OPTIONS & FIRM OFFERS
General Rule: Offers are generally freely revocable until accepted.
 Example: Dickinson v. Dodds: a written offer could be withdrawn at will notwithstanding the fact that it said, “this offer to be
left over until Friday”—that Dodds was legally entitled to revoke his offer before its expiry date because Dickinson had not
given consideration for Dodd’s promise to keep the offer open.
Exceptions to the general rule: option contracts (common law) and firm offers (UCC)
Common Law
Option contracts: offeree pays consideration to the offeror,
rendering the offeror unable to revoke the offer until the
designated period of time (offeror promises to keep the offer
open).
o Traditional—a traditional option contract is created
when an offeror, in exchange for consideration,
promises to limit his power to revoke the offer.
o Modern—courts have mitigated harsh outcomes by
taking a more lenient approach to consideration doctrine
in option contracts – “slackening” in consideration.
UCC 2-205
UCC 2-205: requires neither consideration nor reliance to make
certain offers irrevocable, as long as specific statutory
requirements are met.
Firm offer: under UCC 2-205, a merchant’s firm offer is
irrevocable of the offer is signed and in writing, even if the offer
lacks consideration.
Promissory estoppel: plays a role in limiting the offeror’s
ability to revoke his offer. In some circumstances, if the offeree
reasonably relies on an offer, courts require the offeror to keep
the offer open long enough to allow the offeree to accept it.
OPTION CONTRACTS
OPTION CONTRACTS
 An option is a promise to keep an offer open for a state period of time.
 The purpose of option contracts is to allow the offeree some time in which to decide whether to accept the offer; an option
contract makes the offer “firm”—the offeror obligates himself to keep the offer open.
o NOTE: even if the offeror dies or loses legal capacity, the offer continues.
 While the offer may be firm, the offeree has no obligation to accept it.
 “binding” = not freely revocable (Restatement §87)
 Options are really the first step in a two-step process, allowing the offeree time to consider the deal.
 Generally, if there’s no consideration, when the offeree counteroffers, it is a rejection of the original offer; however, in
the context of an option contract, where the offeree has paid good money to keep the offer open, a counteroffer will not
reject the original offer.
Consideration
 To be valid, an option must have its own separate consideration—the offeree must “purchase” the option by providing an additional
consideration, tied to the promise not to revoke EXCEPT where the option is granted within an existing contract (it is already part
of the “bundle of rights” exchanged in the contract).
 “Slackening in consideration” – as long as it is stated, it doesn’t have to be “real” consideration. Courts are more lenient with
consideration for option contracts than regular ones and are much less likely to inquire whether a nominal payment induced the
promise to keep the offer open in option contracts.
o “Nominal” or “Sham” consideration: consideration that appears to have been manufactured for the sole purpose of
making an otherwise unenforceable promise enforceable.
 “Nominal consideration”: a small payment or minimal performance that is patently not equivalent to the actual
commercial value of the option.
 “Sham consideration”: consideration that is recited in the grant of an option purely for the sake of formality, but
not actually given.
 Restatement (Second) §87(1)(a): advocates this approach; it provides that an offer is binding as an option contract if it “is in writing
and signed by the offeror, recites a purported consideration for the making of the offer, and proposes an exchange on fair terms
within a reasonable time.”
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Example: Fisher case—here, the $1 consideration might be enough (while the Fisher court didn’t consider it all in that
case).
Consideration compensates the offeror for the risk he assumes when he commits to keeping the offer open.
Why is the court more lenient with nominal/sham consideration and recitation of consideration?
o Option contracts allow offerees to plan, investigate, and deliberate without the fear that offers will be revoked before a
decision to accept is made.
o Option contracts come at an early stage where the parties are just beginning to bargain—cumbersome consideration
requirements at this stage may cause negotiations to crumble.
o Because one of the principal aims of consideration is to confine legal enforcement to transactions in which the parties have
actually exchanged promises or performances—and thereby refuses legal enforcement of gratuitous promises—and
options are usually commercial in intent (not gratuitous), courts usually try to uphold an option if there is any basis for
finding consideration for it.
o


What if an offeree initially rejects the offer, but later changes her mind before the period is up?
 In cases where the offeree has given valuable consideration (not nominal or sham), that the option does not come to an end if the
offeree rejects it (or makes a counteroffer, which is effectively a rejection) before the end of the option period. If the offeree
changes her mind, she is able to reverse the rejection by communicating acceptance before the end of the period.
o *This rule is subject to an exception based on promissory estoppel  although the option needs consideration, the
doctrine of estoppel may protect the offeror who reasonably relied on the rejection of the offer. Therefore, if the offeror
has taken substantially detrimental action in reliance on a rejection (i.e. contracting with someone else for the same
performance), the offeree may not reverse the rejection by later acceptance.
PROMISSORY ESTOPPEL AND OFFERS
PROMISSORY ESTOPPEL AND OFFERS
 General Rule: where there is no option contract, an offer may be freely revoked.
 Exception: where free revocation causes hardship.
o Restatement (Second) §45: where acceptance is through performances only, but the performance cannot be accomplished
instantaneously, and the offeree has no practical way to protect herself while performing, it is particularly unfair to allow the
offeror to snatch the offer away from the offeree. In these situations, an option contract is created once the offeree begins
(“tenders”) the requested performance—although the offeree is not obligated to complete performance, the offeror has lost the
power to withdraw the offer.
 This “hardship” goes back to concept of detrimental reliance—when one party is forced to perform its obligations under a
contract on the ground that injustice can only be prevented by enforcing the contract.
 These claims of hardship tend to occur in the world of construction bidding and contracting:
Drennan v. Star Paving Co., (Cal. 1958)
Traynor, J.
ALLOWS PROMISSORY ESTOPPEL TO REPLACE CONSIDERATION; P WINS
Defendant’s argument:
 General rule of contract law: absent the payment of consideration, this is Dickinson v. Dodds—we revoked prior to acceptance
and we had that right to revoke; they told him the very next day (when P showed up at the office) that they revoke—before the
plaintiff could say that he accepted the offer.
 Because there was no consideration, the offer depended on the timing of the revocation of the offer; here, the revocation
occurred first
 Patterson v. Pattberg: old case in which it was required for payment to be tendered to accept the deal. The offeree was knocking
on the offeror’s door trying to pay them to accept the offer and the offeror wouldn’t let them in—this was considered adequate
revocation of the offer.
 Defendant tries to argue that the reliance of the plaintiff wasn’t reasonable—everyone else was coming in MUCH higher, and
P should’ve known that it was a mistake.
Plaintiff’s argument:
 Reliance-based (promissory estoppel): plaintiff relied to his detriment on the defendant’s offer
 Traynor in the decision counters the defendant’s argument that the price discrepancy was too great to be reasonably relied on
by the plaintiff by saying there is typically a 160% variance, which the defendant’s offer falls under; thus, the mistake was not
great enough.
Court’s decision:
 Extended promissory estoppel to this situation (option contracts); allows promissory estoppel to replace consideration
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
The court recognizes that, under traditional common law contract analysis, a binding contract has not been formed. However,
Justice Traynor’s application of the doctrine of promissory estoppel has come to be the majority view.
Damages: The difference between Star’s bid and the final cost of paving to Drennan, plus costs ($3,817.00)
 Traynor in Drennan was at the forefront of developing the doctrine of holding bidders to their bids even without
consideration.
 Contrast:
o Fletcher-Harlee: had the opposite outcome (court let the subcontractor off the hook)—because the defendant
specifically said in the bid that it was not an offer (but for that language, they would have been on the hook).
o James Baird Co. v. Gimbel Bros (1933)  CASE CITED IN DRENNAN
Hunting in Pairs
James Baird Co. v. Gimbel Bros (1933)
Drennan v. Star Paving Co. (1958)
Gimbel (D) submitted an offer to supply linoleum, mistakenly
Star (D) submitted a bid to provide paving, mistakenly priced
priced too low, to Baird (P), a general contractor, who used the
too low, to Drennan (P), a general contractor, who used the bid
offer as part of its bidding on a public building construction
as part of its bidding on a school construction project; Star (D)
project; Gimbel (D) withdrew its offer before the bid was
withdrew its offer after the bid was awarded to Baird (P).
awarded to Baird (P).
SIMILARITIES
 In both cases, a subcontractor submitted a mistaken bid (this time for linoleum) at approximately half of what it should have
been charged.
 In both cases, the contractor in turn submitted a bid relying on the figures provided by the subcontractor.
DIFFERENCES
PROMISSORY ESTOPPEL DOES NOT APPLY TO A
PROMISSORY ESTOPPEL APPLIES TO ENFORCE A
SUBCONTRACTOR’S BID THAT IS WITHDRAWN
SUBCONTRACTOR’S BID THAT IS WITHDRAWN
BEFORE ACCEPTANCE
BEFORE ACCEPTANCE

Judge Learned Hand applies the traditional, strict
construction of the common law to the case. He rejects
the application of the theory of promissory estoppel,
taking what would today be considered an unduly
narrow interpretation of the doctrine.



Traynor applies the contemporary application of
promissory estoppel.
Court places weight not only on the reasonable reliance
the general contractor placed on the bid, but also on an
effort to do justice by placing the risk of mistake on the
one who made the mistake.
Note that the general contractor here did not know of
the mistake by the subcontractor at the time it used the
subcontractor’s bid, unlike in Baird.
Restatement (Second) §87. Option Contract
 §87(1)(a): Recommends a liberal approach to consideration doctrine in the context of option contracts  provides that an
offer is binding as an option contract if it “is in writing and signed by the offeror, recites a purported consideration for the
making of the offer, and proposes an exchange on fair terms within a reasonable time.”
 §87(1)(b): An offer is binding as an option contract if it is made irrevocable by statute.
 §87(2): Suggests that, under appropriate circumstances, an option contract can be created by reliance.
Should a mistake relieve a party of its obligation?
 Unilateral mistake: very high bar for a party to be relieved of its duty.
o Example: Drennan v. Star Paving Co., (Cal. 1958): Traynor counters D’s argument that the price discrepancy was
too great to be reasonably relied on by P by saying there is typically a 160% variance, which the defendant’s offer
falls under; thus, the mistake was not great enough.
 If both parties make a mistake, the courts are more lenient.
FIRM OFFERS UNDER THE UCC §2.205
FIRM OFFERS UNDER THE UCC (§2.205)
 The drafters of the UCC provide clear, straightforward rules on firm offers (the name for option contracts in the UCC).
 §2.205 dispenses with the need for consideration to validate an option (called a firm offer) provided that all of the
prerequisites are satisfied:
1. The offeror must be made by a merchant.
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
2.
3.
4.
5.
Merchant is defined in §2.104(1).
Only the offeror need be a merchant (doesn’t need to be a transaction “between merchants”, just one is
required).
The offer must be in a signed writing.
 “Writing” extends to electronic format.
It must give an assurance to the offeree that it will be held open.
 If exact time period is not stated, §2.205 provides that it will remain open for a reasonable time.
If the assurance is contained on a form provided by the offeree, the offeror must sign the assurance
separately.
The period during which the offer is held open cannot exceed 3 months.
 If the option is intended to last more than 3 months, the offeree must give consideration
UNJUST ENRICHMENT
NOTE: UNJUST ENRICHMENT ARGUMENTS NORMALLY DO NOT WORK. THIS IS A FALLBACK (LIKE PROMISSORY
ESTOPPEL) IF TRADITIONAL CONTRACT ARGUMENT FAILS.
Unjust Enrichment
 Unjust enrichment: a cause of action that prevents a party from retaining a benefit conferred on that party to the detriment of
the other party, if it would be unjust for the enriched party to retain that benefit.
o Note: Unjust enrichment is not based on a promise.
 Unjust enrichment is available in situations where there is no contract or contract is unenforceable:
o Example: Owner of house enters into a contract to sell it. The buyer makes a down payment to the seller at the time
of entering the contract. But the seller then breaches the contract by refusing to sell. Unjust enrichment allows the
buyer to get his down payment back—to restore to the buyer a benefit conferred on the seller that would be unfair for
the seller to keep.
o Example: Owner of house enters into a contract to sell it. The buyer makes a down payment to the seller at the time
of entering the contract. But the contract is unenforceable because it is unsigned by the seller, so that it does not
comply with the statute of frauds. Although the buyer cannot enforce the contract, unjust enrichment still allows the
buyer to get his down payment back.
o Example: A person falls unconscious on the street and is rushed to the ER. Although the person did not make a
contract with the hospital, the principle of unjust enrichment would give the hospital a basis for claiming that he pay
the cost of medical services received.
 NOTE: Because the circumstances under which the benefit was given sometimes have nothing to do with contract at all, unjust
enrichment (while having some relationship with contract), is not a promissory theory of liability and is distinct from contract
 it functions as a separate and independent cause of action
Unjust Enrichment vs. Promissory Estoppel
 Similarities:
o Both have to do with injustice of holding/not holding parties to a contract.
o Both are “fallback arguments”  first sue on traditional contract claim; if that fails, sue for unjust enrichment or
promissory estoppel.
 Differences:
o Unjust enrichment: focus is that the recipient received a benefit.
o Promissory estoppel: focus is on detrimental reliance (the detriment).
o An unjust enrichment case there isn’t even a promise—this stands in direct contrast to promissory estoppel.
The Elements of Unjust Enrichment
 There are 2 elements of unjust enrichment:
1. It would be unjust for the beneficiary to keep the benefit of the enrichment without compensating the other party; and
2. One party must have been enriched by obtaining property, services, or some other economic benefit from the other; and
1.

Injustice
It is not always unjust for a person to keep a benefit without payment; i.e.:
1. When the benefit was intended to be gratuitous.
 DeLeo: If the donor had already given his donation of $25,000 to the congregation, rather than just having
promised it, the gift would not have been subject to invalidation due to lack of consideration—there would be no
injustice in allowing the congregation to keep the money.
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
Symons v. Heaton, (Wyo. 2014): Gary Plachek’s lifelong friend Curtis Symons moved in with him to take care
of him and manage his affairs during the last 10 years of his life. After Plachek died, Symons claimed about
$250,000 from his estate to compensate him for taking care of Plachek. NO UNJUST ENRICHMENT CLAIM
– Symons conferred the benefits on Plachek out of concern for him, and there was no indication that he expected
payment for his acts of friendship.
 “volunteer”: a person who confers a benefit with gratuitous intent (acts without intent to be compensated).
2. When the benefit was imposed and cannot be returned.
 When the person who conferred the benefit had no justification for providing it without being asked, and the
benefit cannot simply be given back.
 Example: When someone washes their neighbor’s car, or plows/shovels their driveway, or mows their
lawn for them, and the recipient of the act never requested the service to be performed. The
washer/plower/mower cannot request compensation for an unauthorized act because it was imposed
without any choice on the neighbor’s part, and because it is a service, it cannot be returned.
 “Officious intermeddler”: a person who provides services to another without the other's request or knowing
assent; intermeddlers are not compensated for their acts because the law should not encourage one’s
intermeddling. EXCEPTION for the provision of emergency services by a person without reason to know that
the other would not consent.
 If the imposed benefit is property with tangible existence, it is returnable and therefore may be unjust for a
person to keep it without payment despite the other party’s intermeddling.
 NOTE: this is similar to an offer accepted by conduct where the offeree exercises ownership rights over
the property. The facts of a case may be ambiguous enough to make it arguable that the parties had an
actual contract. If an actual contract can be established, it is not necessary to use the alternative
theory of unjust enrichment.
Enrichment—the Benefit
 Restitution: the remedy for unjust enrichment; consists of a return of the benefit or a money judgment for its value.
o “Specific restitution”: court may order specific restitution where the benefit itself can be restored/ returned.
However, this is uncommon.
o Money judgement: granted when the benefit is itself the payment of money (i.e., down payment on a house), or
when specific restitution cannot be granted, because the benefit was:
 Consumed or lost;
 The benefit itself consisted of a service that is intangible (i.e., medical services provided by a hospital).
 If restitution is based on the monetary value of the benefit, the court must determine its value. The most common standard
of evaluation is the market value of the goods or services:
o Quantum meruit: (“as must as deserved”); refers to the market value of services.
o Quantum valebant: (“as much as they are worth”); used to denote the market value of goods.
2.


SUMMARY
“Unjust enrichment” refers to the theory of liability—the basis for giving relief.
“Restitution” refers to the remedy for unjust enrichment, just can be measured by a market standard called “quantum
meruit” (for services) or “quantum valebant” (for goods).
Contract Implied in Law vs. Implied in Fact
 While unjust enrichment is now recognized as a distinct cause of action, old terms have never disappeared.
 Courts previously fitted the claim for unjust enrichment (when no separate claim for it existed) under “assumpsit”, the writ
previously established for contracts. Courts did this by creating a legal fiction that the benefit had been contracted for. As a
result, the unjust enrichment claim became known as:
Contract Implied in Fact
A real contract implied by conduct rather than express
agreement.
Contract Implied in Law
There wasn’t actually a contract – it is a legal fiction (“quasicontract”) designed to provide the basis for restitution based on
unjust enrichment.
Likely remedy will be an industry standard fee, not the fee
usually charged by that party


The two can be difficult to distinguish where the conduct of the parties is ambiguous enough that it is hard to tell whether
liability is based on actual agreement inferred from the parties’ actions or on the need to provide restitution to prevent unjust
enrichment.
The distinction between a quasi-contract/contract implied in law and contract implied in fact matters:
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1.
2.
o
Where the statute of limitations is different for a contract vs. unjust enrichment.
Where the basis for determining the price to be paid for services is different.
 (Because quasi-contract confines the price to the market value, while a different charge (i.e., the service
provider’s customary charge) may be claimable in contract).
3. Where other damages, such as consequential damages, may be available in a claim on an actual contract but not in an
unjust enrichment claim.
Example of the difference:
 Implied in fact: Doctor performing medical services and the patient is conscious—doctor is entitled to request
his customary fee, because it is implied in fact. Here, there is no unjust enrichment.
 Implied in law: Doctor performing medical services and the patient is unconscious—it would be an unjust
enrichment for the patient to receive that benefit without paying the doctor for the services rendered.
Volunteers vs. Intermeddlers
 Volunteer: a person who confers a benefit gratuitously. This could be because she has the deliberate intent to make a gift, or
simply because she lacks the intent to be paid.
 Officious intermeddler: a person who confers a benefit, but fully intends to seek payment for it. The barrier to recovery for
an intermeddler is not that she acted gratuitously (as does a volunteer), but that she imposed an unasked-for benefit on the
recipient under circumstances that did not justify that imposition
 NOTE: a person can be both a volunteer and officious intermeddler—when someone confers a benefit without intent to be
paid and in a meddlesome way. This would provide justification for refusing relief on both grounds.
Birchwood Land Company, Inc. v. Krizan (Vt. 2015)  LOSING UNJUST ENRICHMENT CASE
 Birchwood argues that D was unjustly enriched by its creation of the public road access to her lot, arguing that she should be
required to bear a proportionate cost of the construction.
 There was no contract
 This is all about the benefit—unjust enrichment (Birchwood alleges that by virtue of the actions it took, Krizan received a
significant benefit at significant cost to Birchwood).
 KEY FACTS:
o Krizan was under no obligation to develop the land. Birchwood didn’t save her a monetary cost (if she were under an
obligation to develop the land and Birchwood saved her obligatory costs, the court would have come out differently).
Additionally, the benefit isn’t monetary (the value of the land went up, but she hasn’t monetized it).
o It was unrequested (she didn’t ask Birchwood to do this for her).
 Thus, despite the fact that Krizan received a significant benefit, it was an incidental one—Birchwood meant to benefit
themselves and the fact that she was benefitted to was unintended  they were acting for their own purposes. Thus, the benefit
does not trigger unjust enrichment.
 KEY TAKEAWAY: it was critical to the court that the benefit received was not saving obligatory costs—thus, the nature of
the benefit received is important, in addition to the fact that a significant benefit was received that was not paid or asked for.
 *Contrast to Martin case—there’s nothing in this case that shows a bargain. What’s at the heart of the case (Birchwood’s
argument) is that one party received the benefit and it would unjust to allow that party to reap the benefit without paying.
Martin v. Little, Brown & Co. (Pa. 1981)  LOSING UNJUST ENRICHMENT CASE
 James Martin (P) is an enterprising law student and realizes that a book has been plagiarized. Martin voluntarily sent a letter
to Little, Brown & Co. (D) in which he told Little that portions of one of its books, How to Buy Stocks, had been plagiarized
by another book. The information from Martin was unsolicited by Little, and compensation for the information was never
requested or discussed.
 Contract implied in fact?  NO
o In some ways it can be interpreted as an implied contract in fact (due to the back and forth between Martin and Little—
offer to send the materials and an acceptance), but there was no discussion of a price terms (like the Sopranos case—
“I’ll take care of you” if the show hits big—lacked the key price term to create a contract implied in fact).
 Contract implied in law?  NO
o Fallback—contract implied in law (quasi contract)  unjust enrichment
o Martin has a stronger case then Birchwood for unjust enrichment—but this fails as well for one of the same reasons
as Birchwood  if he wanted compensation for this, he had ample opportunity to ask for it (he stayed silent on his
intent to be compensated); in Birchwood, they didn’t request compensation until after the construction was finished—
they had ample opportunity to request payment before that time.
o Volunteer: Not like a doctor’s office where there is an implicit understanding that the patient will pay for medical
services (a professional is providing a professional service—of course the doctor is not a volunteer)—here, the P is a
law student with undeveloped skills.
o Unknown market value—how does the court give a remedy?
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o

