect Lane would not comply with Stage II; reasonable grounds
to demand assurance; ∆ didn’t give it. ∆ breached. ∆ owes $42,055 – $7082.22 = $34,972.78
Peter Wu
MATERIAL BREACH
(B&B)
REPUDIATION
(Albert Hochster)
AGREEMENT
FOR MUTUAL
RESCISSION
NO RESPONSE TO
REASONABLE
REQUESTS FOR
ASSURANCES
(Lane v. Foster)
NO RESPONSE TO
UNREASONABLE/
UNCLEAR REQUEST
FOR ASSURANCES
(Scott v. Crown)
CANCELLATION
REQUEST
(Sea Colony)
IMMATERIAL
BREACH
(Foster not paying
$7000)
Jacob & Youngs v. Kent [reading pipe; same as regular pipe]
It’s not that contractor isn’t liable for installing wrong pipe, but whether the breach is material (it’s not) so
the other party has to keep performing (paying).
Rule: Where change frustrates the purpose of the contract it will not be allowed. Must weigh factors:
1) does breach frustrate purpose of the K; 2) is it intentional?; 3) would owner not paying be cruel?
Rule §348: If a breach results in defective or unfinished construction and the loss in value to the injured
party is not proved with sufficient certainty, he may recover damages in the cost of completing the
contract properly UNLESS the cost is grossly disproportionate to the good to be attained, THEN, the
measure will be difference in value.
If a condition is very strange, it has to be CLEARLY stated.
TWO TYPES OF EXPECTATION DAMAGES
1. Cost of replacement. - default
2. Difference in value - if (1) is grossly out of proportion
Both options put owner in position he wanted to be in.
1. gives him reading pipe
2. gives him difference in home value. Puts him at the same expected value.
But court chooses 2) since he’s not required to actually replace and the cost is clearly disproportionate
to the loss of value.
If the breacher has substantially performed, then the performee must pay for the performance, minus
damages as a result of the (insubstantial) breach
Issue: was the breach substantial? i.e., conversely, did the ∆ substantially perform? Factors:
1. Intent of the parties (e.g., was the term incidental/independent?) (Groves, Peevyhouse,
Peevyhouse dissent, Jacobs)
2. Willfulness (knowingly making a choice not to perform a particular stipulation, etc.) (Groves,
Peevyhouse dissent, Jacobs & Jacobs dissent)
3. Economic waste (Peevyhouse, Groves dissent, Jacobs)
Peter Wu
Groves v. John Wunder [∆ deliberately breached K, removed sand and gravel but did not honor
agreement to leave property at a uniform grade; reasonable cost of doing work = $60k. property only
worth 12k]
Before it was not so crazy to mix up a pipe. Here, it’s egregious, obvious , definitely intentional
In Jacobs, willfulness is about whether there’s breach, here, court uses it to assess damages. Maybe
court is wrong here.
Rule: where the contractor willfully and fraudulently varies from the terms of a construction contract, he
cannot have the benefit of the equitable doctrine of substantial performance
Rule: in reckoning damages for breach of building or construction contract, law aims to give the
disappointed promisee what he was promised: the correct doctrine is the cost of remedying the defect,
Snider v. Peters Home Building Co.
• Reasoning: actual value v. expected value (difference in value) is not proper – owner has the right
to contract for something that will diminish the value of the land – the faithless contractor would be
favored
Restatement §346, Comment b: says that “…If no economic waste is involved, the cost of remedying
the defect is the amount awarded as compensation for failure to render the promised performance.”
Groves is the only case adopting “cost of performance.” Not really precedent.
Peevyhouse v. Garland [coal mining, did not restore at end; cost would be $29k, dim in value $300]
Provision to fix up land was not material.
Court awards diminution in value.
The measure of damages is ordinarily the cost of performance, except where 1) the provision (to
remediate) was incidental, and 2) where the economic benefit that would result is grossly
disproportionate to the cost of performance, the damages are limited to the diminution in value resulting
to the premises
Look at
1. Purpose of the contract (Peevyhouse)
2. Whether there will be economic waste (Jacob/Youngs, Peevyhouse)
3. Badness of Breach (Groves)
Defenses
Lots of ways of escaping liability.
