Donative Promises:
Dougherty v. Salt
NY Court of Appeals, 1919, Cardozo
Outcome/Rule: Promise does not become enforceable contract unless all parties involved
provide consideration.
Facts: Aunt made donative promise to nephew, nephew did not give consideration.
PP: Jury ruled for plaintiff, trial judge set aside, appellate division reversed, this court reversed,
ruled that trial judge was correct.
Relevant R2: §§ 1, 17, 71, 79
§1: Contract is promise - the law considers performance as legal duty and provides remedy for
breach
§17: Requirement of bargain - Needs a) manifestation of mutual assent and b) consideration
§71: Requirement of exchange - Consideration = performance or return promise that is
bargained for; it is bargained for if it is sought by promisor in exchange for his promise and is
given by promisee in exchange for that promise
Performance can be: act other than promise, forbearance, creation/modification/destruction of a
legal relation
Performance or return promise may be given to promisor/other person, may be given by
promisee/other person
§79: Adequacy of consideration and mutuality of obligation: as long as requirement of
consideration is met, no additional requirement of: gain/advantage/benefit to promisor,
disadvantage/detriment to promisee; equivalence or mutuality of exchanged
Williston: reporter of R1, leader of classical contract law school of thought - set of axioms
deemed to be self-evident, with subsidiary rules deduced from axioms
Braucher, Farnsworth, Corbin: R2 people,
Williston (classic) v Corbin (modern)
2 concept of consideration and courts can go either way
Narrow: bargain theory of consideration
distortions - terminology (there are certainly other elements of legally enforceable promise)
Substantive (suggests closed system where law cannot grow)
Broad: consideration is a collective term for elements that make promise legally enforceable.
This includes bargain but also things like reliance
How to actually make a gift without physical transfer:
Deed gift/inter vivos: signed writing specifying personal property to be given, nature of interest
given, intention of donor to give
Will not work for gift of services, personal property not owned at the time, future gift
Donor declares themselves trustee of property they own for the benefit of other - donor
continues to hold legal title of property but beneficiary has beneficial ownership
The stronger the substantive interest in enforcing a given kind of promise, the more the law can
tolerate process concerns.
Element of Form:
4 general, interrelated concerns that lead the systems to treat a given transaction as
unenforceable:
Evidentiary - problem of shaky proof
Cautionary - protect people from their own rashness and the importuning of others
Channeling - Parties need to be aware, by a signalizing, that their actions might have legal
consequences
Deterrent - unwillingness to enforce transactions considered suspect/of marginal value
Schnell v. Nell
SC Indiana, 1861, Perkins
Outcome/Rule: Promise to make a gift in exchange for nominal consideration and/or moral
obligation and/or past consideration is unenforceable for lack of valid consideration
Facts: P’s wife promised her heirs money that wife did not have, so P promised to give his own
money to heirs, in exchange for one cent consideration. Later P refused to pay.
Ds argued: one cent consideration, the love P bore for his wife, P’s wife’s services
Court held: while courts don’t usually question unequal consideration, one cent for $200 is so
out of sync that it is clearly nominal consideration and thus not valid.
The love P bore his wife and her industriousness is also not valid because a) past consideration
and b) may obligate on a moral level, but not a legal one
PP: Common pleas upheld contract, on appeal to SC, reversed in favor of P
Form:
In classic contract law, the form of a bargain could make promise enforceable. (Blackacre farm
for $1)
R2 kept bargain definition of contract, but reversed position on nominal consideration, requiring
bargain in fact.
Nominal consideration can still make promise enforceable in two areas - option and guarantee but this is not always consistent. Nominal consideration in these cases is more likely to be
successful when paid.
A promise under seal used to have a binding effect, even without consideration, but gradually
lost legal effect throughout the 19th and 20th century. However, UCC 2-205 (firm offers), 2209(1) (contract modifications), several NY statutes, and more dispense with need for
consideration for certain types of contracts, if they are written and signed. Many others hold
writing to be presumptive evidence of consideration. These are narrow in scope, however.
Should there be a form, like a seal, for donative promises? It would require the development
and administration of rules dealing with improvidence and ingratitude - messy and perhaps not
very efficient.
Reliance:
Elements that should make a promise enforceable - significant injury to promisee because they
relied on promise
Kirksey v. Kirksey
SC, Alabama, 1845, Ormond
Outcome/Rule: Promise to provide free home and land is gratuitous, unsupported by
consideration, and thus unenforceable, despite the promissee’s reliance induced the promise
(selling her other land and moving herself and her children.)
Facts: D wrote to P, his brother’s widow, and told her to sell her land and move to a house on
his property. He told her he would allow her to live there and farm the land to provide for herself
and her children. P moved and lived there for two years, then D revoked his promise.
Court held: D’s promise was gratuitous, there was nothing to say that there was consideration
and P did not have a cause of action against him.
PP: Trial court jury found for P, this court reversed.
Notes: This case would probably come out differently today because of reliance and promissory
estoppel: the fact that P sold her land on reliance of D’s promise, and the fact that D made a
promise concerning the future, and therefore would be estopped from pleading a lack of
consideration for that promise.
Promissory estoppel:
Can be pled as a cause of action, typically alongside suit for breach of contract. Works as
shield, never sword.
Toscano v Greene Music: P sued for breach of contract and promissory estoppel after D
promised him new job, causing P to leave old job, and then D rescinded offer. Breach of
contract claim was dismissed, but promissory estoppel prevailed.
Restatement accounts for doctrine of promissory estoppel with provisions that make reliance a
basis for overcoming impediment to recovery on breach of contract claim.
R2C
§90 Promise reasonably inducing action or forbearance: A promise which promisor should
reasonably expect to induce action/forbearance by promisee and DOES induce such
action/forbearance is binding if injustice can be avoided only by enforcement of promise.
Remedy for breach may be limited as justice requires.
Feinberg v. Pfeiffer Co.
C of App, Missouri, 1959, Doerner, per curiam
Outcome/Rule: A gratuitous (normally unenforceable promise) can be made binding if promisee
reasonably and detrimentally relies on the promise.
Facts: P was lifelong employee of D company. President of D decided to reward P for service by
increasing her pay and promising $200 a month for life after retirement. Did not ask for anything
on P’s part. P retired two years later and received payments until president died and his
successors felt that performance of promise was unnecessary, not really a contract, and tried to
reduce payments. P sued. D claimed no consideration. P claimed reasonable and detrimental
reliance.
Court: P could not have enforced contract based on theory of past performance as
consideration. Promise was definitely gratuitous. However, P retired earlier than she might have
otherwise, and thus changed her position based on her reliance of D’s performance. D could
reasonably have expected her to do so, and thus D is estopped from pleading lack of
consideration.
In this case, both because P relied on promise and stopped working, and because she then
developed cancer, preventing her from becoming employed again, the only way to prevent
injustice was expectation damages by keeping up the original payments ($200/month)
Notes: Another theory used in Missouri: P’s forbearance of salary in reliance was the act
required for consideration.
Hayes v Plantations Steel Co.
SC, Rhode Island, 1982, Shea
Outcome/Rule: If promisee acts voluntarily, without regard to the promise, they cannot use
reliance to make the promise binding.
Facts. P announced decision to retire and afterwards, D promises to take care of P but neither
party specifies what this means. D gives P payments for awhile and then stops. P sues, based
on theory of promissory estoppel.
Court: P did not change his position based on promise - retired voluntarily before promise was
made. No consideration and no reliance, so no way to recover.
PP: trial court ruled for P, this court reversed
Injury: what injury has promisee suffered?
Reliance interest: is promisee worse off than if promise had not been made?
Reliance damages: put promisee in position as if promise had not been made.
Expectation interest: is promisee worse off than if promise had been performed?
Expectation damages: put promisee in position as if promise had been performed.
Reliance damages:
Out-of-pocket costs: costs incurred in reliance of promise
Opportunity costs: forbearance of opportunity to engage in one activity, in reliance on promise to
be able to engage in other activity
Reliance costs can be financial and non-financial
In cases where reliance damages are difficult to establish, but obviously significant, expectation
damages may be used.
Goldstick v. ICM Realty
7th Circ, 1986, Posner
Some use an approach that treats promissory estoppel as tort doctrine for damages, rather than
giving value of promise, as in breach of contract
But treating it as contract doctrine may sometimes be the only way to do justice, particularly if
there are lost opportunity costs, which can be difficult to account for in reliance damages.
Walters v Marathon Oil Co.
7th Circ, 1981, Spears
Outcome/Rule: A court sitting in equity has discretionary ability to award whatever remedy is
necessary to do complete justice to injured party.
Facts: D promised to allow P to operate franchise of D’s company. P purchased land for
franchise and made improvements on it, as well as giving up opportunities to franchise with
someone else. D then denied franchise to P and P sued for promissory estoppel and won. Was
awarded expectation damages based on how much money P could have made in year one. D
appealed that P was not entitled to damages based on lost profits.
Court: P incurred both out-of-pocket and opportunity costs on reliance of D’s promise and court
was allowed to award whatever damages necessary to do complete justice.
Past Consideration
Donative promises based on pre-existing moral obligation.
R2C
§82 Promise to pay indebtedness: Promise to pay antecedent contractual/quasi-contractual
debt is binding if debt is still enforceable or would be except of statute of lims.
Facts that operate as such a promise in the absence of facts indicating different intention:
a.
Voluntary acknowledgement of existence of debt
b.
Voluntary transfer of money/value as interest/part payment/collateral security
c.
Statement to obligee that statute of lims will not be used as defense
(Many states require these promises to be in writing and signed by promisor, except 2(b).)
§83 Promise to pay debt discharged by bankruptcy: Express promise is binding when it is to pay
all or part of debt that was discharged or is dischargeable in bankruptcy proceedings begun
before promise is made.
Bankruptcy code, 11 U.S.C. § 524
Creates a number of hurdles to enforcing promise to pay debt normally dischargeable
3 exceptions to past consideration = no consideration, under classical contract law
1. Promise to pay debt normally barred by statute of lims (what could have been used as
defense is waived.)
2. Promise by adult to pay debt normally unenforceable because it was incurred when
obligor was underage (what was voidable is affirmed.)
3. Promise made during bankruptcy proceedings to pay debt normally dischargeable in
bankruptcy (what could have been used as defense is waived.)
Mills v. Wyman
SJC, Massachusetts, 1825, Parker
Outcome/Rule: A promise based on moral obligation, without legal consideration, does not
constitute a legally binding contract unless it is tied to a pre-existing legal obligation.
Facts: D’s son, Levi, fell ill and was looked after by P who incurred expenses. After Levi died, P
wrote to D and D promised to repay P’s expenses. D did not pay and P sued.
Court: D’s promise was made without legal consideration on P’s part and was not tied to a preexisting legal obligation, because Levi was an adult. D was not “unjustly enriched” by P’s
performance. D may have had a moral obligation to pay, but not a legal one.
Webb v. McGowin
C of App, Alabama, 1935, Bricken
Outcome/Rule: When promisee confers upon promisor a material and substantial benefit,
promisor gives promise of reward and promisor dies, promisee is entitled to take reward out of
promisor’s estate.
Facts: P saved McGowin’s life and became crippled and unemployable for life. McGowin
promised to reward P with lifelong payments, and paid these until he died. McGowin’s
executors, D, stopped paying and P sued. Originally held for D.
Court: P had conferred substantial material benefit to McGowin, creating a moral obligation on
McGowin’s part, which he acknowledged. This acknowledgement, and the promise that
followed, thus became a legal obligation that could be enforced. This is shaky, and normally
past kindnesses and moral obligations would not give rise to legal obligations. However, this
court and other courts before and after have said that when the law is in doubt, it should be
construed in favor of justice.
Notes: This opinion cites Boothe v. Fitzpatrick - promise by D to pay P for saving and caring for
his bull was held binding.
Unjust enrichment: (Quasi-contract, restitution, promise implied in law, legal fiction)
Obligation in law of unjust enrichment is benefits-based.
Some limitations:
Intervention to save life by professional health/emergency services can give rise to legal
obligation to pay, but not by non-professionals (good Samaritans). Don’t want to create financial
incentives for people who should not be trying to rescue people.
Unsolicited intervention to save property is different because it can be easily evaluated.
Harrington v. Taylor
SC, North Carolina, 1945
Outcome/rule: Voluntary humanitarian act does not constitute legal consideration to support a
contract.
Facts: P intervened to save D’s life, suffering injury. D promised to pay and then didn’t. Court
ruled that the moral obligation did not become a legal one.
R2C
§86 Promise for benefit received: Promise made in recognition of benefit previously received is
binding to the extent necessary to prevent injustice.
Promise not binding if benefit was gift, promisor was not unjustly enriched, to the extent that
promise’s value is disproportionate to the benefit.
The Bargain Principle and its Limits
The Bargain Principle
The law should/will not enter into inquiry as to adequacy of consideration (except when it does.)
Hamer v. Sidway
C of App (Highest), New York, 1891, Parker
Outcome/Rule: Adequate interest sufficient to form contract may consist of a
right/interest/profit/benefit conferred to one party, OR a forbearance/detriment/loss/responsibility
for other party. Court will not attempt to weigh how much either party benefitted/suffered, as
long as it is clear that the parties bargained for what they received.
Facts: P received claim from William Story 2d, for $5,000 and interest. owed to him by D. D had
promised Story $5,000 in exchange for Story refraining from drinking/smoking/gambling until 21.
Story did so and asked D for the money when he turned 21, D said he would keep the money
until he thought Story could handle it properly, and it would accrue interest. D later died without
paying and Story sold claim to P.
Executor of D’s will said that the contract was not valid because there was not sufficient
consideration - Story was not harmed, but benefited and D received no real benefit.
Court: Story gave up a legal right in exchange for D’s promise so D got what he bargained for adequate consideration.
Statute of Frauds:
Governs what contracts must be in writing
A contract said to be “within the Statute” is one that should have been in writing and is not unenforceable.
An exception to statute is said to be “taken out of the Statute.”
Aimed first and foremost at preventing frauds and perjuries, but also serves to prevent
inconsiderate (hasty) engagements.
Courts have not generally favored Statute of Frauds and have found ways to make oral
agreements enforceable. (Hypo with oral rescission of contract, held valid even though original
contract was within S of F)
Some parts of original Statute transferred to UCC
One year provision
Not popular in the States, doesn’t always make a ton of sense, courts have sought to limit its
application
Surety
Richard Rash hypo - contract not within S of F, and enforceable although oral, if principal to be
insured has no obligation to creditor.
Promise is covered by S of F only if made to the creditor, and the creditor needs to know about
the true nature of the relationship, and the surety and principal cannot become joint debtors
Meaning of writing
Broad and recast over the years
Signed document, with signature, or symbol acting as signature, that lays out specifics (but
does not need to be absolutely perfect), possibly consideration but not in all cases, signed by
party charged, can be piecing together of several documents to make coherent whole
Memorandum can fail if it does not correctly state the agreement
May be signed by agent, even if authority of agent is not in writing
For sale of goods, less stringent on details, except as to quantity of goods - enforceable only as
to quantity of goods specified
Electronic contracting
Valid
Claims available for breach of oral contract within statute
Restitution
Normally B can recover value of benefits conferred on A under oral contract falling within S of F
Normative explanation: allowing party to obtain benefits received under contract made
unenforceable by S of F is unjust and unnecessary - enrichment and evidence obvious
Doctrinal explanation: restitution not the same as breach of contract, but actually unjust
enrichment
Restitution gives market value, not contract value, but evidence can be introduced showing
value to benefactor
Quantum meruit: a reasonable sum of money to be paid for services rendered or work done when the
amount due is not stipulated in a legally enforceable contract.