No injustice—he was a volunteer, had the opportunity to make clear that he expected compensation and did not do
so, he’s not a professional acting in a professional capacity.
Analysis: Martin was refused restitution because he was a volunteer. An alternative ground for denying recovery could have
been that he was an officious intermeddler. The court also indicates that even if Martin had established grounds for restitution,
he would not have been entitled to a percentage of the recovery. The Appellant voluntarily notified the publisher of the
plagiarism and corresponded without mentioning any expectation of payment in return. There was no contract, and the
Appellant was not entitled to any recovery for his gratuitous actions.
Feingold v. Pucello (Pa. 1995)  LOSING UNJUST ENRICHMENT CASE (UNCLEAN HANDS)
 Involves a lawyer (professional)—not a volunteer (obviously lawyer—like a doctor—is expecting to be paid). However,
lawyer did not give the price quote (contingency fee) which is customary and even required. Feingold had begun working on
the case when he sent Pucello the 50/50 split fee, which is higher than the industry standard.
 Like Martin and Birchwood—Feingold had the opportunity to state his price before performing any service. However, Feingold
has even more against him because it is required for him to specify the contingency fee and the fee was an unreasonably high
(50/50 split).
 “We think Feingold’s abject failure to comply with this rule precludes any equitable recovery.”
 *This is the heart of the case (Feingold’s unclean hands)—the fact that Feingold should have stated his fee upfront (plus the
unreasonableness of the fee)—and not so much the fact that Feingold did not confer any benefit on Pucello (which he also
hadn’t done in simply scheduling a doctor’s appointment for him and getting an admission from the other driver in the accident).
 Doctrine of unclean hands: An equitable defense requiring a plaintiff to be innocent of wrongdoing related to the claim.
“MORAL OBLIGATION” AND “MATERIAL BENEFIT” DOCTRINES
 Unjust enrichment does not have a promissory basis. Rather, it focuses on whether it is fair to require the beneficiary to pay
for the benefit conferred.
 If the beneficiary promised to pay for the benefit BEFORE OR AT THE TIME OF RECEIVING IT, the promise would
likely be a contract. However, consideration doctrine prevents a promise to pay for the benefit AFTER receiving it—because
consideration requires that the promise be given in exchange for a legal detriment, meaning that a promise made in
recognition of a prior detriment is not supported.
 Past consideration: prior detriment; this is a misnomer because there really is no consideration at all.
 Moral obligation doctrine: courts have avoided the unfair application of “strict consideration” by recognizing the “moral
obligation” exception to it; it is only recognized where a person makes a promise that is in effect a ratification of an existing
but unenforceable or voidable legal obligation. The doctrine is very limited in scope and does not create a general principle
that a court will enforce a promise merely because it finds that the promissor has a moral obligation to perform what he
promised.
o Effect: Moral obligation creates an exception to the past consideration rule and permits enforcement of the later
promise—it dispenses with “new” consideration to validate the promise.
o *Like promissory estoppel, the material benefit rule is based on a promise.
o Example: where the promisor promises to pay a debt that has become unenforceable because of the statute of
limitations.
o Example: a minor’s ratification of a contract after becoming a major—a minor’s contract is voidable at his instance
but can be fully validated when minor comes of age. The other party to the contract is not required to give new
consideration to make this ratification effective.
 “Material benefit” rule: Restatement §86 –“promise for benefit received”. A promise made in recognition of a benefit
previously received by the promisor from the promisee is binding to the extent necessary to prevent injustice. A promise is
not binding, however, if the promisee conferred the benefit as a gift or for other reasons the promisor has not been unjustly
enriched; or to the extent the value of the promise is disproportional to the benefit. However, few courts have been willing to
expand the scope of the doctrine.
 Webb v. McGowin (Ala. 1935)  inspired Restatement §86
o Facts: Joe Webb (P) and J. Greeley McGowin were both employed at a lumber mill. On August 3, 1925, Webb was
throwing chunks of wood from the second floor of a mill held onto one heavy block as it fell in order to prevent it
from landing McGowin. Webb sustained serious injuries and McGowin promised to give him a small pension for
life. When the owner died eight years later, his estate refused to continue the payments
o Holding and Reasoning (Bricken, J.): The court of appeals upheld the promise. It reasoned that by saving
McGowin from death, Webb had conferred a material benefit on him that morally bound McGowin to compensate
Webb. McGowin’s promise recognized this moral obligation. The court stressed that it was enforcing the promise
because the moral obligation was connected to the promisor’s receipt of a material benefit—it was ratification of the
value of prior services.
o Adding a promise can shift the analysis (even though it may not be enforceable under traditional contract
law)—a promise after the fact can help establish that an officious intermeddler isn’t actually one and help clear up
the remedy issue.
7
o
o
The court looks to the promise—it was to take care of Webb for the rest of Webb’s life for saving McGowin’s and
not that McGowin was paying Webb for the rest of his own life.
Calculus is combination of significant benefit conferred on the other side, the recipient recognizing this benefit with
a promise, and then later backing off of it—moral obligation would allow the party that conferred the benefit and
received the promise to recover.
IMPROPER BARGAINING
*The link between the various actions (fraud, duress, misrepresentation, etc.) is a defect in the bargaining process.
GENERAL INTRODUCTION TO THE DOCTRINES
 If the court finds that the apparent manifestation of one party’s assent was induced by improper means, it may refuse to
enforce the contract as a whole or some aspect of it.
 Too rigid a focus on objective manifestations could lead to unfair results where one party’s apparent assent is induced by the
deceit, coercion, or unfair bargaining of the other.
 Remedies:
o General Rule: where the court finds deceit, coercion, or unfair bargaining applicable, the remedy is to allow the
victim to avoid the contract.
o NOTE: a “voidable” (avoidable) contract is not the same as a void contract:
 Void: not a contract at all, but a legal nullity. Neither party can enforce it.
 Voidable: the aggrieved party can elect either to keep it in force or to exercise the right to rescind (avoid)
it.
 General Rule: If a contract is avoided, each party is entitled to restitution of any benefits conferred on the other under the
contract up to the time of avoidance.
o Although the remedy of avoidance and restitution is dominant, other remedies, including specific performance or
monetary damages are possible.
 The doctrines of fraud and duress apply to sales of goods under UCC 1-103(b), which expressly includes them as common
law doctrines applicable under Article 2.
FRAUDULENT MISREPRESENTATION
FRAUDULENT MISREPRESENTATION
 A material misrepresentation of fact, made with knowledge of its falsity and intent to induce a contract, which results in the
other party to enter the contract.
 Fraudulent misrep applies to the sale of goods as well; common law rules and principles govern under UCC 1-103(b).
a.
A Misrepresentation of Fact
 Misrepresentation: as assertion not in accordance with the facts. (RST §159)
o NOTE: if the party does not know that the assertion is untrue, the misrepresentation may be negligent or innocent.
 Misrepresentation must relate to a fact (not mere expressions of opinion or prediction of the future generally).
 A factual assertion: a representation that a fact exists; this is distinguishable from a contractual promise (a commitment
to do something in the future)
 Misrepresentation may take the form of:
o an express statement or
o a deliberate concealment of a fact.
 Restatement (Second) §160: Action intended or known to be likely to prevent another from learning a fact is
equivalent to an assertion that the fact does not exist.
 Although it is obvious that a party has a duty not to lie or actively conceal the truth, the question of whether she has a duty
to come forward with information is more subtle; it is possible, however, for there to be fraud where a party conveys a
falsehood “passively”.
 In most situations involving fraud in the formation of a contract, the misrepresentation was made by one or more of the
parties (or his agent) to the other.
 NOTE: a promise can give rise to a misrepresentation—at the time the promise is made, there is no intention to carry it
out (deliberately misrepresents the promise at the time it is made about that party’s future intentions)—courts may consider
this fraud. If you can show that the promise was made, and at the time there was no intention to carry it out, there may
be fraud.
 McIntosh (statute of frauds, employment contract case)—court overlooked the statute of frauds.
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b.
Knowledge of Falsity and Intent to Mislead (Scienter)
 Scienter: shorthand for the two elements of: 1) knowledge of falsity, and 2) intent to mislead. If a misrepresentation is
made with those elements, it is fraudulent.
 Knowledge of falsity covers situations in which the maker of the misrepresentation knows that she is lying but could also
cover situations in which she is recklessly indifferent as to its truth. (RST §162)
c.
Materiality
 Materiality: a misrepresentation is material if it would be likely to induce a reasonable person to manifest his assent, or it
the maker knows that it would be likely to induce the recipient to do so. (RST §162(2))
 RST §164: allows avoidance of a contract for misrepresentation either if the misrepresentation was fraudulent or negligent
and does not require materiality under fraud (just misrepresentation)—thus, under §164, a party seeking avoidance on the
grounds of fraudulent misrepresentation is not required to prove that the misrepresentation was material.
 NOTE: most courts still do require materiality as an element of fraud.
d.
Justifiable Inducement
 In addition to false misrepresentation, the victim of fraud must also show:
o Inducement: that the misrepresentation induced her to enter the contract (that she would not have entered the contract,
or at least not on those terms, has she known the truth); and,
o Justifiable reliance: that she was justified in relying on the misrepresentation. This mixes objective (reasonableness)
and subjective elements to determine if the victim should have been taken by the falsehood.
Remedy
 There are two possible remedies for fraudulent misrepresentation:
o Avoidance: allows the victim of the misrepresentation to rescind the contract and to obtain restitution for any
performance that has been rendered. This remedy arises under contract law.
o Damages: permits the victim to keep the contract in force and to sue for any loss in value of the performance as a
result of the fraud. This remedy arises from tort law and is available to the victim of contractual fraud because fraud
is a tort as well as the violation of the victims’ rights under contract law.
 *Whether a party wants to rescind or keep the contract depends on how long the contract has been in place—because a
restitution/rescission option is a two-sided restitution (both sides give back to each other what benefits they received).
Thus, a party that delays rescinding can work against them.
e.
1.
Affirmative Fraud
 Affirmative fraud concerns the duty not to lie as opposed to silence as fraud (duty to speak, duty not to conceal the truth).
Hodge v. Craig (TN 2012) – WINNING AFFIRMATIVE FRAUD
 Ex-husband (Craig) sued ex-wife (Hodge) for intentional misrepresentation regarding the identity of her child's biological
father. Case is about the ability to retrieve child support payments based on an action for fraud.
 Affirmative fraud case (D affirmatively misspoke—P asked her if the child was his and she affirmatively told him that he was
and it could be no one else’s—when she knew that it could be the other man’s).
 Shows the elements for proving an affirmative fraud case:
1. D made a representation of fact
2. The representation was false when it was made
3. The representation involved a material fact
4. D either knew it was false or did not believe it to be true or D made the misrepresentation recklessly without knowing
whether it was true or not
5. P did not know that the representation was false when it was made and was justified in relying on it the truth of it
6. P sustained damages as a result of the representation.
 Affirmative fraud—he explicitly asked her if it was his child, and she intentionally lied.
 Hodge v. Craig is an example of a case that does not follow the approach of RST that materiality is only required where the
misrepresentation is non-fraudulent.
 It seems critical to the court that Hodge expressly told Craig, in answer to him asking, that he was definitely Kyle’s father and
that no one else could be the father.
Damages for Intentional Misrepresentation Claim
(RST §549): The proper measure of damages for an intentional misrepresentation claim is:
 (a) the difference between the value of what he has received in the transaction and its purchase price or other value given for
it; and
 (b) pecuniary loss suffered otherwise as a consequence of the recipient's reliance upon the misrepresentation.
Sarvis v. Vermont State Colleges (Vt. 2001) – WINNING AFFIRMATIVE & PASSIVE FRAUD
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2.
Rule of Law: a party induced into a contract by fraud or misrepresentation can rescind the contract and avoid liability for any
breach of the contract.
Fraud can take an affirmative form: an intentional lie or deliberate action to conceal a fact, intended to mislead the other party
into entering the contract. It can also take a passive form: where a party fails to disclose facts under circumstances in which he
has a duty to do so. This case involves a deliberate lie (affirmative fraud) as well as elements of concealment and non-disclosure
(passive fraud—silence as fraud):
Affirmative Fraud: Sarvis submitted a resume to the College that stated he had acted as the president and chairman of the board
of CMI International, Inc. for a period of time, which included the time Sarvis was in prison.
Passive Fraud: Sarvis failed to disclose material information in his resume about his criminal history.
Court says: Sarvis’s actions were more than a failure to disclose material information. Sarvis carefully crafted his application
materials to conceal his criminal history. Sarvis thus fraudulently induced the College into entering the employment
agreements. Additionally, this dishonesty provided just cause to terminate the employment agreements. Honesty is an implicit
duty of every employee.
Silence as Fraud: Fraudulent Nondisclosure and the Duty to Speak
 Silence as fraud (passive fraud) occurs when the alleged deception consists of a failure to disclose information. However,
sometimes a contracting party is entitled to keep information to themselves.
 Restatement (Second) §161. When Non-Disclosure is Equivalent to an Assertion
Kaloti Enterprises, Inc. v. Kellogg Sales Company (Wis. 2005) – WINNING PASSIVE FRAUD (SILENCE AS FRAUD) CASE
 Liability is predicated not on an affirmative fraud, but on a failure to disclose.
 Key Fact: Prolonged relationship between the parties; there was an understanding of the way they ran business together  it
was reasonable for Kaloti to believe that if Kellogg was changing business strategy that they would advise them.
 Ability to obtain information elsewhere—if possible, the courts will generally not step in. Here, there was no way for Kaloti to
obtain the information elsewhere because Kellogg and Geraci entered into a confidentiality agreement that prohibited Geraci
from disclosing Kellogg’s change in business strategy.
 Rule of Law: A party to a contract has a duty to disclose a fact if:
o (1) the fact is material to the transaction,
o (2) the party knows the other party is about to enter into the contract under a mistake regarding the fact,
o (3) the fact is exclusively within the knowledge of the party so that the other party could not reasonably discover it,
and
o (4) the mistaken party would reasonably expect disclosure of the fact.
 Holding: Generally, the parties to a business deal are responsible for gathering their own facts. However, when a party has
exclusive knowledge of facts material to the transaction that the other party has no means of acquiring, the party with the
knowledge usually has an obligation to disclose those facts.
In re House of Drugs, Inc. (N.J. 2000) – LOSING PASSIVE FRAUD (SILENCE AS FRAUD) CASE
 Facts: Suit for damages for the failure of its business (House of Drugs) against the lessor of retail space in a shopping mall.
The lessee claimed that the lessor had committed fraud by failing to disclose, at the time of entering the lease, that two of the
largest tenants in the mall were about to go out of business. The lessee attributed the failure of its own business to the departure
of the major tenants.
 Outcome: Although the court acknowledged that an omission may constitute a material misrepresentation for the purpose of
determining fraud, it did not decide whether the lessor’s failure to disclose the information was fraudulent because even if it
was, the element of reliance was missing.
 Reasoning: Lessee’s officers had business education and experience, and the officers had conducted an independent
investigation of the feasibility of operating their business in that mall. They were aware that one of the tenants was going out
of business. The information should have led them to inquire further about the financial stability of the large tenants.
Caveat Emptor
 At common law, sales of real property are not subject to any implied warranty—the buyer takes the property subject to any
defects that may exist in the property.
 Caveat emptor: “let the buyer beware”.
 *This principle is qualified by the seller’s duty not to defraud the buyer, either by affirmative false statement or failing to
disclose facts that the seller has a duty to disclose. The difficulty is deciding whether the seller had a duty to disclose in light
of the buyer’s responsibility to conduct adequate inquiry to protect themselves.
Milliken v. Jacono (Pa. 2012) – NO DUTY TO DISCLOSE (LOSING CASE)
 NO DUTY TO DISCLOSE MURDER/SUICIDE TO BUYER OF HOUSE
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Rule of Law: a real property seller's failure to disclose the occurrence of a murder/suicide inside a house to a buyer thereof did
not constitute actionable fraud, negligent misrepresentation, or violations of unfair trade practices, consumer protection, and
real estate sales disclosure laws  the occurrence of a murder/suicide or similar tragic event inside a house does not constitute
a "material defect" therein that must be disclosed by a seller to a purchaser. In short, the Milliken court concluded that "purely
psychological stigmas are not material defects" in property that a seller must reveal to a buyer.
Overview: While the murder/suicide may have been subjectively material to a home buyer's decision, under common law fraud
a seller of real estate was only liable for failing to reveal objective material defects. Psychological damage to real estate did
not constitute a defect that the law recognized as material. The fact that a murder once occurred in a house fell into that
category of homebuyer concerns best left to caveat emptor.
Notes: The Milliken court also pointed out that although Pennsylvania's RESDL requires that a seller of a property disclose to
a buyer all known material defects about the property that are not readily observable, the murder/suicide in that case was not a
"latent" defect in the realty, because the tragic event had been well publicized  NOTION OF THE BUYER’S DUTY TO
CONDUCT ADEQUATE INQUIRY TO PROTECT THEIR INTERESTS —“had the plaintiff checked into the
ownership history of the house, she could have discovered the murder/suicide. The plaintiff did not do so, and she bought
the house.”
Stambovsky v. Ackley (N.Y. 1991) – DUTY TO DISCLOSE (WINNING CASE)
 Rule of Law: The nondisclosure of a condition that: (1) materially impairs the value of a contract and that is (2) within the
knowledge of the seller or unlikely to be discovered by a prudent purchaser constitutes a basis for rescission of the contract.
 Facts: Stambovsky (P) entered a contract to purchase Ackley’s (D) house and discovered ghosts haunted the house.
Stambovsky sought rescission of the sale contract.
 Holding: The buyer is entitled to rescission despite caveat emptor because here, Ackley created and perpetuated the notion to
the public that her home was haunted. Stambovsky was unaware of this. Therefore, because Stambovsky was unlikely to inquire
about the condition of the house being possessed, rescission of the contract is proper.
 Dissent: Under caveat emptor, the buyer has the duty to satisfy himself as to the quality of the bargain. Moreover, ghosts are
not substantive enough to discard this doctrine.
 Notes: Both the majority and dissent balanced the buyer’s duty to make reasonable inquiry against the seller’s failure to
disclose—the crucial distinction between the views is the expectation of what would be reasonable:
o Dissent points out that the haunted reputation of the house was well publicized and that the buyer had a duty to
ascertain all the facts.
o Majority says that even though there was information available about the ghosts, a reasonable plaintiff would not
think to look for that.
Milliken v. Jacono
NO DUTY TO DISCLOSE
The court’s resolution of the fraud issue was strongly influenced
by the existence of a statute setting out the seller’s disclosure
obligations. The policy of these statutes is to preclude rescission
of contract solely on the basis of prejudice deemed to be
irrational.
3.
Stambovsky v. Ackley
DUTY TO DISCLOSE
Decided before NY had any statute, so the court had to determine
whether the common law caveat emptor rule precluded the
buyer’s claim of fraud by nondisclosure.
Misrepresentation of Fact, Opinion, or Prediction
 Fraud is based on a misrepresentation of fact, not opinion.
 However, when an opinion/prediction has a factual basis, an expression of a false opinion could qualify as fraud—when does
a false opinion cross the line into fraudulent factual assertion?
Rodi v. Southern New England School of Law (2004) – WINNING FRAUDULENT MISREP. OF OPINION CASE
 Rule of Law: A statement that is couched as an opinion may constitute a statement of fact in the context of a claim for fraudulent
misrepresentation if the statement can reasonably be understood as implying the existence of facts that justify the statement.
 Facts: Law student suing unaccredited law school suing for the misrepresentation—he was told that SNESL was “highly
confident” they would receive accreditation from the ABA; “the future of the school had never been brighter.” Rodi sued
SNESL for fraudulent misrepresentation. Rodi alleged SNESL knew that the ABA was highly critical of SNESL and that
accreditation was very unlikely.
 Holding: A corporation may not falsely tell investors that a project is proceeding smoothly and going better than expected
(Stolzoff v. Waste Sys. Int’l, Inc.). A car dealer may not tell a buyer that a vehicle known to have significant mechanical issues
is believed to be in good condition (Briggs v. Carol Cars, Inc.). Here, the statements made by SNESL that the school was
highly confident of obtaining accreditation and that there was no cause for pessimism reasonably implied that SNESL was not
aware of any facts to the contrary. However, Rodi alleged SNESL knew that the ABA was highly critical of the school and that
accreditation was very unlikely. These allegations, if true, make the statements of SNESL actionably misleading.
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4.
Disclaimer Clause: The disclaimer in SNESL’s catalogue did not preclude Rodi from relying on these statements. The
disclaimer only related to any promises of actually receiving accreditation. However, the relied-upon statements of SNESL
dealt with the school’s ability and capacity to obtain accreditation in the near future.
Rodi shows that some expressions of opinion or predictions of future events are sufficiently fact-based to qualify as
representations of fact. However, other opinions are more properly seen as expressions of taste, viewpoint, or subjective
judgment/belief  to make this determination one must consider not only the apparent factual underpinnings of the opinion or
prediction, but also the relationship of the parties. The basic inquiry is whether, under all the circumstances, the party
to whom the opinion is expressed was justified in relying on it as a fact-based assertion.
Misrepresentation of Intent
 Because fraud involves a misrepresentation at the time of contracting, there is seldom a basis for a victim to assert fraud
where a party breaches a contract after it has been entered.
 However, if the victim can show that the breaching party never intended to perform as promised (that when the
breacher entered the contract, she had already determined to breach it), this could constitute a fraudulent
misrepresentation.
 Even though a promise is an expression of future intent (not a fact) it can qualify as a misrepresentation of the fact of the
party’s state of mind at the time of contracting.
 This is rare and difficult to prove.
Carey v. FedEx Ground Package System, Inc. (Ohio 2004) – WINNING FRAUDULENT MISREP. OF INTENT CASE
 Facts: Carey entered into negotiations with FedEx for the purpose of acquiring a route. FedEx gave him repeated specific and
unambiguous assurances that he would receive a route. While it was holding out for over 2 years on giving Carey the route,
FedEx took advantage of Carey’s services by employing him as a temporary driver. Carey never received the route.
 Outcome: the court held that the plaintiff had alleged sufficient facts to proceed to trial on the question of whether there had
been a fraudulent misrepresentation of intent.
 Reasoning: the court said that although fraud generally cannot be predicated upon promises or representations relating to future
action, a promise could be fraudulent where a party has no intention of keeping the promise when he makes it. In this case, a
jury could find that when FedEx made the successive promises to give Carey a route, it had no intention of doing that, but was
merely stringing him along so that he would continue to work for the company as a temporary driver.
5.
Justifiable Inducement and Contracting Out of Fraud
 The issue of whether the plaintiff was justified in being induced by the affirmative misrepresentation or nondisclosure also
raises the question of whether a party can shield itself from liability for fraud by including a disclaimer in the contract.
 General Rule: as a matter of public policy, a party cannot contract out of fraud (it cannot include a disclaimer in the contract
that precludes the other party from asserting a claim of fraud).
 Justifiable reliance is an element of fraud and in some cases the fact that the victim of the fraud executed a contractual
disclaimer or waiver could lead to the conclusion that the party was not justified in relying on misrepresentation or
nondisclosure that is at odds with the disclaimer or waiver.
Psenicska v. Twentieth Century Fox Film Corp. (2008) – LOSING FRAUDULENT MISREPRESENTATION CASE
 BORAT CASE
 Rule of Law: A party cannot assert a claim for fraudulent misrepresentation if he denies, in an agreement, relying on
representations made to him.
 Inducement of unsuspecting, ordinary people into participating in a “documentary”; they felt there was a damage to their public
image and reputation and that they were duped into this.
 Why do the plaintiffs lose?
o Disclaimer clause (like the disclaimer seen in Rodi)
 *Specificity: It matters to the court that the disclaimer was very specific and wasn’t overly broad or
ambiguous—it specifically spoke to what the plaintiffs are alleging in this case.
 Danann case on pp. 462: “specificity was the touchstone of the disclaimer in Danann…”
 Each plaintiff explicitly disclaimed reliance on any statements about the nature of the movie or the identities
of the parties involved in the movie  the plaintiffs cannot prevail on a fraudulent-inducement claim when
the plaintiffs agreed to not rely on any statements regarding the movie.
o Duty to Read
 Psenicska (P) admitted that he signed the document without reading it  brings us back to Morales and the
Duty to Read.
o Maybe part of the unstated analysis here is the fact that the lawsuit didn’t commence until after the movie was out and
the plaintiffs failed to take measures to stop the movie from showing.
 Remedies: here it was too late for rescission because they can’t “unwind the deal” once the movie is already out, so the
plaintiffs are basically asking the court to give them more money for the unfavorable light that they were portrayed in.
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Counter-arguments and themes  there’s a lot of tension in the law here
o On one side: It is disturbing that parties making representations to induce someone to take on the deal can contract
out of liability/fraud, because attorneys carefully construct the contract so that those representations are not included.
o On the other side: But, if courts don’t uphold the language in contracts and start allowing parties to sue for things
they expressly agreed not to in signing the contract, what is the significance in the language in the contract at all?
o *The result: is often that plaintiff is held to the terms of the agreement (plaintiff signed and had a duty to read the
document).
Affirmative fraud: there was significant intentional misstatements about what the film was and was for, the characters in it,
where it was being aired, etc.
Concealment also problematic
Notes: Courts often articulate the public policy that a party should not be allowed, by a contractual provision, to insulate itself
from fraud—but not in this case.
Crigger v. Fahnestock and Co., Inc. (2006): To maintain a claim for fraud in the inducement, a party must show: (1) a material
representation or omission of fact made by a defendant with knowledge of its falsity and intent to defraud; and (2) damages
sustained as a result of a plaintiff’s reasonable reliance on that representation.”
Merger Clause: a provision in a written agreement declaring that the writing contains all the terms agreed upon by the parties.
The purpose is to preclude a party from claiming that the agreement is subject to terms that are not set out in the writing.
6.
The Distinction Between Fraudulent and Negligent Misrepresentation
 The difference between fraud and negligence lies in the state of mind of the party making the misrepresentation.
 Negligent misrepresentation: a misrepresentation that is not deliberately false (like fraud) but is made carelessly—the
party making the misrepresentation failed to exercise reasonable care in obtaining or communicating the information.
While negligent misrepresentation is less morally culpable than deliberate fraud, there is actually a thin dividing line
between the two.
o RST §162: fraud could be constituted by making statement without confidence of their truth  thus, there is a
thin dividing line between fraudulent and negligent sloppiness in the truth.
o RST §164: includes materiality as an element for negligent misrepresentation but not fraud (because negligent
misrepresentation is less morally culpable than deliberate fraud.
 Other differences between negligence and fraud:
o A limitation/disclaimer/merger clause in the contract likely won’t shield a party who has committed fraud (i.e.
Rodi). However, a limitation/disclaimer/merger clause in the contract is usually effective where there is negligent
misrepresentation.
o Some states restrict relief for negligent misrepresentation or confine it to certain situations.
7.
The Choice of Remedy for Fraud; Punitive Damages
 Rescission (accompanied by restitution if there has been partial performance) and damages are the 2 most common
remedies for fraudulent misrepresentation.
 Where a victim keeps the contract in force and claims damages for loss caused by the fraud, damages this loss is
measured as the difference in value between the actual worth of the performance and what it would have been worth as
represented.
 In some situations, the choice of remedy may have important impact on compensation for the plaintiff—the availability
of punitive damages. Because rescission is a contract remedy and damages are a tort remedy, if the plaintiff sues for
rescission, he could be deprived of punitive damages, but not if he sues for damages—resulting in different values of the
remedy for the same wrongful act.
NOTE: choice of the tort or contract remedy could have an impact on the availability of emotional distress damages (a
tort remedy) as well  Hodge v. Craig
 Seaton v. Lawson Chevrolet-Mazda, Inc. (Tenn. 1991)
o Car sold to buyer without seller revealing that the car had been involved in a wreck and repaired.
o Buyer sued for rescission for fraud. Jury awarded rescission as well as punitive damages.
o The appellate court reversed the punitive award damages on the ground that it is not available when the plaintiff
sues for rescission.
o The TN supreme court reversed and reinstated the punitive damages because “where fraud it committed, the
intentional tort is inextricably mired with elements of contract.”
8.
Fraud in the Inducement Distinguished from Fraud in the Factum
 Fraud in the Inducement: fraud for the purpose of inducing agreement—the misrepresentation related to a fact that
forms the basis of the agreement and falsely gives the other party an incentive to enter into the contract.
NOTE: all of the cases in this section relate to fraud in the inducement.
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Fraud in the Factum: where the fraud concerns the very nature of the contract document itself—its character or
essential terms—rather than a fact underlying the contract.
o RST §163: recognizes fraud in the factum and gives relief for it provided that the victim “neither knows nor has
reasonable opportunity to know of the character or essential terms of the contract”.
o Traditional analysis: treats fraud in the factum as rendering the apparent contract void, not merely voidable
(RST §163). This means that the defrauded party does not have the opportunity to leave the contract in place.
o Example: Where there is substitution of the document itself.
o BORAT case: possible fraud in the factum concerning what the document was purported to be; however, this
probably wouldn’t have been enough to sway the court to change their decision—the focus was on the duty to
read.
o This fraud also begs the question: why didn’t you take the time to read the document?  Duty to read will play
a major part in considering fraud in the factum.
A. DURESS
 Coercion: can undermine the free will of a party, giving rise to a false manifestation of assent; may consist of the actual
application of force but more commonly takes the form of a threat of adverse consequences.
 Duress: the compulsion of a manifestation of assent by force or threat. Older cases confined duress to assent induced by
actual violence, imprisonment, or physical harm; however, modern law recognizes duress may consist of economic harm or
loss as well
o “Economic duress”: the compulsion of a manifestation of assent by force or threat resulting in economic harm or
loss.
 RST §175(1): sets out a generally accepted test for duress—apparent assent has been induced by an improper threat by the
other party.
 RST §175(2): deals with improper threat by someone who is not a party to the contract—the victim may avoid a contract
induced by duress of a nonparty unless the other contracting party gave value/materially relied on the transaction in good faith
and without reason to know of the duress.
 Remedy for duress:
o General Rule: the contract is voidable—the victim of duress may elect to avoid the contract and claim restitution.
o Exception: However, where duress is so powerful that it amounts to physical coercion, a court may declare the contract
completely void.
 This is the same as the distinction between fraud in the inducement (avoidable) and fraud in the factum
(renders the contract void).
Restatement (Second) §175. When Duress by Threat Makes a Contract Voidable.
 If a party’s agreement is induced by an improper threat that leaves the party with no reasonable alternative action, the contract
is voidable by the victim.
Restatement (Second) §176. When a Threat is Improper
 §176 expands on §175 by defining and explaining what an improper threat is.
 RST §176(1)(b): A threat is improper if what is threatened is a criminal prosecution  this is the improper threat in
Germantown.
NOTE: Because it is common for a party to experience some degree of compulsion in entering into a contract, “hard bargaining” or
unfair pressure may not rise to the level of duress—improper threat is crucial to duress, and mere market pressure or the other party’s
hard bargaining or insistence on self-serving terms is not enough to constitute duress.
Doctrine of Unconscionability
Unconscionability: Where the other party’s hard bargaining amounts to unfair and oppressive conducting and the resulting contract is
unfair and one-sided, relief may be available (even in the absence of duress) under the doctrine of unconscionability.
Quigley v. KPMG Peat Marwick, LLP (2000) – LOSING ECONOMIC DURESS CASE
 Rule of Law: For a contract to be unenforceable based on the defense of economic duress, a party to the contract must have
committed a wrongful or unlawful act or threat that deprived the other party of his unfettered will.
 Facts: Joseph Quigley (P) worked for KPMG Peat Marwick (D) for 18 years. In 1981 and 1984, Quigley was promoted, first
to manager and then to senior manager. Each time, Quigley was asked to sign an employment agreement as a condition of his
continued employment. Quigley needed the job to support his family. Quigley signed the agreements to avoid losing his job
but inserted “U.D.” into his signature to signify that the agreement was signed under duress (KPMG told him that if he didn’t
sign the contract, he would be dismissed). The employment agreements contained a provision requiring arbitration of all claims.
Quigley was eventually terminated by KPMG, and sued KPMG for age discrimination.
14

Outcome: the court rejected Quigley’s duress argument—it did not amount to duress because it was not improper or
unlawful (KPMG had the right to fire Quigley as an at-will employee, and the “take-it-or-leave-it” basis of the contract is not
enough for a claim of duress). Quigley also received the benefit of continuing to work for KPMG for 12 years after signing the
contract.
Germantown Manufacturing Co. v. Rawlinson (Pa. 1985) – WINNING FRAUD/DURESS/UNCONSCIONABILITY CASE
 ILLUSTRATES FRAUD (IN THE INDUCEMENT AND IN THE FACTUM), DURESS, AND UNCONSCIONABILITY
 Rule of Law: A contract is voidable as unconscionable if:
o (1) the parties’ bargaining power is significantly unequal and
o (2) the weaker party has no choice but to agree to the contract terms dictated by the stronger party.
 It seems to be more of a misrepresentation than a duress claim (“I never would have sign had I known…” had they not mislead
her). Misrepresentation: “I was tricked” vs. Duress: Coercion  there is overlap between these doctrines, as well as
unconscionability and undue influence.
 Fraudulent Misrepresentation: A misrepresentation is sufficient grounds for voiding a contract if it is fraudulent OR material.
In this case Germantown’s misrepresentation was BOTH.
o Fraud: Although Germantown had Joan sign two notes totaling more than $372,000 in liability, Germantown implied
that Joan’s liability would be limited to $160,000. A statement “uttered with such gross recklessness” is fraud.
o Materiality: The misrepresentation was also material, meaning it was likely to induce a reasonable person to make a
contract. Here, Joan would not have signed the second note if she had known its terms.
 Duress: Restatement§ 175: if a party’s agreement is induced by an improper threat that leaves the party no reasonable
alternative action, the contract is voidable by that party. A threat of criminal prosecution is an improper threat. Here, Joan
interpreted Germantown’s statement that it would not pursue criminal prosecution if the Rawlinsons cooperated to mean that
if she signed the notes her husband would not go to jail. It is irrelevant that Germantown did not expressly state a threat
of prosecution; it is sufficient that it was implied.
 Unconscionability:
o Unfair Surprise: If contract terms are not typically expected by the party asked to agree to them, such as when
boilerplate language includes a risk-shifting clause that the signer would not reasonably expect in the transaction, the
clause may be removed as unconscionable. Here, the harsh allocation of risks was not reasonably comprehensible to
Joan when she signed the second note, and Germantown’s representative did not attempt to explain the extent of her
liability.
o Adhesion contract: Another type of unconscionability arises when there is apparent, but not actual, assent to an
adhesion contract (a standard-form agreement, usually commercial in nature, that is prepared by one party and not
negotiable as a practical matter by the other, who must take it or leave it as offered). Even if a party fully comprehends
and agrees to the terms of an adhesion contract, actual assent is missing if the signing party has little or no choice but
to accept the terms as stated. Here, Joan had no choice but to sign the second note.
 Lack of Accountability: There is no indication that Joan agreed to pay interest on the principal of the second note, and
Germantown’s inclusion of more than $45,000 in interest may have been a breach of its duty to act in good faith.
Odorizzi v. Bloomfield School District (Cal. 1966) – WINNING UNDUE INFLUENCE CASE
 Rule of Law: Where a dominant party to a transaction uses excessive pressure to persuade a party whose weakened mental
state makes him especially susceptible to persuasion, the weaker party may rescind the agreement as obtained by undue
influence.
 Facts: While Donald Odorizzi (P) was under contract to teach at Bloomfield elementary (D) he was criminally charged with
engaging in homosexual activities. Bloomfield’s district superintendent and the school principal visited Odorizzi at his home
and told Odorizzi that if he did not resign immediately, they would suspend him and publicize his dismissal proceeding, causing
“extreme embarrassment and humiliation.” He was also told that he had no time to talk to a lawyer and that if he resigned
immediately, the arrest and suspension would not be publicized.
 Outcome: Court found for Odorizzi that the school used oppressive bargaining tactics (under the theory of undue influence).
 *The problem wasn’t that the school officials acted improperly in suggesting Odorizzi resign and threatening to dismiss
him if he refused—they had a legal right to do this. The problem was in the manner that they set about persuading him
to resign.
o Key Facts: Odorizzi was approached in his home shortly after his release from prison after 40 hours without sleep.
Further, Odorizzi was told that there was no time for him to consult an attorney and that he would suffer severe
embarrassment if he did not resign immediately. Under these circumstances, he resigned immediately without
consulting counsel.
CONTRACT MODIFICATION
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B. DURESS AND BAD FAITH IN RELATION TO CONTRACT MODIFICATION
1.
The Interaction of Consideration and Duress Doctrines
 Two issues emerge when parties agree to modify a contract:
1) Consideration
 A contract (whether it is the initial agreement or later modification) needs consideration to be valid.
 Preexisting duty rule: it is not consideration when a person promises to do something they were already
obligated to do because no new detriment is suffered by that party.
 To avoid this problem the parties must:

Provide for new consideration by both parties (because the exchange of new detriments provides
consideration for the agreement to modify the original contract), or
 By terminating the contract and making a new one (consideration is given when each party abandons
their right to performance under the terminated contract).
2) Improper Bargaining (Duress)
 An agreement (including one to amend an existing contract) can be avoided if it is induced by duress.
 Where the parties agree to modify the terms of an existing contract in a way that affects the obligations of only
one of them, a consideration problem may arise—consideration doctrine attempts to police improper bargaining
but can get in the way of upholding a genuinely voluntary and fair modification of a contract.
 Where a modification is unfairly coerced, courts do have other theories on which to invalidate it.

PUSHBACK: Alaska Packers’ Association v. Domenico
 (case where fisherman refused to continue working unless the cannery increased their pay)  demonstrates both the
use of and drawbacks of consideration doctrine to police unfair contract modifications.
 The court held that the agreement to increase the fisherman’s pay was unenforceable because the fisherman gave no
new consideration to the cannery in exchange for it.
 However, the court’s real concern was the fact that the fishermen coerced the modification from the cannery. The
court would not have been able to use consideration doctrine to negate the modification had the fisherman undertaken
even a modest new detriment in exchange for it.
City of Scottsbluff v. Waste Connections of Nebraska, Inc. (Nebraska 2011) – WINNING DURESS CASE
 Facts: The City filed suit against Waste Connections in September 2008, alleging that the company had increased rates by
41%, to $60 per ton, for solid waste disposal. The City of Scottsbluff alleged the rate increase was retaliation for the city
moving its waste disposal business to the City of Gering. The rate increase came after a contract expired in June 2007.
 Economic duress v. physical duress: original doctrine required physical duress, but the doctrine has evolved to include
economic duress.
o Physical Duress is often ongoing coercion (i.e. Godfather example—the guy could bring suit against the mob
for physical duress for holding a gun to his head and making him sign the contract, but as a practical matter, he
wouldn’t bring suit because he’d be dead).
 Focus: lack of other opportunities  not that there weren’t ANY alternatives, but there were no REASONABLE
alternatives.
o The City looked for other options but there were no reasonable alternatives  thus, they had no other choice.
 Germantown: standard wasn’t that there wasn’t any alternative, that there wasn’t a reasonable one—court could argue in
favor of duress claim that the alternative of not signing the document, even if she knew the cost of it, was not a reasonable
one (sending her husband to jail).
 Supervening difficulties exception: notion that negotiation for a higher price is appropriate in certain circumstances 
where events following the formation of contract create a difficulty not anticipated by the parties at the time of contracting,
a fairly bargained modification to the contract to take account of that unforeseen difficulty is valid.
 Defendant Argument: Waste company tried to frame their justification in terms of supervening difficulties to make their
case that the price increase was appropriate.
 Contrast to Quigley v. KPMG Peat Marwick, LLP (2000) (a losing economic duress case)—employer was at-will
o To what extent did the party (seeking the higher price) contribute to the economic vulnerability of the other side?
 The other side believes that they’ve entered into an agreement with you, and then you threaten to breach
the contract – you’ve contributed to the economic duress.
 Putting the other side on notice: city made the payments voluntarily and under protest—they alerted the other side that
they didn’t want to pay  Restatement also raises this notion of “Paying Under Protest”; the concern is that a party is
agreeing to terms (granted, under duress) that they don’t plan on following through with (because they’re going to wait
until performance has been rendered to bring their duress case).
 Damages: Restitution award for the full amount of the overpayments under the implied contract. Because the City
involuntarily paid the increased rates, the rate modification was invalid, and the company was unjustly enriched by the
overpayments. Thus, the City was entitled to full restitution.
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Austin Instrument, Inc. v. Loral Corp (NY 1971) – WINNING ECONOMIC DURESS CASE
 Rule of Law: A contract is voidable on the ground of economic duress when it is established that the party making the claim
was forced to agree to it by means of a wrongful threat precluding the exercise of his free will.
 Outcome: The court refused to uphold a coerced modification because of economic duress.
o Austin’s refusal to deliver goods under its existing contract with Loral unless Loral paid substantial retroactive and
prospective price increases constitutes economic duress that is sufficient to void the new agreement by Loral to pay
the price increases.
o Loral was deprived of its free will by Austin as Austin’s breach threatened Loral’s ability to fulfill its contract with
the United States government.
o The government comprised a majority of Loral’s business, and thus Loral had a significant interest in maintaining
positive rapport with the government by not breaching its contract.
o Loral demonstrated that it could not obtain the goods from another source of supply by calling ten manufacturers that
could not deliver the goods in time. Additionally, Loral could not accept the normal contractual remedy of accepting
Austin’s breach and later suing for damages as doing so would impermissibly cause it to breach its own Navy
contract.
o Thus, Loral agreed to the price increases based on economic duress from Austin, and such duress is sufficient to void
Loral’s new agreement to pay the price increases.
 Focus: Were there reasonable alternatives?
o NO—court was satisfied from the factual record that there was no reasonable alternative.
 However: you can’t ordinarily depend on this—ordinarily if a company refused to uphold their end of the deal for the
quoted price, you find someone else and then sue the first company for breach of contract for the difference. This is not
typical in that Loral agreed to something, and then tried to get out of it after performance.
 Big Picture: There was not a reasonable alternative
 Compare to:
o Quigley v. KPMG Peat Marwick, LLP (2000): The worker was an at-all employee, so the company had the right
to fire him at any time—had the worker not been an at-all employee, the threat to dismiss him if he didn’t agree,
would have been a valid duress claim. Unlike in Scottsbluff, Quigley did not have an existing contract (Scottsbluff
did).
o Alaska Packers: preexisting duty doctrine—this is also duress (the cannery didn’t have a choice but to comply
with the fisherman’s demands because there was no reasonable alternative—it was too late in the fishing season
to get new fishermen).
2.
Supervening Difficulties as a Basis for Upholding a Modification Without Consideration
 Exception where courts have recognized the validity of a modification without new consideration: the supervening difficulties
exception: where events following the formation of contract create a difficulty not anticipated by the parties at the time of
contracting, a fairly bargained modification to the contract to take account of that unforeseen difficulty is valid.
 Requirements for application of the supervening difficulties exception:
1) A substantial and burdensome unanticipated difficulty in the performance of one of the parties must arise after the
contract had been entered into.
2) The risk of that difficulty must not have been expressly or impliedly assumed in the contract by the party who suffers
the burden and seeks the modification.
3) The difficulty must not have resulted from that party’s error, oversight, or misjudgment.
4) The other party’s agreement to the modification must be genuine and the modification must be fair and equitable in
light of the unanticipated difficulty.
5) The party seeking the modification must have dealt honestly and fairly in requesting it and must not be trying to take
advantage of the necessities of the other in coercing the modification.
3.
Contract Modifications Under UCC Article 2
 UCC l-103(b): the common law principles of the doctrines of duress, fraud, undue influence and capacity apply to sales of
goods.
 UCC 2-209(1): Contract modification—departs from the common law by stating “an agreement modifying a contract within
this Article needs no consideration to be binding.”
o Comment 1 to UCC 2-209: states that the purpose of this is to get rid of the awkward effects of the preexisting duty
rule by giving effect to “all necessary and desirable modifications . . . without regard to the technicalities which at
present hamper such adjustments.”
o Comment 2 to UCC 2-209: expresses the principle that modifications must satisfy the UCC’s general test of good
faith.
 UCC 1-201(b)(20): defines good faith to mean “honesty in fact and the observance of reasonable commercial standards of fair
dealing.”
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UNDUE INFLUENCE
C. UNDUE INFLUENCE
 Involves relationships of trust.
 Undue influence: deals with situations in which neither fraud nor duress could be shown but where one of the parties had a
strong influence over the other and abused that influence or dominance to induce the other party to enter into a disadvantageous
contractual relationship. The focus of the doctrine is on self-dealing by a person who has breached some duty of trust to the
party with whom he has contracted.
Example: a familial or fiduciary relationship of trust (i.e. family members, clergymen, physicians, etc.) in which one party
takes advantage of that trust.
 RST §177(2): a person whose manifestation of assent is induced by undue influence may avoid the contract.
 RST §177(1): defines undue influence as “ . . . unfair persuasion of a party who is under the domination of the person
exercising the persuasion or who by virtue of the relation between them is justified in assuming that the person will not act in
a manner inconsistent with his welfare.”
 RST §177(3): deals with undue influence by one who is not a party to the contract.
o The provision is to the same effect as §164(2) relating to fraud and §175(2) relating to duress: The victim can avoid a
contract induced by the undue influence of a nonparty unless the other party to the contract in good faith, and without
reason to know of the undue influence, gives value or relies materially on the transaction.
 Because the doctrine of unconscionability covers many situations that do not fit into the elements of misrepresentation or
duress, there has not been an incentive to try to expand the doctrine of undue influence beyond its traditional boundaries.
Odorizzi v. Bloomfield School District (Cal. 1966) – WINNING UNDUE INFLUENCE CASE
 The casebook puts Odorizzi under “Duress” section but the court describes the doctrine of Undue Influence in the case:
o The first condition of undue influence is met if a party’s judgment is so impaired that his mental state prevents him
from freely contracting.
o The second condition requires excessive pressure or over-persuasion, indicated by several of the following
characteristics:
 the people representing the dominant party outnumber the weaker party;
(Conditions and
 the time and/or location of the discussion is unusual or inappropriate;
considerations
 the dominant party claims the agreement must be reached immediately, that there is no time to consult an
stated by court in
attorney or third party, that delay will have serious negative consequences; and/or
Odorizzi)
 the weaker party does in fact fail to seek the advice of counsel or a third party.
UNCONSCIONABILITY
D. UNCONSCIONABILITY
1.
Derivation and Meaning of Unconscionability
 Unconscionable: the transaction is so unfair that it would offend the conscience of the court to enforce it.
o Something is unconscionable if it is not in accordance with what is right.
o It offends the conscience because it is unreasonably excessive, unscrupulous, or egregious.
o It is a strong expression of condemnation, connoting a moral judgment and a sense of outrage.
 Because unconscionability is an equitable doctrine, it was initially confined to cases in which the relief sought was equitable;
however, after adoption into the UCC Article 2 and the Restatement as a general policing doctrine, unconscionability doctrine
is now firmly established as a general doctrine, applicable whether the suit is equitable or legal in nature.
 UCC 2-302. UNCONSCIONABLE CONTRACT OR CLAUSE
o 2-302(1): If a contract is found to be unconscionable, the court may:
 Refuse to enforce the contract, or
 Enforce the remainder of the contract without the unconscionable clause, or
 So limit the application of any unconscionable clause as to avoid any unconscionable result.
 RESTATEMENT, SECOND §208. UNCONSCIONABLE CONTRACT OR TERM
o If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the
contract or may enforce the remainder of the contract without the unconscionable term or may so limit the application
of any unconscionable term as to avoid any unconscionable result.
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2.
The Remedy Where a Contract or Terms is Found to be Unconscionable
 Both UCC 2-302 and Restatement §208 both show the remedial flexibility of unconscionability: They both provide that the
court may:
o Refuse to enforce the contract  the remedy of avoidance; or
o Enforce the remainder of the contract without the unconscionable term  sever the unconscionable aspect of the
contract; or
o Limit the application of the unconscionable term so as to avoid the unconscionable result  rewrite the contract to
get rid of its unconscionable effect).
 By falling short of complete avoidance, the latter two remedies give the court the option of adjusting the contract terms rather
than making the all-or-nothing decision to fully enforce or completely invalidate the contract.
 However, these remedies are used cautiously because they could result in the parties having an arrangement that deviates
significantly from what they actually agreed.
3.
The Elements of Unconscionability
 The provisions of UCC 2-302 and RST §208 are very similar—both of them merely recognize the power of the court to refuse
enforcement of an unconscionable contract in whole or in part.
 Unconscionability is for the judge, not the jury—there are two reasons why:
o Traditional: Unconscionability derives from equity, and courts of equity do not have juries.
o Practical: Because unconscionability is such a fluid doctrine, the determination of unconscionability is best left to the
judge, who has the training to apply it more dispassionately.
 Neither the UCC 2-302 and RST §208 says what standards must be applied to decide if a contract is unconscionable—
unconscionability by its nature defies precise definition (it relies on a discretionary judgment by the court, to be exercised in
light of all the circumstances of the case.
a.
Procedural and Substantive Unconscionability.
 Two components of unconscionability:
o Procedural: (“bargaining naughtiness”)
 Relates to the way in which the contract was formed.
 Focuses on unfair bargaining tactics, disparity of power leading to imposition, and other factors that
made it possible for one party to take unfair advantage of the other.
o Substantive:
 Relates to the terms of the resulting contract.
 Focuses on whether, as a result of behaving in a procedurally unconscionable way, one of the parties
was able to impose an unfair contract or term on the other.
 For a finding of unconscionability, many courts require that both the procedural and substantive elements be satisfied
at least to some degree.
b.
Contacts of Adhesion.
 Contracts of adhesion: any contract in which one of the parties has enough bargaining power to be able to dictate
the terms of the contract to the other on a take-it-or-leave-it basis, and the weaker party has no choice but to “adhere”
to the terms; a standard-form agreement that is prepared by one party and not negotiable as a practical matter by the
other, who must take it or leave it as offered.
o Germantown Manufacturing—the court calls the confession of judgment that Mrs. Rawlinson signed
“adhesive.” In finding allegations of fraud and duress sufficient, the court reasoned that Mrs. Rawlinson
could not be held to have assented to the confession because the clause was adhesive—she had no choice but
to sign it, because the performance under the contract was important to her economic or physical well-being,
and she had no power to resist the terms dictated by the party with superior bargaining power.
 Standard-form contracting is not an evil in itself; in fact, it is indispensable for modern day contracting; however, a
powerful contractor who uses standard forms may have the ability and desire to impose a one-sided and unfair
transaction on the parties with whom it contracts.
 Adhesion can be used to signify a degree of oppression (unconscionability) or to simply describe a contract
consisting of nonnegotiable standard terms  just because a contract is offered on nonnegotiable terms, does not
mean that it is adhesive (and therefore unconscionable). Adhesion becomes unconscionable and is actionable if the
abuse of bargaining dominance imposes unfair terms.
 To determine whether a contract is unconscionable, one must:
o Evaluate the facts of the transaction
o Analyze the bargaining conduct
o Analyze the contract’s substantive terms
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