• Pepsi. No K to begin with
• Alaska Packers. No enforceability bc of no consideration
• Boone v. Coe. Statute of Frauds.
Here, we can say there’s a prima facie case for a contract. K would normally be enforceable.
MISREPRESENTATION
Who bears the loss?
• If there’s fraud, that’s easy.
• If it’s an innocent mistake, place liability on the one who made the representations
• We consider the superior knowledge of the seller, make the seller responsible for checking facts as
a matter of public policy
• But we want people to enter contracts to do their research too. Don’t just wander into contracts.
Parol Evidence Rule not applicable to fraud or misrepresentation.
Peter Wu
Misrepresentation; (Restatement §470): any manifestation by words or other conduct that amounts to
an assertion not in accordance with the facts
Misrepresentation becomes material when it becomes likely to affect the conduct of a reasonable
man with reference to a transaction with another person.
Rule: innocent misrepresentation is sufficient to allow a promisee to recover;
§476: “Where a party is induced to enter into a transaction with another party that he was under no duty
to enter into by means of the latter’s fraud or material misrepresentation, the transaction is voidable.”
§162. When a Misrepresentation is Fraudulent or Material
(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a party to manifest
his assent and the maker
(a) knows or believes that the assertion is not in accord with the facts, or
(b) does not have the confidence that he states or implies in the truth of the assertion, or
(c) knows that he does not have the basis that he states or implies for the assertion.
(2) A misrepresentation is material if it would be likely to induce a reasonable person to manifest his
assent, or if the maker knows that it would be likely to induce the recipient to do so.
§164. When a Misrepresentation Makes a Contract Voidable
(1) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by the other partyR upon which the recipient is justified in relying, the contract
is voidable by the recipient.
(2) If a party’s manifestation of assent is induced by either a fraudulent or a material
misrepresentation by one who is not a party to the transaction upon which the recipient is
justified in relying, the contract is voidable by the recipient, unless the other party to the
transaction in good faith and without reason to know of the misrepresentation either gives value
or relies materially on the transaction.
Rule: opinion v. fact. An honest opinion as to the monetary value of property, is just an opinion; while a
statement of property value may be fraudulent misrepresentation if the value of the property is definite or
known, when the case is speculative, as here, it is to be understood to be an opinion that cannot be
relied upon. Byers v. Federal Land Co.
Rule: the general rule is that misrepresentation, to be actionable, must be of fact rather than of opinion;
but exceptions: opinions can be actionable when there is...
• A fiduciary relationship between the parties
• Where there has been some artifice or trick employed by the representer.
• Where the representee does not have equal opportunity to become apprised of the truth or falsity
of the fact represented
• Like when a party has inferior knowledge, the statement of the party with superior
knowledge may be regarded as one of fact, even if it would be considered as opinion if
the parties were dealing on equal terms
Rule: if a party undertakes to disclose, it must disclose the whole truth.
HYPO: I’m trying to sell my home and you ask about the plumbing. I say, “I LOVE the plumbing” when in
fact, it hasn’t worked in 10 years.
Court will say I had superior knowledge. Even if I was emotionally attached and honestly loved it, I
should have qualified that statement.
There is an implicit statement of fact that I don’t know any information incompatible with my statement. I
should reasonably consider the impact of my words.
Peter Wu
Especially since here, she was paying the dance instructors to give her their honest opinion. Vokes v.
Arthur Murray [shitty dancer]
§168. Reliance on Assertions of Opinion
(2) The recipient of an assertion of a person’s opinion as to facts not disclosed and not otherwise
known to the recipient may properly interpret it as an assertion
(a) that the facts known to that person are not incompatible with his opinion, or
(b) that he knows facts sufficient to justify him in forming it.
§169. To the extent that an assertion is one of opinion only, the recipient is not justified in relying on it
unless the recipient
(a) stands in such a relation of trust and confidence to the person whose opinion is asserted that
the recipient is reasonable in relying on it, or
(b) reasonably believes that, as compared with himself, the person whose opinion is asserted has
special skill, judgment or objectivity with respect to the subject matter, or
(c) is for some other reason particularly susceptible to a misrepresentation of the type involved.