Part Performance
Courts have read into provisions of S of F exceptions where plaintiff can recover for expectation damages
where contract has been partly/fully performed on one side
Land contracts: sliding scale of equity in favor of party that will suffer hardship and evidentiary value of
acts of reliance/part performance
Vendor can recover price under oral contract for land once he conveys the land
Purchaser - things get more complicated - restitution may be more just, taking possession matters
Promissory Estoppel
If one side incurred losses, but did not convey benefit
An action to recover reliance damages, unlike unjust enrichment, does fall within contract law, making
this case more complicated
Court has said “reliance is ground for overcoming S of F only where unconscionable injury/unjust
enrichment would result from refusal to enforce contract
The effect of non-compliance - legal consequences of unenforceable agreement
Criminal liability goes beyond purpose of Statute of Frauds (example, promising to kill someone in
exchange for land)
Oral and unenforceable applies only to parties, makes it no less binding as far as third parties are
concerned
R2C
144
Persuading party to break oral contract covered under S of F can be tort
Generally, person cannot undo executed transaction on the grounds that it would not be enforceable as an
executory agreement
R2C, 145
R2C 141
Oral Rescission
R2C 148
Normally, even contracts within the S of F can be orally rescinded - unless it has been executed and
therefore calls for either reconveyance or resale
Oral Modifications:
Normally, a modification of a contract falls within S of F if and only if, the mod and the original put
together is within S of F
Special rule for sale of goods (UCC 2-209(3))
Several different interpretations - some think oral mod ok if its to a term that would not be under S of F,
others say every mod must be in writing, mods that bring contract within S of F for first time must be in
writing, etc
R2C 150 - oral mod can become effective is action has been taken in reliance
UCC 2-209(4) attempt at mod not satisfying 2-209(3) can operate as waiver
2-209(5) - this waiver cannot be retracted if retraction would be unjust because of reliance
Interaction of S of F with parol evidence rule
4 main differing points:
PE rule does not invalidate later oral mod, S of F does
S of F requires writing and can prevent use of oral agreement as grounds for suit, PE rule can exclude
written material
S of F can be satisfied by piecing together written documents, PE calls for integration of contract
In litigation, one party may say that contract is incomplete. Other party could offer parol evidence to
supply gap, this raises two questions: 1) is testimony admissible under PE rule? 2) is gap enough to fail to
satisfy S of F rendering testimony legally irrelevant?
Back to The Bargain Principle
Klockner v Green
SC, New Jersey, 1969
Outcome/Rule: An act is requested by offeror as consideration for unilateral contract is
adequate consideration whether or not offeree would have performed the act regardless of the
offer.
Facts: P was taking care of Edyth and Edyth said she wanted to leave him some money. All she
asked if that P continue to care for her and have his daughter visit her. Edyth’s lawyer modified
her will accordingly, but Edyth died before she could sign and her property went to D who
refused to give it to P, saying there was no real contract because no consideration because P
would have cared for Edyth without the agreement.
Court: Edyth clearly intended to obligate herself to P as long as he continued to care for her. P’s
performance did not need to be induced solely by contract, but only with intent of accepting the
offer.
De Cicco v Schweizer
SC, New York, 1917, Cardozo
Don’t try to assume where someone’s mind would have been if not for a circumstance. If a
promise induced them to persevere on a course of action, reliance and detriment can be
inferred from the fact of performance.
Difference between conditional bargain promise and conditional donative promise?
Bargain: both parties view performance of condition as the price of the promise.
Donative: Parties view condition as the means to make the gift, not the price.
Carlisle v T&R Excavating Inc.
SC, Ohio, 1997
Outcome/Rule: Agreement based on gratuitous promise is not valid contract because there is
no consideration that consists of benefit to promisor and/or detriment to promisee.
Facts: P was married to owner of D. P worked for D and D offered to pay P, but P declined.
Later, D promised to perform free work for P. Later, P and D split up while D had only finished
part of the work promised to P. D stopped working, P hired someone else and sued D for
damages. Court initially ruled for P and this was reversed by SC
Court: D’s offer to do work for P was in the nature of a gift, and had no legal consideration. (and
there could be no meeting of the minds as to the scope of work intended) P’s offer to reimburse
D’s material costs is not consideration. P also did not adequately assert promissory estoppel that she relied on D’s promise to her detriment because she would have built preschool anyway
and therefore having to pay others to finish the work puts her in the same position as if there
had never been a contract - no reliance damages available.
Pennsy Supply Inc v American Ash Recycling Corp
Superior Court, Pennsylvania, 2006
Outcome/Rule: There may be sufficient consideration to form enforceable contract even when
parties have not bargained for specific terms of the agreement. If a promise induced detriment,
and the detriment induced the promise, there is contract, even if parties did not completely
understand what was what.
Facts: Faulty aggregate ash material
Hancock Bank & Trust Co. v Shell Oil Co
SJC, Massachusetts, 1974
Outcome/Rule: A contract based on adequate consideration is not voidable as a violation of
public policy simply because it constitutes a bad or uneven bargain.
Facts: D company leased land and the conditions of the lease were pretty generous and
seemingly more beneficial to D than to the lessor. P acquired the land, with the lease, and sued
to get out of the contract on the grounds that the terms were so lacking in mutuality as to be
void as against public policy.
Court: Once there is proof of consideration to support a contract, courts will not relieve a party of
its terms simply because of a bad or uneven bargain.
R2C
71, 72, 79
Batsakis v. Demotsis
Court of Civil Appeals, Texas, 1949
Outcome/Rule: While valid contract requires all parties to provide consideration, mere
inadequacy of consideration will not void a contract.
Facts: In Europe during WWII, P gave D the equivalent of $25 in exchange for D’s promise to
pay P $2,000 plus interest after the war. P delivered and after the war, D did not pay. P sued
and was originally given only a portion of what he was owed under the contract. He appealed.
Court: It is irrelevant that the amount of consideration paid by P is very small compared to
consideration provided by D. A valid contract exists - both parties knew what they were
bargaining for, and P provided exactly what he promised to provide.
Duress and the Exploitation of Duress
R2C 175, 176
Totem Marine Tug and Barge Inc v Alyeska Pipeline Service Company
SC, Alaska, 1978, Burke
Outcome/Rule: A contract for settlement and release of debt can be rescinded if one party was
induced by improper threat - in this case, economic duress known to and exploited by other
party.
P, a barge company, made contract with D to deliver goods. While attempting delivery, P ran
into many difficulties, some of which were the fault of D. P was late and D terminated
agreement. P pressed D for payment and D resisted, knowing that P faced bankruptcy.
Eventually D settled with P to pay one third of their debt in exchange for P releasing them of the
rest of the debt. P then sued D to rescind settlement and recover the rest of the debt. Initial
court ruled for D. P appealed.
Court: Duress existed here because 1) one party involuntarily accepted other’s terms 2)
circumstances permitted no alternative (P would have gone bankrupt seeking alternative) and 3)
circumstances were result of coercive results of other party (D threatened not to pay at all)
Reversed
Notes from case: Change in law has been broadly toward acceptance of conclusion that
restitution is required of any excessive gain that results from impaired bargaining power.
Unidroit Art. 3.9
Princip of Euro Contract Law 4.108
Andreini v Hultgren
Sc, Utah, 1993, Zimmerman
Outcome/Rule: A contract may be voided if a party's manifestation of assent is induced by an
improper threat -- a violation of the covenant of good faith and fair dealing -- the contract is
therefore not on fair terms, and the victim has no reasonable alternative.
Facts: P experienced pins and needles feeling following surgery, told he needed another
operation, which was ultimately unsuccessful. P sued D for tort of medical malpractice, but D
produced contract for release of liability that P signed right before surgery.
Court: D made improper threat by withholding surgery to induce P to sign contract, so contract
is not valid and P cannot be held to its terms
Chouinard v. Chouinard
5th Circ, 1978, Thornberry
Outcome/Rule: Contract between two parties is voidable when one party took undue/unjust
advantage of other party’s economic duress to coerce party into making contract. In this case,
while P was under economic pressure, it was of his own making and D did not really take
“undue or unjust advantage.”
Facts: D took advantage of P’s financial situation to settle a debate on their legal rights. This did
not constitute improper threat or duress to make the contract voidable.
Post v. Jones
Outcome/Rule: Contract of sale not valid when made during a contrived auction sale where the
vendor was made hopeless, helpless and passive. Duress established.
Notes: There should be some incentive to rescue, but not so much that it takes undue
advantage of the one needed rescued - this would be neither fair nor efficient (the two major
props of the bargain principle.
Unconscionability and Price-Gouging
Williams v. Walker-Thomas Furniture Co.
US C of App, DC Circuit, 1965, Skelly Wright
Outcome/Rule: When element of unconscionability is present during formation of contract,
resulting contract is unenforceable.
Facts: D company leased items to customers and let them purchase over time with installments.
However, if customer leased new item before old items were paid off, installment payments
would be spread to cover each item, resulting in a system where if a customer defaulted on a
payment, D could repossess all previous purchases, even ones that were almost completely
paid off. P had made several purchases and eventually defaulted, and D attempted to
repossess everything. Trial court and appellate found for D. P appealed.
Court: Unconscionability is absence of meaningful choice on part of one of the parties,
combined with contract terms unreasonably favorable to the other party. Courts will ask if the
parties were grossly unequal in terms of sophistication and bargaining power (which they were
in this case.)
R2C 208
UCC 2-302
Uniform Consumer Credit code: 1.301, 5.108
Fed trade commission regulations on door-to-door sales:
UCC: adopted by 49 states and DC and practically adopted by Louisiana
Applies to goods - things movable at the time of identification to the contract for sale
Even when not directly applicable because contract is for services, the principles may be
applicable
How does UCC interact with common law? 1-103 says UCC does not displace common law
except explicitly so
Pittsley v Houser
C of App, Idaho, 1994, Swanstrom
Outcome/Rule: In cases involving a hybrid transaction of both goods and services, a good line
of authority is the predominant factor rule. In this case, looking at the difference in cost between
the price of the carpet and the price of the installation, and the plaintiff’s purpose in making the
transaction, the court determined that the good was the main purpose and the contract was
governed by the UCC
Fact: Dispute over whether the installation of carpet was governed by UCC - carpet is a good,
but the installation is a service.
Court: 2 lines of authority
Predominant factor test: Is the thrust/purpose a service with goods incidentally involved, or vice
versa? This applies UCC to the whole contract
Sever contract into parts, applying UCC to the goods but not the service - action/defect of carpet
would be for UCC, suit for service would not
This court went with the predominant factor rule
Unidroit Art 3.10
P of Euro Contract Law 4.109, 4.110
Commission of Euro Communities Council Directive 93/13/EEC
Maxwell v. Fidelity Financial Services Inc
SC, Arizona, 1995, Feldman
Outcome/Rule: Contract provisions are unenforceable if they are oppressive or unconscionable,
even if they conform to the parties reasonable expectations
Facts: P was sold a defective water heater and obtained a loan from D to purchase. Four years
later, P renegotiated the loan, but later P sought to get out of the contract on grounds of
unconscionability. Trial court and court of appeals found for D, SC reversed.
Court: Unconscionability can be divided into procedural substantive
Procedural: Elements of unfair surprise, fine print clauses, mistakes/ignorance of important
facts, other indications that bargaining did not happen as it should have. Courts look at factors
like age, education, intelligence, experience, bargaining power, who drafted the contract, how
terms were explained to weaker party, alternative supply of goods/services in question
Substantive: Unjust and one-sided contracts (at the time they were made) - so lopsided as to
shock the conscience
Substantive is important by itself and can also provide evidence of procedural unconscionability.
Notes: Many courts have demanded to see both types of unconscionability, some have held that
either can be shown, courts are reluctant to disturb contracts, but UCC itself does not seem to
speak to procedural, but rather just substantive
Novation: substitution of new contract in place of old one
Provisions used: UCC 2-302: Unconscionability
Classic vs Modern contract-law reasoning
Classic (Rigid)
Modern (Supple)
Core set of axioms, and larger set of
doctrines deduced from the
Seeks to justify doctrines on basis of policy, morality
and experience
Objective - directly observable state of the
world (ex. Nominal consideration valid
because objective form of bargain)
Subjective - mental state
(ex. Nominal consideration not valid because this
allows courts to inquire whether parties were
subjectively bargaining for a consideration)
Standardization - application relies on
abstract variable unrelated to parties
intentions or specific circumstances
Individualization - application depends on situationspecific variables related to intentions and
circumstances
Static - Application turns on only what
occurred when contract was formed - ex.
consideration
Dynamic - moving stream of events preceding,
following and constituting formation - ex. reliance
Binary - two categories - ex, no damages or
expectation damages
Multi-faceted - ex, no damages, expectation,
reliance, restitutionary, disgorgement
Doctrine of Mutuality and the Illusory-Promise Rule
Scott v. Moragues Lumber Co.
SC, Alabama, 1918, Sayre
Outcome/Rule: A valid contract may be conditioned upon the happening of an event, even
though the event may depend upon the will of the party who afterwards seeks to avoid its
obligation.
Where the offer does not specify a time for acceptance, the offer may be accepted within a
reasonable time.
Scott made an offer conditioned on his purchasing a boat, Morague accepted that offer, and
therefore, made it a binding contract, where the duty to perform was subject to the condition of
whether Scott purchased the boat, which he did
Express condition provides that
1. Party to the contract is obliged under the contract, but does not come under a duty to
perform until and unless condition is satisfied
2. If condition is not satisfied, duty of party to perform is suspended or terminated
Condition concerns states of affairs that can lie wholly, partly and not at all within the control of
either party
R2C 59 - conditional promises
Doctrine of mutuality:
Illusory Promise Rule:
R2C 77
A promises to sell B at a certain price as many bushels of wheat (not exceeding 5000) as B
wants in 30 days. B accepts. However, B’s acceptance involves no promise by him - no
detriment or benefit conferred on A - so no consideration
Mutuality and illusory promise rules should be eliminated - there are many instances where a
party may wish to bind themselves even if the other party does not - increasing the probability of
exchange
It is still on the books but is being whittle away under modern contract law, such as by
characterizing transaction as unilateral contract - exchanging promise for an act, so that the
party making the act can choose to do or not, but if they do, he party making the promise is
bound
Wood v Lucy, Lady Duff-Gordon
C of App, NY, 1917, Cardozo
Outcome/Rule: Contract may be enforced when there is no evidence of a promise, exchanged
as consideration, in the explicit terms of the contract
A promise to use reasonable effort may be implied from the entire circumstances of the contract
- and this promise can be deemed valid consideration
Facts: D was creator of fashions and hired P as her promoter. P drew up the contract, and
promised to use his reasonable efforts to sell promote D, in exchange for D’s promise not to
market herself or allow anyone else to market her. D sold something herself, P sued and D said
that the contract was void for lack of mutuality of consideration because the contract did not
really obligate P to do anything.
Court: The facts surrounding the case reveal that P promised to use his best efforts to promote
D and this counts as valid consideration to create an enforceable contract. P needs to use good
faith to complete his performance.
Miami Coca-Cola Bottling Co. v Orange Crush Co.
5th Circ. 1924
Outcome/Rule: A contract where one party is free to terminate at will is unenforceable due to
lack of mutuality.