Forum selection clauses: there is nothing inherently unconscionable in a provision that confines litigation to a
particular jurisdiction or that requires disputes to be settled by arbitration. Forum selections clauses are generally
upheld if reasonable and fairly bargained.
Federal Arbitration Act (FAA) §2: makes clear that even though arbitration agreements are favored, an agreement to
arbitrate must qualify as a contract—thus, it can be challenged and avoided, like any other contract, on the basis that
it is unconscionable.
Feldman v. Google, Inc. (Pa. 2007) – LOSING UNCONSCIONABILITY CASE
 (Clickwrap case from Chapter 3)
 Claim is not for duress, but one of unconscionability
 Focus: lack of alternatives  this is the link to the duress cases
 Big Picture: overlap with duress (lack of alternatives) but distinguished elements as well (the court may still enforce the
contract if it is substantively conscionable).
 Reasoning: The court breaks down the factors considered for finding procedural and substantive unconscionability (in
CA, a contract found to be procedurally unconscionable may still be enforceable if its substantive terms are reasonable)
o Factors court considers for procedural unconscionability:
 The buyer’s sophistication
 The use of high-pressure tactics to induce acceptance
 The availability of alternate sources of supply
 Plaintiff could’ve taken his business elsewhere—he DID HAVE alternatives.
o Factors court considers for substantive unconscionability:
 Lack of mutuality in contract formation
 Practical side effects of the challenged provision
o On procedural unconscionability: “Because Plaintiff was a sophisticated purchaser, was not in any way
pressured to agree to the AdWords Agreement, was capable of understanding the Agreement’s terms, consented
to them, and could have rejected the Agreement with impunity, this court finds that the AdWords Agreement was
not procedurally unconscionable.”
o On substantive unconscionability: “Even if the AdWords Agreement were procedurally unconscionable, it is
not substantively unconscionable…as the AdWords Agreement provided reasonable notice of its terms, had
mutual assent, and was in other respects a valid express contract, the court rejects this argument.”
 Outcome: “The court is not persuaded that the forum selection clause, or any other provision cited by Plaintiff, is
unreasonable or shocks the conscience.”
Lhotka v. Geographic Expeditions, Inc. (Cal. 2010) – WINNING UNCONSCIONABILITY CASE
 Rule of Law: The defense of unconscionability to a contract applies if a party does not have a meaningful choice and the terms
of the contract are unreasonably favorable to the other party.
 Outcome: the court took away the entire arbitration agreement (and other aspects of cost bearing, damage limitations, etc.) 
the totality of the arbitration agreement was kicked out.
o They justify this “draconian” kicking out of the entire clause because they found its provisions both procedurally and
substantively unconscionable:
 Substantive: the point was to create an inferior litigation method that was completely one-sided—litany of
overly one-sided provisions. By restricting liability to the cost of the trip, no purchaser who suffered a
serious injury could obtain close to full compensation for the injury. GeoEx also required Lhotka to travel
far from home to pursue mediation or arbitration and to pay for half of the mediator’s costs and attorney’s
fees  these terms were not mutual, because GeoEx was not limited in its recovery of damages and was
not liable for any attorneys’ fees.
 Procedural: GeoEx required that the agreement be signed without modification and told the Lhotka’s that the
contract was like any other they would encounter with other travel companies.
Zuver v. Airtouch Communications, Inc. (Wash. 2004) – WINNING (IN PART) UNCONSCIONABILITY CASE
 Rule of Law: Unconscionability to a contract applies if a term of the contract is overly harsh or one-sided.
 Outcome: Court struck (“severed”) certain provisions of the clause, not the whole thing.
 Contrast to Lhotka: the Zuver court did not take away the entire arbitration agreement (which is what happened in Lhotka) but
struck only certain provisions. Zuver differs from Lhotka in that the parties had time and opportunity to negotiate.
 Facts: Therese Zuver (P) was an employee of Airtouch Communications, Inc. (D). As a condition of employment, Airtouch
required Zuver to enter into several agreements, including an agreement to arbitrate any claims related to her employment.
Zuver was presented the agreement on April 10, 1997 and accepted the agreement on April 25, 1997. Zuver had a medical
condition that eventually caused her to take medical leave. After 9 months on medical leave, Airtouch terminated her
employment. Zuver sued Airtouch for disability discrimination. The arbitration agreement is an adhesion contract, because
Zuver was forced to sign the agreement as a condition of employment.
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