R2C 77
UCC 2-306
Requirements contract:
1) Seller promises to supply all of buyer’s requirements of defined commodity at a stated price
over a designated period of time and 2) buyer promises to purchase all of his requirements of
the commodity during that time from that seller only at that stated price
Output contract
1) Buyer promises to buy all of seller’s output of given commodity at stated price over a
designated period of time and 2) seller promises to sell all of her output of that commodity to
buyer during that time at that price
Both parties have shrunk their realm of choice, and decided that doing so is in their best interest
Requirement of good faith
Mattei v. Hopper
SC, California, 1958, Spence
Outcome/Rule: A clause in a real-estate contract that bases a party’s duty to perform upon that
party’s satisfaction of a condition does not render the party’s promise to perform illusory or
lacking in consideration.
The party needing to satisfy the condition is obliged to do in good faith and may only escape
their duty to perform if they have tried in good faith and the condition was not able to be
satisfied. The party has shrunk it’s realm of choice enough to constitute valid consideration.
Harris v. Time, Inc
SC, California, 1987
Outcome/Rule: An advertisement may constitute a unilateral contract if it calls for a specific act
as consideration for a promise, without further communication and leaves nothing for future
negotiation. Someone receiving that advertisement can perform that act which obligates the
advertising party to perform.
Any bargained-for act can be considered adequate consideration - opening a company’s mailer
is valuable to the company
Office Pavilion S. Florida, Inc. v. ASAL Prods., Inc
District Court of Appeal of Florida, 2003, Warner
Outcome/Rule: An optional promise to perform does not constitute consideration, and a
modification to a contract not supported by consideration is not enforceable
Facts: P and D had valid contract for P to sell D as many keyboards as needed at a certain
price, with a minimum and maximum - D had to order a certain number and P had to supply a
certain number if demanded. Later, they modified the contract to include office chairs, but did
not specify a minimum or maximum. D tried to order a ton, P refused and D brought suit.
Originally held for D, P appealed.
Court: The modification was not supported by consideration - the promise D gave was entirely
optional - they were not obligated at any point to purchase a minimum number of chairs.
Also, the contract was within the Statute of Frauds because a quantity term was not specified in
writing.
Legal Duty Rule and Modification
Gray v. Martino
SC, New Jersey, 1918, Minturn
Outcome/Rule: A promise to perform an act that the promisor was already obligated to do (ex.
police officer) is not valid consideration.
R2C 73
Denney v. Reppert
C of App, KY, 1968
Outcome/Rule: When a reward is offered to public for performance of an act, public officials who
are already bound to try and perform that act are not eligible for the reward.
Lingenfelder v Wainwright Brewery Co.
SC of Missouri, 1891, Gantt
Outcome/Rule: A party cannot demand additional compensation to do what they were already
obligated to do under the contract and if they obtain the promise of additional compensation by
threatening to cease performance, they cannot ask the court to enforce that second promise.
Foakes v. Beer
In the house of lords, 1884
Outcome/Rule: A promise to pay a pre-existing debt is not valid consideration for a new
contract.
Modification:
Absence of consideration is not grounds for reversing a modification where the modification has
been performed - if Wainwright had paid Lingenfelder his additional compensation up front, they
could not have sued to recover it by claiming the legal-duty rule, although they might have a
case under duress, which can void a contract allowing Wainwright to file a restitution claim to
recover the payment
Economic Justification for restricting power of parties to modify
 Short-term benefits to the parties may result in long-term losses to society
 Most parties want the chance to modify, based on information only available after
contract has begun
R2C 89
Angel v Murray
SC, Rhode Island, 1974, Roberts
Outcome/Rule: When unanticipated circumstances arise during course of performance of
contract, the parties may modify the initial contract without additional consideration as long as 1)
both parties agree voluntarily and the modification is made before either side fully performed 2)
circumstances must be unanticipated by both parties and 3) modification is fair and equitable.
UCC 2-209
3-103a, 3-104, 3-311
Accord and satisfaction
McMahon Food corp v Burger Dairy Co
7th Circ. 1996
Outcome/Rule: A debt is not satisfied unless the debtor can prove that an agreement was made
to settle the debt in an honest, good faith contractual dispute, and the agreed upon payment of
debt is made sufficiently clear.
Facts: P owed D a debt and wrote two checks for D, specifying that they were effecting an
accord and satisfaction of the debt. P then sued D for declaration that P was debt-free.
Court: P could not accord and satisfy because they did not clearly, honestly and in good faith
indicate that their payments of the checks was to discharge the debts, they tried to trick a new
manager at D into accepting the payments.
R2C 279, 281
Accord v substituted contract
Rather vague
Courts more like to find subbed contract if original duty was disputed, unliquidated and did not
involve money - subbed contract wholly discharges original contract and if breached, party can
sue only for damages pertaining to new contract
Accord - Undisputed, liquidated, involved money - executory accord usually not enforceable,
until performed.
Limits of Contract
What to do if contract concerns something illegal?
Bovard v. American Horse Enterprises, Inc.
Court of Appeal of California, Third District, 1988
Outcome/Rule: A contract otherwise legal that facilitates illegal activity, may be considered void
as against public policy
In pari delicto - parties found at equal fault may be “left where the Court finds them” unless
circumstances are unduly harsh to one part, in which case there might be room for restitution
X.L.O. Concrete Corp. v. Rivergate Corp.
Court of Appeals of New York, 1994
Outcome/Rule: A contract that is legal on its face, and does not call for performance of illegal
act within the contract, is not voidable even if it arose from antitrust conspiracy.
In the matter of Baby M
SC, New Jersey, 1988, Wilentz
Outcome/Rule: Contract involving exchange of money for binding agreement by surrogate to
give up the baby was declared void as a matter of law and as against public policy
Balfour v Balfour
1919
Outcome/Rule: Not all agreements result in legally binding contracts; the court considers
agreements between spouses not to be legally enforceable because of the relationship between
the parties, court does not want to extend inside a marriage. Does not believe spouses entered
into the contract with the intent that it be legally binding
Perry v Atkinson
C of App, california, 1987, Huffman
OR: Promise to conceive a child is not legally enforceable. Intimate nature takes it out of the
courts
Some things are market-inalienable - they might be given as gifts or donations (surrogacy,
organs, etc) but may not be sold.
Part Two
Remedies for Breach of Contract
Hawkins v. McGee
SC, New Hampshire, 1929, Branch
OR: When one party breaches a contract, the non-breaching party can recover damages based
on the difference between the value of the contract as fully performed, and the value of the nonbreaching party’s present condition, plus any incidental damages that could have reasonably
been foreseen by the parties at the time of formation.
The non-breaching party cannot recover for unforeseen damages.
Sullivan v. O'Connor
Supreme Judicial Court of Massachusetts, 1973, Kaplan
OR: Pain/suffering/emotional distress flowing naturally from breach of contract are compensable
damages under both an expectation measure or reliance measure.
Unidroit 7.4.2
Expectation interest and the threat of expectation damages causes promisor to internalize not
only his own loss but the promisee’s losses as well, should he not perform the contract. It
makes everything more efficient because it gives the promisee confidence to organize their
complex affairs, and is better for the promisor because the promisee is willing to pay a higher
price for that security.
Reliance damages can be really hard to prove and quantify.
The Expectation Measure of Damages
Basic rules of expectation damages work best when plaintiff is able to cover by obtaining from a
third party a reasonable substitute for the goods/services he should have received from the
defendant. Then, the plaintiff’s expectation damages can be measured by the price of the
substitute minus the unpaid balance of the contract price.
If there is a reasonable sub available and the plaintiff foregoes cover, expectation damages are
usually measure by difference in price as if he HAD covered.
The problem comes when there is no substitute, especially when its a service, because
American courts don’t like to compel service
Or when D’s breach of contract for service leaves plaintiff with property that has a defect,
especially if defect can be repaired but at a greater cost than the reduction in market value of
the property.
Louise Caroline Nursing Home Inc v. Dix Construction Co.
Supreme Judicial Court of Massachusetts, 1972, Quirico
OR: It is contrary to public policy to award damages that would put a plaintiff in a better position
than if the defendant had carried out the contract. Hence the proper measure of a plaintiff’s
damages is the reasonable cost of completing the contract or repairing the defendant's
defective performance, minus the part of the contract price that has not been paid.
Peevyhouse v Garland Coal and Mining Co
SC, Oklahoma, 1962, Jackson
OR: Damages for breach of contract to perform remedial work on a property would normally be
measured by the reasonable cost of performance of the work. However in this case, even
though there was an express provision in the contract requiring D to perform remedial work, the
court determined that a) the remedial performance provision was incidental to the main purpose
of the contract and b) the economic benefit to the owner resulting from full performance ($300)
was grossly disproportionate to the cost of performance ($29,000). Therefore, P was only
awarded damages of $300.
R2C 348(2)
City School District v. McLane (Pool beams, aesthetically important case)
OR: If contractor performs in good faith and defects occur, and remedying them would entail
economic waste, damages should be measured by the diminution in value.
However if contractor does not perform in good faith, and the diminution in value cannot be
properly measured by the market - such as in cases involving aesthetics and personal taste the cost of replacement/completion is appropriate, even if it seems disproportionate to market
value.
When a plaintiff pays to complete work not done by defendant, courts will routinely award
plaintiff the cost of completion without questioning the reasonableness of the decision to
complete. Seems to also be true for repairing defective work.
UCC Expectation Damages
UCC 2-711,-712,-713,-714,-715(1),-723,-724
CISG Arts 45, 49, 50, 74, 75, 76
Cost of repair often award as damages to breach of warranty of goods - can sometimes exceed
purchase price of goods. (Continental Sand and Gravel)
Egerer v. CSR West, LLC
Court of Appeals of Washington, 2003, Becker
OR: Under Uniform Commercial Code (UCC) § 2-713, a buyer may recover as damages for
non-delivery from the seller the difference between the market price at the time the buyer
learned of the breach and the contract price. A court is granted a reasonable leeway in
measuring market price under the UCC. A court is permitted to use the market price for goods
different in quality from the material the buyer contracted for, especially where current market
price is difficult to prove or altogether unavailable.
Facts: D agreed to provide P with low-quality fill at a low price. Later D breached and refused to
sell P all he needed to complete his project. P obtained quote for higher-quality fill but decided
against buying it. Later he got higher-quality fill at a lower price, but sued D for the price of the
first quoted higher quality fill. Court held for P because he reasonably tried to cover - the lower
quality fill wasn’t available so he would have had to go higher-quality and that was the price of
what he needed at the time of D’s breach.
H-W-H Cattle Company, Inc. v. Schroeder
United States Court of Appeals for the Eighth Circuit, 1985, Heaney
OR: In the event of a breach of contract under the Uniform Commercial Code, courts apply the
code’s damages provisions in a way that fulfills the parties’ expectations expressed in the
contract. To award HWH market price damages, which is what they were seeking, would have
resulted in windfall for HWH, putting them in a better place than they would ever have been in if
the contract had been performed exactly. Expectation interests are meant to put the party in “as
good of a position, not better”
UCC 2-501,-703,-704,-706,-708,-709,-710,-723,-724
Neri v. Retail Marine Corp.
Court of Appeals of New York, 1972, Gibson
OR: if a buyer repudiates a contract with a lost volume seller, the seller is entitled to the profit
the seller would have made from full performance by the buyer, plus reasonable incidental
damages associated with resale. (UCC 708)
Note: The above situation will work with uniform goods - it did not work with the sale of a
secondhand car, which was deemed too unique to know if they might have sold two if not for a
buyer’s breach
Mitigation
It is a duty to avoid making a bad situation worse
Rockingham County v. Luten Bridge Co.
Circuit Court of Appeals, Fourth Circuit, 1929, Parker
OR: When a non-breaching party in a contract for services receives notice of another party’s
breach, the non-breaching party must treat the contract as broken when notice is received,
cease performance, and sue for any losses sustained from the breach as well as profits that
would have been realized upon performance.
The county did breach, but Luten should not have continued to perform. It could have sued for
damages incurred up until breach, but not after
Shirley Maclaine Parker v. Fox
SC, California, 1970
OR: The measure of recovery by a wrongfully discharged employee is the amount of salary
agreed upon, less the amount which the employee has earned or with reasonable effort might
have earned from other employment. In such cases, the employer must show that the other
employment was substantially similar to the other employment, and the employee's need not
seek other available employment of a different or inferior kind to mitigate damages.
Expectation damages in this case should be profits minus losses she did not incur by not going
through with her performance
Whether costs incurred to correct something are reasonable
Fuschia/white painted house case
If you actually DO pay to repaint the house, it is harder to argue that it is not reasonable to
award you damages based on the cost of repainting - it was obviously worth it to you
Bomberger v McKelvey
SC California, 1950, Gibson
OR: Generally, either party to a contract has the right to stop performance under the terms of
the agreement by giving notice to the other party. However, even under such circumstances a
party may still have a right to continue performance if the party is not interested solely in profit
from the agreement, but must perform the work in order to fulfill other obligations.
Kellett Aircraft Corp
OR: The rule of mitigation of damages cannot be used by the defaulter for hypercritical
examination of the choices of the injured party to cover.
Under the Uniform Commercial Code (UCC), a buyer in a breach of contract case against a
seller may recover consequential damages which could not reasonably have been prevented by
cover or otherwise. UCC § 2-715. The buyer must act in good faith and in a reasonable manner
regarding cover. UCC § 2-715, cmt. 2. If the buyer’s choice was reasonable, the breaching
seller cannot rely on an alternative choice that, in hindsight, might have been less expensive.
Foreseeability and Certainty
Hadley v. Baxendale
1854
OR: When one party breaches a contract, the other party may recover all damages that are
reasonably foreseeable to both parties at the time of making the contract. The non-breaching
party may also recover damages stemming from any special circumstances, provided those
circumstances were communicated to and known by all parties at contract formation.
However, a party cannot recover for damages stemming from special circumstances if those
circumstances were not communicated to the other party - Pickford (defendant, basically) had
no reason to know that Hadley’s mill would be shut down until the shaft was delivered.
When a party has special circumstances, they need to convey them to the other party so that
the other party can decide whether or not to take on the added liability, and whether to charge
extra for it as a guaranty. If Hadley were to have received damages for the special
circumstances, he would be getting something he had not bargained for.
The common law will award general damages to an innocent party if they are foreseeable.
Special damages are awarded only if actual notice is given regarding the possibility of injury.
Foreseeable damages resulting from a delay in transport “are those that are the proximate and
usual consequences of the carrier’s actions.” The non-breaching party is not required to show
that the actual harm suffered was the most foreseeable, only that it was foreseeable to a
reasonable man at the time the agreement was made.
R2C 351
UCC 2-713, 2-715
In deciding who should foot the bill for damages following from breach where other factors
contributed to the injury, plaintiff must only show that defendant’s breach was a substantial
factor, not that it was the only cause
Certainty
Kenford Co. v. County of Erie
Court of Appeals of New York, 1986
(Sports stadium, never built, would have made a lot of money)
In actions for breach of contract, the nonbreaching party may recover damages which are the
natural and probable consequence of the breach. Any further liability than for damages naturally
and directly flowing from the breach must be predicated on such unusual or extraordinary
damages being brought within the contemplation of the parties as the probable result of a
breach at the time of or prior to contracting.
Plaintiffs who can prove by 50.1% that they would have received a certain value but for the
defendant’s breach are often allowed to recover
Unfortunately this often creates an all-or-nothing rule of damages that seems out of touch with
the way probability works. Being in a position to make a profit is to possess an asset, and courts
should figure out how to calculate the value of that asset to properly award damages.
Mental Distress
Valentine v. General American Credit, Inc.
Supreme Court of Michigan, 1984, Levin
OR: Damages for mental distress are generally not recoverable for breach of contract unless
the contract is inherently personal to a party. Courts have sometimes awarded mental distress
damages for cases involving marriage, death of family member, etc, but not for breach of
employment
Compare with Lane v Kindercare where P was able to recover for emotional distress because
the contract breached was of a personal nature and therefore the D could have contemplated
that breach would cause the distress
Liquidated Damages
NPS, LLC v. Minihane
Massachusetts Supreme Judicial Court, 2008, Cowin
OR: In MA, a liquidated damages provision is enforceable if the sum provided for is
proportionally and reasonably related to anticipated actual damages resulting from breach.
The liquidated damages should not constitute a penalty, but the burden of proving that they are
not a penalty is on the defendant in breach. In this case, D was unable to prove that P’s
liquidated damages demand was punitive, or that it was significantly more than he would have
paid had the contract been fulfilled. D was also unable to prove that P had a duty to mitigate,
because the parties agreed on the liquidated damages provision in advance - they both got
exactly what they bargained for.
Liquidated damages are unenforceable when breach or an element of breach causes no
damage. (R2C 339)
UCC 2-718(1)
Alternative performance terms: if genuine, not subject to rule prohibiting punitive liquidated
damages
Differences - under liquidated damages, party not satisfied may choose to seek specific
performance, but under alt. Perf. other party may freely choose between performance or paying.
Also, supervening events that make performance impracticable might absolve party from paying
liquidated damages
Specific Performance
A plaintiff who establishes inadequacy of damages is not entitled to specific performance - it is
left to discretion of courts, based on factors of undue burden on defendant or court, public policy
and unconscionability.
London Bucket Co. v. Stewart
Court of Appeals of Kentucky, 1951, Stanley
OR: Court will not order equitable remedy (specific performance) unless normal remedy of
damages is inadequate or incomplete. In this case, it would not be efficient for court to oversee
specific performance, especially when damages would accomplish same thing.
Walgreen Co. v. Sara Creek Property Co.
United States Court of Appeals, Seventh Circuit, 1992, Posner
OR: Damages are the normal remedy for a breach of contract, but a permanent injunction may
be more appropriate if the plaintiff shows that damages are inadequate based on balancing the
costs and benefits of the alternatives.
However, the costs of a permanent injunction remedy include the cost of continuing supervision
by a court or third party, as well as the risk of imposing a bilateral monopoly in which two
businesses can only deal with each other.
UCC 2-709, 2-716
Specific Performance of Contracts for the sale of goods
Where unique or in other proper circumstances
Propane, where the good was not really unique, but the amount needed was impracticable to
come by elsewhere
Specific performance for sale of land, and for employment
Land: Buyer can get a decree specifically ordering seller to execute deed, and seller can get
decree ordering buyer to take title and pay price (R2C 360)
Today, courts don’t always agree that piece of land/property is unique and rule accordingly
Employment: not specifically enforceable by either employee or employer - we don’t have
slaves in this country anymore
However, sometimes court will enjoin employee from going to work for competitor, which can
look like specific performance, so R2C 367 says that enjoining against working for competitor is
not okay if it forces someone to work for someone
Reliance Measure of Damages
Cost measure
In Bargain Context
Security Stove & Mfg. Co. v. American Railway Express Co.
Missouri Court of Appeals, Kansas City, 1932, Bland
OR: When a defendant carrier has notice of peculiar circumstances surrounding a shipment that
will result in unusual loss to the shipper in case of delay in delivery, the carrier is responsible for
the actual damages sustained by the shipper from the carrier’s delay.
In this case, P told D specifically why it was so important for their shipment to be on time, so
that it can be said both parties included this knowledge into the terms of their bargain.
P incurred significant expenses relying on D’s promise and therefore they are entitled to
damages based on that reliance. This holds true even though P had already incurred some of
their expenses (renting exhibition space) before entering into the bargain with D.
Anglia Television Ltd. v. Reed
Court of Appeal, Civil Division, 1971
Rule of Law
An innocent party may recover expenditures in lieu of lost profits, including those expenditures
incurred both before and after the agreement was made
Restitution Measure
For breach of contract:


Measure is value P rendered, not costs P incurred
Unsettled whether restitutionary damages may be awarded in circumstances where it
would leave P in a better position that performance would have
Osteen v, Johnson
C of App, Colorado, 1970, Dufford
OR: When there has been a substantial breach but the breaching party substantially performed,
the only remedy available is restitution. The injured party can maintain an action for restitution
only of what he has given the defendant if the defendant's non-performance is so material that it
is held to go to the contract’s essence. In this matter the issue to be determined is whether
Johnson’s breach went to the essence of the contract. Johnson breached the contract because
the second record was neither pressed nor mailed out. Osteen is entitled to restitution of the
$2,500, minus the reasonable value of the services Johnson did provide
R2C, 344, 345, 370, 371
United States v. Algernon Blair, Inc.
United States Court of Appeals for the Fourth Circuit, 1973, Craven
In a Miller Act action, the promisee upon breach has the option to forego any suit on the
contract and claim only the reasonable value of his performance. Here, Coastal had provided
Blair with labor and the use of equipment. Blair, who breached the subcontract, did not pay for
these benefits conferred upon it by Coastal. The purpose of quantum meruit is to allow a
promisee to recover the value of services he gave to the defendant, irrespective of whether he
would have lost money on the contract and been unable to recover in a suit on the contract.
R3R,UE 37, 38
Expectation as a cap on reliance and restitutionary damages
Subsequent ruling and restatement provisions have rejected the result in Algernon Blair
Restitution in favor of plaintiff in default
Kutzin v. Pirnie
New Jersey Supreme Court, 1991, Clifford
OR: The common law rule, which had previously been recognized in New Jersey, was that a
breaching buyer of property who had paid a deposit may not recover the payment, even if the
seller received a profit as a result. In Oliver v. Lawson, 48 NJ 574 (1967), the Supreme Court of
New Jersey allowed the seller to keep the entire $20,000 deposit on the sale of a $215,000
home which was later sold without substantial loss, holding that the buyer had not provided
enough proof that the seller was unjustly enriched. However, the trend is moving away from the
harsh rule toward a rule that the buyer is entitled to restitution of sums paid which are over and
above the loss actually suffered by the seller. This new rule is superior because it compensates
the seller properly while avoiding a forfeiture, which is disfavored in the law. The Pirnies are
entitled to restitution in the amount of the difference between their payment and the damages
suffered. To permit the Kutzins to retain the entire amount of the deposit would result in an
unjust enrichment to them.
Vines v. Orchard Hills, Inc.
Supreme Court of Connecticut, 1980
Purchasers of property, after their own good faith breach, may recover a down payment, but
only if the seller is unjustly enriched at the time of the breach. A liquidated damages clause
allowing the seller to retain a down payment is presumptively valid because of the buyer’s
breach. However, a buyer may rebut that presumption by showing that the seller suffered no
damages from the breach. The relevant time for such a determination of damages is the time of
the breach.
UCC 2-718 (2)(3)
Disgorgement Damages
United States Naval Institute v. Charter Communications, Inc.
United States Court of Appeals for the Second Circuit, 1991, Kearse
OR: In a breach of contract action, a plaintiff is generally entitled to recover damages for actual
losses caused by the breach, but not the profits of the defendant. Naval is entitled to actual
damages for Berkley’s breach of contract, not Berkley’s profits. Under the Copyright Act, a
copyright holder may transfer her interest. A person who holds a copyright interest, such as an
exclusive licensee, cannot be guilty of infringing on her own rights. That said, the licensee may
be liable for breaching the license agreement. The general rule is that in a breach of contract
action, damages are awarded to compensate for the actual losses suffered by the nonbreaching party. A defendant’s profits have occasionally been used to determine damages, but
those cases have been limited to situations where the profit represented the loss to the plaintiff.
A damage award based on the defendant’s profits could potentially be punitive, which is
contrary to the principles of contract law
Part Three: Assent
Interpretation
Lucy v. Zehmer
Supreme Court of Appeals of Virginia, 1954, Buchanan
OR: Zehmer’s outward actions, when interpreted by a reasonable person, indicate a willingness
to be bound in his agreement to sell his farm to Lucy, and Lucy is thus entitled to specific
performance of that agreement. The objective, outward expression of a party’s intent to be
bound in an agreement, as opposed to that party’s subjective mental assent to the agreement,
is all that matters when determining the existence of a valid and enforceable contract. If the
words or actions of one of the parties has only one reasonable meaning, any undisclosed
intentions have no bearing on the existence of a valid and enforceable contract unless they
reflect an unreasonable meaning that is actually disclosed to the other party.
Raffles v. Wichelhaus
Court of Exchequer, 1864
OR: There is no contract if there is a mutual misunderstanding by the parties as to the meaning
of a term of the agreement. Where there is a latent ambiguity as to meaning, parties may offer
parol evidence to explain the terms. In this case, the evidence shows that Wichelhaus meant
one Peerless and Raffles meant another. Thus, there was no meeting of the minds and, hence,
no binding contract.
Oswald v Allen
2nd Circ, 1969
No contract exists between two parties if their understandings of the agreement differ. If the
terms of the agreement are ambiguous and the parties each have a different understanding of
the agreement there is no contract unless one of the parties knew of the other’s understanding.
The parties’ mental assent is not required, but a court cannot find a contract if there is no
sensible basis for choosing between the parties' different understandings.
If one party’s understanding of terms/contracts is more reasonable than the other, contract
cannot be rescinded.
Problems of interpreting purposive language
Language is always used in context; nothing has one literal meaning except what is interpreted
in light of circumstances
R2C 204 - Omitted terms, supplied by the court
Spaulding v. Morse
Supreme Judicial Court of Massachusetts, 1947, Dolan
OR: If the instrument as a whole suggests that a particular result was desired by the parties,
although not expressed by formal words, that defect may be supplied by implication and the
underlying intention may be effectuated, provided it is sufficiently declared by the entire
instrument. he purpose of the provision in the divorce decree was intended to provide for their
son’s maintenance while in custody of Ms. Morse and for his education thereafter. After he
completed high school he was inducted into the army and so was no longer in his mother’s
custody, nor was he enrolled in an institution of higher education. Thus, neither of the purposes
of the divorce decree was applicable at that time. The proper construction of the trust instrument
is that the Morse was not required under its terms to provide for the maintenance and education
of the son while he was in the armed services.
Beanstalk Group, Inc. v. AM General Corporation
United States Court of Appeals for the Seventh Circuit, 2002, Posner
OR: The terms of a contract should not be interpreted literally where it would lead to absurd
results. Ordinarily, written contracts are enforced according to the ordinary meaning of the
words used, without resort to evidence of the parties’ intent. But where enforcing a contract
according to the literal meaning of the terms used therein would produce absurd results, courts
may rely upon extrinsic evidence to determine the parties’ true intent. Such evidence may
include the court’s cultural understanding of general commercial practices. Here, the
representation agreement defines a license agreement as one that grants merchandising rights
in the Hummer trademark, “whether in the form of a license or otherwise.” Beanstalk argues
that, because the joint-venture agreement transfers the Hummer trademark to GM, it is in effect
a license agreement, although not in the form of a license. Accordingly, Beanstalk demands 35
percent of the payment made from GM to AM General under the joint-venture agreement. Such
an interpretation leads to absurd results. It is unlikely AM General would have intended for
Beanstalk to receive a commission on the joint-venture agreement when Beanstalk played no
role in negotiating the joint-venture agreement. Moreover, although the representation
agreement does not require a license agreement to be in the form of a license, it does require
that it have the same function as a license. Here, the joint-venture agreement has the
characteristics of an agreement for the sale of the trademark, not the licensing of the trademark.
Thus, the court cannot conclude that AM General intended for Beanstalk to collect a 35 percent
commission for the joint-venture agreement.
Offer
R2C 24, Offer is manifestation of willingness to enter into a bargain
Lonergan v. Scolnick
Court of Appeal of California, 1954, Barnard
OR: Merely asking a person whether he is interested in purchasing a property does not
constitute an offer to sell the property to that person. There is no contract until the parties have
agreed to some specific thing. If the person interested in the property knows or has reason to
know that the owner is not expressing an intent to sell but is in fact waiting for further
agreement, the property owner has not made an actual offer. The correspondence here
indicated that Scolnick intended to find out whether Lonergan was interested in the property,
and not to make a definite offer to sell the property to Lonergan. The April 8 letter was notice
that Scolnick had to make some further expression of assent. Lonergan knew or should have
known that he was not being given time in which to accept an offer that was being made, but
that some further assent on Scolnick’s part was required.
There was no mutual meeting of the mind on dickered terms
Lefkowitz v. Great Minneapolis Surplus Store
Supreme Court of Minnesota, 1957, Murphy
OR: When an advertisement is clear, definite, and explicit, and leaves nothing open for
negotiation, it constitutes an offer, acceptance of which will complete the contract. The store’s
advertisement is a clear, definite, and explicit offer, and acceptance by Lefkowitz formed a valid
and enforceable contract. Whether an individual newspaper advertisement constitutes such an
offer, as opposed to merely an invitation to make an offer depends on the legal intention of the
parties and the surrounding circumstances. Additionally, once an offer is made, the offeror can
unilaterally modify the terms of the offer before acceptance. However, after acceptance, the
offeror may not impose additional or arbitrary conditions on the offer.
Sateriale v. R.J. Reynolds Tobacco Company
United States Court of Appeals for the Ninth Circuit, 2012, Fisher
Although under the common law advertisements are not generally construed as offers, an
advertisement constitutes an offer when the advertiser, in clear and positive terms, promised to
render performance in exchange for something, and the recipient of the advertisement
reasonably might have concluded that by acting in accordance with the request a contract would
be formed. An inquiry into this question should be based on the totality of the circumstances
surrounding the advertisement.his case represents an exception to the common law rule that
advertisements are not offers as RJR’s advertisements were not typical advertisements to sell
goods. First, RJR was not intending to sell a limited inventory of goods or services through the
advertisement, but it was trying to sell as many cigarettes as possible. Second, there was no
situation where RJR could have been “trapped into a situation in which acceptances exceeded
inventory.” RJR had total control over the number of certificates it issued, and, consequently,
the number of potential acceptances. Having concluded that the common law rule regarding
advertisements does not apply, the court also concludes that the plaintiffs have adequately
alleged that the RJR advertisements constituted an offer. RJR repeatedly used the word “offer”
in the certificates; the certificates and advertisements contained no qualifications on RJR’s
intent to be bound; the program had a formal enrollment process; and the plaintiffs have claimed
substantial reliance on the alleged offers.
R2C 26 Preliminary negotiations
UCC 2-328, Auctions
Reserve - seller does not have to sell if bid is unsatisfactory
Without reserve - seller does
Termination of Offer
Akers v. J.B. Sedberry, Inc.
Court of Appeals of Tennessee, 1955, Felts
An employment contract is not terminated when the employer does not immediately accept or
take under further advisement employee’s offer to resign. An offer is rejected when the offeror is
justified in inferring from the words or conduct of the offeree that the offeree intends not to
accept the offer or to take it under further advisement. An offer may be terminated in a number
of ways, (1)where it is immediately rejected by the offeree; (2) where it is not accepted by him
within a fixed time, or (3) if no time is fixed, within a reasonable time. In this matter, Akers and
Whitsitt made the offer to resign at the outset of the conference, and they made it clear that they
expected an answer immediately. Mrs. Sedberry continued the conference as if no offers had
been made, nor did her express or implied conduct indicate that she wished to consider the
offers further. Akers and Whitsitt were therefore justified in inferring that Mrs. Sedberry had
rejected their offers of resignation.