4.
Parts of the Arbitration Clause Upheld: Zuver was given several days to review the contract, and the terms of the arbitration
agreement were presented plainly in a separate attachment. Therefore, Zuver had a meaningful choice in signing the arbitration
agreement. Also, the losing party having to pay attorney’s fee is not unreasonable.
Parts of the Arbitration Clause Severed:
o The confidentiality clause: is substantively unconscionable, because the confidentiality provision only benefits
Airtouch while preventing employees from discovering patterns of discrimination.
o The limitation of Airtouch’s liability: is likewise substantively unconscionable, because this limitation heavily favors
Airtouch.
Under the severability clause, these two provisions are struck from the agreement, and the remaining provisions will be
enforced.
Severability clauses: Courts will sever even absent a “severability clause” in the contract—because the overreaching parties
are the ones putting it in there when they realize how many one-sided clauses are in the contract so that the entire thing doesn’t
get thrown out. Trial court has discretion whether to throw out entirely or strike certain provisions.
NOTE: Confidentiality clauses are usually upheld in other contexts, but the court here said it was unconscionable in the context
of individual employment arbitration.
The Range of Unconscionability Doctrine
 Although it may be true that unconscionability doctrine is commonly associated with consumer transactions, the doctrine
goes well beyond that range:
o Lhotka and Brower involve consumer transactions; Germantown Manufacturing, Feldman, and Zuver do not.
 Claims of unconscionability are most commonly asserted against the larger or more dominant party by the smaller or more
subservient party, such as a consumer, an employee, or some other individual who had no role in drafting the standard
contract. This is to be expected because the problems of adhesion and abuse of bargaining power are most likely to be
found where one party has the market power and legal sophistication to insist on a contract on its own self-serving
terms.
 The fact that the party claiming unconscionability has the sophistication and resources to resist the imposition of unfair terms,
or has had the opportunity to negotiate the terms, makes it less likely that a court would find unconscionability.
ILLEGALITY
Illegality
 Illegal contract: a contract made in violation of a law, which is void and does not bind the contracting parties to its terms.
 “The public interest is the most important consideration, and it encompasses many concerns: the reluctance of the court to aid
a lawbreaker; the public policy of upholding the law that has been violated; the creation of disincentive to future violations…”
Danzig v. Danzig
 Rule of Law: Generally, a contract for something illegal will not be enforced; courts don’t want to lend support to illegal
contracts.
 Facts: Steven Danzig (P) was approached by an attorney, Jeffrey Danzig (D), to solicit legal clients in exchange for 1/3 of the
client’s fee. These agreements (paying referral fees) were a violation of the rules of professional conduct for attorneys in
Washington. In March 1993, Steven solicited a client for Jeffery but was not paid. One-third of the fee for this client would
have been approximately $89,000. Steven sued Jeffrey for breach of contract. The trial court dismissed the lawsuit because the
contract was illegal.
 BUT Court of Appeals says trial court was too quick to throw case out; remanded for further consideration.
 Why did court remand?
o A bit more subtle (to brother who is not lawyer) that it’s illegal to pay a referral fee; but a lawyer should be well aware
of that—notion that the Defendant is more morally culpable than the plaintiff
o Transaction is already completed; doesn’t require enforcement of the actual contract  might not rise to serious moral
turpitude
o Unjust enrichment; applying rule defendant would be unjustly enriched at expense of plaintiff
o The Washington statute is focused more on wrongfulness on the lawyer’s side, not the person making the referrals.
 What is the public policy concern here?  concern that clients might not get best representation (we would like to think people
recommend lawyers because they are best representation, but because they will pay them for referral).
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VIOLATION OF PUBLIC POLICY
A. CONTRACTS IN VIOLATION OF PUBLIC POLICY
Woodman v. Kera LLC (Mich. 2010)
 *This case set out the fundamental and longstanding approach to minors’ contracts but is also used to show the public policy
considerations.
 Rule of Law: a minor cannot be bound in contract by a parent or guardian.
 Facts: Trent Woodman (P) was a 5-year-old who had a birthday party at Bounce Party, an indoor play area operated by Kera
LLC (D). Before the birthday party, Trent’s father signed a release that allegedly released Kera from any liability related to
personal injury (thereby agreeing to a pre-injury waiver on behalf of a minor). Trent broke his leg during the birthday party.
 Question: whether court should change the longstanding CL rule that a minor cannot be bound in a contract by a
parent/guardian.
 Public policy considerations:
o If parents are entitled to waive claims of their children to participate in recreational activities, this might result in a
reduction of costs for businesses that provide recreational activities.
o However, this might also result in an increase in injuries to children due to the decreased motivation of these businesses
to ensure safe facilities.
o Also, the public might have to share in the cost of medical expenses for children who are injured when their parents
are not able to pay.
o The common-law rule that parents cannot bind their children in contract thus stands.
 Outcome: Court decides to keep long-standing common law rule, just leave matters as they are. Thus, the waiver is invalid
and unenforceable as to all of Woodman’s claims.
o Court felt that if there’s going to be changes to this rule, legislatures should study it more closely and they can take
broader perspective.
o As general rule, legislature is in better position to make rules on public policy
Noncompete Provisions
 Non-compete provision gets a lot of play in area of public policy concern.
 Courts don’t freely throw out contract/provisions because it would overthrow whole notion of contract law  “The
competing public policies that are raised by noncompetition provisions are the policy of freedom of contract, which favors
upholding a validly agreed noncompetition clause, and the policy in favor of protecting and sustaining competition in the
marketplace.”
Syncom Industries, Inc. v. Wood (NH 2007)
 Rule of Law: Contract provisions that restrain competition are valid and enforceable only if the restraint is reasonable.
 Facts: Defendants Wood and Hogan entered into employment agreement with Syncom that contained a noncompete
provision—not to solicit business from any of Syncom’s customers in any territory for 3 years after leaving Syncom and not
to work for/be associated with any company or person that might solicit business from any of Syncom’s customers.Wood and
Hogan eventually left Syncom and founded a new company directly competing with Syncom. Trial court upheld the
noncompete agreement.
 Outcome: NH Supreme Court was not a fan of defendants’ behavior, but they don’t uphold the noncompete.
o Why?  They say the provision was unreasonable, broader than necessary to protect Syncom’s information.
 Covenants barred solicitation of business from any of company’s customers located in any territory serviced
by company while they were in employment of the company.
o Also, Wood came into job with contacts; only worked at company for short amount of time; clause blocks him from
accessing people with whom he had prior contact.
o Length of time of noncompete was long – 3 years
 Court strikes it down; says it went too far – length and restrictions went too far  struck clause but said that’s not necessarily
end of the matter. Lower court now has ability to reform covenant, scale it back, make it more appropriate, but Supreme court
said they should only do that if Syncom was acting in good faith.
 Two schools of thought on this:
o Some say that the parties did agree to this, court is kicking aside something that parties agreed to.
o Some say if they went too far, set entire agreement aside.
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LACK OF CONTRACTUAL CAPACITY
INCAPACITY BASED ON MINORITY
B. INCAPACITY BASED ON MINORITY
1. General Principles
 General Rule: a minor’s contract is avoidable at the minor’s will.
o Avoidable, not void—a minor who wishes to keep the contract may simply refrain from disaffirming it.
o The law uses a bright-line objective test to determine the contractual capacity of minors (<>18).
o One contracts with minors at their own risk.
o Tension in the law: protection of the minor vs. one-sidedness of giving the minor so much power
 Public Policy reason of minority doctrine: the protection of minors who are deemed to be unable to act with maturity and
rationality in their own interests in entering the contract, making them vulnerable to exploitation.
o Exploitation does not actually have to be shown for avoidance—the policy of protecting the minor usually
outweighs concern about protecting the other party’s reliance interest, even if that party did not act unfairly or
exploitatively.
o Thus, a minor can avoid her contract simply by showing that she was a minor at the time she made it. She does
not need to show that the other party was guilty of improper bargaining or deliberate advantage-taking.
2. Disaffirmance and Ratification
 In most cases a minor’s lack of contractual capacity makes the contract voidable—the minor may choose to avoid (or
disaffirm) the contract on grounds of incapacity or to keep it in force.
 A minor may disaffirm the contract, expressly or by conduct, at any time before reaching majority or within a reasonable
time after reaching majority.
 Once the contract is disaffirmed, it comes to an end, and the minor cannot change his mind and seek to enforce it.
*Link between the cases: the party on the other side is arguing for an exception to the general rule that the minor has the contractual
ability to avoid the contract.
Foss v. Circuit City Stores, Inc. (ME 2007) – WINNING INCAPACITY BASED ON MINORITY CASE
 Rule of Law: A contract made by a minor is unenforceable unless the contract is ratified in writing after the minor turns 18
years old  known as the “Infancy Doctrine” (minor’s absolute right to disaffirm).
 What arguments does circuit city make that there should be an exception?
o Foss ratified the contract by submitting time cards
o Foss ratified the contract by continuing to work for Circuit City after turning 18—he continued to benefit, and he
never disavowed the terms.
o Foss ratified the contract by commencing the lawsuit
 Court says that because of Maine’s law specifying that the contract must be ratified in writing, Circuit Stores is SOL. The court
indicates that this statutory requirement is stricter than the common law rule, under which a minor can ratify a contract by
implication if he retains or continues to receive benefits under the contract after reaching majority or even if he simply fails to
disaffirm the contract within a reasonable time after attaining majority.
 Circuit City also says that the contract is valid because they obtained parental consent—BUT neither parent actually signed.
 Woodman: had Foss obtained parental consent, his contract would have been valid.
o This would be a stronger case than Woodman to enforce parental consent (in Woodman, the infant was a 5 year old;
here, a 17 year old).
o Is it the particular circumstances here, or does the court here generally disagree with Woodman?  look at what they
did do and what they could’ve done to get the mother’s signature—did they take any reasonable measures—what else
could they have done?
 Request an actual written copy prior to hiring Foss
 Presenting the contract again when he turns 18  like Quigley: the at-will employment case (at 18 saying “if
you want to keep working, you have sign again”).
 Topheavy: link between the cases is misrepresentation (in Topheavy, she gave a false ID, in Foss he entered his mother’s name
as consent to the online agreement).
 Misrepresentation: Court says this does not act as an estoppel to the plaintiff’s recovery—“This immature and false
representation is exactly why the law acts to protect the infant.”
I.B. v. Facebook, Inc. (Cal. 2012) – LOSING INCAPACITY BASED ON MINORITY CASE
 *Disaffirmance of minors’ Internet transactions.
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3.
Facts: Kid makes purchase on Facebook (with his mother’s consent) but then unknowingly makes more—mother tried to get
the money back and Facebook would not comply.
This is not a misrepresentation argument, but rather Facebook argues that the kid already reaped all the benefits from the
transaction, and it cannot be taken away from him, so he cannot disavow the contract.
Big Picture: The concern is the one-sidedness of the minor getting all the benefit at the expense of Facebook.
California law: “a minor may disaffirm all obligations under a contract, even for services previously rendered to the other
party”
E.K.D. case: Facebook uses this case for its argument; however, in EKD, the minor plaintiff, continued to use Facebook—
therefore continuing to get the benefits on an ongoing basis—and disavow the contract. Here, however, even though the minor
received some benefits, the transactions were not ongoing.
Does the benefit received matter?
o Contract for “necessaries”: an exception to the general rule pertains to items purchased that are not necessary 
original public policy concern about adults taking advantage of children; but for necessaries, the courts reverse.
 Seen in Foss (court mentions “except for necessaries”)  in Facebook, it’s the exact opposite—it was not
necessary at all.
Note: I.B. v. Facebook states the principle that a minor cannot disaffirm only part of a contract—she cannot seek to
avoid the parts of the contract that she does not like while keeping in force its beneficial aspects.
Misrepresentation
 Some courts adopt the Foss approach, where the minor is not estopped from disclaiming the contract despite fraudulent
misrepresentation. The Foss court stated that the “immature and false representation is exactly why the law acts to protect
the infant.”
 Other courts are more willing than the Foss court to entertain a claim for damages arising from the misrepresentation or
even to enforce the contract by estopping the minor from asserting the right to disaffirm. However, even where a court is
willing to hold the minor accountable for fraudulent misrepresentation, the major party must establish the elements of
fraud.
Topheavy Studios, Inc. v. Doe (TX 2005) – WINNING INCAPACITY BASED ON MINORITY CASE
 Topheavy’s argument was that they thought she was 18—but it’s on you to ascertain or attempt to ascertain the age of the
minor.
 Misrepresentation: plaintiff present fake ID
 Issue: to what extent is the minor’s right to disavow affected by misrepresentation?
 Court says that a misrepresentation does not excuse Topheavy—because they did not do enough to confirm that the plaintiff
was of age.
 Court takes a more nuanced approach: and says that misrepresentation CAN negate the ability to get out of a contract—
but here it doesn’t  the court focuses on the justifiable reliance (one of the elements of misrepresentation is justifiable
reliance).
o Topheavy didn’t question or verify the information (i.e. it was obviously not a very good fake).
 Court in Foss makes a stronger and more affirmative decision that the misrepresentation was not going to sway the court—
the difference is that Circuit City knew the kid’s age (here, the misrepresentation was about the age itself).
4.
5.
Exceptions to a Minor’s Lack of Capacity, Especially Contracts for Necessaries
 Contract for necessaries: the most important common law exception to the Minor Doctrine.
o “necessaries” covers goods or services essential for the minor’s health and sustenance or reasonably necessary
for the preservation or enjoyment of life, such as food, medical needs, clothes, or shelter.
o “Necessaries” is a broader term than “necessities,” and it can go beyond goods or services essential to sustain life
to include items that are not luxuries but are useful and appropriate, given the minor’s reasonable standard of
living.
o Courts interpret what constitutes a “necessary” differently.
o A necessary = minor may be bound by his contract or at least liable for the reasonable value of what he received
under the contract.
 Emancipation of a minor:
o A minor becomes emancipated when his parents’ duty of support terminates.
o Emancipation in itself does not create contractual capacity in the minor for all purposes. Rather, it just makes it
more likely that a contract entered into by a minor for appropriate goods or services will qualify as a contract for
necessaries.
Restitution on Disaffirmance
 Restitution for a minor who has disaffirmed a contract:
o The major party is required to restore to the minor any benefit he has received from the contract.
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The minor is obliged to restore to the major party any property that she received under the contract and still
possesses.
o Where the minor is no longer in possession of the property/benefit, the traditional approach is to confine the
minor’s restitutionary obligation to the return of whatever contractual benefit she still retains at the time of
disaffirmance.
 Rationale: for confining the minor’s liability to the return of what she still possesses is the policy of
protecting a minor from improvident contracts and of discouraging adults from contracting with minors.
o The minor is not liable to pay the major party for services that the major has rendered that are, by their nature,
intangible and incapable of being returned.
The traditional approach places the strongest emphasis on protecting the minor and allocates all the risk of contracting
with a minor on the adult party  It does not hold the minor accountable for his conduct.
This is appropriate where the adult has taken advantage of the minor, but it is harder to justify where the contract was on
fair terms and the minor received an economic benefit.
INCAPACITY BASED ON MENTAL ILLNESS
C. INCAPACITY BASED ON MENTAL ILLNESS OR DEFECT
 Incapacity doctrine: A requirement in contract law that at the time of contract formation, the parties to the contract must be
capable of understanding in a reasonable manner the nature and effect of the act in which they are engaged. A contract made
by a mentally incompetent person is voidable.
 General Rule: An adult is presumed to have contractual capacity.
o This presumption is rebuttable—a mentally incompetent party may overturn the presumption by evidence that
establishes that she lacked contractual capacity at the time of entering the transaction.
 Goal: The protection of a mentally incompetent person from exploitation is a principal goal of incapacity doctrine.
 Burden of Proof: The burden of proving lack of capacity is on the person alleging it. Because a psychiatrically recognized
condition is required, expert testimony in the form of psychiatric diagnosis is usually necessary to establish the basis for
avoidance.
 The impairment must be shown to have existed at the time of contracting.
 Most courts treat incapacity as rendering the contract voidable by the incompetent party, not void, so if the incompetent party
chooses not to avoid the contract, it is binding, and her incapacity cannot be raised as a defense by the other party.
 A mentally incompetent person does not necessarily need to show that the contract is unfair or exploitive. However, unlike
with minors, the other party’s legitimate reliance is weighed against the need to protect the mentally incompetent party  in
deciding whether a contract should be avoided on grounds of mental incapacity, courts usually consider not only the
degree and seriousness of the mental incompetence but also whether the vulnerability of the incompetent party attracted
exploitation by the other.
 “Cognitive test”: The older (and stricter) test for mental incompetence; at the time of contracting, the party must have had
such a severe mental illness that she was unable to understand the nature and consequences of the transaction.
 “Motivational test” (“volitional test”): the modern test for mental incompetence used by many courts today; this test is
broadened from the older one to include cases in which the party may have understood the transaction, but the mental illness
affected her ability to act rationally in relation the transaction.
 Restatement (Second) §15. Mental Illness or Defect
o Adopts the more modern view and recognizes both the cognitive and motivational tests.
o However, it still distinguishes cognitive disorders from motivational ones  the RST §15 indicates that the other
party’s reliance interest weighs less heavily where the incompetent party suffers from a cognitive disorder, not only
because of the more severe impact of the illness on capacity, but also because illness on this scale is presumed to be
much more obvious.
 *At least in theory, a person who contracts with a minor is placed on inquiry by the minor’s youthful appearance, but
a person who contracts with an adult is not generally expected to wonder if the party is able to make contracts.
Therefore, the other party’s knowledge or reason to know of the mental defect (gained either by knowledge of the
incompetent’s background or by observation during the transaction) is relevant to the incompetent’s right to avoid the
contract, or to the remedy available if avoidance is allowed  how does this apply to modern day transactions and
contracts, many of which are online (not done face to face). Since the other party would not be able to tell if someone
was incompetent for an online transaction, does the incompetent have no recourse for getting out of the contract?
 Mental incompetence may take many forms deriving from illness, injury, old age, or substance abuse.
 Alcohol or drugs may well induce contractual incompetence. However, courts usually require a very debilitating degree of
intoxication as a basis of avoidance (Lucy v. Zehmer) and are unlikely to give relief unless it is clear that the other party
exploited the alcohol or drug-induced incapacity.
o NOTE: Courts reason that the incapacitated party had some control over the decision to drink or take drugs.
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It is important to distinguish incompetence generated by these mental impairments from incompetence in business or personal
affairs. Mental incompetence cannot be used as a basis for avoidance merely because a person manages her affairs poorly or
has acted foolishly, recklessly, or with bad judgment. Her conduct must be attributable to a psychiatrically recognized condition.
In Re Seminole Walls & Ceilings Corp. (Fl. 2007) – LOSING INCAPACITY BASED ON MENTAL INCOMPETENCE CASE
 Rule of Law: A contract may be set aside for reason of incompetency if a party lacked the mental capacity to enter into a
contract at the time of the transaction.
 Facts: Seminole Walls (D) filed for bankruptcy. PITA Corporation was a subsidiary of Seminole that had purchased a collection
of photographs from Joseph Jasgur (P). During the bankruptcy proceedings, Jasgur disputed that the photographs were owned
by PITA. Seminole’s bankruptcy trustee entered into a settlement agreement with Jasgur in January 2005 to settle the dispute.
The agreement was amended by Jasgur and the trustee in March 2005. Jasgur was over 85 years old when the agreement was
signed, had a mini-stroke around the time of signing the agreement, and was subsequently diagnosed with serious medical
conditions. Jasgur was also declared mentally incompetent on August 10, 2005. However, Jasgur was represented by competent
counsel who negotiated the settlement agreement. Jasgur’s acquaintance, Tom Endre, assisted Jasgur during the period when
the agreements were signed. Endre testified that Jasgur understood he was signing a legal compromise.
 Holding: Although a contract may be set aside if a party lacked the mental capacity to enter into a contract at the time of the
transaction, even if a party suffered from some weakness of mind, the contract will be valid as long as the party had sufficient
intelligence to understand the transaction and act upon his own free will. The party must have been incompetent at the time of
the transaction in order to avoid the contract, and subsequent incapacity does not affect the contract. In this case, Jasgur has
shown some evidence of physical impairment at the time of the transactions. However, this evidence does not support a
conclusion that Jasgur was mentally incompetent at the time of the transaction. Jasgur was represented by counsel who believed
him to be competent. Endre testified that Jasgur knew he was signing a legal compromise, and the individuals who witnessed
Jasgur sign the agreement and amendment did not notice any issues that suggested he was incompetent. Therefore, Jasgur is
not entitled to avoid the settlement agreement based on mental incompetence.
 The court applied the more TRADITIONAL COGNITIVE TEST—solely focused on his ability to comprehend at the
time of the contract, and not his ability to understand the consequences  contrast to Farnum where the court applies
the more lenient volitional test.
EXAM TIP: Different jurisdictions apply the different tests for incapacity—on exam, explain and work through both (Seminole
Walls as example of traditional Cognitive Test; Farnum as example of more lenient Volitional Test)
Farnum v. Silvano (Mass. 1989) – WINNING INCAPACITY BASED ON MENTAL INCOMPETENCE CASE
 Rule of Law: A contract for the sale of real estate is voidable if entered into by a person who:
o (1) is unable to understand in a reasonable manner the nature and consequences of the transaction; or
o (2) is unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of the
person’s mental disease or defect.
 Key Facts:
o She’s a 90-year-old woman with dementia selling her house for half its value to a 24-year-old who mows her lawn—
the age difference and relationship brings a strong sense of undue influence/expoitation.
 Voaks v. Dance [something]: Young guy telling old lady what a good dancer she is and induced her to spend
$31,000 in dance lessons—took advantage of the relationship they had .
o Evidence of mental incapacity stemming back at least 3 years (i.e. dementia, erratic behavior, frequent confusion,
asking about “noise upstairs” when there was no second story to the house, why her long-deceased siblings no longer
called her, etc.).
o Lack of independent lawyer (at the sale, she was “represented”) by an attorney from the bank that was paid for by
Silvano (the buyer).
 Holding: In M.A., an individual’s competence to enter into a contract for the sale of real estate involves something more than
a mere transient surge of lucidity. It involves an ability to truly understand and comprehend the nature and quality of the
transaction, together with an understanding of the transaction’s significance and consequences. Here, while the trial court
could have found that Farnum was lucid enough to know she was selling her home to Silvano for approximately half of the
home’s value, the court failed to consider whether Farnum lacked the ability to understand the consequences and reasonableness
of doing so. Moreover, Silvano knew, or had reason to know of, Farnum’s medical condition at the time of the sale.
 Notes: Although it is not clear how much Silvano knew about Farnum’s mental condition, the sense of exploitation is strong.
He was warned off the transaction by Farnum’s nephew, and it is easy to infer that Silvano knew of Farnum’s mental frailty
before the sale. He surely knew that he was getting a great deal on the house.
 The court applied the more LENIENT VOLITIONAL TEST—focus on the ability to comprehend at the time of the
contract AND ability to understand the consequences  links to Restatement 15(1)(b)—volitional test
 Remedy: Farnum is entitled to rescission of the conveyance.
o Rescission: A judicial order declaring a contract a nullity and returning all parties to the same positions they were in
before entering into the contract.
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Note: the trial court will have discretion in determining whether Farnum will have to pay the interest back to Silvano
 trying to let the trial court know where they stand on the issue? —two-sided rescission (adjustment)—he had use
of the house for that period, so she should get a credit for the rental value for that period, but he should also get a
credit for the interest that could have been returned on his money. The more time transpires, a court might become
less reluctant to allow avoidance of a contract.
Farnum’s right of avoidance was subject to Silvano’s right of restitution. She had to restore Silvano to the status quo
by refunding the price, adjusted as the court prescribed. In contrast to a minor, a major party who seeks avoidance of
a contract on grounds of mental incapacity must generally restore the consideration that she received under the contract
as a condition of avoidance. However, a court does have the equitable discretion to vary this rule where the other
party knew or had reason to know of the incompetency, he acted in bad faith in taking advantage of the incompetent
party, and the incompetent party is no longer able to make restitution.
Example: Hauer v. Union State Bank of Wautoma (Wis. 1995)
 Facts: Under an agreement with Ms. Hauer, the bank lent her $30,000, secured by shares that Ms. Hauer
owned in a mutual fund. The bank knew that the purpose of the loan was to enable Ms. Hauer to invest the
proceeds in the questionable business venture of another customer of the bank who was in financial
difficulty. The bank had also been told by Ms. Hauer’s stockbroker that she needed income from the mutual
fund for living expenses and that she had suffered brain damage in an accident. The third party later became
bankrupt and Ms. Hauer lost her investment.
 Outcome: The court avoided the loan agreement on grounds of mental incompetence and granted restitution
of the collateral to Ms. Hauer. However, it did not require her to make restitution of the loan amount to the
bank because the bank had reason to suspect her mental disability and it violated its obligation of good faith
in entering into the contract with her.
CONTRACT INTERPRETATION & CONSTRUCTION
A. THE CONTENT OF CONTRACTUAL OBLIGATIONS
 The objective theory of contracts demands that the court focus not on what the parties actually intended, or even what they
actually understood their contracting partners to intend, but rather on what a reasonable party would have expected under the
circumstances.
 To interpret the intended meaning of a contract, courts may look to:
o surrounding circumstances and context in which it was made,
o the scope of contractual obligations,
o the content of contractual obligations,
o the words the parties used in reaching agreement and the reasonable expectations such words might have engendered,
o the conduct of the parties to help establish their contractual relationship,
o contextual evidence to provide some guidance as to what the parties might have intended when they used the words
and phrases at issue, and
o other circumstances surrounding the transaction.
 Interpretation: The process of discerning the meaning reasonably intended by the parties to a contract.
 Construction: The process of determining the legal consequences of the parties’ agreement.
 Wood v. Lucy, Lady Duff-Gordon: Left open in the case was precisely what efforts would have been required of Mr. Wood.
o Interpretation example: The search for the actual intent manifested by the parties—whether they expressed it clearly,
they showed it through their conduct, or other circumstances pointed to it—would be the process of interpretation.
Cardozo reads the agreement to find that there was an implicit promise and saved the contract—he wasn’t inventing
a contract but putting something in that wasn’t there before (because it was implied)—this is interpretation.
o Construction example: If the court determined the parties’ obligations by reference to background rules of law or by
determining what was fair, just, or otherwise required by relevant public policies, the court would have engaged in the
process of construction.
 Doctrine of “misunderstanding”: the court may invoke this doctrine in unusual cases where a court cannot resolve the dispute
over the meaning of a contract term by the processes of interpretation and construction. This doctrine applies where the parties
manifested apparent assent to the same language but have materially different understandings of what the language means, and
the court cannot use objective criteria to favor one party’s understanding over the others.
INTERPRETATION
B. INTERPRETATION
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1.
Sources of Contract Meaning
 The Restatement, Second, and the UCC both take a highly contextual view of contract interpretation.
 When parties present conflicting evidence of what they meant (or reasonably understood each other to mean), both the
Restatement, Second, and the UCC give some guidance as to what evidence is likely to be the most probative of the parties’
reasonable expectations.
UCC 1-201
 Defines “agreement” broadly to mean “the bargain of the parties in fact, as found in their language or inferred from other
circumstances” and “contract” to mean “the total legal obligation that results from the parties’ agreement.
Restatement (Second) §202. Rules in Aid of Interpretation
 States that “words and other conduct are interpreted in the light of all the circumstances”
Restatement (Second) §203. Standards of Preference in Interpretation
 Establishes a hierarchy among conflicting indications of meaning:
o RST §203(b): express terms are given greater weight than course of performance, course of dealing, and usage of
trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing
is given greater weight than usage of trade.
o RST §203(c): specific terms and exact terms are given greater weight than general language.
o RST §203(d): separately negotiated or added terms are given greater weight than standardized terms or other terms
not separately negotiated
 Three concepts introduced by Restatement, Second §§202 and 203:
o course of performance,
o course of dealing, and
o usage of trade.
 The UCC also uses these concepts and expands upon them.
UCC 1-303. Course of Performance, Course of Dealing, and Usage of Trade
 UCC 1-303(a): A “course of performance” is a sequence of conduct between the parties to a particular transaction that exists
if: (1) the agreement of the parties with respect to the transaction involves repeated occasions for performance by a party; and
(2) the other party, with knowledge of the nature of the performance and opportunity for objection to it, accepts the performance
or acquiesces in it without objection.
 UCC 1-303(b): A “course of dealing” is a sequence of conduct concerning previous transactions between the parties to a
particular transaction that is fairly to be regarded as establishing a common basis of understanding for interpreting their
expressions and other conduct.
 UCC 1-303(c): A “usage of trade” is any practice or method of dealing having such regularity of observance in a place,
vocation, or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence
and scope of such a usage must be proved as facts. If it is established that such a usage is embodied in a trade code or similar
record, the interpretation of the record is a question of law.
 If the construction of the express terms of an agreement and any applicable course of performance, course of dealing, or usage
of trade is unreasonable:
o UCC 1-303(e)(1): Express terms > course of performance, course of dealing, or usage of trade.
o UCC 1-303(e)(2): course of performance > course of dealing and usage of trade.
o UCC 1-303(e)(3): course of dealing > usage of trade.
Terry Barr Sales Agency, Inc. v. All-Lock Company, Inc. (1996) –INTERPRETATION OF ORAL AGREEMENT
 *Parties disputed one of the central terms of the relationship—what payment was due for the services provided by one of the
parties.
 Rule of Law: A court must consider the contract of employment and the intention of the parties in order to determine whether
an agent is entitled to commissions on sales made by someone other than the agent  where an oral contract is entered into
between the parties, but they differ as to terms thereof, and there is evidence tending to support the claim of each of them, the
jury must consider all of the circumstances to determine what the terms of the contract are.
 Facts: All-Lock (D) manufactured locks and latches for cars and entered into an oral agreement with Terry Barr Sales Agency,
Inc. (P) in 1973 for Barr to sell All-Lock’s products in exchange for a commission. Additionally, Barr would service some preexisting sales that were previously serviced directly by All-Lock. These inherited accounts were subject to a reduced
commission rate. Barr and All-Lock did not discuss whether the agreement covered post-termination commissions. A fairly
common practice in these types of agreements was for the sales agent to be paid for the life of the part because of the resources
required to procure an initial contract. In 1994, All-Lock terminated the oral agreement with Barr and refused to pay posttermination commissions after 90 days.
 Issue: what happens when the agency terminates the oral agreement?
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2.
Terry Bar Arg.: we’re still entitled to commissions going forward if those clients stay with you because we did the initial work
to bring them in for you  “life of the part”
All-Lock Arg.: there is no agreement that Terry Bar is entitled to life of the part commission.
Big Picture: in the absence of a written agreement, the court looks to context and the surrounding circumstances (i.e.
testimony of the parties). Court gives significant weight to “course of performance” and/or “usage of trade”.
Restatement §203(b): express terms are given greater weight than course of performance, course of dealing, and usage of
trade, course of performance is given greater weight than course of dealing or usage of trade, and course of dealing is given
greater weight than usage of trade.
*The fact that there’s no written agreement gives the court almost nothing to work with in interpreting the agreement
 the court needs to fall back on the secondary points/alternative modes of interpretation (course of performance, usage of
trade, course of dealing) in absence of “express terms” which is given the highest weight.
Court doesn’t decide who wins, but just that there’s enough of a dispute for the case to move forward.
Contrast how the court determines the case here with an oral agreement to Rooftops
Notes: Although the court seemed to acknowledge that “life of the part” commissions are a common feature of relationships
among manufacturers and their sales representatives, constituting some evidence of the existence of a relevant usage of trade,
the existence and scope of usages of trade are often subject to significant dispute, and often parties are unable to agree on a
generally applicable standard. As a result, the incorporation of usages of trade as a matter of course into contract obligations
could be problematic.
Interpretation of Written Agreements
 Sometimes, to determine the scope of the parties’ intended obligations, courts rely exclusively on the written memorials, and
bar evidence of agreements that are not reflected in the writing. However, if the language is ambiguous: reasonably susceptible
to more than one meaning; the fact-finder may consult contextual evidence to guide interpretation of the written agreement.
 Interpretation of a written agreement involves (in theory) two stages:
o The judge decides whether the writing is unambiguous, and if it is, the judge interprets the parties’ agreement to
consist of the unambiguous meaning expressed in the writing.
o If the writing is ambiguous, the jury (or the judge) determines which of the possible meanings is the most reasonable
in context.
 Courts disagree on the first stage—the determination of whether the language is unambiguous.
 “Plain meaning” approach: the traditional approach; in determining whether the language is unambiguous, a court would
attempt to discern the usual sense of the words used in the writing, as understood by a reasonable person. The judge might
consult dictionaries, his or her own intuitions, or general rules and standards of interpretation, but the facts and circumstances
surrounding the transaction were not to inform the decision at all. Whether the language actually captured the intent of the
parties was irrelevant.
 “Contextual” approach: modern day dominant approach; courts reasoned that further inquiry into the facts and circumstances
surrounding the transaction might be appropriate to discern the parties’ actual intentions when they used certain words or
phrases. Courts allow judges to consider circumstances outside the written agreement to determine whether the written
agreement was ambiguous or unambiguous, even if the language of the agreement at first glance appeared to be clear. This
approach rests on the intuition that ambiguities in an agreement may become apparent only when the language is read in context.
o “extrinsic” or “parol” evidence: relevant contextual evidence; might be drawn from a course of dealing between the
parties, relevant usages of trade, or a course of performance under the written agreement in question.
 “Neoformalists”: scholars that advocate a widespread return to the plain meaning approach of classical contract law.
Neoformalists suggest that the contextual approach undermines the very certainty and predictability written agreements are
designed to achieve and has the added disadvantage of allowing extended factual inquiry, which may add to the expense and
duration of the litigation. Sophisticated parties might prefer a system that allows for clear and easy resolution of disputes. In
business disputes in particular, these scholars argue, the plain meaning approach should prevail.
 Because early cases tended to apply the plain meaning approach, whether a writing was unambiguous was not considered a
factual issue, and therefore it was appropriate for the judge to resolve it. It is thus sometimes said that interpretation of an
unambiguous writing is a question of law, whereas interpretation of an ambiguous one is a question of fact.
Right Field Rooftops, LLC v. Chicago Baseball Holdings, LLC (Illinois 2015) – PLAIN MEANING APPROACH
 Facts: In 2002 when the Cubs sued certain Rooftop owners for selling tickets to patrons to watch Cubs games from the
Rooftops. At that time, the parties opted to settle their differences. On January 27, 2004, the Cubs entered into an agreement
that permitted the Rooftops to continue their business but required the Rooftops to give the Cubs 17% of their profits. In return,
the Cubs agreed not to erect any barricades that would block the long-distance viewing of the game from across the
street. There was, however, one clause within the License Agreement that permitted the Cubs to have an “expansion”
of Wrigley Field if that expansion was approved by a “governmental authority.” The Cubs received a government-issued
permit to update the stadium with electronic signs and video boards that will entirely block the views of the field from the
Rooftop clients. The Rooftops want the signs down, or they assert they will be put out of business entirely. The Cubs instead
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claim that their move is fair and within the expected understanding of the parties when they entered into the License Agreement
eleven years ago. Owners moved for preliminary injunction.
Holding: “Armed with the License Agreement, briefs, and arguments from the parties, the Court concludes that the Rooftops
have not… established a breach of contract claim.”
Key provision: Article 6.6 (the 2004 License Agreement): “Any expansion of Wrigley Field approved by governmental
authorities shall not be a violation of this Agreement, including this section.”
Issue: what does the agreement say about the dispute (over the video billboards blocking the Rooftops’ view) and how does it
inform the court  whether the jumbotron constitutes an “expansion” under the agreement.
Cubs Arg.: we have government approval on the expansion; therefore, we have not violated the contract.
Rooftops Arg.: the jumbotron isn’t an “expansion” under the contract—“expansion” means additional seating, thus the
jumbotron doesn’t constitute an expansion. The header of Article 6 and Article 6.1, 6.2, and 6.4 specific refer to “bleacher
expansion”.
Court says: HOWEVER, Article 6.6. refers to “Any expansion”—and the court concludes that the expansion should be viewed
more broadly  “Reading Section 6 as a whole, as the Court must, the Court concludes that “any” means “every or all.””
o Article 6.6. also specifically references other expansions aside from bleacher seating (“The Cubs shall not erect
windscreens or other barriers to obstruct the views of the Rooftops, provided however that temporary items such as
banners, flags, and decorations for special occasions, shall not be considered as having been erected to obstruct views
of the Rooftops.”)  If “any expansion” were limited to construction projects that increased Wrigley Field’s seating
capacity, or even structural expansions, it would be unnecessary to specify that windscreens and other barriers were
subject to the governmental approval exception.”
Procedural link back to Topheavy—preliminary injunction.
Court looks at plain meaning of the contract (i.e. court looks to the “natural” meaning of expansion).
o NOTE: as opposed to Terry Bar, this is a written agreement—Terry Bar is an oral agreement, and thus takes a different
approach in its interpretation.
The language in the contract focuses on the effect of the expansions (not intent to obstruct).
Heart of the case: The Rooftops were relying on the fact that Wrigley Field was declared a landmark and needed government
approval to make changes to the stadium. Wrigley Field had to lobby for years for the expansions, let the Rooftops know about
their plans to do so, and now, years later, when the government approved the additions and that wasn’t the result you wanted,
you have a problem with it.
o Court says to Rooftops: you chose to enter into the agreement, you agreed to let this ride on government
approval and now that the results aren’t what you want, you want the court to interpret the contract in an
unduly narrow way in order to block the construction.
Court tries to figure out the role of the clause in Article 6.6 allowing any government approved expansion—they basically say
that the Rooftops signed the agreement with the clause in it (they delegated their protection) and now they’re asking the Court
to bail them out.
Pacific Gas & Electric Co. v. G.W. Thomas Drayage & Rigging Co. (Cal. 1968) – CONTEXTUAL APPROACH
 Traynor, C.J.
 Rule of Law: Extrinsic evidence of a party’s intent is admissible to assist in the interpretation of a disputed contract term.
 Facts: Thomas Drayage & Rigging Co. (D) entered into a contract with Pacific Gas & Electric Co. (PG&E) to provide labor
and equipment necessary to remove and replace the upper cover for PG&E’s steam turbine. Thomas agreed to perform the
work at its own risk and expense and to indemnify PG&E for any “loss, damage, expense and liability resulting from injury
to property” or any other act associated with performance of the contract. During performance, the cover fell and damaged
part of the exposed rotor of PG&E’s turbine. PG&E brought suit to recover $25,144.51 in damages.
 Issue of interpretation: the indemnity clause
 Substantive issue: does the policy cover damage to plaintiff’s property?
 Appellate court issue: was the trial court correct in excluding the extrinsic evidence (that would contradict the plain meaning)?
 Defendant Argument: extrinsic evidence should be admissible to show that the “plain meaning” of the indemnity clause was
that it should only apply to damage of the property of third parties, not PG&E.
 Holding: The trial court erred in refusing to admit extrinsic evidence on the issue of the plain meaning of Thomas’ indemnity
provision. If a preliminary consideration of all credible evidence offered to prove the intent of the parties still leaves
contractual terms fairly susceptible to at least two rational interpretations, extrinsic evidence relevant to prove either
of these meanings is admissible.
 *Traynor’s analysis: even if agreement seems unambiguous, the contract still needs to be considered in light of the
circumstances (should not be limited to its “four corners”) and extrinsic evidence should be allowed to the extent that it is
relevant.
o Traynor acknowledges that judges impose their own understanding and opinions on what certain words mean, and
just because a word may be unambiguous to a judge, doesn’t mean that it is unambiguous to the parties.
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Pro-Traynor arg.: at the end of the day, we are trying to derive and protect the intention of the parties—so why would
we not look to evidence that shows this? Why shut off the analysis? Contracts are supposed to reflect the common
intent of the parties. When the language of the contract itself fails to make this intent clear, a court must resort
to other evidence of the parties’ intent in order to preserve the enforceability of the contract.
o Anti-Traynor arg.: opens up a lot of uncertainty and introduces new grounds for litigation, everything is fair game
over battle for credibility, etc. Some commentators feel that his approach subverts the parol evidence rule to the point
where there is little left to enforce. He walks a fine line between admitting evidence of subjective intent and permitting
that intent to govern and change the contract in a way that violates the parol evidence rule.
Compare to Rooftops:
o Pacific Gas & Electric Co., like Right Field Rooftops, confronts the issue of whether a clause contained in a written
agreement is unambiguous.
o In Rooftops, while they did allow limited extrinsic evidence, they followed a plain meaning approach—only if the
language is ambiguous, will extrinsic evidence be considered. The defendant in Rooftops wanted to bring in
admissions of plaintiff’s agents, etc. – Traynor is open to allowing that type of evidence (this is very different than the
limited extrinsic evidence allowed in Rooftops).
Some courts take a middle ground between Traynor and Rooftops—extrinsic evidence is allowed for certain things.
Extrinsic evidence: At trial, evidence other than questions posed to the witness, including documents or testimony from other
witnesses. Extrinsic evidence also refers to evidence external to a will or contract, offered to vary or explain the terms of the
will or contract.
White City Shopping Center v. PR Restaurants, LLC (Mass. 2006) – PLAIN MEANING APPROACH (+ some contextual)
 Rule of Law: Unambiguous words in a contract must be construed in accordance with their ordinary and usual sense.
 Facts: The lease agreement between PR Restaurants, LLC (Panera Bread chain owner) and White City Shopping Center (D)
prohibited White City from renting out any other space in the shopping center to a restaurant that had annual sales of
sandwiches greater than 10% of its own total sales. The lease agreement did not define sandwiches. PR later sought a
preliminary injunction to prevent White City from entering into a lease with Qdoba, which sold burritos, quesadillas, and
tacos on the grounds that PR believed that those items qualified as sandwiches.
 Issue of interpretation: the definition of “sandwich”
 Question of the case: what is a sandwich?
 Problem: Panera Bread basically contracted in an anti-competitive clause into the lease agreement by prohibiting White City
from renting out any other space in the shopping center to a bakery or restaurant that had annual sales of sandwiches greater
than 10 percent of its own total sales.
 How does the court go about analyzing the meaning of sandwiches?
o Plain meaning:
 “if the words of the contract are plain and free from ambiguity, they must be construed in accordance with
their ordinary and usual sense.”
 Court looks to dictionary definitions (just as Rooftops did as part of their analysis)
 Court says the ordinary meaning of sandwich does not include tacos/burritos.
o Contextual approach:
 Lease didn’t include the definition of sandwich
 During lease negotiations the parties didn’t discuss the sandwich issue/definition
 PR didn’t include evidence that they intended tacos/burritos to be included with sandwiches.
 *Plain meaning and contextual approaches are on a continuum—neither are 100% pure in the approach that they take
(Traynor would be far to the contextual end of the spectrum)
3.
Interpretation of Standard Contracts
 Interpretation explores tension created by the objective theory of contracts and, in particular, whether nondrafting parties
should be deemed to assent to the terms of writings that purport to evidence their contract, regardless of whether they read and
understand those terms.
 In cases where the standard terms were revealed or made available before money changed hands:
o Courts generally give effect to the standard terms and do not refer to the individual circumstances of the purchaser in
doing so.
 If the standard terms were revealed only after the purchaser paid for the product, service, or intellectual property rights:
o The cases are in disagreement as to whether the standard terms should become a part of the contract.
o Generally, it is not the content or the meaning of the terms that is at issue but, rather, whether they should be deemed
a part of the parties’ agreement at all.
 While courts generally start with the language of the standard terms, most courts acknowledge that in mass-market transactions,
it is seldom practical for purchasers to read standard terms before assenting to contracts.
 How far a court is willing to stray from unambiguous standard terms is a matter of substantial dispute.
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verba fortius accipiuntur contra proferentum: ancient maxim—roughly translated means that words should be taken most
strongly against the party who uses them; if an ambiguity is found, some courts interpret those ambiguities strictly against the
drafter, without any further inquiry into the reasonableness of that interpretation.
contra proferentum principle: used by some courts as a tie-breaker rather than (verba fortius accipiuntur contra proferentum);
between a reasonable interpretation advanced by the drafter and one advanced by the other party, the reasonable interpretation
of the other party should prevail.
Reasonable Expectations Doctrine: Ambiguity regarding the meaning of terms in an insurance contract may be resolved by
ascertaining how a reasonable insurance policy purchaser would construe terms in the insurance policy at the time the insurance
contract was entered.
Atwater Creamery Co. v. Western National Mutual Insurance Co. (Minn. 1985) – REASONABLE EXPECTATIONS APPROACH
 Rule of Law: The reasonable expectation of an insured as to coverage under an insurance policy will defeat the literal language
of the policy.
 Essence of insurance company’s position is that burglary requires visible marks being made and there are no such visible marks.
 Isn’t “visible marks” straightforward? How is this ambiguous?
o Reasonable expectations approach: Atwater had a reasonable expectation of what this contract would be. Although
the term was clear, the court was upfront about the fact that they were too uncomfortable with not allowing recovery.
 But wouldn’t this be disturbing if it was a regular contract? What is the tension in the law?
o Duty to read: Courts have said that a party has an obligation to read the contract  Atwater’s officer actually came
forward and said that he didn’t read the whole thing—so why did the court apply reasonable expectations here?
 Insurance policies in particular aren’t easy to understand from a layperson point of view—they are known to
be exceedingly lengthy, written in small type and from a legalistic standpoint.
 *Understand the limitations on the reasonable expectation doctrine—normally the court would enforce
the duty to read, but they note that insurance policies are particularly difficult for laypeople to understand.
 Additionally, it was clearly established that this was a legitimate burglary—it just so happened that it was a
skilled burglar who leave behind much evidence. So, Atwater shouldn’t be denied recovery because they
got robbed by someone who was good at it.
 NOTE: Do not overuse the reasonable expectations doctrine—although the court takes this approach here, the duty to read
usually supersedes this.
 Court basically says: You have a duty to read, but not in painstaking detail.
 “Flavor” of unjust enrichment?  this isn’t an unjust enrichment case, but there’s a hint of it in the fact that the court is
uncomfortable with the insurance company getting out of liability here—that they’re selling burglary policies but then crafting
language to get out of it–creates notion that the party trying to get out of the contract is the party that has benefited so much
from it.
 The court decides the case on multiple reasons:
o Lengthy contract
o Difficult to understand
o Hints of unjust enrichment
o Premiums were paid for a number of years
 Question 3 (pp. 604): If the insurance company wished to avoid a repeat of this case in the future, how should it change its
policy language or practices?
o If you want the courts to back you up, make the clause more evident in the contract—make sure that it was discussed
and read and acknowledged by the other party—you could put it up front in the contract, make it bold, send out a letter
(“as we discussed, you will only be covered for burglaries..”).
 BUT: if you make it prominent, would anyone buy the policy?  probably not—but this helps explain why
the court decided the way it is: if no one would buy the policy if they knew this clause, then the insurance
company likely DID NOT make it clear to Atwater.
CONSTRUCTION
C. CONSTRUCTION OF CONTRACT OBLIGATIONS
 Construction: the process by which courts determine the full legal obligations that result from the parties’ agreement. Often
the role of contract construction is to supplement the manifested intent of the parties, because the agreed-upon terms and the
implications of the parties’ conduct simply do not settle the dispute.
 Like interpretation, construction is generally couched in terms of the parties’ probable intent.
 Think of interpretation and construction as two ends of a continuum:
o Pure interpretation focuses on discerning the actual intent manifested by the parties.
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Pure construction supplies contractual content based on public policies or general principles of law.
*Most cases fall somewhere in between.
Gap Fillers
 If the intention to be bound is clear and most of the material terms are ascertainable, a court may “fill the gaps” in the parties’
agreement by supplying a term that seems reasonable under the circumstances.
 If a court feels that there is no reasonable basis for supplying a contract term necessary for resolution of a dispute (without
imposing obligations on the parties that they did not discuss or contemplate), it is likely that the court will refuse to enforce the
contract altogether.
 “Gap fillers” refers to standard presumptions that can be used to fill out the parties’ intent (because these certain fact patterns
have come up so frequently over the years).
Restatement (Second) §204. Supplying an Omitted Essential Term
 The Restatement generally endorses the gap-filling function of courts.
 “When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to
a determination of their rights and duties, a term which is reasonable in the circumstances is supplied by the court.”
UCC § 2-204(3)
A provision of the UCC which states that an agreement will not be deemed invalid because of a missing term or terms so long as the
parties intended to make an agreement and there is a reasonably certain basis to determine an appropriate remedy for the omission.
UCC 2-311. OPTIONS AND COOPERATION RESPECTING PERFORMANCE
 2-311(1): An agreement for sale which is otherwise sufficiently definite to be a contract is not made invalid by the fact that it
leaves particulars of performance to be specified by one of the parties. Any such specification must be made in good faith and
within limits set by commercial reasonableness. *Here, the UCC is providing a standard by which to measure the discretion
the agreement gives to the parties.
 2-311(2): A provision of the Uniform Commercial Code stating that, unless otherwise agreed, specifications related to
assortment of goods are at the buyer’s option and specifications or arrangements related to shipment are at the seller’s option.
 *As long as the parties had the intention to be bound, the UCC will supply (among other things): a price, a method of
payment, and a method of delivery if the parties failed to do so.
Family Snacks of North Carolina, Inc. v. Prepared Products Co. (2002) – REASONABLE EXPECTATIONS
 Rule of Law: When an agreement is sufficiently detailed to be a binding contract, a court will supply a reasonable term
necessary to determine the parties’ duties and rights that is missing from the contract.
 Facts: Family Snacks (P) entered into a supply agreement with Prepared Products (D) under which Prepco agreed to purchase
$10 million of products from Family Snacks over the course of a year, beginning on July 1, 1998. No provision dealt with
whether Prepco had to provide Family Snacks with a specific order before Family Snacks would provide pricing for the
product. Prepco did not order any products during the first year, and Family Snacks sued Prepco for breach of contract.
 Threshold issue: To the extent that there is a gap in the contract, if it’s significant enough, maybe the parties don’t even have a
contract?
o Court says that there is enough for an enforceable contract—it specifies a standard that would establish the
consideration after the product was manufactured. Although the price term was not directly specified in the agreement,
the price could be determined using the detailed formula contained in the agreement.
 Issue: will a court supply a reasonable term necessary to determine the parties’ duties and rights that is missing from the
contract? – YES
 Where is the gap? What is the missing term necessary to determine the rights and duties of the parties?
o The missing term is: Who had the obligation to act first?
 Court looks to UCC to help fill the gap:
o Under the UCC §2-204, the single missing term does not cause the contract to be unenforceable for indefiniteness,
due to the fact that the parties intended to make a contract and that there is a reasonably certain basis for giving a
remedy.
o Under UCC § 2-311, specifications relating to assortment of the goods are generally at the buyer’s option.
 Holding: Based on this section of the UCC, Prepco was responsible for first identifying the products that Prepco wished to
purchase (the buyer had an obligation to buy and failed to do so). Prepco did not do so and thus breached the contract.
2.
Exclusive Dealings: Output and Requirement Contracts
 UCC 2-311(1): “Any such specification must be made in good faith and within limits set by commercial reasonableness.”
*Here, the UCC is providing a standard by which to measure the discretion the agreement gives to the parties.
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There are several contexts in which one of the parties reserves some discretion over its own performance:
o Example: Conditions of satisfaction—courts often imply or construe an obligation to act reasonably, in good faith
or in accordance with some other standard in determining satisfaction.
o Wood v. Lucy, Lady Duff-Gordon: example of how courts sometimes imply or construe an obligation to use best
efforts when the parties agree to deal exclusively with each other. Both at common law and under the UCC, courts
regularly impose limitations of this sort on the discretion conferred on one of the parties under the agreement.
But what does good faith, commercial reasonableness, or best efforts require in any given situation?
o Output and requirements contracts are two kinds of exclusive dealings contracts:
 In an output contract, the buyer agrees to purchase whatever goods the seller produces.
 In a requirements contract, the seller agrees to provide whatever goods the buyer requires to satisfy its
needs.
o The UCC tells courts to construe parties’ obligations under output and requirements contracts in light of a good faith
standard.
GOOD FATH AND FAIR DEALING
UCC 2-306. Output, Requirements and Exclusive Dealings
 2-306(1): A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual
output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate
or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or
demanded.
 2-306(2): A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes
unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts
to promote their sale.
Indiana-American Water Co. v. Town of Seelyville (Indiana 1998) – “GOOD FAITH & FAIR DEALING” UNDER UCC 2-306
 THIS WAS AN OUTPUT/REQUIREMENT CONTRACT: “Company agrees to sell to the Town, and Town agrees to purchase
from Company, . . . such quantities of water as the Town may hereafter from time to time need. . . . ”
 Facts: The Town of Seelyville entered into a 25-year contract to obtain its water from the Indiana-American Water Company.
The contract limited the quantity of water that the town could purchase to 1 million gallons of water a day. 14 years later, the
town announced plans to develop a well field of its own. The water company sued, arguing that the town would breach the
contract if it proceeded to create its own water supply.
 Holding: Although the town had an obligation to act in good faith under UCC 2-306, and this obligation was sufficient to
render the contract enforceable, the Town’s development of its own water supply would not breach the contract terms or the
town’s duty of good faith.
 Key Fact: The Town had acquired a well field many years before the execution of the contract under scrutiny. Town’s decision
to develop its preexisting well field constitutes a legitimate, long-term business decision, and not merely a desire to avoid the
terms of its contract with Water Company.
 Generally, the buyer in a requirements contract governed by UCC §2-306(1) is required merely to exercise good faith in
determining his requirements and the seller assumes the risk of all good faith variations in the buyer’s requirements even to
the extent of a determination to liquidate or discontinue the business. However, the buyer is not free, on any whim, to quit
buying from the seller. If the buyer has a legitimate business reason for eliminating its requirements, as opposed to a desire
to avoid its contract, the buyer acts in good faith.
3.
The General Obligations of Good Faith and Fair Dealing
 The obligation to perform contractual obligations in good faith is a general one that applies to all contracts—not just to those
that are unclear or incomplete.
 RESTATEMENT, SECOND §205. DUTY OF GOOD FAITH AND FAIR DEALING
o Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.
 UCC 1-304. OBLIGATION OF GOOD FAITH
o Every contract or duty within the UCC imposes an obligation of good faith in its performance and enforcement.
 Courts struggle to determine what good faith requires in light of the particular agreement of the parties.
United Airlines, Inc. v. Good Taste, Inc. (Alaska 1999) – EXPRESS CONTRACT TERMS > “GOOD FAITH & FAIR DEALING”
 The “Saucy Sisters” case
 Rule of Law: The implied covenant of good faith and fair dealing does not require a party to have cause to terminate an
agreement that can be terminated at-will  the express terms of the contract > implied covenant of good faith.
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Facts: United terminates the contract; Saucy Sisters sued – said you terminated because you found a better offer and wanted
to save money; not because you were dissatisfied with the deal. SS argues that in reliance of the contract, they spent a lot of
money. BUT: there was termination agreement in the contract, allowing United Airlines to terminate upon 90 days’ prior
written notice. United gave written notice in compliance with the agreement.
Issue: If an agreement explicitly gives one party the ability to take an action (here, terminate the whole contract), can that party
stand on its express contractual authority, or must it consider its power to be constrained by general notions of good faith or
fair dealing?
o Majority: Says that the party stand on its express contractual authority.
 It’s implicit or a fair reading of that is to say that United can exercise its power to terminate under the
termination clause without having a good cause argument on the other side.
o Dissent: Says that the party must consider its power to be constrained by general notions of good faith or fair dealing.
 The dissent (written by the Chief Justice) acknowledges that there is a termination clause—but notes that the
clause does not explicitly state that you can terminate the agreement without good cause.
 Talks about reasonable expectations – shout back to Atwater: notion that we want to cut some slack on the
party that has the unfair advantage here. BUT: we have to be careful with using that concept in Atwater – the
contract in Atwater was explicit and very clear but it was part of a very long dense agreement. Also, Atwater
concerned an insurance contract, which the law carves out a special exception for.
The heart of the case takes us back to good faith and fair dealing.
o Arbitron: Shout back to Arbitron case where they had rights to reset the price – they had that discretion, but they had
to exercise that discretion in good faith. Here – even though United has the right to terminate, they still have to exercise
in good faith.
MISUNDERSTANDING
4.
Overflow and Interpretation, Misunderstanding
 Words are often susceptible to more than one meaning. However, contracts do not rest on what the parties subjectively
understood at the time the contract was entered, but rather on what a court concludes would be reasonable to expect under the
circumstances.
 General Rule: The fact that the parties may have misunderstood each other’s intentions generally does not prevent the
formation of a contract  once a contract is found, courts typically can employ the usual techniques of contract interpretation
and construction to determine whose understanding should prevail and what the requirements of the ultimate contract should
be.
 Exception: Misunderstanding (“complete misunderstanding”).
o When the parties use the same words but mean materially different things, and when a dispute arises courts are
unable to resolve the differing interpretations in a manner that is reasonable or fair.
o Outcome: The court may conclude that any manifestation of mutual assent is illusory, and no contract has been formed.
 Example: Raffles v. Wichelhaus (Eng. Rep.1864) – TRADITIONAL MISUNDERSTANDING RULE
o Classic case of the “ship(s) Peerless”
o Rule of Law: Where parties attach materially different meanings to important contract terms, and neither knows nor
has reason to know of the misunderstanding, no contract results.
o Facts: Plaintiff agreed to sell some cotton arriving from Bombay on the ship Peerless. The defendant agreed to buy
some cotton arriving from Bombay on the ship Peerless. As it turned out, there were at least two ships Peerless
roaming the high seas: one slated to leave Bombay in October, the other in December. In a plunging cotton market,
the defendant refused to accept the cotton that arrived by the later ship Peerless, arguing that he had meant the earlier
ship when he had agreed to make his purchase.
o Holding: The court held for the defendant—where the plaintiff meant one ship and the defendant another, there could
be no meeting of the minds and thus no contract.
 NOTE: No contract due to misunderstanding is rarely seen today—more often, the interpretation advanced by one party is
held to be better than the other. But occasionally complete misunderstandings do arise that lead a court to conclude that the
parties did not form a contract.
Konic International Corp. v. Spokane Computer Services, Inc. (Idaho 1985) – MODERN MISUNDERSTANDING CASE
 Rule of Law: When there is a mutual difference of understanding or mistake regarding the meaning of material terms of a
contract, no enforceable contract exists.
 Facts: David Young, an employee of Spokane Computer Services, Inc. (D) was instructed by his superior to purchase a surge
protector for his company. Konic told him the price was “fifty-six twenty.” The Konic salesman meant the price was $5,620.00,
but Young understood it to be $56.20. After learning of the price discrepancy, Spokane told Konic that it did not want the surge
protector. Konic refused to take it back and demanded the balance owed.
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
Holding: NO CONTRACT DUE TO MUTUAL MISUNDERSTANDING
o The misunderstanding concerned a material term of the contract—the price term.
o When there is a mutual misunderstanding or mistake regarding the meaning of material terms of a contract, no
enforceable contract exists because there can be no mutual assent (“meeting of the minds”) when the parties attach
materially different meanings to the contractual terms, and neither knows or has reason to know the meaning attached
by the other.
o Spokane and Konic were equally at fault for failing to discover the price discrepancy between the invoice and the
purchase order.
PAROL EVIDENCE RULE
A. INTRODUCTION TO THE PAROL EVIDENCE RULE
 Parol Evidence: Evidence not in writing in a contract that is used to determine the parties’ intent.
 Parol Evidence Rule: extrinsic evidence may not be used to modify or supplement a written contract.
 The rationale behind the parol evidence rule is that the parties to an agreement will include all of their terms in a written
contract, so any terms that are not in the written contract were not intended to be part of the final agreement.
Integrated Agreements
 Integrated agreement: A written contract that contains the entire understanding and agreement of the parties regarding all
contract terms. 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.
 The parol evidence rule only applies to written contracts that are integrated agreements. Contemporaneous written contracts
are typically considered to be part of the same integrated agreement.
 A completely integrated agreement is a writing that has been adopted by the parties as a final and complete statement of the
terms.
o For completely integrated agreements, the parol evidence rule will exclude extrinsic evidence that is within the scope
of the agreement. This means that a completely integrated agreement may not be supplemented by a prior agreement
or a contemporaneous spoken agreement.
 A partially integrated agreement, on the other hand, is a writing that has been adopted by the parties as a final but incomplete
statement of the terms.
 For the parol evidence rule to apply, an integrated agreement must also be binding (i.e. if a contract is not supported by
consideration, or if it is merely a draft or proposal, then it will not be considered binding and the parol evidence rule will not
apply).
 Generally, the parol evidence rule applies to extrinsic evidence of any prior agreements, as well as any contemporaneous spoken
agreements. For an integrated agreement, the parol evidence rule will exclude extrinsic evidence that is inconsistent with the
agreement. This means that a completely or partially integrated agreement may not be modified by a prior agreement
or a contemporaneous spoken agreement.
Exceptions to the Parol Evidence Rule
 First, extrinsic evidence may be used to establish whether a written contract is an integrated agreement, as well as whether an
integrated agreement is completely or partially integrated.
 Second, extrinsic evidence may be used to clarify the meaning of an ambiguous term.
 Third, extrinsic evidence may be used to support a defense to enforceability, such as illegality (i.e. if a leasing office previously
agreed to lease an apartment for the purpose of storing stolen goods, then their prior agreement may be used as evidence of
illegality).
 Finally, extrinsic evidence may be used to determine whether a remedy should be granted or denied to one of the parties.
B. APPLICATION OF THE PAROL EVIDENCE RULE
 There is a lot of overlap between interpretation and parol evidence rule.
o Distinction seen through Terry Bar: here, the parties had an oral agreement that they were trying to ascertain—parol
evidence had no application here because the parties never had a written agreement.
 Parol evidence can also block prior written agreements, not just oral ones.
 To what extent does parol evidence knock out prior written/oral agreements?
 Mitchill v. Lath (1928)  PAROL EVIDENCE EXCLUDED
o Written agreement was silent on the issue of the separate ice house—the written contract had obligations of parties
but did not at all mention the ice house issue.
o Party wanted to introduce oral evidence, and the court said no—the agreement was completely silent on the issue at
bar.
 Doctrinal questions:
36
o
o
o
1.
What are the parameters on what might “naturally be made as a separate agreement”?
Does it contradict what’s in the agreement?
What does it mean to say that it is a “partial integration” and “full integration”?
The Evolution of the Parol Evidence Rule
Masterson v. Sine (Cal. 1968) – CONTEXTUAL (“SOFT”) APPROACH TO PAROL EVIDENCE RULE
 Traynor, C.J.
 *Court distinguishes between a grant deed option and a separate contract limiting its assignability
 Rule of Law: A court, when considering a disputed contract, may consider evidence of a collateral agreement if it is of a sort
that would naturally be made separately from the disputed contract.
 Big Picture: Traynor is very open to allowing extrinsic evidence.
 Facts: Dallas Masterson and his wife (P) conveyed a ranch to Medora and Lu Sine (D) through a grant deed which reserved
the option for the grantors to purchase the property back within 10 years. Medora Sine is Dallas Masterson’s sister and the wife
of Lu Sine. Masterson declared bankruptcy after the conveyance and the bankruptcy trustee tried to enforce the option to
repurchase the property conveyed to the Sines. At trial, the trial court admitted extrinsic evidence showing what the buyback
amount was intended to be, but refused to allow extrinsic evidence (by enforcing the parol evidence rule) offered by the Sines
that the parties intended the property to be kept within the Masterson family and thus that the option was personal to the
Mastersons and could not be exercised by the bankruptcy trustee.
 Threshold Issue: whether or not the option to buy back the conveyance can be exercised.
o Exercised by the trustee in bankruptcy (managing Masterson’s assets for his creditors)—not Masterson.
 Issue: Whether or not the extrinsic evidence should be admissible to the court.
 The contract itself spoke to the option right, but it did not say anything about the limitation that the option right can only be
exercised by Dallas Masterson (with the intent being that the property stay in the Masterson family)—it was silent on the
restrictions.
 Dallas argues that this was the real agreement between him and his sister—that he was the only one who could exercise
the option right.
 The limitation that he’s asserting isn’t in writing but in the oral agreement between himself and his sister.
 *They’re speaking about oral agreements that happened some time ago  but both parties are in agreement that they had this
external oral agreement—(they’re on the same side—not adverse interests)—but the question is whether it’s admissible.
 Outcome: Court says the extrinsic evidence should have been allowed and the lower court erred in excluding it.
 At the heart of the case is the notion whether extrinsic evidence should have been allowed to determine whether the
option should truly be limited to a family member.
 Why did Traynor allow the evidence in?
o Contextual approach: looks at circumstances surrounding circumstances.
 Like Pacific Gas & Electric—although focused on specific word in the agreement, Traynor here was very
open to allowing extrinsic evidence.
 Mitchill—completely silent on the issue of the ice house. Here, the contract was completely silent on the
issue of the limitation  is this more of an interpretation approach like PG&E: what is the proper
interpretation of the option?  very similar theme to PG&E—he says aren’t we ultimately trying to ascertain
the true intent of the parties?
 Traynor draws on the Restatement’s “natural agreement” language and points out that the UCC is actually
even more permissive.
o “Definite permissiveness” for parol evidence  he’s very permissive but limits it to something that the parties
would put in a separate agreement (if not, don’t allow it). Since this is something that the parties would naturally put
in an agreement, the parol evidence is allowed.
 Dissent (Burke, J.):
o Evidence should not have been allowed in—there were definite terms and now a party is trying to come in and say
wait there’s actually more to the agreement but it was just oral  this is exactly what the parol evidence rule was
created to prevent.
o What are the parameters on what might “naturally be made as a separate agreement”? Does it contradict
what’s in the agreement?
o Points out that Dallas isn’t actually exercising the right on his own account—he’s arguing that there was a limitation
that the property must be exercised by him but he’s not the one exercising it—the trustee in bankruptcy is.
o Generally, if there's an option in a contract and it’s silent on limitations, the law supports that it is correct to
logically assume that no limitation exists.
 Dissent says that Traynor’s gatekeeping function of “naturally separate” is really not much of a gatekeeper at all and he’s using
the doctrine to suit his purposes.
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
2.
NOTE: Justice Burke loses sight of the fact that deeds and contracts are not equivalent documents. Indeed, he berates the
majority for resting its interpretation on this distinction. However, parties do not usually put the details of a real estate
transaction in the deed. Think of the deed as a declaration of rights and the contract of sale as an agreement regarding
those rights. The majority relies on this distinction as the key to its analysis.
Contemporary Approaches to the Parol Evidence Rule
Myskina v. Conde Nast Publications, Inc. (N.Y. 2005) – PAROL EVIDENCE EXCLUDED
 Rule of Law: The parol-evidence rule bars the admission of any prior or contemporaneous negotiations or agreements offered
to contradict or modify the terms of a written agreement.
 Contextual vs. textual (four corners) approach  Is this like Traynor in Masterson?
o More of a four-corners approach (less permissive than Masterson)
o Not pure 4 corners (contextual vs. textual can be placed on a continuum, not a dichotomy)
o Myskina has a higher standard for evidence to be allowed in than Masterson:
 The agreement must be collateral in form
 It must not contradict express or implied provisions of the written contract
 *It must be one that the parties would not ordinarily be expected to embody in the writing…it must not be
so clearly connected with the principal transaction as to be part and parcel of it  this is the distinctive
requirement (under this requirement, Masterson would not have been allowed to submit the oral evidence
that Traynor allowed in Masterson).
 There was a specific agreement, it spoke to the use of editorial purposes  so Myskina isn’t allowed to submit extrinsic
evidence on the issue of editorial purposes that were already addressed in the written contract.
 What about fraud?
o Borat case—even though claim was framed in tort, to the extent there was an explicit agreement the court came out
against the plaintiffs.
o Masterson was similar to Saucy Sisters—right to terminate (the interpretation of that was there was a right to
terminate—but didn’t specify the actual terms).
 Reasoning:
o First, this is a fully integrated agreement – the release plainly sets forth a simple release consenting to the use of the
photographs. The oral agreement to restrict the publication of the photographs, as claimed by Myskina, was
fundamental to the entire transaction and would be expected to be included in the written agreement. However, the
oral agreement was not included in the release.
o Second, the alleged oral agreement would contradict the express terms of the written release.
o Finally, the oral agreement does not qualify for the exception to the parol-evidence rule for collateral agreements,
because the alleged oral agreement was not collateral. The oral agreement was central to Myskina’s understanding of
the release.
Lopez v. Reynoso (Wash. 2005) – PAROL EVIDENCE ADMITTED
 Rule of Law: Parol evidence may be taken into consideration to: (1) determine the intent of the parties, (2) to properly construe
the writing, and (3) to determine whether the writing was actually intended to be the final expression of the agreement.
o However, parol evidence cannot add to, modify, or contradict the terms of a fully integrated contract.