R2C 38, 41 - Time limits for accepting offer
By mail, unless otherwise specified, acceptance is seasonably tendered if mailed by midnight on
the day that the offer is received
If offeror makes offer to offeree and communicates that offer is good for ten days, offeror might
begin to take certain steps preparing for his own performance, should offeree accept. However,
if on day two offeree makes expression suggesting that offer is off the table, offeror may change
his position on reliance of that idea. Offeror would then be in a jam in on the 10th day, offeree
changed his mind and decided to accept.
Under rules of offer and acceptance, in most cases, a rejection terminates offeree’s power of
acceptance even if there is time left on the original offer.
Ragosta v. Wilder
Supreme Court of Vermont, 1991, Peck
1) An offer is revocable at any time prior to acceptance, absent the operation of equitable
estoppel; (2) equitable estoppel requires that the defendant must have known the facts; the
defendant must have intended that his conduct shall be acted upon; the plaintiff must have been
ignorant of the true facts; and plaintiff must have relied on the conduct of the defendant to his
detriment; (3) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does induce such action or
forbearance is binding if injustice can be avoided only by enforcement of the promise.
Ragosta argument that there was a binding contract for sale is rejected. Wilder’s letter was an
offer that only could be accepted by performance, as he returned the $2,000 that would have
formed an option contract. In such a case the offer is revocable at any time prior to acceptance,
absent the operation of equitable estoppel. Equitable estoppel is not applicable in this case.
Equitable estoppel has four elements: the defendant must have known the facts; the defendant
must have intended that his conduct shall be acted upon; the plaintiffs must have been ignorant
of the true facts; and the plaintiffs must have relied on the conduct of the defendant to his
detriment. Here, Ragosta could not have acted on an understanding that Wilder would definitely
sell, as Wilder 's offer explicitly conditioned the sale on him not selling to another party first.
Since Ragosta relied on Wilder’s offer and spent $7,500 to secure a loan, the case is remanded
for a determination of what remedy, if any, was necessary to prevent injustice.
R2C 45 Option contract created by part performance or tender
Drennan v. Star Paving Co.
Supreme Court of California, 1958, Traynor
An offer which the offeror should reasonably expect to induce definite and substantial reliance
by the offeree, and which does induce such reliance is binding on the offeror and enforceable
even without consideration if enforcement is necessary to prevent injustice to the offeree.
Star should have reasonably expected Drennan to rely on its bid when making his own bid, and
Drennan did rely on the bid such that enforcement of the terms of Star’s bid is necessary to
prevent injustice to Drennan. An offer which the offeror should reasonably expect to induce
definite and substantial reliance by the offeree, and which does induce such reliance is binding
on the offeror and enforceable even without consideration if enforcement is necessary to
prevent injustice to the offeree. When reasonable reliance on the offer by the offeree results in a
foreseeable negative change in the offeree’s position, a promise not to revoke the offer is
implied on behalf of the offeror. This reasonable reliance serves a substitute for the
consideration ordinarily required to form a bilateral contract. It thus does not matter that
Drennan provided no consideration for the agreement between himself and Star, as it was
reasonably foreseeable for Star that Drennan would rely on its bid if it was the lowest bidder. It
was in Star’s business interests for Drennan to rely on its bid, as doing so resulted in Drennan
winning the general contract and Star winning the subcontract. Additionally, it does not matter
that Star made a mistake in calculating its bid, as it had a duty to exercise reasonable care in
bid preparations. This duty of care is heightened by the fact that the negative consequences for
Drennan stemming from an erroneous subcontractor bid were reasonably foreseeable to Star.
Finally, Drennan could not reasonably know that Star made an erroneous bid, as there is often
significant variation among subcontractor bids. Star should have reasonably expected Drennan
to rely on its bid when making his own bid, and Drennan did rely on the bid such that
enforcement of the terms of Star’s bid is necessary to prevent injustice to Drennan.
Promissory estoppel and detrimental reliance
R2C 87(2)
Many courts adopted Drennan decision, however it does have the unfortunate effect of a lack of
symmetry of detrimental reliance between contractors and subcontractors
Acceptance
Form of acceptance
Keller v. Bones
Nebraska Supreme Court, 2000, Stephan
If an offer does not establish a deadline by which communication of the acceptance must be
made, such communication must be made within a reasonable time after the acceptance. This
condition is so even if the offer established a deadline by which the offer could be accepted.
Generally, an offeror is the master of the offer. And while notice of acceptance is generally
required to form a valid contract, such notice need not necessarily comply with the timing
required for acceptance. In this case, the lower courts erred in finding that a valid contract was
not formed. The 5:00 p.m. deadline in Keller’s offer applied only to the Boneses’ acceptance of
the offer. When the Boneses accepted at 4:53 p.m., a contract was formed so long as notice of
the acceptance was given to Keller within a reasonable amount of time. The Boneses’ agent
gave such notice a mere 19 minutes after the acceptance, well within a reasonable amount of
time after the acceptance, thus forming a valid contract.
R2C 30, 56, 60
UCC 2-206
Bishop v Eaton
SC, Massachusetts, 1894
When an offer is made, notice of the act which constitutes acceptance must be given in a
reasonable way, depending on the nature of the transaction, the circumstances of the parties,
and the nature of any previous dealings. In this matter, the offer was made by letter and it is
reasonable for Bishop to accept the offer in the same manner. Since Bishop lived in Illinois and
the Eatons lived it Nova Scotia, Eaton should have expected to receive notice of acceptance in
the mail, and it would be a particularly harsh rule to hold Bishop responsible for Eaton’s failure
to receive the letter. Bishop did all he was required to do to accept the offer of guaranty when he
seasonably placed the letter of acceptance in the mail.
Mailbox Rule:
Revocation effective when received
Acceptance effective when mailed
Crossed revocation and acceptance - acceptance wins, contract formed
Delay or failure of transmission - if an acceptance takes place? Not sure how these come out
Date on which contractual liability arises - date of acceptance
R2C 30, 49, 60, 63-68
UCC 2-206
Silence as Acceptance
McGurn v. Bell Microproducts, Inc.
United States Court of Appeals for the First Circuit, 2002, Lipez
Silence in response to an offer can constitute an acceptance if the offeree (1) takes the benefit
of the offered services, (2) knew or had reason to know of the existence of the offer, and (3) had
a reasonable opportunity to reject the offer. Generally, silence does not constitute acceptance,
but the presence of these circumstances can constitute an exception to that general rule. In this
case, the district court erred in granting summary judgment to McGurn. There is a genuine issue
of material fact as to whether Bell knew or had reason to know of McGurn’s alteration. Given the
location of McGurn’s alteration above the signature line and Bell’s routine verification of signed
offer letters, it is permissible to infer that a Bell employee saw the alteration. However, although
permissible, the inference is not so clear that the district court should have found it as a matter
of law.
R2C 69
Hobbes v Massasoit Whip Co
In cases of standing offer, silence, and retention of goods, can constitute acceptance. Conduct
which looks like acceptance is acceptance.
Negative-option plans - like books or record club - may require you to opt out once you’ve been
opted in
Offers accepted through silence in order of the weight courts give them
1. Offeree enriches himself
2. Offeror detrimentally relies
3. Offeror has reason to expect profits resulting from offeree’s acceptance
Day v. Caton
Supreme Court of Massachusetts, 1876
(Party wall case) Silence in the face of the actions of another party rendering services which
were valuable to the silent party may be evidence of an acceptance and an agreement to pay
for the services. Caton had opportunity to object to the wall being built, the wall benefitted
Caton, and Caton knew Day expected to be paid for the service.
Acceptance 2-207
UCC 2-204(1), 2-204, 2-207
2-207 does not apply absent the exchange of preprinted, standardized forms (Columbia
Hyundai)
Gardner Zemke Co. v. Dunham Bush, Inc.
Supreme Court of New Mexico, 1993, Franchini
When a contract for the sale of goods is formed under §2-207 of the Uniform Commercial Code
(UCC), any conflicting terms in the offer and acceptance cancel each other out and are replaced
by existing applicable provisions of the UCC.
There is insufficient factual information to conclude that Dunham’s acknowledgement letter
amounts to an acceptance of and not a counteroffer to Gardner’s purchase order and an
enforceable contract now exists despite the presence of the conflicting terms. When a contract
for the sale of goods is formed under §2-207 of the Uniform Commercial Code (UCC), any
conflicting terms in the offer and acceptance cancel each other out and are replaced by existing
applicable provisions of the UCC. §2-207 provides that in a sale of goods, a definite and
seasonable expression of acceptance or a written confirmation sent in a reasonable time
operates as an acceptance despite stating terms which are additional to or different from those
included in the offer, unless the responsive form states that acceptance is expressly made
conditional on assent to the additional or different terms. Acceptance is “expressly made
conditional when the offeree clearly and unequivocally communicates to the offeror that its
willingness to enter into a contract is conditioned on the offeror’s “assent” to additional or
different terms, and must be examined within the commercial context of the transaction. The
facts considered by the trial court do not conclusively show that Dunham expressly made its
acceptance conditional on Gardner’s assent to its additional or different proposed warranty
terms, and thus it is unclear whether Dunham’s acknowledgement form containing different
warranty terms operates as an acceptance and not a counteroffer. If, on remand, the trial court
concludes that Dunham’s acknowledgment form operated as an acceptance, it must determine
which of the conflicting terms in the offer and acceptance are controlling on the warranty issue.
The trial court should hold that under §2-207, any conflicting terms in the offer and acceptance
cancel each other out and are replaced by existing applicable provisions of the UCC.
Materially alter: while normally this might apply to a term with economic significance, the
comment to 2-207 uses a different test - whether term will result in “surprise or hardship”
Examples: Court held that added term requiring arbitration did not materially alter because it
would not be surprising to a reasonable merchant
Expressly made conditional clause:
Acceptance must be expressly conditional on the offerer’s assent to additional/different terms
Consumer Form contracts, Boilerplate
Blanket assent, not specific assent, to terms that are not unreasonable or indecent and do not
cut under the dickered terms
Shrinkwrap, clickwrap, browsewrap
DeFontes v. Dell, Inc.
Supreme Court of Rhode Island, 2009, Williams
A purchaser of goods will only be bound by additional terms in a shrinkwrap agreement if the
agreement makes clear that the purchaser can reject the terms by returning the goods.
Arbitration agreements are generally enforceable. The issue is whether a purchaser of goods
will be bound by an arbitration clause in a terms and conditions agreement. Under the Uniform
Commercial Code (UCC), parties may contract for the sale of goods by any means. UCC § 2204. An order to buy goods is generally an offer that the seller may accept by a promise to ship.
UCC § 2-206. The modern trend, however, is to give the buyer the right to accept the
agreement after receiving the goods and any additional terms. These are called “shrinkwrap
agreements.” ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir. 1996). In ProCD, a software
purchaser was bound by the shrinkwrap agreement included in the packaging and appearing
onscreen when the purchaser used the software. The court held that a seller could invite
acceptance by conduct, and “[a] buyer may accept by performing the acts the vendor proposes
to treat as acceptance.” Id. Subsequent cases expanded this rule to other types of products. Hill
v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir.1997). Basically, when a product is delivered with
a shrinkwrap agreement, additional terms become part of the contract, provided the agreement
expressly gives the consumer the right to reject by returning the product for a refund in a
reasonable time. It is unreasonable to expect a seller to inform a consumer of every term at the
moment of a purchase. Formation is complete once the purchaser accepts the terms after a
reasonable time to reject. This is the “layered contracting” theory of formation, but the seller
must nevertheless prove that the buyer accepted the shrinkwrap terms.
ProCD, 1996, Easterbrook
Shrinkwrap licenses included within a product’s packaging are enforceable unless their terms
are objectionable on grounds applicable to contracts in general, such as violating a positive rule
of law or being unconscionable.
Hancock v. American Telephone & Telegraph, Inc.
United States Court of Appeals for the Tenth Circuit, 2012, Matheson
At issue is the defendants’ standard use of “clickwrap” agreements, which require their
customers to click on a dialog box consenting to terms and conditions before they are given
access to defendants’ services. The plaintiffs argue that the defendants’ standard processes,
which include the use of clickwrap agreements, are so confusing that the plaintiffs did not
knowingly consent to the forum selection or arbitration clauses. Clickwrap agreements are
regularly enforced by courts where the agreement is clearly presented to the customer, the
customer is afforded an opportunity to read the agreement, and the customer clearly indicates
acceptance of the terms.
Nguyen v. Barnes & Noble, Inc.
United States Court of Appeals for the Ninth Circuit, 2015, Noonan
A website user lacks sufficient notice to a company’s terms of use if, despite the presence of
conspicuous hyperlinks to the terms of use, the website neither provides notice to users nor
prompts users to affirmatively demonstrate assent.
Register.com, Inc. v. Verio, Inc.
United States Court of Appeals, Second Circuit, 2004, Leval
When a benefit is offered subject to stated conditions, and the offeree accepts the benefit with
knowledge of the terms, the taking constitutes a binding acceptance of the terms.
Indefiniteness, Preliminary Negotiations, Duty to Bargain in Good Faith
Academy Chicago Publishers v. Cheever
Supreme Court of Illinois, 1991, Heiple
The agreement between Academy and Cheever contains indefinite and uncertain material
terms, and thus is not a valid and enforceable contract. An agreement between parties that
lacks definiteness and certainty in its material terms is generally not a valid and enforceable
contract. However, such an agreement can be held valid and enforceable if there is a mutual
assent to and common understanding of the indefinite and uncertain terms by all parties, as
exhibited by the conduct of the parties. In such cases, the trial court can interpret the meaning
of the agreement from the parties’ conduct and reasonably enforce the terms of the agreement
as written. The publishing agreement between Academy and Cheever contains many indefinite
and uncertain material terms. For example, the agreement says nothing about the length and
content of the proposed book, or who will specifically decide what stories will be included.
Additionally, the contract includes no specific date for delivery, no criteria for determining
whether the final product is acceptable, no certain dates for publication, and no certainty as to
the style of the manuscript. Additionally, the parties’ conduct does not illustrate their mutual
assent to or common understanding of the terms as written, as the parties dispute the length
and content of the book.
Contracts need reasonable certainty to be valid, reasonably certain - 1) provide basis for
determining existence of breach and 2) provide basis for giving appropriate remedy
Part performance and reliance can provide for remedies even when contract terms are
uncertain, can show assent or meeting of the minds by conduct
Channel Home Centers v. Grossman
United States Court of Appeals for the Third Circuit, 1986, Becker
A property owner's promise to a prospective tenant, pursuant to a detailed letter of intent, to
negotiate in good faith with the prospective tenant and to withdraw the lease premises from the
marketplace during the negotiation, can bind that owner for a reasonable period of time. This
rule is particularly applicable where the prospective tenant has expended significant sums of
money in connection with the lease negotiations and preparation and where there is evidence
that the letter of intent was of significant value to the property owner. Channel argues that the
letter was a binding agreement to negotiate in good faith. The test for enforceability of an
agreement is whether both parties have manifested an intention to be bound by its terms and
whether the terms are sufficiently definite to be specifically enforced. There must also be
consideration (that which is bargained for and confers a benefit upon the promisor or causes a
detriment to the promisee) on both sides.
Teachers Insurance and Annuity Association of America v. Tribune Co.
United States District Court for the Southern District of New York, 1987
The primary concern for courts in disputes over preliminary agreements is to avoid trapping
parties in surprise contractual obligations that they never intended. That the parties contemplate
concluding a final agreement does not prevent that preliminary agreement from taking effect
before the final agreement is reached. Moreover, parties can bind themselves to negotiate
together in good faith in an effort to reach final agreement within a scope laid out in the
preliminary agreement. There is a strong presumption against finding binding obligation in
agreements which include open terms, call for future approvals, and expressly anticipate future
preparation and execution of contract documents. but courts are willing to uphold a preliminary
agreement if it is clear that the parties intended to be bound to it.
Wheeler v White, 1965
Under the doctrine of promissory estoppel, a promise which the promisor should reasonably
expect will induce reliance by the promisee and which does induce such reliance is enforceable
if the interests of justice require its enforcement. This doctrine does not create a contract where
one did not previously exist, but it does allow for non-contract reliance damages to the party
who detrimentally relies on a non-binding promise.
Hoffman v. Red Owl Stores, Inc.
Supreme Court of Wisconsin, 1965, Currie
Hoffman is entitled to some relief from Red Owl under the doctrine of promissory estoppel, and
the trial court was correct to order a new trial on the issue of damages stemming from the sale
of the independent grocery store. A promise may give rise to an action for promissory estoppel
even if it does not contain all essential details of a proposed transaction and is incapable of
resulting in a binding contract. An action for promissory estoppel is appropriate so long as the
promise was one which the promisor should have reasonably expected to induce action or
forbearance of a definite and substantial character on the part of the promisee, the promise
actually induced such action or forbearance, and injustice can only be avoided by enforcement
of the promise. The promise by Red Owl to set up Hoffman with his own store does not contain
all essential terms to give rise to an enforceable contract, but may still be enforced under the
doctrine of promissory estoppel. Red Owl and Lukowitz could have reasonably expected their
statements to induce reliance by Hoffman.
Parol Evidence Rule
Mitchill v Lath
C of App, NY, 1928, Andrews
Under the parol evidence rule, written or oral evidence that contradicts a final written agreement
is not admissible in a court of law unless it constitutes a parol collateral agreement that is
completely distinct from and independent of the final written agreement.
Three conditions must be satisfied before an oral agreement may be admitted to vary the terms
of a final written agreement:
1. the oral agreement must be truly collateral (distinct and independent from the written
agreement) in form;
2. the oral agreement must not contradict express or implied provisions of the written
contract; and
3. the oral agreement must be one that parties would not ordinarily be expected to embody
in a written agreement, based on an examination of the circumstances surrounding the
drafting of the written agreement.
The oral agreement between Lath and Mitchill fails the third condition in that nothing in the
circumstances surrounding their contract for the sale of Lath’s farm suggests that it is natural for
a completely separate contract to exist for the removal of the icehouse. On the contrary, the
final written agreement is extremely detailed and by all appearance seems complete. If such a
provision requiring Lath to remove the icehouse exists, one would naturally expect to find it in
the written agreement due to the comprehensive nature of the writing. The closeness of subject
matter of the written and oral contracts (Lath’s farm and Lath’s icehouse across from the farm)
suggests that any oral contract governing removal of the icehouse is not truly collateral to the
contract for the sale of the farm, and is thus inadmissible in a court of law.
An integrated agreement discharges prior agreements
Completely integrated agreements discharge prior agreements to the extent that they are within
its scope
Williston approach: Where writing appears to be complete instrument, it is deemed total
integration unless alleged additional terms might naturally have been made as separate
agreement by the parties.
Favored by forward thinking lawyers favoring reliability
Corbin approach
Favored by litigators and people not wanting to be bogged down with legalese
R2C 209, 210, 213,214,215,216
Interform Co. v. Mitchell
United States Court of Appeals, Ninth Circuit, 1978, Sneed
Whether a writing is integrated and reflects the final agreement of the parties depends on the
intent of the parties as determined from all the documents employed, the circumstances
surrounding the execution of the documents, and the subsequent conduct of the parties.
Masterson v. Sine
Supreme Court of California, 1968, Traynor
Even when it is unclear whether a written contract is intended by the parties to be complete,
evidence of a separate oral agreement may be admissible to prove the terms of the contract if
the oral agreement is something that would naturally be made as a separate agreement by the
parties given their actual situation and circumstances when drafting the written contract.
Generally, evidence of oral collateral agreements should always be admitted unless it is likely to
mislead the trier of fact. The deed executed by the Mastersons is completely silent on its
completeness and the question of assignability. However, because of the structured nature of a
deed, it is unlikely that the deed itself incorporated all existing oral collateral agreements and it
would be inappropriate for a court to assume as much. While many states have statutes
preventing restrictions on the assignability of options, California has no such statute. Thus, no
overriding statutory provision prohibits the introduction of an oral collateral agreement showing
that the parties intended to create a familial restriction on the assignability of the grantors’ option
to repurchase. Given these particular factual circumstances, the trial court should have admitted
evidence offered by the Sines that the parties agreed that the option was not assignable in order
to keep the property within the Masterson family.
Uses of Parol Evidence not precluded by the rule
Snyder v Lovercheck
SC, Wyoming, 1999, Taylor
The parol evidence rule does not bar parol evidence that is used to establish a separate distinct
contract, a condition precedent, fraud, mistake, or repudiation. In the context of fraud, a court
will not bind a party to a disclaimer if the disclaimer was fraudulently obtained. In this case, the
trial court erred in declining to consider Lovercheck’s oral statements about the rye problems.
The parol evidence rule does not bar parol evidence that is used to establish fraud. Snyder
should have been entitled to state his claim of fraud using Lovercheck’s prior oral statements.
Merger clause: states that the contract is fully integrated
Waiver
Operates similarly to modification with some differences
Is not required to be supported by consideration, or reduced to writing to satisfy Statute of
Frauds
Can be tacit
Can be retracted unless retraction would be unjust in view of the other party’s change of
position in reliance on the waiver
Often written contracts have their own private Statute of Frauds, requiring that all modifications
be done in writing - n.o.m clause. This is supported by UCC 2-209
Clark v West
C of App, NY, 1908, Werner
Clark alleges sufficient facts to possibly show that West expressly waived the condition
precedent requiring Clark to completely abstain from alcohol, and West should be permitted to
answer these allegations in the complaint. A “waiver” is the voluntary and intentional
relinquishment of a known right, and implies an election to dispense with something of value or
forego some advantage which the party waiving it might at its option have demanded or insisted
upon. If some condition in the contract constitutes the actual consideration for the contract, that
condition cannot be waived. However, if the condition is merely a condition precedent, it may be
waived by the party that would enforce it for the purpose of avoiding forfeiture by the other party
to the contract in the event the contract is not strictly performed. The contract between West
and Clark is made for the purpose of Clark writing books. It is not for the purpose of causing
Clark to abstain from intoxicating alcohol in general. This provision in the contract merely exists
for the purpose of preventing Clark from engaging in activities that can interfere with his writing
of books; the primary purpose of the contract. Thus, the provision requiring Clark to abstain from
all intoxicating alcohol should be properly construed as a condition precedent that can be
waived by West. The contract should be interpreted as providing that West will pay Clark $6 per
page unless his work is impeded by his consumption of intoxicating alcohol. West’s actions in
only paying Clark $2 per page do not automatically imply that West has waived the condition
precedent requiring no alcohol consumption. Thus, if a waiver exists, it must be expressly stated
by West.
R2C 84
Westinghouse - sometimes even an anti-waiver clause can be waived by party’s conduct - in
this case, plaintiff’s habit of accepting late payments might have waived its right to then
foreclose upon a late payment without first communicating to D that it would do so
Wisconsin Knife Works v. National Metal Crafters
United States Court of Appeals for the Seventh Circuit, 1986, Posner
Section 2-209(2) of the Uniform Commercial Code allows for provisions prohibiting modification
except through a signed writing. Such a provision must be contained in a signed contract. Here,
NMC signed acknowledgments to the first two purchase orders and led Wisconsin Knife to
reasonably believe that NMC also assented to the last four purchase orders as well. Thus, the
clause forbidding modification except by a signed writing was valid, and the jury was improperly
instructed to consider whether the contract had been modified. This court notes that it is
possible for a provision prohibiting oral modification to be waived. Section 2-209(4) states that
an attempt at modification can operate as a waiver of a provision prohibiting modification except
by a signed writing. However, this provision cannot be read so broadly that any oral modification
operates as a waiver. Otherwise, § 2-209(2) would be rendered superfluous. The reasonable
interpretation of § 2-209(4) is to require reasonable reliance upon the oral modification. Reading
a reliance requirement into the provision lends more credibility to the party claiming oral
modification. Here, the instructions given to the jury were improper because they lack any
reference to reliance, and no evidence of reliance was offered at trial.
Dissent (Easterbook, J.)
Section 2-209(4) states that an attempted modification can operate as a waiver. The majority has
interpreted § 2-209(4) to require reasonable reliance on an attempted oral modification. However,
a reliance requirement is not essential under § 2-209(4). This is clear from the contents of § 2209(5), which states that an oral waiver can be retracted while the contract is executory unless
there is detrimental reliance. Section 2-209(5) shows that the use of the term “waiver” does not
automatically mean “reliance” is required. Here, although it was error to instruct the jury as to
modification, the jury’s finding that there was a modification is sufficient to resolve the case. The
evidence supports the jury’s conclusion that Wisconsin Knife agreed to delayed delivery. This was
an attempt at modification that can operate as a waiver under § 2-209(4), and under § 2-209(5),
Wisconsin Knife was entitled to revoke this waiver absent NMC’s reliance. It is unnecessary to
determine whether NMC detrimentally relied, since NMC is not seeking damages for lost profits.
NMC only seeks to defeat Wisconsin Knife’s claim of breach of contract.
BMC Industries
UCC does not require consideration or detrimental reliance for waiver of contract term
Unilateral Mistake
Mechanical errors
DePrince v. Starboard Cruise Services, Inc.
Court of Appeal of Florida, 2015, Rothenberg
A defense of unilateral mistake to a breach-of-contract claim requires evidence that the
breaching party did not act negligently or with undue care. Generally, courts utilize one of three
tests to determine whether unilateral mistake of fact may be used as an affirmative defense to a
breach-of-contract claim. In this case, the Florida test requires Starboard to sufficiently show
that: (1) the mistake was induced by DePrince; (2) Starboard did not act negligently or with a
want of due; (3) the denial of Starboard’s request to be released from the contract would be
inequitable; and (4) DePrince’s position has not changed, such that granting Starboard relief
would not be unjust. Here, Starboard has failed to submit any evidence to satisfy the first two
prongs of the test. First, there is no evidence that DePrince induced Starboard to make the
pricing mistake. Second, there is a factual dispute regarding whether Starboard acted with due
care in quoting the wrong price to DePrince. Starboard urges this court to instead adopt a twoprong test that places a much lower burden of proof on the party seeking to avoid the contract.
However, the two-prong test also requires Starboard to show that it did not act negligently in
forming the contract. Further, although Florida’s new jury instruction on unilateral mistake is
nearly identical to a three-prong test articulated in the Restatement (Second) of Contracts §§
153 and 154, Florida courts have yet to adopt the three-prong test
. Finally, despite the trial court’s claim that the diamond purchased by DePrince was not unique
and was thus not subject to an order for specific performance, the facts contradict the trial
court’s holding. DePrince’s expert gemologist stated that the diamond was unique based on a
variety of characteristics and a specific, assigned laser number. Because Starboard failed to
satisfy the first two prongs of the test, and because disputed issues of material fact remain
unresolved
Donovan v. RRL Corp.
Supreme Court of California, 2001, George
Under § 153(a) of the Restatement Second of Contract, in order to get out of a contract, a
defendant who has made a unilateral mistake of fact must show: (1) the mistake was a
fundamental assumption of the agreement, (2) the mistake materially effects the value of the
agreement, (3) the defendant did not assume the risk of the mistake, and (4) it would be
substantively unconscionable to enforce the contract in light of the mistake. While a contract
had been formed by the parties, it is unenforceable if it fulfills every element of the § 153(a)
unconscionability doctrine. RRL here made a mistake about the advertised price. Price is a
fundamental assumption of a contract in addition to materially impacting the value of that
contract. Further, it is unreasonable to place the risk upon RRL. The mistake was made in good
faith and consumers cannot realistically expect absolute accuracy in every price listed in
advertisements. Imposing such a high standard of accuracy upon automobile dealers would
amount to strict liability for even the slightest mistake. In the context of modern transactions,
strict liability is an unreasonable standard to put upon businesses. Lastly, due to the loss that
would be suffered by RRL for its minor mistake, it would be unconscionable to enforce this
contract. RRL would lose more than $9,000 while Donovan would reap a $12,000 advantage.
This amounts to substantive unconscionability because RRL would be unduly penalized and
Donovan would be rewarded simply for taking advantage of RRL’s vulnerability.
In re UAL Corp, 2005, Posner
When an innocent mistake can be rectified without harm to anyone, it should be. Loss of
windfall is not the kind of harm that a court should endeavor to avert.
When there is no real injury brought about by the mechanical error (accidentally making offer to
one person, but ultimately getting the same price) courts will probably enforce the contract
Mistakes in Transcription, reformation
Travelers Insurance Co. v. Bailey
Supreme Court of Vermont, 1964, Barney
A party seeking reformation has the duty of establishing, beyond a reasonable doubt, the true
agreement to which the contract in question is to be reformed. In similar cases of mistakenly
issued insurance policies, courts justify reformation on mutuality of mistake or because the
policyholder knew or ought to have known that there was a variation between the policy
requested and the policy received. Where there has been established beyond a reasonable
doubt a specific contractual agreement between parties, and a subsequent erroneous rendition
of the terms of the agreement, the party penalized by the error is entitled to reformation, if there
has been no prejudicial change of position by the other party while ignorant of the mistake.
Here, there is no reliance by Bailey on the policy, as the premiums he paid would actually have
been higher for the policy that was issued. Furthermore, the mere passage of time between
issuance and learning of the error does not constitute reliance.
Mutual Mistake, shared mistaken factual assumptions
Some kinds should provide a basis for relief but not others
Appropriate remedy for some mistakes is rescission - A leases B a plot of land and both
mistakenly believe it is zoned for commercial use - should be rescinded to avoid hardship to B
For other mistakes, appropriate remedy is reformation - mistranscription cases
Sherwood v. Walker
Supreme Court of Michigan, 1887, Morse
Replevin for a cow is when one side wants their cow back.
The jury should be instructed that if they find that Rose was sold upon the mutually mistaken
understanding of the parties that she was barren, and if she was later found to be not barren,
Walker has a right to rescind the contract and judgment should be directed in his favor. When a
contract is made based on the mutual mistake of the parties that relates to a material fact such
as the subject matter of the sale, the price, or some other fact which materially affects the
agreement, the parties may rescind the contract once they learn of the mistake. The mistake of
fact must truly relate to the substance of the contract, rather than merely the quality of the
contracted-for item. Walker agreed to sell Rose to Sherwood for an insubstantial sum based on
the belief of both parties that Rose was incapable of breeding and thus only useful for beef. The
total amount Sherwood agreed to pay under the contract was $80. If, however, Rose had been
sold as a breeder, she would have been worth at least $750. This very large discrepancy in
price demonstrates the completely different value of a beef cow versus a breeder cow. A barren
cow is not merely a lower quality of cow than a breeder, but is actually a substantially different
creature for practical and contractual purposes. Thus, a mistake as to Rose’s ability to breed
materially affects the substance of the contract between Sherwood and Walker.