“If the writing is a complete integration, any terms and agreements that are not contained in it are disregarded. If it is not
intended to be the complete expression of the parties’ intent—in other words, if it is only partially integrated—the writing
may be supplemented or replaced by consistent terms or agreements shown by a preponderance of the evidence.”
o Additional flexibility in this language.
 Lopez makes a distinction:
o As a threshold matter—are we talking about partial integration or complete integration?
o Then Lopez asks if it is contradictory (will be kicked out) or supplementary (my not be kicked out—at least not
automatically).
 How much weight should we give the clause?  “You guys agreed on it” vs. “its boilerplate”
o Compare to Tallmidge case: generally, if there’s a merger clause, we will find that it is complete integration.
o There was a merger (integration) clause here—however, the court determined that the merger clause was a boilerplate
term of the purchase agreement and was shown to be factually false. The evidence showed that the additional prior
agreement, which reduced the purchase price for the contract, existed and was relied upon by Reynoso.
 Holding: The trial court properly evaluated the testimony and determined that the contract was not fully integrated. Therefore,
the prior agreement was part of the contract, and the testimony regarding the prior agreement was correctly admitted into
evidence.
 UCC 2-202: soft parol evidence rule
 Masterson: silent on return policy—so what was being offered was not contradictory (introducing evidence into silence is not
contradictory).
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o

Even Traynor did acknowledge in Masterson, however, that written evidence is more accurate than human memory
 so the case is more convincing when we have written evidence.
*In general, we follow the UCC.
MISTAKE & EXCUSE DUE TO CHANGED CIRCUMSTANCES


In limited circumstances, the doctrine of mistake and the various doctrines that allow excuse for changed circumstances
may relieve a party from its contractual obligations if circumstances make it inappropriate to hold the party to its apparent
agreement.
Mistake vs. Excuse Due to Changed Circumstances:
o Mistake:
 Focuses on facts in existence when the parties enter the contract
 “But for the mistaken belief, I would not have concluded the contract.”
o Excuse Due to Changed Circumstances:
 Facts that occur after the date of the contract radically alter the nature or effect of the agreed performance
 (i.e., A change in conditions causes a promised performance to be impossible, or highly impractical;
circumstances change such that a party’s reason for entering the contract disappears).
 “The risk I assumed when I agreed to the contract does not fairly encompass performance under the
circumstances at hand.”
 Excuse due to changed circumstances may be available under one of two closely related doctrines:
impracticability (sometimes called impossibility) or frustration of purpose.
MISTAKE
A. MISTAKE
 Mistake: The situation in which either: (1) the parties to a contract did not mean the same thing, or (2) at least one party had a
belief that did not correspond to the facts or law. As a result, the contract may be voidable.
o Could be one or both of the parties are mistaken (operating under a misapprehension of fact) when they enter a
contract.
o “But for the mistaken belief, I would not have concluded the contract.”
o Court may find a contract voidable where the actual benefits and burdens of the contract differ so radically from the
complaining party’s original expectations that it seems inappropriate to enforce the contract.
o The doctrine of mistake focuses on facts in existence when the parties enter the contract.
 NOTE: Courts usually DO NOT grant relief for Mistake or Changed Circumstances.
o The aggrieved party may find the requirement of performance to be harsh, but relief often would be equally harsh to
the other party.
o Relief is especially unlikely to be available if the aggrieved party was responsible for the situation or explicitly or
implicitly assumed the risk of the resulting burden.
 The doctrine of mistake seeks to strike a balance between the party who is adversely affected by the mistake and the party
who would be adversely affected if the court were to grant relief from the contract.
o Every ill-advised contract does not give rise to an argument of mistake.
o Just because a contract may look like a bad idea in retrospect does not mean that relief will be available.
o If the party who is disappointed by a bargain is always free to seek relief from its strictures, the value of the bargain
to the other party disappears.
 Three general themes of when relief of Mistake will be available:
o The nature of the mistake: The mistake must relate to a fact that was in existence at the time of the contract. It cannot
be a mistake in judgment or a mistaken prediction as to future events.
o The seriousness of the mistake: The mistake must relate to something that is central to the contract, rather than a
minor or peripheral matter, and it must have a significant effect on the benefits the mistaken party receives or the
burdens he undertakes under the contract.
o The risk of the mistake: For relief to be available in cases of mistake, it must be unfair or otherwise inappropriate to
allocate the risk of the mistake to the aggrieved party.
 Two general categories of mistakes:
o Mutual mistakes: only arises when both parties have a mistaken belief of fact.
o Unilateral mistakes: can also give rise to relief in some circumstances, but typically only where enforcement of the
contract would lead to palpable injustice.
o *Although the two categories are theoretically distinct, they are best understood as different points along a continuum.
39
Remedies for Mistake:
 Reformation: An equitable remedy by which a court will modify a written agreement to reflect the actual intent of the parties,
usually to correct fraud or mutual mistake in the writing, such as an incomplete property description in a deed. In cases of
mutual mistake, the actual intended agreement must usually be established by clear and convincing evidence. In cases of fraud,
there must be clear evidence of what the agreement would have been but for the fraud.
 Rescission: A party’s unilateral unmaking of a contract for a legally sufficient reason, such as the other party’s material breach,
or a judgment rescinding the contract. Rescission is generally available as a remedy or defense for a non-defaulting party and
is accompanied by restitution of any partial performance, thus restoring the parties to their pre-contractual positions.
1.
Mutual Mistake
 Where is relief granted and where is it not?
o Wood v. Boynton (Wis. 1885) – NATURE OF MISTAKE (LOSING CASE)
 Facts: Ms. Wood sold a stone to Mr. Boynton, a jeweler, for $1. Ms. Wood informed Mr. Boynton that she
had been told that it might be a topaz, and he responded he wasn’t sure but thought it probably was. When it
later became clear that the stone was in fact an uncut diamond worth over $700, Ms. Wood sought to rescind
the sale.
 Holding: NO RELIEF OF MISTAKE (RESCISSION)
 Reasoning: While both parties were in fact ignorant of the nature of the stone at the time of the sale, no
rescission because there was no mistake as to the identity of the thing sold  rather, at most there was a
mistaken belief as to its probable value.
o Sherwood v. Walker (Mich. 1887) – SERIOUSNESS OF MISTAKE (WINNING CASE)
 Facts: Sherwood (P) contracted to buy a cow for $80 from Hiram Walker (of whiskey fame) (D). Both parties
were under the impression that the cow, Rose 2d of Aberlone, was barren and unable to breed. When the time
for performance came, the seller refused to deliver Rose to the buyer. Rose, it seemed, was pregnant. Being
a breeder, rather than barren, she was worth at least $750.
 Holding: RELIEF OF MISTAKE GRANTED (*sent to jury to decide*)
 Reasoning: rescission might be available under facts such as these, where the mistake or misapprehension
of the parties went to the whole substance of the agreement, even though there was no mistake as to the
identity of the creature.
 RESTATEMENT, SECOND §152.  MUTUAL MISTAKE
o Mutual mistake is avoidable when:
 Basic assumption
 Material effect
 *Unless the party bears the risk of mistake
 RESTATEMENT, SECOND §154.  WHEN A PARTY BEARS THE RISK OF A MISTAKE
o A party bears the risk of a mistake when:
 (a) the risk is allocated to him by agreement of the parties, or
 (b) he is aware, at the time the contract is made, that he has only limited knowledge with respect to the facts
to which the mistake relates but treats his limited knowledge as sufficient, or
 (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.
Mistake vs. Misunderstanding
 Konic: MISUNDERSTANDING—the parties were talking on the phone negotiating the price term. There was a
misunderstanding as to the price term.
 Bert Allen Toyota: MISTAKE, not a misunderstanding—the machine malfunctioned, kicking out the wrong price term 
there was no negotiation.
SCI Minnesota Funeral Services, Inc. v. Washburn-Mcreavy Funeral Corp. (Minn. 2011) – LOSING MISTAKE CASE
 Rule of Law: No rescission or reformation based on a unilateral mistake (that relates only to the value of the subject of a
sale).
 *A court may order an agreement rescinded only if both parties were mistaken with respect to facts material to the agreement,
and the court will not reform a contract based on a unilateral mistake unless there is some evidence of fraud or inequitable
conduct.
 Facts: SCI (P) sold all its shares of Crystal Lake, which consisted of 3 cemeteries, to Corinthian for $1 million. Neither party
was aware that among Crystal Lake’s assets were 2 vacant lots that SCI had previously purchased and paid property taxes
on. Corinthian later sold all its shares of Crystal Lake for $1 million to Washburn-McReavy (D). Once the parties became
aware that the transferred properties included the two vacant lots, SCI and Corinthian sought reformation or rescission of both
the stock sale agreement and the share purchase agreement.
 Holding: SCI AND CORINTHIAN BORE THE RISK OF THE MISTAKE
40
o
o

RESCISSION:
 Rescission of an agreement is appropriate if both parties were mistaken in regard to a material fact. However,
where the subject of the agreement is the sale of stock, rescission is not warranted if the mutual mistake of
the parties merely concerns the value of the shares.
 Here, the subject of the sale was the transfer of SCI’s stock to Corinthian and Corinthian’s transfer to
Washburn. The claimed mistake only concerns the value of the shares transferred. Therefore, rescission
is not warranted.
REFORMATION:
 The plaintiffs also seek reformation of the agreements.
 Reformation is an equitable remedy that is available to amend the language of a contract to reflect the parties’
true intent.
 Reformation is appropriate where:
 (1) a valid agreement exists expressing the parties’ true intent;
 (2) the written agreement fails to express the parties’ true intent; and
 (3) this failure is attributable to a mutual mistake of the parties, or a unilateral mistake caused by
fraud or inequitable conduct by the other party.
 Here, the stock sale agreement allowed SCI to exclude any assets not used for the cemetery business. This
provision gave the plaintiffs the right to exclude the two vacant lots from the transfers. Consequently, the
plaintiffs are unable to demonstrate that the agreement did not reflect the true intent of the parties.
 Moreover, since SCI failed to exclude the two vacant lots notwithstanding its right to do so, the mistake was
SCI’s unilateral mistake.
 Although SCI claims it was unaware of the existence of the two vacant lots, it is charged with constructive
knowledge of the actions of its employees who purchased the lots and paid property taxes on them.
 Since, in the absence of fraud or inequitable conduct, reformation is not available for unilateral
mistakes, reformation is not warranted in this case.
Notes:
o Gartner case: The court quotes the Gartner case for the proposition that a contract may be rescinded (that is, avoided)
if both parties were mistaken as to facts material to the agreement.
o Costello case: The court cites and follows the Costello case to conclude that the mistake here was one of value, not of
fact. In Costello the court held that a sale of corporate stock could not be rescinded based on a mistake relating to the
attributes, quality, or value of the stock, if the means of information were open to both parties alike, and each was
equally innocent, there being no concealment of facts “and no imposition.”
o Restatement §152: As an alternative ground for its holding, the court concludes that even under the Restatement §152
test, the contract is not avoidable because SCI bore the risk of the mistake—court points to the clause that allows SCI
to exclude properties from the sale.
Mistake of Current Fact as Distinguished from Other Mistaken Judgments, Assumptions, or Beliefs
 Like fraud, where the distinction between a fact and something that is not a fact (i.e., a judgment) can be subtle, similar issues
can arise with mistake, because the doctrine of mutual mistake only applies if the mistake relates to facts in existence at the
time of the contract.
o Opinions and judgments, as well as facts that arise after the contract is entered into, are not appropriate grounds for
relief under mistake doctrine.
 Ignorance of the law: can a law be a fact?
o Sometimes a party seeks to avoid a contract because at the time the contract was entered, neither party appreciated the
legal consequences of the agreement.
o Once those consequences become clear, one of the parties finds the contract to be much less advantageous than it had
assumed, and it argues the contract should be avoided as a result.
o In this instance, the mistake of the parties consists of ignorance of a law that will impose consequences on their
behavior.
o Courts differ as to whether a “law” can also be a “fact” for purposes of the mistake doctrine:
 Some cases refuse to characterize an error as to the current state of the law as a “mistake in fact.” Instead,
they reason that parties are presumed to know the law, and thus failure to verify the state of the law is a
mistake in judgment, not in fact. If they attempted to verify the law but received bad advice, any remedy is
against the advisor, not avoidance of the contract.
 Some modern cases considering the issue disagree with this conclusion and acknowledge that the existence
of a law can be a fact.
 Mattson v. Rachetto (S.D. 1999) – WINNING MISTAKE (IGNORANCE) OF LAW CASE
o Facts: Jon Mattson and Jerry Rachetto were law partners, and Jon Mattson was married to Jerry Rachetto’s sister. The
Mattsons deeded a tract of land to the Rachettos but insisted that the Rachettos lease the tract back to them to allow
them to cultivate hay and graze livestock on the property. In spite of the fact that both Jon Mattson and Jerry Rachetto
41
o
o
o
o
o
o
were lawyers, no one realized that the lease was void under a state statute invalidating long-term agricultural
leases. After 12 years had passed, Jerry Rachetto discovered the law invalidating the agricultural lease and erected a
fence around the property to prevent the Mattsons from it.
Key Fact: Buyback lease was void under state statute—both parties were mistaken
 It was a two-sided transaction (a sale and a leaseback)—only the leaseback wasn’t allowed under the state
statute.
Issue: Allow rescission of the contract?  court says yes even though they’re both lawyers.
Plaintiff Argument: The Mattsons took the matter to court and asked that the sale-leaseback transaction be rescinded
for mutual mistake.
Defendant Argument: The Rachettos argued rescission was not appropriate. Alternatively, they argued, if rescission
was appropriate, only the lease should be rescinded, not the transaction as a whole.
Holding: The parties contracted under a “mutual misapprehension of the law,” and rescinded not only the lease, but
the underlying sale of the buffer tract as well. Only the leaseback wasn’t allowed under state law—the court knocked
out both because then only one party would have been benefited.
Reasoning: The Mattson court treated the parties’ ignorance of the law as a mistake of fact (rather than considering
it to be a mistake of judgment).
 This wasn’t considered “conscious ignorance” because this was a very subtle and obscure law—even though
they’re both lawyers, they chance that they would know this obscure not-well-known law is very low.
When a Party Bears the Risk of a Mistake
 One of the important functions of contract law is to allow parties to allocate risks of unknown or uncertain events.
 The doctrine of mistake, if applied too broadly, has the potential to upset the expectations of the parties and undercut the risk
allocation function of contracts generally. As a result:
o If the language of a contract clearly and expressly allocates risk of the mistake at issue to one of the parties, a court
will refuse to allow avoidance of the contract.
o If the language of the contract is unclear or if the contract doesn’t address the matter at all, courts examine whether
under the circumstances it is appropriate to allocate the risk of the mistake to the aggrieved party. If so, a court will
refuse to avoid the contract. If not, relief under mistake doctrine may be available.
Estate of Nelson v. Rice (AZ 2000) – LOSING MISTAKE CASE
 Rule of Law: A party bears the risk of mistake when he is aware, at the time the contract is made, that he has only limited
knowledge with respect to the facts to which the mistake relates but treats his limited knowledge as sufficient.
 Facts: The representatives of Martha Nelson’s estate, held a public estate sale. They hired Judith McKenzie-Larson to appraise
Nelson’s personal property, who explicitly told them that she did not appraise fine art. At the public estate sale, Carl Rice (D)
purchased two paintings for the asking price of $60. Rice was not an experienced art dealer. The paintings turned out to be very
valuable and Rice sold them at auction for over $1 million. The Estate (seller) brought suit seeking to rescind the sale on the
grounds of mutual mistake and unconscionability.
 Estate argument: Neither side knew the true value of the paintings.
o Court said yes—there was a mutual mistake  BUT the seller bore the risk of the mistake.
 Why did the court say the seller bears the risk?
o There was ample opportunity to discover the mistake—it’s your property, you should know the nature of what you’re
selling.
 *The doctrine of mistake is an uphill battle particularly for sellers.
o Restatement §154  “conscious ignorance”
 The case also illustrates two other points:
o The difficulty of putting the parties back where they were before the contract  the remedy that the seller wants
is rescission (the paintings back)—which really means sales proceeds here, because Rice has already sold them at
auction. BUT Rice has also already spent the money (bought a house, etc.).
o The principle that courts will not inquire into the adequacy of consideration  if you sold a $1 million painting
for $60, that’s on you; we’re not going to delve into the valuation of the property.
 Renner case mentioned in Estate of Nelson – WINNING MISTAKE CASE
o Buyer bought the property for a specific purpose
o Both parties thought there was sufficient water available for production of jojoba
o *It was something that was not readily discoverable by the parties at the time of contracting.
 There was nothing in the contract that allocated risk to the buyer (contrast to McCall case)
Cherry v. McCall (TX 2004) – LOSING MISTAKE CASE
 Rule of Law: A contract may be rescinded based on mutual mistake if there is a mistake of fact that materially affects the
agreed-upon exchange.
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2.
Facts: The Cherry’s (P) purchased a home from the McCalls (D). The contract had an “as-is” clause. After the purchase, the
Cherry’s discovered a walled-in room in the basement contaminated with mold, filled with trash, including plumbing fixtures,
boards, pipes, rocks, and used building materials. The Cherrys sued the McCalls, seeking a declaratory judgment that either (1)
the McCalls breached the contract or (2) the existence of the hidden room qualified as a mutual mistake justifying rescission
of the contract.
Why is this a better case for the party asserting mutual mistake?
o Because it’s the buyer that’s asserting the mistake (contrast to Estate of Nelson)
Why is this a worse case for the party asserting mutual mistake?
o The contract stipulated that the property was to be bought “as is”
Only after they bought the home did they discover the mold, faulty electricity and plumbing.
Why not bring suit for misrepresentation/fraud?
o There was a concealment/nondisclosure  BUT apparently the McCall’s did not know about the room either.
Restatement §154: Risk is “allocated” to the buyer here due to the “as is” clause in the contract  therefore, the Cherry’s have
taken the entire risk of the property.
Sophisticated parties—just because you’re unsophisticated does not mean that you can avoid your contractual obligations 
Cherry’s argument that they’re not sophisticated buyers doesn’t work with the court.
Unilateral Mistake
 Unilateral mistake: where the mistake relates more to one party than to the other.
 Elements of unilateral mistake are set out in the Restatement, Second §153
 Because one party is more mistaken than the other or the mistake is more material to one party than it is to the other, courts
require a particularly strong showing of inequity in order to avoid the contract.
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Example #1: one party has a mistaken belief of fact, while the other knows the true state of affairs.
o NOTE: This is the clearest example of unilateral mistake.
o To protect the noncomplaining party’s reasonable expectations, relief will be available only if enforcement of the
contract would lead to palpable injustice.
Example #2: both parties share the same mistaken belief of fact, but the mistake really isn’t particularly relevant to the
noncomplaining party’s intentions or purposes when it enters the contract.
o Mistake is shared, but not “mutual” in the legal sense.
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o
The mistake may relate to a basic assumption for the complaining party only, or materially affect the performance of
the complaining party only.
o The noncomplaining party, though mistaken, is relatively indifferent to the true state of affairs.
Bert Allen Toyota, Inc. v. Grasz (Miss. 2005) – LOSING UNILATERAL MISTAKE CASE
 Rule of Law: A contract may be rescinded on the basis of a unilateral mistake if:
o (1) the mistake was so fundamental in character that there was no meeting of the minds,
o (2) there was no gross negligence on the part of the party seeking rescission,
o (3) no intervening rights have accrued,
o (4) the parties may still be placed in status quo, and
o (5) the party seeking rescission did not induce the mistake through negligence.
 Facts: Horst Grasz (P) entered into discussions to purchase a new 2003 Toyota Tacoma pickup truck from Bert Allen Toyota,
Inc. (D). However, the computer miscalculated the numbers, and the contract reflected a total price of $15,017.50 instead of
the actual price of $17,017.50. Although the sales manager was aware that the computer had made similar mistakes in the past,
the sales manager did not confirm the calculations performed by the computer. The total price of $15,017.50 was circled, and
the sales manager handwrote “everything” next to the price. Bert Allen Toyota discovered the miscalculation when preparing
the final paperwork after the truck arrived from the manufacturer and refused to sell the truck to Grasz at the lower price stated
on the agreement
 Holding: Bert Allen Toyota was negligent in failing to check the calculations of the computer. Additionally, BAT was aware
of the cost of the vehicle and of the profit margin typically included in the sales price. Because BAT negligently induced the
mistake, BAT cannot rescind the contract on the ground of unilateral mistake. Accordingly, the judgment of the trial court is
affirmed.
 NOTE: it was easy here to unwind the deal and return the parties to where they were before the contract (“no intervening rights
have accrued” “parties may still be placed in their status quo”).
*PUSHBACK: Drennan v. Star Paving Co.
 Drennan is also an example of a unilateral mistake, and of a court’s reluctance to grant relief for that mistake.
 Facts: a subcontractor submitted a bid of $7,131.60 to do some paving work and subsequently attempted to withdraw the bid
as being too low.
 Holding (Justice Traynor): NO MISTAKE
o Drennan’s reliance on the bid made it irrevocable.
o Star Paving argued in part that its bid was the result of mistake, and it was therefore entitled to revoke it  court
denied relief on this basis because:
 Drennan had no reason to know that defendant had made a mistake in submitting its bid, since there was
usually a variance of 160 per cent between the highest and lowest bids for paving in the desert around
Lancaster.
 Under these circumstances defendant’s mistake, far from relieving it of its obligation, constitutes an
additional reason for enforcing it, for it misled plaintiff as to the cost of doing the paving.
 Even had it been clearly understood that defendant’s offer was revocable until accepted, it would not
necessarily follow that defendant had no duty to exercise reasonable care in preparing its bid. It presented its
bid with knowledge of the substantial possibility that it would be used by plaintiff; it could foresee the harm
that would ensue from an erroneous underestimate of the cost.
 Moreover, it was motivated by its own business interest. Whether or not these considerations alone would
justify recovery for negligence had the case been tried on that theory, they are persuasive that defendant’s
mistake should not defeat recovery under the rule of section 90 of the Restatement of Contracts.
 As between the subcontractor who made the bid and the general contractor who reasonably relied on it, the
loss resulting from the mistake should fall on the party who caused it.
 Analysis: In Drennan, the calculation of the bid was in the hands of Star Paving, so it is fair to say that Star Paving was the
only party who was mistaken. Drennan didn’t make any assumptions about the facts underlying the bid; it simply accepted Star
Paving’s figure and used it in computing its own bid. In the face of Drennan’s reasonable reliance on Star Paving’s mistake,
the court concluded that the loss should fall on the mistaken party.
 *Where only one party is mistaken, it will take a strong showing of unconscionability or unfairness to relieve that party
of the consequences of its own mistaken actions.
3.
Mistake in Expression and Reformation
 Rescission: essentially the same thing as avoiding the contract  the transaction is unwound: the parties gain relief from their
contractual obligations, but they disgorge the benefits received to date from the contract as well.
 The Restatement contemplates a wider array of remedies  suggests that courts grant relief as justice may require, including
in a proper case protecting the parties’ reliance interests or even adjusting or reforming the terms of the contract.
o NOTE: less courts follow this over strict rescission as relief.
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Mistake in expression: a mistake as to words used (a typographical error); the final documents, signed by both parties, do not
express what the parties actually intended.
o Relief: this is one context in which courts routinely allow reformation rather than insisting on rescission.
o Difficulty with mistake in expression is that it is not always easy to distinguish a pure mistake in expression (i.e., a
typo) from an erroneous term in a contract caused by an underlying mistake as to a fact external to the writing.
Reformation: An equitable remedy by which a court amends the terms of an agreement to give effect to the true intent of the
parties.
o Where courts reform a contract in which there has been a mistake in fact, the courts are crafting obligations for the
parties that their agreement did not contemplate.
 Example: Unconscionability doctrine: When a court finds a contract or one of its clauses to be
unconscionable, the court may decline to enforce the contract, may sever the unconscionable clause, or may
limit the application of an unconscionable clause to avoid any unconscionable result.
o NOTE: courts are cautious about resorting to the remedy of reformation to adjust for a mistake of fact unless the
circumstances are particularly clear.
CHANGED CIRCUMSTANCES
B. EXCUSE DUE TO CHANGED CIRCUMSTANCES
 Changed circumstances = (1) impracticability (2) frustration of purpose
 Big issue: whether the party looking to get out of the contract actually bore the risk.
Changed Circumstances vs. Mistake
 There’s a lot of overlap between changed circumstances and mistake, but:
o Mistake doctrine: applies to errors of fact made at the time of contracting.
o Doctrines of impracticability and frustration of purpose: look to events subsequent to contract formation.
 Whether it is a mistake or changed circumstances, a party is asking the court to read an “out” into the contract for them.
 When are impracticability and frustration of purpose used?
o Developments have so changed the environment in which performance is to take place and are so contrary to the
assumptions made at the time of contracting that the very premises of the contract have been overturned.
o Where a party asserts that its contract performance has become impracticable or where it argues that its purpose in
performing the contract has been frustrated, it is saying that a profound change of circumstances has defeated its
legitimate expectations under the contract. As a result, it seeks excuse from performing as originally promised.
 What relief is available?
o The court may avoid the contract altogether or adjust the performances required under the contract to take account of
the changed circumstances.
 What are the crucial issues to be evaluated?
o The crucial issues to be evaluated in deciding whether a contractual performance has become impracticable or its
purpose frustrated are materiality and risk allocation.
 What is the standard for providing relief?
o Relief is only available if the supervening change in circumstances imposes a severe and unwarranted burden on
the party seeking relief and it is not appropriate to place the risk of the change on that party.
 NOTE: in modern contract law, the doctrine of impracticality has somewhat absorbed the doctrine of frustration of purpose
(but frustration doctrine is still recognized in common law).
1.
Impracticality
 A party may avoid performance if it becomes impractical due to changed circumstances. A performance has become
impractical if it will cause extreme and unreasonable difficulty, expense, injury, or loss to one of the parties.
 Impracticability Defense: A defense to a breach of contract claim, which provides that a party’s performance is excused if:
(1) the party’s principal purpose is substantially frustrated (2) without his fault by the occurrence of an event, (3) the nonoccurrence of which was a basic assumption on which the contract was made, unless the contract language or the circumstance
indicate the contrary.
 The standard for impracticability is subjective, focusing on whether the specific parties to the contract can perform, rather than
whether anyone at all can perform.
o Example: Farmer Joe agrees to sell 100 gallons of milk to a grocery store for $3 per gallon. However, if all the cows
in the region die, and it will cost Farmer Joe at least $30 per gallon to obtain milk from an out-of-state farmer to sell
to the grocery store, Farmer Joe’s performance has become impractical.
 The non-occurrence of the event must have been a basic assumption of the contract.
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o Example: Farmer Joe did not foresee the death of all the cows in the region.
And the event must not be the party’s fault
o Example: Farmer Joe did not cause the death of the cows.
RESTATEMENT, SECOND §261. DISCHARGE BY SUPERVENING IMPRACTICABILITY
Where, after a contract is made, a party’s performance is made impracticable without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the contract was made, his duty to render that performance is discharged,
unless the language or the circumstances indicate the contrary.
CNA International Reinsurance Co. v. Phoenix (Florida 1996) – WINNING IMPRACTICALITY CASE (RST §261)
 *River Phoenix case
 Rule of Law: A personal-services contract is rendered impossible to perform by the death of the party obligated to perform
the services.
 Facts: Jude Nile was a corporation owned by River Phoenix (D) and his mother, Arlyn. Nile entered into agreements to
loan out Phoenix for the purpose of filming several movies. Both agreements contained a general obligation not to do
anything that would deprive the parties of their benefits. Phoenix died due to an overdose prior to the completion of both
movies. The parties sued Phoenix for breach of the actor-loanout agreements.
 Holding: THIS IS THE ONE CASE WE HAVE THAT THE PERFORMANCE WAS EXCUSED  DEATH EXCUSES
PERFORMANCE
 Generally, under the Restatement §261, a party’s obligation to perform a contract is discharged if the performance becomes
impracticable, without fault of the party, due to an event that changes a basic assumption upon which the contract was
made.
 This case is different because it’s not just impracticable to perform—it’s objectively impossible to perform.
 Plaintiff (Insurance Co.) Argument: lack of reasonable care—he is at fault for his death via overdose; this is a common
theme that runs throughout mistake and changed circumstances (to what extent someone is at fault/responsible and how
that factors into the analysis of granting relief).
o Court refuses to get into this—whether he’s at fault with regard to his own death (there’s a longstanding rule that
someone is not responsible legally for their death—to open this up for changed circumstance doctrines brings up
issues of where we draw the line and the court doesn’t want to do this).
 Remedy sought: While the insurance companies are not asking for specific performance (obviously, because he’s dead)
but they’re asking the monetary equivalent of if he had performed—the court says they can’t do this (from practical
standpoint, they don’t even know how much money the films would have made).
 Also, the actual contract did provide for relief in certain circumstances (i.e. it said he wasn’t to get on planes, etc.)  Court
says that the insurance companies could have provided for something like this as well and they didn’t, so since the court
is analyzing this in the ABSENCE of language addressing the circumstances, they’re not going to read it into the
contract.
 Note: Although the court does not discuss risk allocation in so many words, it must have decided that the policyholders
bore the risk of the actor’s untimely death.
*NOTE: Modern common law cases where impossibility or impracticability are at issue often cite Restatement, Second §261. The
equivalent rule applicable to a sale of goods is UCC 2-615(a). Although there are differences in the wording of these two provisions,
their concept and elements are substantially the same.
UCC § 2-613: A provision of the Uniform Commercial Code that excuses a total or partial loss of goods occurring prior to delivery
where the goods (1) were identified to the contract and (2) suffered casualty by no fault of either the seller or buyer.
UCC § 2-615. EXCUSE BY FAILURE OF PRESUPPOSED CONDITIONS: A provision of the Uniform Commercial Code that
permits a delay in the seller’s performance where such performance is made impracticable by a circumstance whose nonoccurrence was
assumed at the time the contract was made.
Clark v. Wallace County Cooperative Equity Exchange (Kansas 1999) – LOSING IMPRACTICALITY CASE (UCC 2-615)
 Rule of Law: Where a seller contracts to provide goods that are not identified at the time of contracting and the seller’s performance
is then impaired by a foreseeable event that damages the goods, the seller is not excused from delivering the goods as promised.
 Facts: Farmer Clark (P) contracted to sell 4,000 bushels of corn, but due to a freeze in the region (something he could not control),
he could only deliver half that amount. Clark contended that he was excused from delivering the balance because of the weather.
Coop disagreed and reduced its payment to Clark by the amount attributable to the shortage.
 The court said that he’s responsible for delivering the rest because he was still possible for him to deliver.
 There was no objective impracticability—because the contract never specified that the grain had to be grown on his own property
(so he could have purchased the grain from someone else to make up for what he couldn’t produce himself).
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He wants to avoid taking this loss because he will have to buy the grain at a high price (due to the freeze) and then sell it to the
Coop for a lower price.
Kansas statute asks:
o Was the non-occurrence of the contingency the seller’s fault?
 The court says yes—he could have still provided the grain.
o Did the seller have reason to know of the impracticability?
 The court says yes, these types of contracts are made all the time and it is not unreasonable to foresee
weather conditions affecting grain output.
o Did the seller assume the risk of the contingency?
 The court says yes—the Coop was locking in the price they wanted for that amount of grain; the seller
is obligated to give them that, even if they take a loss in profits due to weather shorting the expected
output of grain.
UCC § 2-615, which excuses a party from performance on account of impracticability, does not assist Clark’s claim. The
impracticability excuse may not be relied upon where the seller could foresee the contingency that caused the loss. Farmers in
Kansas can foresee late September freezes.
Public Policy: If the court were to determine otherwise, farmers could enter into forward commodity agreements without specifying
the land to be harvested, risk a crop failure, then suffer no liability for a shortage.
All Points Capital Corp. v. Boyd Brothers, Inc. (Florida 2011) – LOSING (COMMERCIAL) IMPRACTICALITY CASE
 Rule of Law: A party’s obligation to perform a contract is discharged if the performance becomes impracticable, without fault of
the party, due to an event that changes a basic assumption upon which the contract was made.
 Facts: Boyd Brothers, Inc. (D) operated a printing business, and a significant portion of its customers were located along the coast
of the Gulf of Mexico. Boyd defaulted promissory notes owed to All Points. Boyd raised the defense of commercial
impracticability based on a BP oil spill in the Gulf of Mexico. All Points filed a motion for summary judgment.
 Foreseeability is not enough to get out of the contract  general point: in contract law, you have the ability to negotiate certain
clauses in the contract to protect you (contrast to torts—in torts you don’t have the ability to negotiate to protect yourself from
foreseeable harm).
 The party trying to get out of the contract bore the risk and the court won’t let them get out of their obligations.
 Holding: Court says there’s not enough direct connection to warrant commercial impracticability. The BP oil spill in the Gulf of
Mexico may have impacted Boyd’s business. However, the oil spill did not prevent Boyd from operating the printing business.
Rather, the oil spill simply made Boyd’s business more difficult and less profitable. This is not sufficient to invoke the
impracticability defense.
FRUSTRATION OF PURPOSE
2.
Frustration of Purpose
 Frustration of Purpose Defense: A defense to a breach of contract claim, which provides that a party’s performance is excused
if it is made impracticable without his fault by the occurrence of an event, the non-occurrence of which was a basic assumption
on which the contract was made, unless the contract language or the circumstances indicate to the contrary.
 Krell v. Henry (Eng. Rep. 1903)  CREATED THE DOCTRINE OF FRUSTRATION OF PURPOSE
o Facts: Krell owned a flat on Pall Mall, London, which overlooked the route to be taken by the coronation procession
of King Edward VII, to take place on June 26 and 27, 1902. About ten days before the coronation, Henry noticed a
sign in the window of the flat offering it for use to view the procession. He responded to the notice and on June 20 he
entered into a contract with Krell for the use of the flat on the days in question and paid a deposit.
o Issue: After the contract was made, the coronation was postponed because the king became ill. The court had to decide
whether Henry was liable for the remainder of the price of the rooms even though the purpose for which they were
hired had fallen away.
o Holding: The court held that performance would also be excused where a change in circumstances following the
contract defeated the mutually understood purpose of the contract. The assumption must be fundamental to the
contract and must be shared. It could not be merely the private purpose of one of the parties.
o Reasoning: The court could not simply apply the precedent of Taylor v. Caldwell because the contract had not become
impossible to perform. The rooms had not been destroyed, and Henry could still have taken occupancy on June 26
and 27. The court therefore had to extend the doctrine established by Taylor beyond the limits set in that case.
 Restatement, Second §265 reflects the doctrine of frustration of purpose.
RESTATEMENT, SECOND §265. DISCHARGE BY SUPERVENING FRUSTRATION
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Where, after a contract is made, a party’s principal purpose is substantially frustrated without his fault by the occurrence of an event the
non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are
discharged, unless the language or the circumstances indicate the contrary.
Lindner v. Meadow Gold Dairies Inc. (Hawaii 2007) – LOSING FRUSTRATION OF PURPOSE CASE
 Rule of Law: A party to a contract may be excused from performance under the doctrine of frustration of purpose if:
o (1) a principal purpose of the contracting party was frustrated,
o (2) the frustration was substantial or severe, and
o (3) the event causing the frustration was not foreseeable to the parties when they entered the contract.
 Facts: Jeffrey Lindner (P) leased property on the Hawaiian island of Kauai to Meadow Gold Dairies, Inc. (D), which operated
a dairy farm on the property. A few months prior to the lease renewal, a parcel of land downstream from Meadow Gold’s dairy
farm had been purchased by Mandalay Properties Hawaii and developed into a home called the Tara Plantation. The Tara
Plantation was designed to be a home for Peter Guber, the owner and chairman of Mandalay Entertainment, a film-production
company. Guber took issue with the operation of the dairy farm. Guber complained of raw sewage and contamination of his
land and water downstream from the dairy farm and threatened a lawsuit under the Clean Water Act, 33 U.S.C. § 1251 et
seq. Subsequently, Meadow Gold closed the dairy farm and terminated the lease approximately 13 years before the end of the
term of the lease.
 Two key things Lindner brings out:
o Impracticability
o Frustration of purpose
 Big picture: think about the overlap between the two doctrines
 How would you change mistake to changed circumstances?
o The change was present at the time of contracting (mistake) vs. the change occurs after the contract was made (changed
circumstances)
 Meadow Gold Dairies’ argument essentially boils down to the changed circumstance being that previously, they weren’t being
held to comply with the Clean Water statute.
 Holding: The frustration of purpose must be so severe that the frustration is not fairly regarded as within the risks assumed
under the contract. Inconvenience, unprofitability, and reduction in profits are not sufficient to establish severe frustration. In
this case, compliance with previously enacted federal law is not a severe frustration of purpose and was not unforeseen.
CONDITIONS AND PROMISES
A. AN OVERVIEW OF THE COMPONENTS OF A CONTRACT: CONDITIONS AND PROMISES
 Promise: is a commitment to act or refrain from acting in a specific way in the future.
o A relationship does not qualify as a contract unless at least one party has made a promise to be performed in the future.
 Condition: an event, not certain to occur, which must occur before performance under a contract becomes due. RST §224.
o That is, when making the contract, the parties agree that the obligation to render a particular performance (or set of
performances) is contingent on the happening of a specified uncertain event.
o The “event” need not be an affirmative happening; it could also be a non-happening  a performance could be
conditional either on the stated uncertain event occurring or on it not occurring.
1.
Identification of Promises and Conditions
HYPO TO IDENTIFY THE PROMISES AND CONDITIONS: Amber Ayle plans to open a pub. Bud Brewster owns a small
apartment building that has vacant retail space on the ground floor, which would be suitable for Amber’s pub. The lease includes
the following terms:
Promise #1
Promise #2
Condition #1
1. Bud will deliver possession of the premises to Amber on September 1 and will allow Amber
to occupy and conduct business on the premises for the term of this lease.
2. Amber will pay monthly rent of $15,000 for the premises, payable in advance on the fifteenth
day of each month, commencing on August 15.
3. At the time of executing this lease, the parties have not ascertained the permissible retail
uses of the premises under current zoning regulations. This lease will be of no force or effect
if the current zoning of the property does not allow the operation of a pub on the premises.
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Condition #2
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2.
4. Amber has submitted an application for a liquor license. This lease is contingent on Amber’s
pending application for a liquor license being approved by the state liquor board by not later
than July 30.
5. Amber may renew this lease for a further period of five years on the same terms set out in
this agreement, save that the monthly rent will increase to $16,500. To exercise this option
to renew, Amber must give written notice of intent to renew to Bud no later than March 31
of the final year of the initial lease period.
6. At the termination of this lease, Amber will vacate the premises and redeliver them to Bud in
the same condition as at the beginning of the lease term.
Two central express promises are exchanged in this contract:
1. Bud promises to give Amber occupation of the premises for the period of the lease, beginning on September 1, and
2. Amber promises to pay rent and to return the premises in good condition at the end of the lease term.
Two central express conditions are expressly stated:
1. Clause 3 states that the lease will be of no force or effect if the current zoning of the property does not allow a pub to
be operated on the premises, and
2. Clause 4 makes the lease contingent on the grant of a liquor license to Amber. If either of these conditions is not
satisfied, the lease does not go into effect.
Two other conditions, not expressly stated as such but inferred from the intent of the parties:
1. Bud’s obligation to give possession of the premises to Amber on September 1 is conditional on Amber paying the
September rent on August 15; and
2. If Bud fails to give Amber occupation of the premises in September, Amber would not be obliged to make her advance
payment of the October rent on September 15.
The rendition of performance by each party is an uncertain future event because it is not inevitable that Amber will pay the
rent or that Bud will allow Amber to continue in occupation of the premises.
NOTE: Amber’s renewal option in Clause 5 also contains a condition—Bud’s obligation to allow the extension of the lease
for an additional five years is conditional on Amber’s giving timely written notice of intent to exercise her renewal right.
The Requirement of Uncertainty in Relation to Future Events and Past Events
 If an event is certain to occur, there is little purpose in making a promise conditional on it.
 Uncertainty: means, in most cases, that the event contemplated must be one that will occur in the future because an event
that has already occurred cannot usually qualify as uncertain.
 EXCEPTIONS: it is not an invariable rule that the event must lie in the future.
o Sometimes even though an event has occurred, the parties may not know, at the time of executing the contract, if it
happened.
o A condition based on a past event may serve a useful purpose where the parties themselves are unsure about whether
it occurred and cannot readily ascertain that information at the time of contracting.
The zoning of the
property is a
condition
contingent upon
an existing state
of affairs.
Example (from HYPO):
3. At the time of executing this lease, the parties have not ascertained the permissible retail uses
of the premises under current zoning regulations. This lease will be of no force or effect if the
current zoning of the property does not allow the operation of a pub on the premises.
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3.
Uncertain future events from HYPO:
 Whether the liquor license will be granted,
 Whether the parties will honor their commitments to perform, or
 Whether Amber will decide to give a notice of renewal.
What Purposes Do the Parties Seek to Achieve in Including Conditions in the Contract?
 Each condition has a particular purpose.
 *Make sure you understand why the parties made the term a condition and what purpose it serves in the transaction.
 Escape clauses: allow one or both of the parties to escape the contract if the condition is not fulfilled.
49
Example (from HYPO):
3. At the time of executing this lease, the parties have not ascertained the permissible retail uses
of the premises under current zoning regulations. This lease will be of no force or effect if the
current zoning of the property does not allow the operation of a pub on the premises.
4. Amber has submitted an application for a liquor license. This lease is contingent on Amber’s
pending application for a liquor license being approved by the state liquor board by not later
than July 30.
Clauses 3 & 4 are
escape clauses.
They are likely
included by Amber
b/c she doesn’t
want to be stuck
w/ a 5-year lease if
she can’t open the
pub.
o
Sequence of performances: the order in which the promises and conditions are mentioned and the way in which they
are divided up into the Clauses is important—you infer the order in which they must be performed from the sequence.
4.
The Sequencing of Performance: Conditions Precedent and Concurrent Conditions
 Condition precedent: Where a condition must be satisfied before the performance subject to that condition will become due.
o HYPO: All the conditions in the lease are conditions precedent.
 Example (from HYPO): Amber’s timely written notice of renewal is a condition precedent to the renewal of
the lease for an additional five-year term.
 Concurrent conditions: a set of promises that are dependent on each other and must be performed simultaneously.
o HYPO: There are no concurrent conditions in the lease.
5.
The Arcane and Confusing Distinction Between Conditions Precedent and Conditions Subsequent
 The distinction between conditions precedent and concurrent conditions is important because it goes to the very structure of
the contract and relates to the order in which performance obligations arise under the contract.
 However, there is also a distinction between conditions precedent and conditions subsequent  however, it does not much
matter in the context of contract law.
Definition
Sequence
Example
Burden of Proof
Consequences
Conditions Precedent
An event that must occur before a
contractual duty becomes due.
Occurs/is present before a contractual duty
becomes due.
A contract for the sale of land says,
“Buyer’s duty to pay the purchase price is
conditional upon a building permit being
issued by the county.”
Must be proved as an element of the claim
by the party alleging a breach.
The ultimate effect of its nonoccurrence is:
The contingent promise need not be
performed.
Conditions Subsequent
An event that discharges a duty that is
already in existence.
Occurs/is present before a contractual duty
becomes due.
A contract for the sale of land says,
“Buyer’s duty to pay the purchase price is
excused if a building permit is not issued by
the county,”
Must be proved as a basis for excuse by the
party denying a breach.
The ultimate effect of its nonoccurrence is:
The contingent promise need not be
performed.
NOTE: courts tend to follow the preference indicated in Restatement, Second §227, which states a clear preference for interpreting
conditions as precedent where any doubt exists as to the intent of the parties.
6.
An Introduction to the Distinction Between Express Conditions and Construed or Implied Conditions
 Express conditions: explicitly stated events that must occur before a party is subject to a particular obligation or liability.
o Language used: “[This contract] will be of no force or effect if…”; “_____ is contingent on_____.”
 Inferred conditions: those not expressly stated in the contract but that are inferred, as a matter of interpretation or construction,
that the parties intended or reasonably must have intended to be conditions.
 Consequences of the distinction:
o The distinction does have one significant consequence: If the parties have expressed a condition, a court will give
great weight to their expressed intention and will strictly enforce the condition, requiring exact compliance with its
requirements.
 Example: Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co. (N.Y. 1995)
o STRICT ENFORCEMENT OF EXPRESS CONDITION
o Sum.: Verbal consent given in place of written consent by deadline. Contract void because the written consent was
not received.
50
o
o
o
o
o
o
Facts: Oppenheimer and Co., the tenant of office premises, entered into an agreement with Oppenheim, Appel, Dixon
& Co. under which it subject to the express condition that on or before February 25, 1987, it would deliver to
Oppenheim, Appel, Dixon & Co. the prime landlord’s WRITTEN CONSENT to the installation of communications
equipment on the premises. If not, the sublease would be “null and void and of no further force and effect.”
Oppenheimer and Co. did get the prime landlord’s consent to the work in time, and the sublessor’s attorney
VERBALLY informed the sublessee of this by telephone on February 25. However, the WRITTEN CONSENT was
not delivered to the sublessee by the deadline. The sublessee immediately notified the sublessor that it did not intend
to go forward with the sublease, which it contended was “invalid” because of the sublessor’s failure to deliver the
written consent on time.
Dispute: The sublessor sued the sublessee for breach of contract, arguing that it had substantially complied with the
condition.
Holding: SUBLEASE IS NULL & VOID
Reasoning: The court found that the language of the sublease unambiguously established the timely delivery of the
prime landlord’s written consent as a condition. Because the condition was express, it must be exactly and strictly
complied with, and there was no justification for requiring the sublessee to accept anything short of full and
precise compliance.
Although this strict reading of the language of the agreement may seem unduly technical or harsh, under principles of
freedom of contract, a court cannot interpret a contract to avoid such results if the contract unmistakably expresses the
intent to treat an event as a condition.
NOTE: for a condition to be express, it is not enough that the term is express—the intent to make it a condition also
must be articulated.
Implied v. Construed
 Implied (implied in fact)
o A condition is implied in fact where it is not expressly stated but can be inferred as a matter of evidence from the
language in context.
 Construed (implied in law)
o A condition is construed (or implied in law) where there is not enough evidence to draw a factual inference, but either
a rule of law recognizes a condition under the circumstances or the court concludes as a matter of law that it is
reasonable and fair, given the nature of the relationship and the usual expectations in this type of contract, to find that
a condition exists.
 NOTE: in both cases the end result is that a condition is found to exist.
 The important point is that even where the contract does not say in so many words that a term is a condition, courts may find,
based on the nature and purpose of the contract, that it was intended to be a condition or that the parties, acting fairly and
reasonably, must be taken to have intended it as such.
7.
Pure Promises, Pure Conditions, and Terms that are Both Conditions and Promises (Promissory Conditions)
 Pure Conditions
o Pure condition: a term that is only a condition, and neither party makes any promise that it will be fulfilled.
o The nonfulfillment of the condition excuses the performance that was contingent on it.
o Because no promise of fulfillment was made, neither party breaches as a result of the nonfulfillment, and the
nonperformance of the obligation contingent on the condition is not a breach of contract  the nonfulfillment of either
of these conditions excuses the parties from their obligations under the lease, so that failure to perform is not a breach
of contract.
o Example (from HYPO): if, at the end of the term of the lease, Amber does not give Bud notice of renewal, this
condition precedent to the extension of the lease is not fulfilled. Amber did not promise to give the notice, and it seems
clear, on a reasonable interpretation of their intent, that the parties meant Amber to retain the discretion to exercise
the renewal if she so wishes. If she does not exercise it, the lease terminates at the end of the initial five-year period.
 Promissory Conditions
o Promissory Conditions: (“impure conditions”) where a term in a contract is both a promise and a condition; the
parties promise, either expressly or impliedly, that a condition will be fulfilled.
o If a promissory condition is not fulfilled, the consequences of both a failure of a condition and a breach of contract
follow; that is, the person responsible for fulfilling the condition will be liable for damages or some other remedy, and
the other party is relieved of the obligation to render the performance contingent on the condition.
o Example (from HYPO): if, Amber fails to pay the rent on August 15, Bud is not obliged to deliver possession of the
premises to her on September 1, and he can claim from Amber any damages that he suffers as a result of her breach
of the lease.
 Pure Promises
o Pure Promises: an unconditional promise—a in a contract that is not a condition of any further performance.
51
o
8.
Example (from HYPO): Clause 6—Amber’s promise to vacate the premises and redeliver them to Bud in the same
condition as at the beginning of the lease term  this is a pure promise because it is not an event that must occur
before some performance under the contract becomes due—there is no subsequent duty of performance by Bud that
is contingent on Amber’s performance of this promise.
Interpretation to Determine if a Term is a Condition or Merely a Timing Provision
 Where parties’ intentions are not clear, the nature of the provision (either a promise, condition, or promissory condition) must
be decided by interpretation or construction:
o Example: Koch v. Construction Technology, Inc. (TN 1996)
 Facts: the prime contractor (CTI) entered into a subcontract with Koch under which he would paint a
structure erected by the prime contractor for the property owner. The subcontract contained a payment
provision that read, “Partial payments subject to all applicable provisions of the Contract shall be made when
and as payments are received by the Contractor.”
 Dispute: Koch completed his work, but CTI only paid him part of the contract price. CTI refused to pay the
balance because it had not been paid by the owner in full. CTI argued that the “pay when paid” term in the
subcontract made the owner’s payment a condition precedent to CTI’s obligation to pay Koch. Koch sued
CTI for the balance of the contract price.
 Holding: The Supreme Court awarded Koch the balance due to him under the contract.
 Reasoning: The court interpreted the “pay when paid” clause as not being a condition, which would release
the general contractor from paying the subcontractor in the event that the owner fails to pay, but instead as a
provision that fixes the timing of the payment  although the general contractor’s obligation to pay the
subcontractor does not become due until the general contractor has been paid by the owner, the general
contractor is not excused from paying the subcontractor if the owner fails to pay at all.
 The reasoning behind this interpretation is that the general contractor has dealt with owner and must
be taken to have assumed the risk that the owner will not be able to pay. The subcontractor has no
contractual relationship with the owner, so a simple “pay when paid” provision in the subcontract
cannot reasonably be interpreted to shift the credit risk of the owner’s nonpayment onto the
subcontractor. If the parties intend the subcontractor to assume this risk, the subcontract should
contain an express condition that clearly shows this to be the parties’ intention.
B. A PROMISE TO TAKE ACTION TO TRY TO SATISFY A CONDITION
 “Ancillary promises” attached to conditions
o In between “pure conditions” and “promissory conditions” there is a third category in which the condition is not fully
promissory, in that a party does not promise that it will be fulfilled, but it is not a pure condition either, because a
party promises to take some action to try to get it fulfilled.
o The promise to try to bring the condition about might be express (i.e. by specifying the action to be taken or obliging
the party to make reasonable or good-faith efforts to attempt to secure the fulfillment of the condition) or it might be
inferred by interpretation or construction.
o Example (from HYPO): Imagine Amber had not yet applied for the license, and the lease provided: “This lease is
contingent on Amber being granted a liquor license by the state liquor board by not later than July 30.”
 Amber wouldn’t get the license unless she submitted an application and pursued the application process
properly, so in the absence of a promise to make reasonable or good-faith efforts to obtain the license, Amber
could prevent the condition from being fulfilled simply by failing to try to get the license.
 *The condition of obtaining the license is not promissory in that Amber does not promise that she will get
the license (just that she will try)  there is an ancillary promise of reasonable or good-faith efforts that is
attached to the condition.
C. SUBSTANTIAL COMPLIANCE WITH CONSTRUED (OR IMPLIED) CONDITIONS
 A condition is express if the parties use language in the contract (such as “on condition that,” “contingent upon,” “provided
that,” “subject to,” or equivalent words) that makes it clear that the stated event is intended to be a condition.
 Just because a term is express does not mean that it is an express condition. For a term to qualify as an express condition, its
language must state that an event is intended to be a condition.
 “Constructive condition of exchange”: used to describe the situation in which the court construes one party’s promise to be
a condition of the promise of the other.
 Where the parties clearly and unambiguously express a condition, the doctrine is that the court should strictly enforce it to give
effect to the parties’ manifested intent and should not find that approximate or substantial satisfaction is good enough. However,
if the term is not expressly stated as a condition, so that the court has to interpret or construe it as such, the court has much
more flexibility and may use its discretion to find that the condition can be satisfied by substantial compliance.
52
HYPO
o Landlord will provide:
o Habitable premises—both a promise and a condition
o Gym—court would not say this is a condition (that tenant can breach because it’s not fulfilled).
o Picnic area with flower bed—this is least likely for court to say tenant can breach w/ remedy.
o Breach would be:
o Rat infested
o Machines break down
o Flower bed
*To the extent that it is a condition and not just a promise, it opens up a whole new realm of possibilities for remedies—i.e. The key to
“habitable premises” being a condition is that promise to pay rent can be broken.
Jacob & Youngs, Inc. v. Kent (N.Y. 1921) – BREACH OF PROMISE, NOT FAILED CONDITION (DAMAGES = DIMINUTION
IN VALUE)
 Cardozo, J.
 Rule of Law: If a party substantially performs its obligations under a contract, that party will not be forced to bear the
replacement cost needed to fully comply with the agreement but instead will owe the non-breaching party the difference in
value between full performance and the performance received.
 Facts: Jacob & Youngs (P) is a general contractor that built a country residence for Kent (D). The contract stated that Jacob
was to be paid $77,000, and one specification in the contract was that all pipes used be manufactured in Reading, Pennsylvania.
After J&Y completed work, Kent noticed that some of the pipe was manufactured in other places besides Reading. Kent
demanded the pipe be replaced. Replacement of the pipe, however, would require substantial additional work and expense by
Jacob. Additionally, the existing pipe was of the same quality as Reading pipe and was supplied based on an innocent mistake
by Jacob caused by the inattention of its subcontractor. At trial, J&Y was not allowed to introduce evidence that the pipe
installed was of the same quality as Reading pipe, and the jury entered a verdict for Kent.
 *Cardozo: This was a breach of promise, not a failed condition.
o The lower court said that it was a failed condition so that J&Y was not entitled to the final payment.
o Cardozo says that Kent is not off the hook for the payment on the grounds that they failed with the pipes—he says
that the defendant is entitled to the offset (the diminution in value to the extent that the pipes are inferior and
therefore decrease the value of the home).
o The offset is not failure of a condition—it is a diminution of value.
o So he says there should be an allowance—but here, “diminution of value” would be nominal or nothing in the
allowance because there’s no difference in value between the pipes.
o *This is a very different approach than saying that J&Y failed a condition and therefore defendant is off the hook
for the last payment.
o Something might be the type of condition where exact compliance it required; and other conditions might require
material—but on absolute compliance—because of their immateriality.
 Compare to HYPO—“habitable premises” is at the heart of the contract between the landlord and tenant,
and thus must be complied with absolutely; however, the gym and the flowers are not.
o Efficiency concern: this would be extremely inefficient to tear everything down and replace the pipe with the same
exact kind of pipe. The homeowner is asking for monetary relief in not having to pay—if you gave the homeowners
the money to it themselves, they wouldn’t tear the house apart, they’re going to pocket the money—because the piping
is the same.
 To allow this would be economic waste.
 To allow this would also be unjust enrichment—a windfall—because they’re going to end up with what they
wanted anyway.
o Compare building a house to a piece of equipment—if this had happened with a piece of equipment, the value is
transferrable (the buyer is off the hook for the payment, but the seller gets the equipment back—here, J&Y can’t take
the performance back  “there will be a harshness sometimes and oppression in the implication of a condition when
the thing upon which labor has been expended is incapable of surrender because untied to the land.” – J&Y cannot
redeem or take back their performance and this is not fair.
o *Flexibility—Cardozo is reluctant to apply a bright-line rigid rule that any deviation, no matter how
substantial, is a failed condition.
o Question 1 (pp. 747)
o C) The owner’s promise to pay is dependent on the builder’s promise to build the house but only as regards matters
of substance, not as regards insignificant departures.
 If it fails, did it fail in a significant way? Or a trivial one?
 Cardozo suggests that there should be some flexibility as to insignificant conditions when compared to the
relation of the project  minor deviations will not excuse performance (here, final payment to J&Y).
o Dissent: Says that Cardozo is forcing a newly made contract on the buyer—he’s entitled to specify in the contract what kind
of pipes he wanted—noncompliance with this is a failure of a condition.
53
o





How different would the case have come out if it WASN’T an innocent mistake on the part of the contractor, but if it was
fraudulent?
o The case would’ve come out differently—if the contractor tried getting cheaper material on purpose, this would have
been fraudulent.
o The fact that this was an innocent oversight was significant here (along with the fact that the piping wasn’t a significant
or material difference).
What if the contractor actually bought a more expensive/better product than what was contracted for?
o One view—the party is entitled to what they contracted for—maybe they had reasons for wanting the less
expensive/not as good product.
Holding: 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.
o 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.
o “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.
o 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.
Analysis: Justice Cardozo is clearly worried about forfeiture—the result of a failed condition that denies payment to a party
even though it has tendered substantial performance. In this case, denying the contractor recovery for work done because of a
mix-up in the use of virtually identical pipes seems arbitrary and unfair. Justice McLaughlin is far more worried about the
letter of the contract than about overarching fairness. He measures J&Y’s (P) mistake in pipe feet and brand names. The
difference between Justice Cardozo and Justice McLaughlin, thus, comes down to a fundamental conflict over the
interpretation of contracts, Justice Cardozo is willing to bring fairness concerns to bear on the contract while trying to
maintain its integrity.
Substantial Performance: An equitable defense to breach of contract asserted by a party who has substantially performed
their contract obligations prior to breaching the contract.
Notes:
o Judge Cardozo classifies sets of promises into three categories:
 promises that are so plainly independent that they can never be conditions of each other,
 promises that are so plainly dependent that they must always be conditions, and
 promises that are dependent in matters of substance but independent with regard to insignificant departures.
 INDEPENDENT = not conditions of each other.
 DEPENDENT = conditions of each other.
o The distinctions focus on the concept of dependence:
 Modern common law
 Treats most promises as dependent  holds that there is a relationship of dependence between
most promises exchanged under a contract.
 Unless a promise is so trivial as to be inconsequential, or the parties expressly declare it to be
independent (which would be unusual), there are almost no “plainly independent” promises.
 Early common law
 Treated most promises as independent.
 Example: parties entered into a contract for the sale of a horse for £5, payment to be cash on delivery
(C.O.D.). If the seller failed to show up and deliver the horse, he could still sue the buyer for the £5.
Because the law treated the promises as independent, the buyer could not raise as a defense the fact
that the seller had not delivered the horse. He would be liable on his promise to pay the £5 and
would have to maintain a separate action for delivery of the horse.
 Kingston v. Preston, 99 Eng. Rep. 437 (King’s Bench 1773):
 Lord Mansfield established the principle that promises in a contract could be construed as
dependent—that is, as conditions of each other.
 Example: On this basis, even though the parties to the sale of the horse did not expressly state that
the buyer’s obligation to pay for the horse was dependent on the seller delivering it, the nature of
the contract and the reasonable expectations of the parties allow the court to construe the promises
as dependent—that is, as conditions of each other. Because of the C.O.D. term, they are concurrent
conditions.
NOTES: Building/construction arrangements can’t be concurrent conditions because the performance of the promise to pay can be
rendered instantaneously, while performance of the promise to build the house must take some time. The parties therefore have a few
options:
54
o
o
o
The building contract could provide that the owner pays the full contract price in advance, before the builder begins work;
or, conversely, the contract could provide that the owner pay the price at the completion of the building work;
or (most likely) the contract could break up the performance of the parties into stages.
D. CONDITIONS OF SATISFACTION
 Condition of satisfaction (COS): a form of escape clause that allows a party to escape its obligations under the contract if that
party is not satisfied with the other party’s performance or some other specified state of affairs.
o Used where a party’s desire for the contract is dependent on her being satisfied with the outcome of some uncertain
event.
o May be dependent on the satisfaction of the party herself, or on some third party acting on the contracting party’s
behalf.
 If a party retains unlimited discretion to decide whether to perform, she really has made no commitment, and her apparent
promise is an illusion. It therefore does not constitute a legal detriment.
 Example:
o COS: a lender’s agreement to make a loan to a borrower may be made conditional on the lender’s satisfaction with
the borrower’s credit rating, as shown on a credit report to be obtained.
o Illusory: the lender’s promise to make the loan if it is satisfied with the credit report would be illusory if its judgment
of the credit report could not be questioned and was completely within its discretion.
o Not illusory: the promise would not be illusory if the lender agreed, either expressly or impliedly, that its
determination of satisfaction would be based on a measurable standard. It would then suffer the legal detriment of
binding itself to that standard, so that it could not act on a whim and would have to justify its lack of satisfaction.
 Courts assume that parties do not normally intend promises to be illusory, and that they expect that the exercise of discretion
to be subject to some control.
o Therefore, even if the contract does not set out a standard for determining dissatisfaction, courts readily infer that the
parties intended this judgment to be subject to some measurable standard.
 Where the contract itself does not specify the standard to be used, courts generally favor an objective standard—the party’s
dissatisfaction must be reasonable.
 However, in some contracts, where the object is to cater to the particular tastes and desires of the party, a court may be inclined
to a subjective standard—the party’s dissatisfaction must be genuine and honest.
o Example: a buyer’s promise to take delivery of and pay for a painting commissioned by the buyer may be conditional
on her being satisfied with the finished product.
E. THE USE OF CONDITIONS TO PROVIDE FOR ALTERNATIVE PERFORMANCES
 A condition could be used as a channeling device: The parties need not provide that a party’s obligation to perform is dependent
in its entirety on the condition being satisfied. They could use a condition to structure the contract so that if the condition is
satisfied, the party renders one performance, and if it is not satisfied, the party must render another.
F. THE USE OF CONDITIONS TO SEQUENCE PERFORMANCE OF THE PARTIES WILL NOT BE INSTANTANEOUS
AND SIMULTANEOUS
G. EXCUSE OF CONDITIONS
o General Rule: Courts usually enforce express conditions strictly.
o However, an express condition is subject to the court’s power to police contracts for fraud, duress, and other bargaining
impropriety (circumstances in which it is not appropriate to insist on strict enforcement of a condition).
o Exceptions: there are 4 situations in which courts will excuse a condition where expressly agreed to by
the parties:
arise from post-formation words or actions of the party for
o Waiver
whose benefit the condition was included in the contract.
o Estoppel
The basis for excuse here is that the party’s behavior forfeits
o Obstructive/Uncooperative Conduct
his right to hold the other party to the condition.
o Forfeiture
1.
A general excuse based on the court’s discretionary power
Waiver and Estoppel
to do justice between the parties. It is more controversial
o Similarities:
than the other grounds and Courts use it sparingly.
o Both arise from approximately the same conduct
o Both have the same end result
o The basic point of both doctrines is that after the contract has been entered, the party who is the beneficiary of the
condition manifests the intention, reasonably interpreted from words or conduct, that he will not require the condition
to be satisfied as a prerequisite to his performance; that is, he can be reasonably understood to have abandoned the
condition, so that his duty to perform has become unconditional.
55
a.
Waiver
o Waiver: a knowing and voluntary abandonment of a right.
o Waivers may be express or implied from words or conduct.
o Waivers can come up in 2 different situations:
o The waiver is asserted by the party who has the right to claim nonfulfillment of the condition. Although he can rely
on nonfulfillment to escape the contract, he wishes the transaction to proceed despite the nonfulfillment.
 Example: A developer needs to buy 2 buildings on a city block in order to construct an office tower. The
2 buildings are owned by different owners. Developer enters a into a contract with Owner A to buy
Property A, subject to the condition that within 30 days he is able to secure the purchase of Property B.
Even if Developer is unable to persuade Owner B to sell, he may simply waive the condition, making
the purchase of Property A unconditional. Provided that the condition was included solely for the
benefit of Developer, and its waiver has no adverse impact on the contractual rights of Owner A,
Owner A cannot object to the waiver and must perform.
o The party who is protected by the condition (Party A) seeks to assert that it has not been fulfilled, but the other party
(Party B) claims that Party A cannot rely on the condition because he has waived it.
 Example: an insurance policy states that to be reimbursed for any loss covered by the policy, the insured
must submit a claim to the insurer within 10 days of the loss. The insured submits a claim 12 days after
the loss. The insurer does not reject the claim when it receives it but accepts and processes it. A short
while later, the insurer rejects the claim as having been filed beyond the 10-day period. The insurer’s
conduct in accepting the late claim with knowledge that it was filed late could be interpreted to indicate
the intent to relinquish the condition—that is, the insurer may have waived the condition by its
conduct.
o Where a claim of waiver is raised against the party protected by the condition (the insurer), consideration doctrine imposes
a restriction on the validity of a waiver.
o Unlike a modification: a bilateral agreement with consideration; a waiver is a one-sided relinquishment of a right for no
consideration. Therefore, the non-waiving party may raise waiver by the other only if the waived right is a nonmaterial or
ancillary part of the contract.
o If the right is a material part of the exchange, it can only be abandoned by a modification contract under which consideration
is given for relinquishing it.
o Thus, a party claiming that the other party waived a condition must show not only that the waiver was knowing and voluntary,
but also that the right waived was nonmaterial.
b.
Estoppel
 Estoppel: operates in this context where the beneficiary of a condition indicates by words or conduct that he will perform the
contingent promise despite nonfulfillment of the condition.
 The party to be estopped must have known or had reason to know that his words or conduct were likely to have been relied on
by the other party, and they must in fact have been relied on by that party to her detriment.
 NOTE: If the beneficiary of the condition promises to perform despite nonfulfillment of the condition, promissory estoppel,
rather than equitable estoppel, may be the more appropriate doctrine.
DISTINGUISHING WAIVER & ESTOPPEL
The difference lies in the elements that must be satisfied to hold the actor accountable for that behavior: MATERIALITY.
Waiver
Estoppel
o If the words or conduct abandon a nonmaterial condition, o If the condition is material, estoppel must be used.
waiver can be used.
o Estoppel must show conduct of the party to be estopped
o Unlike estoppel, waiver does not require justifiable
was justifiably relied on by the other party to her
reliance and detriment.
detriment.
o Unlike waiver, estoppel is not confined to nonmaterial
changes in the contract, and
o the behavior need not meet the same standards of a
knowing and voluntary abandonment of a right—a party
may be estopped on the basis of careless action not
deliberately intended to give up a right.