Dissent:
The record does not reflect that Sherwood intended to buy Rose merely for beef. Rather, it
shows that he believed she could eventually be made to breed. However, at the time of making
the contract, both Sherwood and Walker believed Rose to be barren. That Sherwood correctly
speculated that Rose could be used to breed should not operate to allow Walker to rescind the
contract at his leisure. The cow contracted for by the parties was ultimately the cow sold. The
subsequent development of Rose becoming capable of breeding has no bearing on the contract
as formed and should not form a basis for rescinding the contract.
A party should not be able to benefit from their own mistake.
Does the mutual mistake relate to a difference in some quality or to the whole substance of the
whole contract.
Griffith v. Brymer
King’s Bench Division, 1903
If performance under an agreement is, unbeknownst to both parties, impossible at the time of
contracting, the agreement is void. In other words, an agreement is void if it is based upon a
mutual incorrect assumption that performance is possible. This circumstance is often referred to
as a mutual mistake of fact. In this case, the contract between Griffith and Brymer is void.
Brymer rented the room to Griffith so that Griffith could view the coronation procession.
Unbeknownst to Griffith and Brymer, such performance under the agreement was impossible at
the time of contracting because the coronation procession had been cancelled. As performance
under the agreement was impossible at the time of contracting, the agreement is void. Griffith is
entitled to a return of his 100 pounds.
Wood v Boynton
Wisconsin, SC, 1885
A seller may rescind the sale of a good and title will revest if (1) the buyer was fraudulent in
procuring the item or (2) if the seller made a mistake in delivering a good that was not the good
sold. The latter exists if there is a mistake in fact about the identity of the good sold with the
good delivered. In such a situation, there is not technically a rescission of the sale because title
never actually passed to the buyer. Regarding fraud, inadequacy of price alone is not sufficient
to establish fraud. There must be some evidence that the parties were not ignorant in the
transaction. In the current matter, Boynton was not fraudulent, as he was ignorant of the nature
of the stone and its value. Boynton was not an expert in uncut diamonds and did not have it
inspected before offering to buy it. Though the price was vastly inadequate, the evidence shows
that neither party was aware of this. Additionally, there was no mistake about the identity of the
item that was sold. Wood presented the stone to Boynton, which he paid for and she delivered.
There is no evidence of mistake.
R2C 151, 152, 154
Risk can be allocated to one of the parties by their express intent, by their omission to decline to
act without clarifying an uncertainty, or if the courts decide it should be that way based on the
circumstances
Lenawee County Board of Health v. Messerly
Supreme Court of Michigan, 1982, Ryan
A contractual mistake is a belief that is not in accord with the facts, held at the time the contract
is executed. Here, the mistake was the belief that the property was suitable for residential
purposes, which it was not, because the sewage system rendered it inadequate. A contract may
be rescinded because of a mutual misapprehension of the parties, but this remedy is granted
only in the sound discretion of the court. Rescission is appropriate when the mistaken belief
relates to a basic assumption of the parties upon which the contract is made, and which
materially affects the agreed performances of the parties. Rescission is not available, however,
to relieve a party who has assumed the risk of loss in connection with the mistake. In the current
case, the contract was made upon the assumption that the apartment was suitable for
residential use. The performance of the contract was valuable for the Messerlys because the
property was worth less on discovery of the mistake. Nonetheless, both parties are innocent and
thus rescission cannot be granted to the Pickleses. The risk of loss should be allocated to the
purchasers. The Pickleses had agreed to the term in the contract stating that the “purchaser has
examined this property and agrees to accept same in its present condition.
Unexpected Circumstances
Taylor v Caldwell, 1863
Impossibility
The continuing existence of the hall at the time the concerts were to be given is essential to
performance of the contract between Taylor and Caldwell, and thus the destruction of the hall
excuses performance by both parties. In contracts in which the performance depends on the
continued existence of a given person or thing, a condition is implied that the impossibility of
performance arising from the perishing or destruction of the person or thing shall excuse the
performance. This is analogous to the rule in personal services contracts which states that
“where a contract depends upon personal skill, and the act of God renders it impossible, as for
instance, in the case of a painter employed to paint a picture who is struck blind, it may be that
the performance might be excused.” Thus, if the contract depends on the personal skill of the
person and that person is injured or dies, performance of the contract is no longer required.
Similarly, in contracts to transport perishable goods, if the goods are destroyed or spoiled in
transit through circumstances not arising from the fault of either party, all parties to the contract
are excused from performance. In these cases, courts will imply a condition in the contracts that
they are to be performed unless unexpected circumstances (death or destruction) make
performance impossible.
Penalty default Rule - you should put a force majeure clause that allocates risk in extreme
circumstances
Impossibility may also not excuse the contract if one party contributes to the impossibility
Impracticability
Mineral Park Land v Howard
SC California, 1916
Where the performance of a contract becomes prohibitively expensive, the performance is
considered impracticable or tantamount to impossible. Moreover, where the performance of a
contract depends on the existence of a certain thing, and the parties depended on the existence
of that thing in executing the contract, performance will be excused if that thing no longer exists
or if it never existed. Here, the extra earth and gravel Howard needed for the performance of the
contract should be considered as not available at Mineral Park's property because its extraction
was extremely expensive. This excessive cost rendered Howard's performance impracticable
and, for all intents and purposes, impossible.
United States v. Wegematic Corp.
United States Court of Appeals for the Second Circuit, 1966, Friendly
Under UCC 2-615, delay in delivery is not a breach if performance as agreed has been made
impracticable by the occurrence of a contingency the nonoccurrence of which was a basic
assumption on which the contract was made. Wegematic argues that delivery was made
impossible by "engineering difficulties" whose correction – if possible - would have taken up to
two years and would have cost over a million dollars. Here, where a product such as the
Wegematic’s is advertised as a revolutionary breakthrough, the risk of the revolution's
occurrence does not fall on the purchaser. In such cases, the purchaser can reasonably
suppose that the technological breakthrough has already occurred or will occur in time for the
manufacturer to deliver by the delivery date.
US did not bargain to take on Wegematic’s gamble and aspirations
Transatlantic Financing Corp. v. United States
United States Court of Appeals for the District of Columbia Circuit, 1966, Skelly Wright
The court listed three conditions that must occur for the doctrine of impossibility to apply.
1. something unexpected must have occurred.
2. The risk of the unexpected occurrence must not have been allocated either by
agreement or by custom and
3. occurrence of the contingency must have rendered performance commercially
impracticable.
Transatlantic argues that performance under the charter was legally impossible and so it was
entitled in quantum meruit for shipping around the Cape of Good Hope. Though the closure of
the Suez Canal was unexpected, the risk of the occurrence had not been allocated to the United
States because the Suez was the only acceptable passage according to either the charter or
trade custom. Moreover, Transatlantic understood the instability of the Suez region and likely
allocated this risk to its customers through increased shipping rates. Finally, it is not
commercially impracticable to change course through the Cape of Good Hope. The cargo was
not harmed during the transit, it added 3000 miles to a 10,000 mile voyage, and it added
$43,000 to a $304,000 cost. These differences are insufficient to amount to commercial
impracticability
Krell v. Henry, 1903
The occurrence of the coronation ceremony was understood by both parties to be the subject
matter of the contract, and thus nonoccurrence of the ceremony excuses nonperformance of the
contract. When a condition that is not expressly mentioned in a contract can nevertheless be
implied from extrinsic evidence as being understood by both parties to be the subject matter of
the contract, the nonoccurrence of the condition may excuse nonperformance of the contract by
both parties. Each case involving a contract with a potential implied condition must be examined
based on its own unique circumstances. It must be determined whether the condition is actually
the subject matter of the contract, whether performance of this subject matter was somehow
prevented, and whether the event preventing performance was not reasonably foreseeable by
the parties at the time of contract formation.
Chase Precast v John J Paoenssa
SC, Mass, 1991
The purpose of a contract is frustrated if the occurrence of a contingency makes performance
impossible and the contingency could not have been anticipated as a real possibility which
could affect performance. Paonessa bore no responsibility for the elimination of the barriers
from the project, so Paonessa could rely on the defense of frustration of purpose only if the risk
of the barriers being eliminated was not allocated to him by the contract. Since Chase had
previously provided median barriers to Massachusetts it was aware that the items could be
eliminated from the work order, and Chase was familiar with the industry practice that a
contractor is paid only for those items delivered and that lost profits are not recoverable.
Because the elimination of the barriers was something which Chase could have foreseen, the
risk of the occurrence of this contingency fell on Chase, and Paonessa thus could rely on
frustration of purpose as a defense to its non-performance.
Third Party Beneficiaries
Problems
1. Who made the promise to who?
2. Who furnished the consideration?
3. Who assented to being part of the contract, and to being bound to someone else?
Intended vs incidental beneficiaries
Lawrence v. Fox
Court of Appeals of New York, 1859
Holly’s statement that he was indebted to Lawrence is sufficient to establish the debtor-creditor
relationship. Where one person makes a promise to another for the benefit of a third person,
that third person may maintain an action upon it. Here, there was sufficient consideration
because Fox promised to repay Lawrence for Holly in return for the loan. On the issue of privity,
since Fox promised Holly he would repay Lawrence, it was unnecessary for Fox to expressly
make a promise to Lawrence.
Seaver v Ransom
C of App, NY, 1918, Pound
There are four circumstances where the right of a third party to enforce a contract may be
upheld (1) where there is a pecuniary obligation running from the promisee to the beneficiary;
(2) where the contract is made for the benefit of the wife, affianced wife, or child; (3) in public
contracts where the municipality seeks to protect its inhabitants by covenants for their benefit;
and (4)where, at the request of a party to the contract, the promise runs directly to the
beneficiary although he does not furnish the consideration. Although this case does not clearly
fall within any of these four categories it is possible that there are other circumstances where
the equities permit enforcement by a third party. In order for a third party to enforce a contract
made for his benefit, there must be liability to him on the part of the promisee. Here there is no
difference in law or equity between the desire of the childless aunt (Ms. Beman) to make
provision for a niece and the moral duty a parent to make testamentary provision for his or her
child. The latter is routinely upheld and there is no justification in distinguishing between the
duty of a parent and the matter at issue. Here, if Ms. Beman had left her husband the house on
condition that he pay the plaintiff the value of the home and he had accepted the devise, he
would have become personally liable to pay and the plaintiff could have recovered from him.
R2C 302, 304, 315
Allow third party beneficiaries to enforce the contract if it is a necessary or important means of
effectuating the contracting parties’ intentions and objectives.
Hale v Groce
SC, Oregon, 1987, Linde
Groce argues that an attorney owes a professional duty of care only to his client and therefore
cannot be sued for malpractice by others who are inadvertently injured in the course of him
discharging his duty. Unless Groce had a duty to the plaintiff derived from his contractual
undertaking with his client, he cannot be held liable because an individual is not liable for
negligently causing a stranger's purely economic loss without injuring his person or property.
Some source of a duty outside the common law of negligence is necessary in order for the
plaintiff to prevail. A contract claim, however, does not necessarily depend on showing
negligence. If the purported beneficiary is an intended third-party beneficiary of a lawyer's
promise to his client, the court is willing to enforce this part of the contract against the attorney.
Here, Hale claimed that Groce had contracted to prepare a trust document providing a gift to
Hale and that Groce failed to perform this duty. This is a valid claim under contract law,
Scarpitti v. Weborg
Supreme Court of Pennsylvania (1992)
Under § 302 of the Restatement Second of Contract, when a third party beneficiary’s right is
essential to satisfy a contract, and the beneficiary stands to receive the value of the contracted
performance, a third party beneficiary relationship does not need to be specifically intended by
the parties to the contract.
Martinez v. Socoma Companies, Inc.
Supreme Court of California, 1974, Wright
A contract, made expressly for the benefit of a third person, may be enforced by him at any time
before the parties to the contract rescind it but a contract may not be enforced by persons who
are only incidentally or remotely benefited by it. Generally third parties who are found to be
donee beneficiaries can enforce a contract. A person is a donee beneficiary only if the
promisee's contractual intent is either to make a gift to him or to confer on him a right against
the promisor. If the promisee intends to make a gift, the donee beneficiary can recover if such
donative intent must have been understood by the promise or from the nature of the contract
and the circumstances accompanying its execution. Plaintiffs alleged they could enforce the
contracts as third-party beneficiaries. There was no intention on the part of the government to
make a gift to the neighborhood residents. Rather, the government’s purpose in funding the
contracts was to advance the public purposes stated in the contracts and in the underlying
legislation.
Zigas v. Superior Court
California Court of Appeal, 1981
Under the landlords’ contract with HUD, the tenants are third party beneficiaries who are entitled
to sue to recover the excess rents charged by the landlords. Standing to sue as a third-party
beneficiary to a government contract depends on the intent of the parties as manifested by the
contract and the circumstances surrounding its formation. If the parties intended the contract to
benefit a third party, that third party may sue either of the original parties for breach. Several
factors support a finding that the original parties to a government contract intended the
agreement to benefit a third party. First, if a third party, not the government, suffered a
pecuniary loss as a result of breach, the contract was likely intended to benefit the third party.
Second, if the contract contained no administrative procedure providing for the resolution of
complaints by third parties, it is likely the parties intended that third parties should sue on the
contract in the event of breach. Third, when the contract does not limit liability for a breaching
party, there is no reason to prohibit third parties from bringing suit to enforce their alleged rights
under the contract. Finally, when a reasonable interpretation of the contractual language
suggests that the agreement itself was intended to make third parties direct beneficiaries and
not incidental beneficiaries, those third parties have standing to sue on the contract.
Moch
For an individual to prove that he is an intended third party beneficiary, he must show that the
parties to the contract intended him to so benefit, and intended that they are answerable to him.
While it is true that almost every city contract benefits the public to a certain extent, such benefit
is incidental and not “immediate.”
Copeland v Beard,
SC Alabama, 1928, Bouldin
If a debtor no longer has a right of action against a third party who promises to pay the debt, the
creditor does not have a right of action against the third party either. In other words, the thirdparty promisor can assert any defense against the creditor that it could have asserted against
the original debtor. A creditor’s rights are derivative of the debtor’s rights. However, while the
debtor’s contract with the third-party promisor is between the debtor and the third party (and the
creditor is not a party to this contract), the contract presents the creditor with an option to accept
or reject the third-party promisor as the new debtor. If the creditor chooses not to consent to the
contract and accept the third-party promisor as the new debtor, and that new debtor is ultimately
released from liability, the creditor has no recourse against the new debtor. In this case, the trial
court erred in finding that Beard could maintain an action against Copeland. Copeland can
assert any defense against Beard that he could assert against the original seller, including his
being released from liability for the debt. As Beard did not accept Copeland as her new debtor
before Copeland resold the property and was released from the debt, Beard has a right of action
against Copeland only in so far as the original debtor has a right of action against Copeland.
Since the original debtor released Copeland from the debt, Beard cannot maintain an action
against Copeland.
Good Faith Performance
Duty of good faith and fair dealing grows as the contract progresses, any right/power you have
under contract becomes qualified by GFFD
Seggebruch vs Stosor
App, Court Illinois, 1941, O’Conner
Where a party agrees to perform under a contract, that party is under an implied duty to use
reasonable diligence in performing the agreed upon undertaking.
Bloor, 1979
Ballantine was only a part of Falstaff’s enterprise. Good faith required continued production until
cancellation, even if there was no profit. Falstaff was free to operate the rest of its business at
its managers’ discretion but Falstaff had incurred a specific obligation under the sales contract
to pay Bloor either royalties or liquidated damages. Although Falstaff was not required to
continue the production of Ballantine brands to the point of bankruptcy, once insolvency was no
longer a threat Falstaff had to maintain appropriate levels of production.