Mercedes-Benz Credit Corp. v. Morgan (Ark. 1993) – WAIVER
o Facts: concerns the repossession of a Porsche following the default of Morgan, the buyer, who bought the Porsche on
credit in 1990. Mercedes-Benz Credit Corporation (MBCC) financed the purchase of the car. Under the car loan
agreement, Morgan was obliged to pay 48 monthly installments of $253.37 beginning on March 1, 1990. Morgan
56
o
o
2.
made monthly payments over the next 14 months, but all except 1 were late. MBCC always accepted the late payments
and never told him that it intended in the future to strictly enforce its rights under the contract. Finally, in March
1991, MBCC exercised its right to repossess the car.
Holding: Damages awarded to Morgan.
Reasoning: The court acknowledged that Morgan had defaulted in his payments and that MBCC would have had the
right under the agreement to repossess the car. However, because it had repeatedly accepted late payments, MBCC
had waived its right to repossess merely because a payment was overdue. MBCC could at any time have retracted its
waiver and reinstated its right to repossess for late payment, but to do so, it had to give Morgan notice that he would
have to comply strictly with the payment terms in future. Because it never gave such notice, its repossession was
wrongful and a conversion.
Obstructive or Uncooperative Conduct
 Obstructive/Uncooperative Conduct: conduct that breaches an express or implied condition in contracts that a party will not
do anything to obstruct or hinder the fulfillment of a promise.
 Even if there is no promise to make a condition occur, or to try to make it happen, most contracts will likely contain an
undertaking not to do anything to obstruct or hinder its occurrence.
 This may be stated expressly in the contract, but more likely it will be implicit as part of the general obligation of good faith
and fair dealing.
 Where a promisor prevents fulfillment of a condition in breach of the duty not to hinder or impede its occurrence, the proper
response is to excuse the condition, making the promise unconditional. If the promisor then fails to perform, he is in breach of
the contract.
Sullivan v. Bullock (Idaho 1993) – OBSTRUCTIVE/UNCOOPERATIVE CONDUCT
 Rule of Law: Implied in every contract is a condition to cooperate and one party’s failure to cooperate will excuse the other
party’s nonperformance.
 *To excuse a party’s nonperformance, the conduct of the party preventing performance must be outside what was permitted in
the contract or outside the reasonable contemplation of the parties when the contract was executed.
 Facts: Cora Sullivan (P) hired Dallas Bullock (D) to remodel her home. During construction, Sullivan stated that Bullock and
Bullock’s workers were not to enter Sullivan’s home on a particular day. However, one of Bullock’s workers entered Sullivan’s
home. Upon finding out, Sullivan told Bullock that Bullock was no longer allowed to enter Sullivan’s home. Bullock sent
Sullivan the bill for the work completed and Sullivan refused to pay. Sullivan sued stating that Bullock’s work was defective.
Bullock argued that Bullock could have remedied any defects but was prevented from doing so by Sullivan.
 Issue: who breached the contract?
o Sullivan (P) Arg.: Bullock breached because 1) the work was unsatisfactory and 2) she specifically told the contractor
not to let the workmen into the house on a day she was not going to be home and workmen did enter.
o Bullock (D) Arg.: Sullivan breached because he was unable to live out the contract and completing the project (and
fixing anything that was unsatisfactory).
 Damages
o Bullock wants the full contract price ($6,780)  he requested the remaining $2,956.40.
o The Court reverses and remands the decision on the measure of damages  adjustment from the full contract price
because Bullock would be compensated too much (because now he’s been relieved of the duty to finish out the
contract, he’s going to save money on the labor, material expenses, etc.).
 Tour of Costa Rica: wove into the damages an offset for not having to finish the contractual performance.
 Holding: Homeowner (Sullivan) breached the contract.
 Reasoning:
o There is an implied condition in every contract to cooperate.
o Lucy Lady Duff: like in Lucy, the contract doesn’t have to expressly state the duty to cooperate  notion of implied
obligations.
o It was an immediate breach of contract when she failed to cooperate.
 Question of whether Mrs. Sullivan acted reasonably in pulling the contract (note: her anger in someone climbing through her
window to enter her house when she said she didn’t want anyone there is reasonable—but the way she handled the situation
wasn’t).
o The court notes that it was unknown to Bullock that his worker entered the home.
o She could have handled the situation differently.
o To what extent was it unlawful for the worker to enter the house?  exam tip: be careful not to embed a tort claim
(trespass of worker) in the context of the contract—because it happened in the nature of a contract arrangement, the
trespass claim would have to be analyzed in whether it should be severed from the contract claim and it raises a host
of issues as to who you hold accountable.
 The second ground for terminating the contract: why wasn’t the fact that the work was unsatisfactory grounds for her
terminating the contract?
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o

3.
The court notes the lack of detail in contract and misunderstandings/ miscommunications led to several breaches in
the contract—but the court says she waived her right to this claim because “the evidence presented that during the
time the work was being performed, Mrs. Sullivan did not clearly convey to Mr. Bullock her dissatisfaction and he
continued with the perception that the project was progressing with approval.”
 *This brings in the concept of waiver (and shows its overlap with estoppel)  the reason you can waive
something that’s not a main part of the contract because if you could waive something at the heart of the
contract, then it’s not a waiver, it’s an exchange (think consideration).
Note: The court mentioned that implied in every contract there is a condition to cooperate. A contract is generally subject to
either an express or implied condition an implied promise not to prevent or hinder performance. Some authorities state that
the conduct of the party preventing performance must be wrongful or unjustified.
Unfair Forfeiture
 The fourth exception to strict enforcement and compliance with express terms is forfeiture: a court’s exercise its equity power
to excuse the condition or exact compliance with the condition.
 This situation arises where neither the language of the contract nor the facts permit a resolution through strict enforcement,
waiver, or estoppel, and the use of equitable discretion is the only way to avoid an unfair result by excusing technical
noncompliance with a condition.
 The courts use this equitable power sparingly.
United Properties Limited v. Walgreen Properties, Inc. (New Mex. 2003) – LOSING FORFEITURE CASE
 Rule of Law: Equity will not relieve a lessee of the consequences of negligently failing to give written notice of renewal of
the lease within the time required by the lease.
 Facts: Walgreen Properties (D) leased property to United Properties Limited (UPL) (P). UPL spent over $1.2 million on capital
improvements to the property and subleased portions of the property to other businesses. Under the lease, UPL was required to
give written notice of intent to renew by September 30, 1999. T forgot to give notice for lease renewal in time (prior to three
months of termination of the lease). T attempts to give notice of renewal prior to the lease termination, but L doesn’t allow
them to.
 Holding: equity will not relieve a lessee of the consequences of negligently failing to give written notice of renewal of the
lease within the time required by the lease.
 *Tension in the law:
o Traditional rule: strict enforcement of contract  CERTAINTY OF CONTRACT
 Contract clearly and unambiguously provided that written notice for renewal
 It was a condition that was clearly set forth in order to renew
 Oppenheimer: where contract expressly provides a timeline, party is held to it strictly.
o “Modern” rule: balancing rule  FLEXIBILITY OF CONTRACT
 Other courts have balanced the following:
 Whether the delay was slight
 Whether loss to landlord would be small
 Whether loss to tenant would be unconscionable
 Dissent: Says this would provide a huge windfall for landlord. Loss to tenant would constitute a forfeiture (L would get
something for nothing—all of the improvements and increase in value to the property that tenant created).
o Jacobs & Young: the contract provision here is trivial and there will be a windfall (unjust enrichment) for the other
party.
 In this case, UPL has certainly invested substantial money into improving the property. However, the Majority says that there
is a strong public interest in protecting parties’ contractual expectations and must uphold the “definiteness” of the
contract.
 Disproportionate Forfeiture: A principle of equity that applies to prevent the strict enforcement of contractual terms when
doing so would cause a breaching party to give up all contractual rights in a manner that is disproportionately harsh to that
party’s interests, particularly when compared to the interests of the non-breaching party served by strict enforcement.
 Notes:
o This was a pure condition: if UPL wanted to renew the lease it had to give written notice of intent 3 months before
lease ends but they did not do this.
o Split in jurisdictions that choose to adopt unfair forfeiture
o Elements of UF from Fountain case used in this case:
1. Failure to meet condition was due to mere negligence (Not intentional)
2. Delay is slight
3. Loss to landlord small
4. Loss to tenant is large
5. From dissent: No reliance by landlord or third parties on failure to fulfill condition
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MATERIAL BREACH
Connection between material breach and substantial performance
 Jacobs & Young: performance might be a condition for payment, but perfect performance might not be required for
substantial performance.
 *Whether something is an important enough term to reach material breach is the difference between material breach and
substantial performance.
 Material breach is the flip side of substantial performance.
 To the extent a party fails to reach substantial performance, they are denied payment.
 Movement away from complete wipeout (if someone fails to reach substantial performance).
o No payment at all goes too far—gives a windfall to the other side.
 Allow recovery—on the value of what was provided.
o Recovery is still allowed but not on the contract—they only get the value of what was provided to the other side (some
courts).
o Carrig v. Gilbert-Varker Corp. (Mass. 1943)
 DEMONSTRATES WHAT MAKES A CONTRACT DIVISIBLE
 Breaks the transaction into a series of contracts to allow the other party to still recover.
Landis v. William Fannin Builders, Inc. (Ohio 2011)
 Issue:
o Homeowners want cost of completion as the remedy  to completely redo the siding.
o Fannin wants to try re-staining the existing siding again
 HOMEOWNERS WIN
 Distinguish between Jacobs & Young:
o Homeowners in J&Y did not show why it really made a difference/why they cared about the manufacturer of the
piping  here, the homeowners showed and communicated that they really cared about the siding.
o The court is convinced that, unlike in J&Y, the homeowners here will use the money to actually fix the siding and not
just pocket it.
o The defect is visible (the exterior siding of the house) rather than inside the walls where you would never know the
difference in the piping.
o *Here, the homeowners planned to stay in the house for a long time—this is significant because if they planned on
leaving soon, it would give them a windfall because they’d pocket the money and sell the house; in that case, the
market value of the siding would be the more appropriate measure of damages.
Raymond Weil, S.A. v. Theron (N.Y. 2008)
 Brings out the concept of cure
 Contract provided a pure provision, which stated there was a 5-day cure period
o NOTE: If even if a contract does not provide a specific cure provision, generally there is a notion that a party should
be allowed to cure (remedy) the issue/defect  Restatement §237 and §242 (comment a)
o Sullivan case: worker broke into her house to keep working and she called the contract off.
 In not acting reasonably, the court likely factored in that she did not give the other party a chance to
cure/remedy the issue.
 *Think of in terms of reasonableness  under what circumstances would it be okay to not allow a party to
try to fix their mistake?
o Other considerations:
 Is time of the essence under the contract?  this may not count for anything though if a date stating when
performance must be rendered is just boilerplate—there must be a legit reason for why the party is seeking
to strictly enforce this.
 UCC—has a very specific provision  2-508(1)
 Claim #1: necklace
o Court says that this was cured
o There would be no damages because the cure negates any damages
o Notion of waiver—because there was a deviation from the contract and you can’t completely unwind what was done
(the poster was still up for awhile and seen by people)  (pp. 778, end of ¶2): “this satisfied RW at the time” – the
court notes that because RW let it go after it happened, they waived the right to claim this.
 Claim #2: Dior watch
o Court says the damage that was done cannot be unwound—therefore it is not curable.
o The wearing of the watch was a material breach.
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*Court says that Theron wearing the watch was relevant not so much to the breach, but to the damages  what does
this mean?
 Once she wore the watch, she can’t dodge the fact that she did in fact breach the contract and she needs to
face the consequences of it, which should be factored into the damages.
 She put in motion everything that transpired, and from the other sides’ perspective this was a significant and
material breach  question for damages: if a party puts a chain of events in motion because of a breach, to
what extent of the damages should that party be held responsible for?
*The court doesn’t discuss this, but note that the breach occurred months before the suit was brought, and they waited until the
expiry of the contract (they say back and reaped all the benefits of the rest of the time she was under contract with them and
then sued to get all the money back)  this is at odds with the way RW handled it (if a party breaches, RW had the opportunity
to terminate the contract right then and there—if it was so material to them, why didn’t they do this?)
o

Menorah Chapels at Millburn v. Needle (N.J. 2006)
 Issue: divisibility (severability) of the contract
o Aspect of emotional distress damages  generally contracts focuses on economic harm, not emotional harm.
 Menorah clearly breaches the contract:
o Question #1: was it a material breach?
 Court says yes.
o Question #2: was this a divisible contract?
 Court says no.
 What is the crucial difference between Carrig and Menorah that causes them to come out differently?
o The notion that what Menorah Chapels provided was a combination of services—Menorah fails in a way that is
significant to the family (from the purchaser’s perspective, they didn’t get what they would be forced to pay for) 
whether the contract would have been made if the parties had known that the transaction would not be fully
performed. The mere itemization of prices does not establish that a contract is severable.
o In contrast, the construction of the houses does not take away the value of the homes already built—its divisibility is
more than just a line-item deduction.
 What does Menorah get?
o Quantum meruit—doesn’t give an exact determination of value, but it is essentially the value of what the services
provided are worth less the service not provided.
Wholesale Sand & Gravel, Inc. v. Decker (Maine 1993) – ANTICIPATORY BREACH (BY CONDUCT)
 Different in this case:
o Sullivan: contractor was ready, willing, and able to work and it was the other party pulling the plug—it wasn’t the
contractor that was in breach.
o Here, it wasn’t that work was being done and it was being done in a deficient manner, the contractor never showed up
after the initial difficulty with the bulldozing.
o *Here, as opposed to Sullivan, the homeowner repeatedly tried to get the contractor to do the work they contracted for
 it was reasonable for the homeowner to end the contract.
 Contractor’s argument:
o We did show up and there was difficulty with the land
o Anticipatory repudiation—ask: did the time for completion come and go?
 They were still within a reasonable amount of time to complete what the parties contracted for.
 Contractor argues that the owner pulled the plug prematurely—he still had more time to complete the work
promised in the contract and he planned on doing so.
o Standard: reasonableness (the parties failed to provide a timeline).
 He was still within a reasonable time to complete and the other party was in breach by blocking contractor’s
performance.
 Homeowner’s argument:
o Contractor’s conduct led me to believe that he was not going to complete the job—I don’t have to sit here and wait
for the 60 days to be up in order to get someone else to do it.
 Outcome: Court repudiated the contract
o (pp. 801, last full ¶): shows the homeowner repeatedly trying to get the contractor to do the work and he kept saying
he’d do it and not showing up.
o (pp. 802, top): key ¶ on defining anticipatory repudiation and the standard of review involved  “definite,
unequivocal, and absolute” showing that the party will not complete the work promised.
*UCC: perfect tender rule gives buyer tremendous rights to reject because there’s a low chance of unjust enrichment—the buyer has to
give the goods back to the seller (unlike in Jacob & Young, where Cardozo was concerned with the fact that the homeowners would get
a windfall).
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*In this Problem, the court might loosen up the perfect tender rule where there are specifically manufactured goods and the seller would
take loss—think about how much the items returned would be worth on resale (here, the poetry books would be worth almost nothing
to the seller, so this seems unfair).
CONTRACT DAMAGES
HYPO: Buyer and Seller have “deal” for $500,000. There is a delayed closing:
 (1) the property value increases to $520,000 (+$20,000)
o Which party wants out?
 The Seller
 *Parties’ incentives: where property value is higher than buying price, the seller wants out of the deal.
o Damages: $20,000 (FMV – contract price)  $520,000 - $500,00
o Case: Turner Broadcasting System, Inc. v. McDavid
 (2) the property value decreases to $470,000 (-$30,000)
o Which party wants out?
 The Buyer
o Damages: $30,000 (contract price – FMV)  $500,000 - $470,000
o Case: Hubbell Homes v. Key
BENEFIT OF THE BARGAIN
B. BENEFIT OF THE BARGAIN
1.
Components of Expectation Damages
 *The loss to the plaintiff of the value of the contract is the quintessential component of expectation damages.
 “Direct” or “General” Damages: the component of damages to compensate for the loss of the value that would have come
directly from the contract itself.
o D doesn’t perform at all = the value of the entire contract from the plaintiff’s point of view.
 NOTE: If the breach excused the plaintiff’s own performance, the expenses the plaintiff saved by not having
to perform must be taken into account.
o D partially performs but then breaches = the difference in value between what the plaintiff expected to get from
the contract and what the plaintiff actually received.
 D breaches by either by not completing the performance or by performing in a deficient manner.
 Examples: Hawkins v. McGee and Sullivan v. O’Connor
 “Indirect” or “Special” Losses: When a defendant breaches a contract, however, the plaintiff often suffers losses in addition
to the mere loss of the value of the contract.
o Two kinds of “indirect/special” losses:
 “Consequential” losses: Where the D’s performance was essential to some aspect of the plaintiff’s business
and the breach caused the P to forego potentially profitable opportunities that it could have pursued had the
D performed  compensates for P’s gains that were prevented.
 Sometimes, lost profits in other transactions and injuries that are caused by the breach are
compensable consequential damages  where the P suffers some harm, loss, or injury (whether
economic or personal) that would have been averted or would not have arisen had the D performed
the contract.
 “Incidental” losses: generally, refer to the P’s costs of coping with the breach, such as the costs of inspecting
the defective performance or the costs of arranging substitute performance.
 Recovery of direct, consequential, and incidental damages is subject to significant limitations, and the classification of a loss
may determine whether the loss is compensable at all.
o Example: Mitsui O.S.K. Lines, Ltd. v. Consolidated Rail Corp. (N.J. 2000)
 DAMAGE CATEGORIZATION MATTERS
 Issue: whether certain losses were consequential or incidental.
 Facts: The P had shipped some cargo by train, and the train derailed. In the aftermath of the derailment, the
P spent $42,382 to have experts inspect and survey the damaged cargo. Conrail (D), the rail company at issue,
paid the P for the damage to the cargo but refused to reimburse the P for the survey and inspection costs. A
clause in the shipping contract barred recovery of consequential damages. The clause was silent on the
subject of incidental damages.
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

2.
Arguments:
 Conrail (D): claimed that survey expenses were consequential damages and thus could not be
recovered.
 Mitsui (P): argued that survey expenses were incidental damages and thus could be recovered.
Holding: INCIDENTAL DAMAGES
Reasoning: The court concluded that, although such clauses were generally enforceable, the damages were
incidental and thus not barred by the clause.
Introduction to Measurement of the Expectation Interest
 Any measurement of the plaintiff’s expectation interest must tally up the losses he suffered and offset any gains or savings he
realized as a result of the breach:
RESTATEMENT, SECOND §347. MEASURE OF DAMAGES IN GENERAL
(a) the loss in the value to him of the other party’s performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
EXPECTATION
INTEREST



DIRECT LOSS
INCIDENTAL OR
CONSEQUENTIAL
LOSSES
ANY AVOIDED
COSTS
Question to ask:
o Would an alternative party have been able to perform for approximately the same price?
 If so, the contract was not unusually advantageous to the non-breaching party  this means there is no direct
loss attributable to the breaching party’s failure to perform.
o What has the non-breaching party lost? Can the non-breaching party demonstrate that there are economic
consequences directly attributable to this loss?
 If not, the non-breaching party typically will not be able to recover for it.
o Were there unusual circumstances that would make damages available for emotional distress the non-breaching party
may have suffered?
Example: Party A contracted with Party B to do his taxes for $1,000. Subsequently, Party A repudiated when she learned that
others in the area charge $2,000 for the same performance. Upon A’s breach, B hires another party to do the work, but because
of the late date, is told that the work cannot be finished before the April 15 deadline. The new party charges B $2,000, but this
charge includes filing the return electronically with the IRS as soon as it is completed. However, the return was late, and B has
to pay interest and penalties to the IRS. B’s expectation losses would consist of:
o Direct loss: the difference between the $2,000 B paid the new accountant and the $1,000 he had agreed to pay A; plus
o Incidental and consequential losses: penalties and interest paid to the IRS, less
o Avoided costs: cost of the electronic filing.
The calculation of expectation damages is highly fact-specific.
Hubbell Homes v. Key (Iowa 2010) – PLAINTIFF GETS ONLY FAIR MARKET VALUE, NOT LOST PROFITS
 Damages is a comparison: the difference between the FMV to the contract price.
 General Rule: this is the usual measure of damages for sale of property (real estate transactions).
 Key Q: was the contract price higher than the fair market value?
o Hypo: if the contract price was $510,000 and the FMV is $500,000, why is it unfair to give the Seller damages: the
Seller was not harmed—they’re getting $10,000 more than the house is worth  they’re actually benefitting.
 NOTE: This is Chronister  a party tried to sue for damages, and Posner says that the party trying to sue
actually benefitted, and therefore did not receive damages.
 Damages Hubbell wanted: lost profits (how much it took them to build the house – contract price).
o Hubbell sought damages based on lost profits—that is, the difference between what it cost to build the house and what
the Keys had agreed to pay for it. The court held that this measure of damages was not appropriate in these
circumstances.
o One of the defendants’ arguments in Hubbell Homes v. Key was that the plaintiff presented insufficient evidence of
the market value of the house at the time of the breach. The court concludes that the $350,000 price agreed in the
summer of 2008 can be considered as an indication of fair market value, even though the breach occurred several
months before that.
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o
Often appraisers determine fair market value by examining comparable sales data.
3.
Measurement of the Expectation Interest When Neither Party Performs
 Determination of direct losses when neither party performs at all—the court must examine whether the defendant’s
performance would have had any economic value to the plaintiff.
 To measure this economic value, courts typically refer to one of three measures:
o Measurement by reference to market value
 The market value of the promised performance is compared to the terms of the contract at issue.
 Example: Hubbell Homes v. Key
o Measurement by reference to substitute transaction
 If the plaintiff enters into a substitute transaction, a court may compare the terms of that transaction to the
terms of the breached contract.
o Measurement by reference to lost profits
 When a court concludes that a measurement based on market value or a substitute transaction will not
adequately protect the plaintiff’s expectation interest, courts may refer instead to the profit the plaintiff would
have gained under the contract—that is, the difference between what the plaintiff would have received under
the contract and what it would have cost the plaintiff to perform had the contract gone forward.
 Example: Hubbell Homes v. Key—this is the measurement requested, but rejected, in Hubbell.
a.
Measurement by Reference to Market Value
 The market value measure determines a party’s direct losses by comparing the contract price to the market value of the
performance promised under the contract.
 A market measure seeks to compensate the plaintiff for the economic value it would have received had the defendant performed
the contract.
 Even if the plaintiff neither seeks nor obtains the equivalent of contract performance elsewhere, the plaintiff is usually entitled
to use the market value as the basis of calculating the loss of economic value due to the breach.
Turner Broadcasting System, Inc. v. McDavid (Ga. 2010) – DAMAGES = DIFFERENCE BETWEEN THE CONTRACT PRICE
AND FAIR MARKET VALUE
 Damages awarded: contract price – FMV
o (FMV at the time that the contract is breached)
 This essentially uses the same factors as in Hubbell but reverses the order in the actual calculation.
o Contract price = $215 million
o FMV = ~$550 million
 *Generally, courts will not decide deals on inadequate consideration (they won’t say if it’s enough)  discrepancy in prices
won’t get a party out of a deal.
 *The damages were higher than what McDavid would have had to pay to even get the team – just goes back to the notion that
courts will not let a party get out of a deal and relieve them of their contractual obligations (except where other factors are
involved, i.e. fraud, unconscionability, etc.).
 *While this may seem like a windfall to McDavid, from a contract perspective, this is just giving McDavid the Benefit of the
Bargain (had Turner not breached, McDavid would have profited from the team).
 Notes: McDavid and Turner had an informal, oral understanding that McDavid would purchase the Atlanta Hawks, the Atlanta
Thrashers, and the operating rights to Philips Arena for a “fire sale” price. Before the parties could sign a formal written contract
to memorialize the terms of their deal, Turner agreed to sell the assets to the Atlanta Spirit on approximately the same terms.
Nevertheless, McDavid is awarded $281 million in damages for breach of contract  does this result represent an unjustified
windfall to McDavid or good policy?
b.
Measurement by Reference to Substitute Transaction
 Sometimes, the plaintiff obtains a replacement for the defaulted performance.
 If the replacement is less advantageous than the contract performance would have been, a comparison between the two can
serve as a measure of the direct losses the plaintiff has suffered because of the breach.
Handicapped Children’s Education Board v. Lukaszewski (Wis. 1983) – DAMAGES = COST OF OBTAINING NEW EMPLOYEE
+ FORESEEABLE CONSEQUENTIAL DAMAGES
 Damages: the difference between the salary it has agreed to pay to the substitute employee and the salary it had contracted to
pay the defendant.
o *This is the value of the replacement employee (the substitute transaction)
 *THIS IS NOT THE FAIR MARKET VALUE APPROACH (although the two different approaches can overlap).
o NOTE: The FMV approach is not limited to real estate (it could be applied to services as well).
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

Shout back to excuse material (River Phoenix case)
Benefit of a more qualified replacement received by the school was not actually a benefit because it was imposed on them
*Damages for breach of an employment contract is the ADDITIONAL cost of obtaining replacement services.
o You are entitled if you select appropriately, you can hold a party accountable for the additional cost (not the full cost
of the contract).
o FMV – the difference is the fact that Lukaszewski and replacement were both given their FMV based on their
credentials.
NOTE: intermediary appellate court came out the other way—sometimes the extra value CAN negate the recovery.
Facts: Employment contract was breached by therapist with high blood pressure, caused by the stress of having to continue
working at far away school, instead of one close to home.
Notes: the court measures the employer’s expectation damages based on the difference between the salary it has agreed to pay
to the substitute employee and the salary it had contracted to pay the defendant.
c.
Measurement by Reference to Lost Profits
 Lost profits = the profit it would have earned under the contract at issue.
 Given in situations where a court finds that neither the market value measure nor the substitute measure of the plaintiff’s loss
adequately compensates the plaintiff.
 The lost profits measure of damages is not always available  Hubbell Homes v. Key
 Example: Party A contracted with Party B to do his taxes for $1,000. Party B decides last minute to do his taxes himself.
o Party A can recover lost profits: If Party A might argue had Party B not breached, she would have prepared both
returns and earned $2,000. Unless Party A was fully booked, she could have completed both Ed’s return and that of
the other client. Thus, Party A would have “lost volume”—had there been no breach, she would have earned the profit
from two transactions.
o Party A cannot recover lost profits: If Party A was fully booked and Party B’s breach enabled her to take on a client
that she wouldn’t otherwise have been able to serve, the lost profits measure of damages would not be available. To
award her lost profits without recognition of the additional profits she was able to earn due to the breach would
overcompensate her.
4.
Measurement of the Expectation Interest When the Breaching Party Performs in Part
 Performing in part = when a party begins to perform but either does not complete performance or performs in an unsatisfactory
manner.
 Restatement §347: (direct damages)  the plaintiff is to receive “the loss in the value to him of the other party’s performance
caused by its failure or deficiency. . . . ” = To the extent the deficient performance has value to the plaintiff, that value
should be taken into account in determining damages for breach.
 Deficient performance can be:
o material (total) breach, or
o substantial performance (partial breach)
 Measurement: In either case, to properly calculate her direct losses, the court must measure the difference in value (if any)
between what was expected and what was received under the contract.
 Damage awards for construction cases differ in their approach  some take the Jacob & Youngs approach of diminution in
value, other take the Landis approach of awarding the parties the reasonable amount for them to get what they contracted for.
 Example: Party A contracted with Party B to do work on their home. Party B breaches the contract by doing work that was
not what Party A had contracted for. However, the work done was beautiful and actually raises the property value of the house.
o Jacob & Youngs approach:
 Diminution in value would get Party A nothing even though Party B breached, because the property value
actually increased as a result of the breach.
o Landis approach:
 Party A would be awarded the amount it would cost to tear down and redo the work to make it into what
Party A had wanted.
 Factors the court considers when choosing which measure to apply:
o The extent of the waste (esp. when destruction of quality work would be required).
o The willfulness of the breach (courts are more likely to allow disproportionate cost of completion damages when the
breach is deliberate than when it is inadvertent).
o The desires and motivations of the nonbreaching party (courts may limit damages to diminution of market value where
the interests at stake seem primarily pecuniary rather than personal).
 Peevyhouse v. Garland Coal & Mining Co. (Okla. 1962):
o DIMINUTION OF FAIR MARKET VALUE AWARDED (JACOB & YOUNGS APPROACH)
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o
o
o
o
o
Facts: Willie and Lucille Peevyhouse leased farmland to the Garland Coal Company. The Peevyhouses agreed to let
Garland strip-mine for coal as long as it performed remedial work at the end of the five-year lease term. Garland mined
the coal, but it didn’t do the remedial work. The Peevyhouses sued.
What the Peevyhouses wanted: $25,000  this was the amount necessary to restore the land to the condition
promised by Garland.
What Garland wanted: $300  argued that its damages should be limited to the diminution in the value of the
Peevyhouse’s farm ($300 was what they said the reduced FMV was).
Holding: $300 (the FMV)
RULE: “where the contract provision breached was merely incidental to the main purpose in view, and where the
economic benefit which would result to lessor by full performance of the work is grossly disproportionate to the cost
of performance, the damages which lessor may recover are limited to the diminution in value resulting to the premises
because of the non-performance.”
BENEFIT OF THE BARGAIN UNDER THE UCC
C. “BENEFIT OF THE BARGAIN” DAMAGES UNDER THE UCC
 The central precept of UCC remedies is that the aggrieved party is to receive compensation for its lost expectation.
 UCC 1-305(a). REMEDIES TO BE LIBERALLY ADMINISTERED
o Makes emphasis on the expectation interest clear.
o The remedies provided are meant to put the aggrieved party “in as good a position as if the other party had fully
performed”
 The UCC remedies are very similar to common law damages but differ in detail and tone. Similarities:
o General measure of expectation interest:
 comparing the contract price and the terms of a substitute transaction, or
 comparing the contract price and market value.
o Where the breaching party performs deficiently, both look at the difference in value between the performance that
was rendered and the performance that was promised.
1. Buyer’s Damages Under the UCC
 Seller breaches by:
o Repudiating
o Failing to deliver
 Buyer’s remedies:
o Rejection of contract
o Revokes acceptance


a.
In any of these situations, the contract is
“wholly executory”: the Seller has not
performed, but the Buyer does not have
to pay either.
Where Seller performs but the performance is deficient (the Buyer gets some value, but not the value promised): the
UCC measures the difference in value between that which was promised and that which was provided as the appropriate
measure of direct damages.
Revocation of acceptance: UCC 2-608
o A disappointed buyer who has accepted goods does not always have the option to revoke acceptance.
o UCC 2-608: restricts revocation of acceptance to situations where the nonconformity of the goods is substantial. It
imposes certain procedural requirements before a buyer can revoke.
o Once acceptance of goods is effectively revoked, the situation is treated as if the buyer had rejected the goods on
delivery.
The Buyer’s Damages When the Seller Repudiates or Fails to Deliver or When the Buyer Rightfully Rejects or Revokes
Acceptance of the Goods
 When the seller fails to perform, the buyer may make a substitute purchase.
 Remedy of “cover”: if the substitute purchase is more expensive than the contract price, the buyer can often recover the
difference from the breaching seller  UCC 2-712
 UCC 2-712. “COVER”; BUYER’S PROCUREMENT OF SUBSTITUTE GOODS
o (1) Requires the buyer to make the substitute purchase in good faith, without unreasonable delay, and that the
substitute be reasonable.
o (2) Damages = the cost of cover + the contract price + any incidental or consequential damages - expenses saved
in consequence of the seller’s breach.
o (3) Failure of the buyer to effect cover does not bar him from any other remedy.
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o