R2C 205
UCC 2-306
UCC definition of good faith - honesty in fact and the observance of reasonable commercial
standards of fair dealing
Sanders v Fedex, Sc, NM, 2008, Bosson
Every contract contains an implied covenant of good faith and fair dealing. This covenant
demands that neither party do anything to deprive the other party of the benefit of their
agreement, whether that benefit is express or implied. Evidence as to what the parties intended
as a benefit cannot be used to override the express terms of the contract, but can be used to
clarify ambiguous terms within the agreement. FedEx argues that because there is no express
right to purchase additional routes in the contract, Sanders does not have a claim for breach of
the implied covenant of good faith and fair dealing. However, Sanders’ right to purchase
additional routes can be inferred from the express term “independent contractor.” Sanders might
have understood the term to allow for additional routes because, as an independent contractor
for FedEx, his income was directly tied to his ability to acquire additional routes. Furthermore,
Sanders and other FedEx independent contractors testified that FedEx managers represented
that independent contractors would be able to purchase additional routes. The contract itself
has assignment provisions allowing independent contractors to assign their routes to qualified
purchasers, which suggests that such transfers did take place. As a whole, a jury could
reasonably infer from the evidence that the parties intended the term “independent contractor”
to include the right to purchase additional routes from other independent contractors, and that
FedEx did not act in good faith in regards to this intended benefit.
Market Street Associate v Frey
US C of App, 7th Circ, 1991
Good faith prevents a party from taking opportunistic advantage of another party in a way that
was not resolved explicitly by the parties at the time of drafting and that undermines the parties'
cooperative venture. In other words, the concept of good faith ensures that as unforeseen
circumstances arise during performance of a contract, the parties behave cooperatively and
treat each other how they would have agreed to treat each other if they had foreseen the
circumstances when they were negotiating the contract. Here, the key question to determine
whether Market Street acted in good faith is whether it tried to trick the trust when it requested
financing without referencing paragraph 34. On the trust's motion for summary judgment, the
facts must be construed in Market Street's favor. Under that standard, Market Street considered
$3 million an excessive price for the property and only sought financing from the pension trust
when it discovered that it could not get financing elsewhere. Market Street acted honestly and
without any ulterior motive. The fault was the trust's inattention to Market Street’s proposal and
financial situation, which ultimately caused Market Street to believe that the trust did not want to
finance the improvements regardless of the purchase option. The necessary inquiry into the
state of mind of Market Street's representative cannot be made on a motion for summary
judgment.
Relationship between contracting parties is less than fiduciary but more than just not committing
fraud
Don’t be opportunistic
Efficiency cost of opportunism - bargaining process becomes difficult and inefficient in the long
run for all parties who try
Jacob & Youngs v Kent
C of App, NY, 1921, Cardozo
Jacob substantially performed its contract with Kent with only trivial defects and is thus entitled
to receive the remainder of the amount owed under the contract. A party that substantially
performs its obligations under a contract may recover expectation damages for any remaining
payment owed under the contract, minus an offset for defects in the party’s performance.
“Substantial performance” is a question of degree and is appropriate for determination by a trier
of fact. The trier of fact appropriately concluded that the defect in the pipes supplied by Jacob is
insignificant in relation to the overall project. Thus, even though full performance of the contract
was not completed, principles of fairness and equity justify not penalizing Jacob significantly by
withholding payment when the effect of the defect itself was so insignificant. The need for
fairness and equity in the enforcement of contracts outweighs the need for consistency and
certainty in legal principles as a policy matter, and justifies awarding expectation damages for
Jacob on the contract which it substantially performed.
Substantial performance avoids forfeiture
Is there anything Kent could have done differently? Stipulate in contract why particular pipe was
so important and allow J&Y to bargain for that specifically, perhaps by charging more
Substantial performance not applicable in case where one party was guilty of a wilful or
intentional breach
Kreyer v Driscoll
SC, Wisconsin, 1968, Hallows
The doctrine of substantial performance is an exception in building contracts to the general rule
requiring complete performance of the contract. To recover on an uncompleted construction
contract the contractor must make a good faith effort to perform and substantially perform his
agreement. However, Kreyer did not substantially perform. He left uncompleted approximately
one half of the plumbing, one half of the electrical work, one half of the heating, one half of the
tile work, all the linoleum, and about one fourth of the decorating. Thus Kreyer was not entitled
to the full contract price under a theory of substantial performance. However, the Driscolls did
not deserve a windfall because of delays and minor faulty work. Accordingly, Kreyer could
recover in quantum meruit for the value of the work he did provide
In this case, it goes to restitution territory
Perfect tender rule
UCC 2-508, 2-601, 2-608, 2-612
2-601 - nominally preserves perfect tender rule, but other provisions strip away much of its
significance
Requirement of good faith - rejection because of minor defect that does not substantially alter
the goods can be sufficient to support a finding of bad faith on the part of the buyer
T. W. Oil, Inc. v. Consolidated Edison Co.
Court of Appeals of New York, 1982, Fuchsberg
The UCC creates an exception to the perfect tender rule in section 2-508, which provides that
where the buyer rejects a non-conforming tender which the seller had reasonable grounds to
believe would be acceptable, the seller may if he reasonably notifies the buyer have a further
reasonable time to substitute a conforming tender. The trial court was correct in determining that
T.W. satisfied this standard. Edison, the buyer, had rejected the non-conforming tender. T.W.,
however, had reasonable grounds to believe its tender would be acceptable, as the certificate
from the refinery stated the sulfur content was 0.52%, and even if T.W. had known that the
sulfur content was 0.92% it could have reasonably believed that Edison would have accepted
the oil as it was authorized to burn oil with sulfur content of up to 1%. Finally, T.W. promptly
notified Edison of its intention to cure the defect through a substitute shipment.
ConEd wanted out of their bargain and tried to take advantage of perfect tender rule to do so court was not convinced and might have found bad faith
Requirements for cure: A cure that tries to sub something that was not within the agreement or
contemplation of the parties is invalid (Zabriskie, Manassas - not conforming car cases)
Conditions
Express Conditions
Difference between promises and conditions
Conditions are qualifications on the promise
Occurrences that affect duty to perform
Express conditions - must be literally fulfilled
As opposed to implied conditions, which may be satisfied by substantial performance
In a contract, something could be a condition on the buyer’s part and a promise on the seller’s
part
Things that can affect condition’s legal effect
Presumption against forfeiture
Prevention doctrine
Duty of GFFD
Excuse for impracticability
Excuse forfeiture
Waiver
Estoppel
Merritt Hill Vineyards v Windy Heights Vineyard
C of App, NY, 1984, Kaye
Consequential damages - subset of expectation damages - think back to Hadley v Baxendale
Merritt Hill’s right to the return of its deposit or to consequential damages depends upon
whether the undertaking to produce the policy and mortgage confirmation is a promise or a
condition. A promise is a manifestation of intention to act or refrain from acting in a specified
way. A condition is an event, not certain to occur, which must occur, unless its non-occurrence
is excused, before performance under a contract becomes due. Here, the contract requirements
of a title insurance policy and mortgage confirmation were contained in a section of the contract
labeled “Conditions Precedent to Purchaser's Obligation to Close” and were expressed as
conditions of Merritt Hill’s performance rather than as promises by Windy Heights. Therefore
Merritt Hill is entitled to the return of its deposit but not to consequential damages,
No contract means return of consideration, but no expectation or consequential damages.
Howard V fedCrop
4th circ, 1976, Widener
A contract provision will not be construed as a condition precedent in the absence of language
plainly requiring this construction. Although a provision does not have to use the word
“condition” to create a condition precedent, the contract language may inform the construction of
the provision. For instance, if other contract provisions contain language identifying them as
"conditions precedent," the absence of this language in another provision may indicate that that
provision was not intended as a condition precedent. If there is doubt about whether a contract
provision creates a condition precedent or a promise, then the provision will be construed to
create a promise. In this case, paragraph 5(b) of the policy sets forth an express condition
precedent to the Howards' recovery under the policy. However, paragraph 5(f) does not include
the words "condition precedent," nor does it set forth any conditions to receive payment under
the policy. Rather, it simply sets forth a promise that the Howards would not destroy the tobacco
stalks prior to inspection. Accordingly, the district court incorrectly concluded that provision 5(f)
was a condition precedent under which plowing the fields operated as a forfeiture of the
Howards' coverage under the policy.
When it is doubtful whether words create a promise or condition precedent, they will be
construed as creating a promise
Distinctions between operation of a promise and operation of a condition
Oppenheimer & Co., Inc. v. Oppenheim, Appel, Dixon & Co.
Court of Appeals of New York, 1995, Ciparick
A condition precedent is an act or event, other than a lapse of time, which must occur before a
duty to perform a promise in the agreement arises, unless the condition is excused. Express
conditions are those agreed to and imposed by the parties themselves. Implied or constructive
conditions are those imposed by law to do justice. The condition here was clearly an express
condition precedent. However, Oppenheimer could not claim substantial performance, because
there is no mitigating standard of substantiality available under the law to the nonoccurrence of
an express condition precedent. Conversely, substantial performance only provides relief
through excuse of the non-occurrence of the condition to avoid forfeiture. In this matter, there
was neither forfeiture by Oppenheimer nor unjust enrichment of OAD.
Johnson v Coss
SC, SD, 2003, Zinter
Generally, where a contract contains a condition precedent, there is no obligation to perform the
contract until the condition is fulfilled. One exception is the prevention doctrine, which requires a
party to perform where he or she prevents the condition from occurring. The prevention doctrine
excuses performance of the condition where the party against whom that condition operates
contributes materially to the non-occurrence of the condition. Here, summary judgment against
Coss was inappropriate because there is a genuine issue of material fact as to whether Coss
materially contributed to the failure of the condition in the Agreement.
Implied condition of notice - landlord repair hypo
Conditions of Satisfaction
Courts will looks at whether satisfaction is honest and reasonable and to do so will look at
1. Language used - personally satisfied or satisfactory?
2. Ability to apply objective standard
3. Degree to which one party will be enriched at the other’s expense
4. Forfeiture imposed
Morin Bldg. Prods. Co. v. Baystone Constr., Inc.
United States Court of Appeals, Seventh Circuit, 1983, Posner
The satisfaction of the General Motors’ agent should have been evaluated according to a
reasonable person standard, under which Morin should be considered to have adequately
fulfilled its contractual obligations. In a contract containing a standard owner’s satisfaction
clause, satisfaction is judged by a reasonable person standard when the contract involves
commercial quality, operative fitness or mechanical utility which other knowledgeable persons
can judge. However, when the contract involves personal aesthetics or fancy, satisfaction
depends on the owner’s good faith judgment. Regardless of the actual contractual words used,
the intent of the parties is ultimately controlling. The “aesthetic effects” clause in the contract
was likely only inserted in Morin’s siding contract because Baystone used a generic form
contract. The parties likely did not intend the quality of factory siding to be ultimately judged by
“aesthetics.” Thus, the intent of the parties suggests that the satisfaction of the General Motors’
agent should have been evaluated according to a reasonable person standard, under which
Morin should be considered to have adequately fulfilled its contractual obligations.
Excuse
Aetna Casualty and Surety Co. v. Murphy
Supreme Court of Connecticut, 1988, Peters
Murphy’s delay in reporting Aetna’s claim against him to Chubb does not automatically forfeit his
right to insurance coverage under his contract. However, because Murphy did not provide any
factual evidence to prove that his delay did not prejudice Chubb’s legitimate interest in
conducting an investigation to protect itself from stale claims. Murphy has not rebutted the
presumption of prejudice to his insurance carrier and is not entitled to insurance coverage from
Chubb. An insured person, who delays reporting an insured incident in violation of notice
provisions in his insurance contract, does not automatically forfeit his right to insurance
coverage as long as he provides sufficient factual evidence to rebut the presumption that his
delay prejudiced the insurance carrier. Courts will often not rigidly enforce contractual
provisions, even against insured persons who have defaulted, when doing so will amount to a
forfeiture of the contractual rights of the defaulting insured that is disproportionately harsh in
comparison to any prejudice suffered by the insurance carrier. The balance of fairness between
Murphy’s and Chubb’s interests is dependent upon three factors. First, the notice provisions in
Murphy’s insurance contract constitute a “contract of adhesion” in that Murphy did not have an
opportunity to negotiate these terms. This lack of negotiation weighs against strictly enforcing
the contract against Murphy as Murphy had no opportunity to bargain about the consequence of
providing delayed notice. Second, strict enforcement of the contract’s notice provisions will
cause Murphy to forfeit his contractual rights in a manner that is disproportionately harsh
compared to Chubb’s interest in enforcement. This is because enforcement of the notice
provisions amounts to a complete forfeiture of all insurance coverage for Murphy despite his
dutiful payment of insurance premiums. Finally, Chubb’s legitimate interest in guaranteeing for
itself a fair opportunity to investigate incidents to avoid stale claims can be adequately protected
without irrebuttably presuming that late notice prejudices Chubb.
Conditions are sometimes reviewed in terms of public policy - Burne, 90 day life insurance
notice
Unreasonableness - Royal-Globe Ins - car accident victim in intensive care
Repudiation and Insecurity
Damage issues with repudiation:
Repudiation for goods - buyer can cover and seek damages for the difference, or between
possible cover and contract price
If buyer choose not to cover
Minority rule - market price at time of tender
Majority rule - market price at time buyer should reasonably treat repudiation as final and cover
Duty to mitigate
Modern cases hold that duty to mitigate overrides concept of election
Ability of aggrieved party to perform
Aggrieved party cannot recover if it is clear that they could not have performed even if buyer
had not repudiated
Hochster v. De la Tour, 1853
As soon as De la Tour informed Hochster of his intent to breach their agreement, Hochster was
entitled to seek damages for the breach. When one party to an agreement is informed by
another party to the agreement that the second party intends to breach the agreement, the first
party has an option to file suit for damages immediately in anticipation of the breach, or to wait
until the act was supposed to be done. It is unwise to adopt a universal rule that no action can
be brought for breach until the day when the act was supposed to be done arrives, as many
promises for future acts are acceptable in society. For example, people frequently enter into
promises to marry each other on a certain date, and can be sued for breach of the promise of
marriage if they marry others before that date. Additionally, if a person agrees to lease property
to another beginning on a future date and leases the property to someone else before that date,
that person can be held liable for breaching the lease agreement. If Hochster is not permitted to
sue for damages until the day when his agreement with De la Tour is supposed to be
performed, he will miss out on an opportunity to mitigate the damages by seeking other
employment.
UCC 2-610 - Anticipatory Repudiation
Promise to perform in the future by implication includes an engagement not deliberately to
compromise the probability of performance
Wholesale Sand & Gravel v. Decker
Supreme Judicial Court of Maine, 1973
An anticipatory repudiation of a contract is a definite and unequivocal manifestation of intention
on the part of the repudiator that he will not render the promised performance when the time
fixed for it in the contract arrives.
Repudiation can be made definite through conduct as well as words
Zotos
If a party to contract demands something of the other party that they are not entitled to ask for,
and says they will not perform unless their demand is met, this counts as anticipatory
repudiation
Thermo Electron
Request for change in terms in not repudiation
Taylor v Johnston
Election of remedies
Seacoast
Cannot take back repudiation once other party has relied on it
Kanavos
Burden may be on aggrieved party to prove that they could have performed.