UCC 2-712 Comment:
 Resort to cover is not mandatory
 The buyer can choose between:
 “Cover” damages  UCC 2-712
 Market measure of damages  UCC 2-713
UCC 2-713. BUYER’S DAMAGES FOR NON-DELIVERY OR REPUDIATION
o (1) Measure of damages for non-delivery or repudiation by the seller = market price (at the time when the buyer
learned of the breach) - the contract price + incidental and consequential damages - expenses saved in consequence
of the seller’s breach.
o (2) Market price is to be determined as of the place for tender or, in cases of rejection after arrival or revocation of
acceptance, as of the place of arrival.
o UCC 2-713 Comment:
 The market measure of damages only applies when and to the extent that the buyer has not covered by UCC
2-712.
Particularly favorable substitute transactions can yield market measure > cover measure.
o Buyer’s Arg.: it should be able to keep the fruits of its diligence, and that the breaching seller should not be able to
limit its recovery by reference to the substitute transaction.
o Seller’s Arg.: the cover measure more accurately captures the actual damages to the buyer; giving the aggrieved party
the market measure would exceed the benefit of its bargain
o UCC 2-713 Comment:
 Comment to UCC 2-713 sides with the seller in this debate.
 Alternatively, the buyer may proffer proof of a particularly expensive substitute transaction, and the seller
may seek to limit the buyer’s damages to the market measure.
Chronister Oil Co. v. Unocal Refining and Marketing (1994) – BUYER MUST ACTUALLY PURCHASE REPLACEMENT GOODS
TO GET COVER DAMAGES (UCC § 2-712)
 The purpose of the cover provision is not to allow buyers to obtain damages when they have not been hurt, but to provide a
market measure of the hurt
 Unocal Arg.:
o It is entitled by UCC 2-712 to cover by obtaining a substitute for the lost 25,000 barrels, even from itself.
o Damages = the difference between the cover price, which it deems to be 63.14 cents a gallon, the average cost of the
inventory from which it obtained the substitute supply of gasoline, and the contract price of 60.14.
 Court’s Question: What did Unocal give up as a consequence of the breach, and whether it was something of value?
 Court’s Answers:
o Unocal gave up the opportunity either to sell the gas on the market OR to have a larger than usual inventory.
o Neither course of action would have been equal to Unocal’s average cost of inventory.
o The 25000 barrels it diverted to its dealer cost it less and was worth less than the oil Chronister failed to deliver.
 In Chronister, the average cost of the alleged cover (63.14 cents per gallon) exceeded both the contract price (60.4 cents per
gallon) and the market price (55.3 cents per gallon).
 Court found that Chronister breached, but that Unocal was not entitled to damages.
 Compare to Turner case—normally the fact that the price went up for the substitute transaction, the buyer is entitled to the
difference.
 Why was Unocal a loser?
o Because Unocal was not hurt  The purpose of the cover provision is not to allow buyers to obtain damages when
they have not been hurt, but to provide a market measure of the hurt.
o Unocal did not purchase oil (they took the oil out of their inventory)
o *Key fact: the current price of oil is lower than both what they paid previously and what the contract price was 
had there not been a breach, Unocal would have had this inventory and sold it in the market, but they would have only
been able to recover 55 cents per gallon (and there would have been a loss)—BUT: Chronister breaching was actually
beneficial to Unocal.
o The purpose of damages is to put the party back to where they would have been  the real cost here is the
opportunity cost: what Unocal would have given up as a result of the breach.
 What did Unocal give up as a consequence of the breach, and whether it was something of value?
o Unocal gave up the opportunity either to sell the gas on the market OR to have a larger than usual inventory.
o Neither course of action would have been equal to Unocal’s average cost of inventory.
 What is the measurement of damages?
o *What Unocal is giving up is what the oil is worth today, not what you paid for it awhile ago  so you compare the
contract price of 60.14 cents to the opportunity cost (what Unocal would have obtained if they sold it in the market)
at 55.3 cents per gallon.
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

This is a bad deal for Chronister, not Unocal  think about Turner and Hubbell hypos – Sellers usually break contract in rising
market, where they can get more money by selling to someone else (this is a falling market).
Another way of looking at the analysis: but for the breach, Unocal would have received more inventory, for which they would
have paid 60.14 cents per gallon (this is higher than the current market cost of 55.3 cents)  since they want to pay less, having
the contract breached works in their favor.
b.
The Buyer’s Damages upon Acceptance of Deficient Performance
 When a buyer accepts nonconforming performance (a buyer who accepts goods, notwithstanding the fact that the seller’s
performance does not conform to the contract) doesn’t waive its rights to complain of the nonconformity.
 Assuming the buyer gives timely notice of the deficiency to the seller, the buyer can claim damages to compensate it for the
seller’s breach.
 UCC 2-714. BUYER’S DAMAGES FOR BREACH IN REGARD TO ACCEPTED GOODS
o UCC 2-714: A provision of the UCC that provides that the measure of damages for breach of warranty is the difference
between the fair market value of the goods accepted and the value that the goods would have had if they had been as
warranted.
o UCC 2-714 gives a court substantial leeway to determine the appropriate measure of damages under these
circumstances:
 (1) Where the buyer has accepted goods and given notification he may recover as damages for any nonconformity of tender the loss resulting in the ordinary course of events from the seller’s breach as determined
in any manner which is reasonable.
o Measurement of damages
 (2) the difference at the time and place of acceptance between the value of the goods accepted and the value
they would have had if they had been as warranted, unless special circumstances show proximate damages
of a different amount.
 (3) Any incidental and consequential damages may also be recovered.
2.
Seller’s Damages Under the UCC
 Like the buyer’s damages, the seller’s damages under the UCC depend on: the nature of the breach and the actions that the
seller takes in response to the breach.
a.
The Seller’s Action for the Price
 Situation: Buyer accepts conforming goods but simply refuses to pay for them.
 Damages: Action for the price  like specific performance (enforcing the buyer’s obligation to pay for goods that it has
received and accepted is not really awarding damages for the buyer’s breach; rather, the court is enforcing the buyer’s
obligation under the contract).
 Measurement: The contract price
 Authority: UCC 2-709: describes the seller’s action for the price; it authorizes a seller to recover damages from a breaching
buyer in the amount of the price due on the contract for any accepted goods or rejected goods the seller was unable to resell.
 Rationale: Seller has fully performed its side of the bargain, and all that remains is to receive payment.
 NOTE: Since Seller asks for payment of a debt rather than performance of a nonmonetary obligation, it escapes many of the
challenges posed by other specific performance actions.
b.
The Seller’s Damages When the Buyer Repudiates or Wrongfully Rejects the Goods
 Situation: (1) Buyer repudiates before the seller performs, or (2) Buyer fails to accept the goods when the seller tenders them.
 General Rule: Seller is not entitled to the full contract price as direct damages but rather the contract price less the value of the
goods.
 Measurement: This value can be measured in one of two ways:
o (1) By the price received by the seller in a substitute sale (this is the seller’s equivalent of the buyer’s cover) or
o (2) by the market value of the goods.
o Exception: Sometimes these damage formulations are arguably inadequate to compensate the seller for its lost
expectation. In those cases, the UCC looks to the profit the seller would have made on the contract with the buyer in
computing the seller’s damages.
 NOTE: where either situation happens, the seller doesn’t have to provide the goods to the buyer.
 UCC 2-706. SELLER’S RESALE INCLUDING CONTRACT FOR RESALE
o UCC 2-706: contains the seller’s remedy that is analogous to the buyer’s remedy of cover  the seller enters into a
substitute transaction, and its lost expectation is determined with reference to the substitute transaction.
o Measurement: To arrive at direct damages, the resale price is deducted from the contract price.
 UCC 2-708. SELLER’S DAMAGES FOR NON-ACCEPTANCE OR REPUDIATION
o UCC 2-708(1): allows the seller to measure its damages with reference to the market value of the goods instead of
substitute transaction.
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o
o
o
Measurement: The market price is deducted from the contract price to arrive at direct damages.
UCC 2-708(2): allows a seller to receive lost profits if the measure provided in UCC 2-706 or UCC 2-708(1) is
inadequate to compensate the seller for its lost expectation.
Difference to Buyers’ remedies: the treatment of consequential damages in the seller’s remedies and the lost profits
measure of damages.
LIMITATIONS ON RECOVERS OF THE “BENEFIT OF THE BARGAIN”
D. LIMITATIONS ON RECOVERY OF “THE BENEFIT OF THE BARGAIN”

1.
Reasonable Certainty of Damages
Rancho Pescado, Inc. v. Northwestern Mutual Life Insurance Co. (Arizona 1984)
 Ranchos Argument
o the court erred by eliminating the jury's award of damages
o Contends the jury's award of damages for anticipated future profits was soundly supported by
the evidence.
 Northwestern Contends
o Arizona has adopted a per se rule which prohibits an award of damages for loss of future
profits to a new business.
o Northwestern further contends that even if a per se rule is not used, Rancho Pescado failed to
sustain its burden of proving loss of future profits with reasonable certainty.
 Recovering Damages Rule
o Damages are NOT recoverable UNLESS they are REASONABLY CERTAIN.
 Lost Profits Rule (Modern Trend)
o Allows recovery for lost profits IF they can be proven with reasonable certainty.
o We approve, where evidence is available to furnish a reasonably certain factual basis for
computation of problem losses even where a new business is involved.
 Courts Belief for New Businesses
o We believe it would be patently unfair to deny damages to a business where they have been
proved with reasonable certainty merely because the business venture was newly established.
Hollywood Fantasy Corp. v. Gabor (1998)
 See separate case brief doc.
 Courts Response Lost Profit must be proved with Reasonable Certainty.
o The $ 100,000 damages award cannot be supported as the recovery of lost profits.
o Although recovery of lost profits does not require that the loss be susceptible to exact calculation,


lost profits must be proved with "reasonable certainty."
Courts Response Future Profits amount to $250K
o This was based on his estimate that HF would make a $ 25,000 profit from each of ten future events.
o However, there was only one previous venture that lost money and the employees did not get paid.
o Also, he had no future commitments.
o No evidence that HF had been a successful enterprise or a prior enterprise.
Rule Speculative, Uncertain Conditions
o Profits which are largely speculative, as from an activity dependent on uncertain or changing market
conditions, or on chancy business opportunities, or on the success of a new and unproven
enterprise, cannot be recovered.
o The mere hope for success of an untried enterprise, even when that hope is realistic, is not enough for
recovery of lost profits.
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2.
Foreseeability of Damages
a.
Introduction to the Principle of Hadley v. Baxendale
 First major limitation on the recovery of contract damages: reasonable certainty.
 Second major limitation on the recovery of contract damages: the foreseeability principle.
 Hadley v. Baxendale: established the proposition that damages, to be recoverable, must be foreseeable at the time the contract
is entered.
Hadley v. Baxendale (Eng. Rep. 1854)
 See separate case brief doc.
 Parties: Mill Operators v. Delivery Service (Owner)
 A PARTY INJURED BY A BREACH OF CONTRACT CAN ONLY RECOVER THOSE DAMAGES THAT MAY
REASONABLY BE CONSIDERED AS ARISING NATURALLY FROM THE BREACH, OR AS HAVING BEEN
CONTEMPLATED BY THE PARTIES IN ADVANCE AS A LIKELY RESULT OF THE BREACH
 Hadley v. Baxendale established a limitation on damages to those which naturally result from a breach
and are reasonably contemplated by the contracting parties at contract formation. These damages are
consequential damages.
 Hadley v. Baxendale sets the leading rule to determine consequential damages from a breach of
contract: a breaching party is liable for all losses that the contracting parties should have foreseen, but is
not liable for any losses that the breaching party could not have foreseen on the information available
to him.
 Consequential damages are affected by the circumstances under which the contract was made, such as
the amount of information provided by one party to another. The modern trend has been to define the
test as one of “foreseeability.” A party must only have been given notice of facts that made a loss
foreseeable to be held liable. Both the Restatement (Second) and the UCC have adopted this standard.
 Victoria Laundry (Windsor), Ltd. v. Newman Industries, Ltd. (Eng. 1949):
o Lord Justice Asquith remarked on an inconsistency in Hadley v. Baxendale  he speculated that
the headnote, which described the facts, must have been incorrect insofar as it stated that the
plaintiff’s servant told the defendant’s clerk that the mill was stopped.
o Justice Asquith noted “If the Court of Exchequer had accepted these facts as established, the
court must . . . have held the damage claimed was recoverable. . . . ”
Notes:
 Hadley allows two types of damages:
o Damages that arise naturally according to the usual course of things
o Damages that were in the reasonable contemplation of the parties
 Hadley limits damages when they meet neither test.
 General Rule: direct and incidental damages survive scrutiny under Hadley.
 Exception: In rare cases, where changes in market conditions are sudden, unexpected, and disastrous, courts may occasionally
invoke the principle to limit hugely disproportionate direct damage awards.
 Direct damages: no “special circumstances”, principles of foreseeability don’t come into play.
 Incidental damages: no “special circumstances”, principles of foreseeability don’t come into play.
 *Direct damages and incidental damages not really affected by “foreseeability” principle – but consequential damages
(which may or may not be foreseeable at the time) are affected  this is because direct and incidental damages are so
closely tied to the original promise that was breached, that it is fair to say that they are the type of damages that arise
naturally, according to the usual course of things, from the breach of contract.
 Example: Homeowner contracts with a plumber to fix faucet.
o Direct Damages: the usual measure of direct damages would be the cost of completion or repair.
o Incidental Damages: additional expenses incurred by homeowner (i.e. if homeowner paid another plumber to diagnose
the problem in the original work).
o *These expenses are so closely tied to the original promise of the plumber that it is fair to say that they are the type
of damages that arise naturally, according to the usual course of things, from the plumber’s breach of contract.
69
o


Consequential Damages: suppose that the homeowner stores an original copy of the Magna Carta in a metal box below
the kitchen sink, and water from the ruined faucet leaks, thus destroying the immensely valuable historical document.
Is this loss chargeable to the plumber?
*Consequential damages is the arena where Hadley v. Baxendale plays its most prominent role  as the loss becomes more
and more remote from the ordinary consequences of breach, the foreseeability principle increasingly comes into play.
However, courts differ on the application of the foreseeability rule:
o Generally, if a loss stems from general requirements, the foreseeability principle does not limit compensation.
o If the loss flows from special or particular requirements, those requirements must have been brought home to the
breaching party at the time of the contract.
o General Rule: In many jurisdictions, if the breaching party is or should be aware of special or particular requirements
at the time of the contract, the foreseeability principle is satisfied.
o More restrictive approach: “Tacit agreement”  REJECTED BY MODERN COURTS
 “Tacit agreement” approach to Hadley v. Baxendale: the idea that the special circumstances must be
brought home to the defendant to such a degree that he fairly may be supposed to have assumed the risk
associated with those circumstances

Globe Refining Co. v. Landa Cotton Oil Co. (1903):
 (Holmes, J.): “The knowledge must be brought home to the party sought to be
charged, under such circumstances that he must know that the person he
contracts with reasonably believes that he accepts the contract with the special
condition attached to it. . . mere notice to a seller of some interest or probable
action of the buyer is not enough necessarily and as matter of law to charge the
seller with special damage on that account if he fails to deliver the goods.”
 *Modern cases tend to reject this rule.
 UCC 2-715: incorporates a test akin to that of Hadley v. Baxendale
 Official Comment 2 to UCC 2-715: notes that the “‘tacit agreement’ test for the recovery
of consequential damages is rejected.”
o Generally, both at common law and under the UCC, if the defendant merely knows or has reason
to know of the special requirements, that is sufficient to charge him with responsibility for
consequences that may flow from those circumstances in the event of breach.
McNaughton v. Charleston Charter School for Math and Science, Inc. (S.C. 2015)
 What is the normal recover for employer’s breach?
o The remaining wages on the contract after wrongful termination.
 NOTE: there was a contingency that employment was based on funding and enrollment—the court
found that the school did have the funding necessary to keep McNaughton employed, therefore, this
contingency was not an issue for McNaughton’s recovery.
 Note: McNaughton’s attorney described the damages she suffered when she lost her job. The losses the
attorney detailed far exceeded the damages the jury awarded.
3. The Mitigation Principle

a. Reasonable Efforts to Mitigate Damages

DeRosier v. Utility Systems of America, Inc. (2010)

b. Mitigation of Damages Under the UCC

70
UCC 2-710. SELLER’S INCIDENTAL DAMAGES
UCC 2-715. BUYER’S INCIDENTAL AND CONSEQUENTIAL DAMAGES
CONTRACT REMEDIES IN THE BROADER CONTEXT

The broader categories of contract remedies are:
o Contract Damages
 Contract damages conventionally aim at restoring the aggrieved party to the economic position it would have
occupied had the contract been performed as agreed.
 General Rule: neither noneconomic damages (such as those for emotional distress) nor punitive damages
are available for breach.
 *There are exceptions  Section A
 Agreed remedies: Parties may specify or limit in advance the remedies that will be available to them through
clauses in their contract that describe the nature and extent of remedies available for its breach.
 Courts uphold depending on the circumstances.
 *Illustrates the tension between freedom of contract and the remedial goals of contract law pervades
the topic of agreed remedies.
o Specific Performance
 When the court compels performance or restrains breach.
o Restitution
 Party may elect to rescind the contract and seek restitution.
 Restitution is a common remedy upon avoidance of a contract due to:
 Bargaining misbehavior
 Misunderstanding
 Mistake
 Unjust enrichment (where parties have not entered into a contract)
 Some measure of restitution may be available where a contract is:
 Illegal
 Implicates public policy concerns
 Involves a party who lacked full legal capacity
NONECONOMIC AND NONCOMPENSATORY DAMAGES
A. NONECONOMIC AND NONCOMPENSATORY DAMAGES
 Although the dominance of economic considerations is especially strong in the law of contract damages, an aggrieved party
may pursue noneconomic or noncompensatory damages, particularly in an egregious case.
 Under extremely narrow circumstances, courts will grant relief for noneconomic or non-compensatory damages  NOTE:
these are exceptional cases; the overwhelming majority of contract cases do not allow for emotional disturbance or punitive
awards damages.
1.
Damages for Pain, Suffering, and Emotional Distress
 Theory of efficient breach: under this theory, contracts present a choice to the parties bound by their strictures: one can either
perform or pay damages  as long as it gives the nonbreaching party the “benefit of the bargain,” the theory holds that
contract rules should be neutral as between the two alternatives.
o Limitations to the nonbreaching party’s ability to attain the full benefit of the bargain:
 (1) the costs of litigation itself generally are not compensable.
 (2) damages are recoverable only if they can be established with reasonable certainty, they were foreseeable,
and they were not reasonably avoidable.
 (3) Generally, contract damages do not look to compensate the nonbreaching party for any emotional
disturbance he may have suffered as a consequence of the breach.
 Why limitations on emotional disturbance?
o The prospect that plaintiffs might manufacture claims of emotional distress troubles courts.
71
o

Courts also worry about imposing unexpected, potentially unlimited, and ultimately unjustifiable liability on those
who fail to perform ordinary contract obligations.
Except in unusual cases, compensation for these claims is simply not the province of contract law.
Erlich v. Menezes (Cal. 1999)
 LOSING IIED CASE
 (General Contractor) v. (Homeowner)
 TORT REMEDIES ARE NOT AVAILABLE IN BREACH OF CONTRACT ACTIONS
 Rule of Law: In a breach of contract claim, an injured party cannot recover damages for emotional
distress if he has only suffered economic damages and there has been no breach of a legal duty in tort
law.
o Black Letter Rule: Absent physical injury, emotional distress damages can be recovered only in
limited circumstances involving intentional torts, constitutional violations, and the breach of the
covenant of good faith and fair dealing in insurance contracts.
 Facts: The Erlichs (P) entered into a contract with Menezes (D) to build their “dream home.” After the
rains came, it was discovered that the house was defective. There were leaks in every room and major
structural problems. The Erlichs had their home inspected by a general contractor and structural
engineer who, in addition to confirming defects leading to the leakage, found several structural
problems with the home. Plaintiffs brought suit for the full costs associated with repair of the home, and
for emotional distress.
 Procedure: The jury found that Menezes negligently breached the contract. The jury awarded damages
for breach, as well as emotional distress damages. Menezes appealed. The Court of Appeal affirmed the
decision of the trial court. Menezes appealed to the Supreme Court of California.
 Issue: Can an injured party in a breach of contract claim recover damages for emotional distress when
he has suffered only economic damages and there has been no breach of a legal duty in tort law?
 Holding and Reasoning (Brown, J.): No. In an action for breach of contract, the measure of damages is
the amount that compensates the injured party for the breach or an amount that would likely result
from the breach. The damages must be “clearly ascertainable in both their nature and their origin.”
Damages are limited to those that are in the contemplation of the parties or reasonably foreseeable to
them when they enter into the contract. An injured party may not recover tort damages for a breach of
contract unless the action amounting to a breach of contract is also a violation of a legal duty under tort
law. Generally, a party can only recover tort damages for a breach of contract in the following
circumstances: “(1) the breach is accompanied by a traditional common law tort, such as fraud or
conversion; (2) the means used to breach the contract are tortious, involving deceit or undue coercion
or; (3) one party intentionally breaches the contract intending or knowing that such a breach will cause
severe, immitigable harm in the form of mental anguish, personal hardship, or substantial consequential
damages.” Even when an injured party can establish that a party violated a legal duty under tort law,
emotional distress damages cannot be recovered when the injured party has only suffered economic
injury. In a commercial contract, recovery for emotional distress can only be awarded when the breach
also caused bodily harm, or the contract or breach is of such a nature that serious emotional distress is a
particularly likely result. Section 353 of the Restatement (Second) of Contracts states that a contract to
build a home is not one for which serious emotion distress is a particularly likely result. Menezes did not
intentionally harm the Erlichs, nor did he engage in tortious conduct, such as fraud or conversion. The
Erlichs negligent breach of contract claim, without more, is not sufficient to allow for recovery of
emotional distress damages. Moreover, even if the Erlichs could establish that Menezes violated a legal
duty, they cannot establish that they suffered anything but an economic injury. The Erlichs have not
established that they were physically injured by Menezes’s negligent construction of the home. Though
Mr. Erlich suffered a heart attack, the evidence shows that this was due to a physical condition pre72
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existing the construction of the home and was not a physical injury directly tied to Menezes’s breach.
Additionally, because the breach of contract claim involves the building of their home, the Erlich’s
cannot establish that the contract is one for which serious emotional distress is a particularly likely
result. Accordingly, the Erlichs cannot recover emotional distress damages in this matter. The judgment
of the Court of Appeal is reversed and the case is remanded.
Analysis: As a general rule, tort remedies are not available in breach of contract actions. The exception
to this rule is when the breaching party breaches an additional or special duty or acts with intent and
malice. In this case, Menezes (D) was negligent, but he was not guilty of fraud and had no duty to ensure
that Plaintiffs’ emotional stability remained in the status quo.
Notes:
o Measure of damages the court held available: the cost of repairing the home, including lost use
or relocation expenses, or the diminution in value.
o The court concluded that the balance of policy considerations counseled against expanding
contract damages to include mental distress claims in negligent construction cases:
1) The potential for significant increases in liability in amounts disproportionate to
culpability,
2) the court’s inability to formulate appropriate limits on the availability of claims, and
3) the magnitude of the impact on stability and predictability in commercial affairs.
Notes:
 Rest. 2d Contracts, §353: “Recovery for emotional disturbance will be excluded unless the breach also caused bodily harm
or the contract or the breach is of such a kind that serious emotional disturbance was a particularly likely result.” The
Restatement specifically notes the breach of a contract to build a home is not “particularly likely” to result in “serious emotional
disturbance.”
 There are 2 categories of IIED damages that are sometimes available for breach of contract:
1) Breach relating to the nature of the breach
2) Breach relating to the nature of the contract
 Nature of the breach:
o *These are the most common exceptions.
o States will allow emotional distress damages when:
 The breach causes bodily harm, or
 If the breach is such that the facts establish an independent tort for which these types of damages are available
under tort law.
o NOTE: IIED damages are not automatically available every time the defendant commits a tort.

o Example: Lutz Farms v. Asgrow Seed Co. (10th Cir. 1991) (pp. 902):
 Liberal approach  the court allowed IIED damages where there was a willful, wanton, or
malicious breach without the actions of the breaching party qualifying independently as a
tort.
 Facts: two brothers were forced into bankruptcy when their onion crop failed. The onion
growers sued the supplier of the onion seed. At trial, the brothers argued that in a
calculated and considered effort to rush the onion seed to market, the supplier failed to
test adequately the genetic quality of the seed. The brothers introduced evidence to
support their claims.
 Holding: The court held that there was evidence of a willful and wanton breach adequate
to support an award of damages for emotional distress. Whether the breach itself
amounts to a tort or is merely tort-like in nature, the intentions of the breaching party are
likely to be highly relevant to the recovery of emotional disturbance damages.
Nature of the contract:
o Some courts allow recovery of damages where the nature of the contract itself makes emotional distress a particularly
likely result of breach.
o This approach is not universal.
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o
o
Most jurisdictions typically allow such damages only where emotional well-being or security is itself one of the objects
of the contract.
Typical example: contracts to perform funereal or mortuary services  contracts having something to do with death,
communication of the fact of death, or treatment of dead bodies.
o Example: Ross v. Forest Lawn Memorial Park (Cal. 1984) (pp. 903):
 Facts: Francine Ross alleged that a cemetery breached its contract to provide a funeral
and burial for her 17-year-old daughter Kristie. Ms. Ross specified that the ceremonies be
kept private. Because her daughter had been a punk rocker, Ms. Ross feared in particular
that the services would be disrupted by her daughter’s musical cohort and asked that
they be excluded. Instead: Many punk rockers attended both the funeral services in the
chapel and the gravesite burial services. The uninvited guests were drinking and using
cocaine and were physically and verbally abusive to family members and their guests. A
disturbance ensued and grew to the point that police had to be called to restore order.
 Outcome: Francine Ross was allowed to pursue emotional disturbance damages
Lane v. Kindercare Learning Centers, Inc. (Mich. 1998)
 Rule of Law: Damages for emotional distress can be recovered for a breach of a personal contract.
 Facts: Katherine Lane (P) enrolled her 18-month-old daughter in Kindercare Learning Centers, Inc. (D), a
daycare. Lane dropped off her daughter around lunchtime one day with prescription medication. When
she returned at 6:00pm to pick her up, she found that Kindercare had placed her daughter in a crib for a
nap and then forgot about the daughter, and also failed to give her the medication.
 Procedure: Lane sued Kindercare for breach of contract and also sought damages for emotional distress.
Kindercare filed a motion for summary judgment, which was granted by the trial court. Lane appealed to
the Michigan Court of Appeals.
 Issue: Can damages for emotional distress be recovered for a breach of a personal contract?
 Holding and Reasoning (Per curiam): Yes. Damages for emotional distress can be recovered in cases
alleging a breach of a personal contract. The general rule is that damages for a breach of contract are
limited to damages that are a natural result of the breach or are contemplated by the parties when the
contract is made. For commercial contracts, therefore, damages for emotional distress cannot be
recovered. However, personal contracts can support damages for emotional distress. Personal contracts
deal with elements of personality and matters of mental concern and solicitude. Personal contracts
include contracts for the performance of a cesarean section, for the care and burial of a dead body, and
for the care for an elderly mother. In this case, the contract was for the care of an infant child. This is a
contract of a personal nature rather than a commercial contract, such as an insurance contract or a
contract to construct a house. Therefore, a breach of this contract could result in the recovery of damages
for emotional distress. Mental anguish was a foreseeable result of a breach of this contract. Additionally,
damages for emotional distress resulting from the breach of a personal contract do not require proof of
a physical injury. Therefore, Lane may be entitled to damages for emotional distress resulting from
Kindercare’s breach of the contract to care for her infant daughter. Accordingly, the judgment of the
trial court is reversed.
 Key Terms:
o Personal contract: A contract that deals with an element of personality and matters of mental
concern and solicitude.

Notes:
o Examples of personal contracts: a contract to perform a cesarean section; a contract for the care and burial of a dead
body; a contract to care for the plaintiff’s elderly mother and to notify the plaintiff in the event of the mother’s illness;
a promise to marry; and a contract to care for one’s child.
o Examples of commercial contracts: a no-fault automobile insurance contract, a disability insurance contract, a
hospitalization insurance contract, and a contract for the construction of a house.
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PUNITIVE DAMAGES
2.
Punitive Damages
 Plaintiffs who argue for emotional disturbance damages often seek punitive damages as well.
 General Rule: a tort can justify punitive damages if it is willful, wanton, reckless, or malicious.
 Purposes of IIED and punitive damages are different:
o IIED: seeks to compensate the plaintiff for harm caused by the breach.
o Punitive damages: intended to punish the breacher and deter others from following the breacher’s example.
 “Exemplary” damages: damages that are intended to make an example of the evil defendant  aimed at punishment and
deterrence (rather than compensation).
 Courts are generally averse to punitive damages in a contract cause of action even more so than IIED—at least IIED damages
have at base a compensation goal, while punitive damages do not.
 RESTATEMENT, SECOND §355. PUNITIVE DAMAGES
o Punitive damages are not recoverable for a breach of contract unless the conduct constituting the breach is also a tort
for which punitive damages are recoverable.
 UCC 1-305(a):
o “ . . . neither consequential or special damages nor penal damages may be had except as specifically provided in [the
Uniform Commercial Code] or by other rule of law.”
 NOTE: IIED damages are not automatically available every time the defendant commits a tort.
 Examples: Some courts allow recovery where the breach of contract is accompanied by significant willful fraud, others when
the breach of contract also constitutes a severe breach of fiduciary duty or of some other special relationship, and insurance
cases.
 Bad-faith denial of an insurance claim
o A court-created tort created specifically for when insurance companies willfully deny claims without reasonable basis
to do so.
o Rationale: the insurance companies have a special relationship with their insureds that makes a willful and
unreasonable breach of contract an act of bad faith.
o Note: breach in the insurance context may constitute an independent tort; however, it is the breach of contract itself
(refusal to pay) which constitutes the central element of the tort—not some separate or independent action associated
with the breach.
AGREED REMEDIES
B. AGREED REMEDIES
 Penalties
o Where a party is dissatisfied with the general compensation goal of contract remedies, that party may wish to compel,
or at least strongly encourage, performance.
o One way to do this is to include a penalty for breach in the contract.
o If the penalty is sufficiently severe, where it has the option the party who owes performance may think long and hard
before breaching the contract.
o BUT NOTE: in the CL, there remains a very strong hostility toward agreed remedies that are intended to act as
penalties.
 Liquidated Damages
o Where parties seek to simplify and clarify remedies in advance rather than leaving them to the uncertain and
contentious processes of litigation. One way to do this is to specify in the contract what the damages for breach will
be  liquidated damages clause: a clause that liquidates (or makes certain) the damages that are available to the
aggrieved party.
o Liquidated damages are nonpenal.
o A liquidated damages clause relieves the aggrieved party of the necessity of establishing those damages with
reasonable certainty yet also puts the breaching party on notice of the extent of its potential liability.
o Furthermore, by establishing liability in advance, liquidated damages clauses may facilitate negotiated settlement of
disputes rather than costly and uncertain litigation.
o BUT NOTE: clauses that establish liquidated damages at too high a level may deter or penalize breach. For this
reason, courts tend to scrutinize them carefully and can refuse to enforce them.
 Limiting Available Remedies
o Parties may seek to limit the remedies available for breach:
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1.
Putting a cap on the damages available for breach.
“Underliquidating” damages: Clauses that set liquidated damages at too low a level, which may have the
effect of limiting remedies.
 Specifying that the breaching party will not be responsible for specified categories of damages.
o Contractual limitations on remedy are very common.
Modifying/Restricting Available Remedies
o Yet another device is to modify or restrict the types of remedies that are available:
 A contract that says a dissatisfied buyer’s sole remedy is the repair or replacement of defective parts rather
than the collection of damages.
 Requiring an aggrieved party to give notice of the breach within a certain period of time or else be barred
from any remedy.
o General rule: courts are often willing to enforce contractual limitations or modifications of remedy.
 NOTE: exceptions may be made where the parties have uneven bargaining power, or the agreement leaves
the aggrieved party without a reasonable remedy for breach.
Policing Liquidated Damages Clauses
 RESTATEMENT, SECOND §356. LIQUIDATED DAMAGES AND PENALTIES
o (1) Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable
in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing
unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
 UCC 2-718. LIQUIDATION OR LIMITATION OF DAMAGES; DEPOSITS
o (1) Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable
in the light of the anticipated or actual harm caused by the breach, the difficulties of proof of loss, and the
inconvenience or non-feasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large
liquidated damages is void as a penalty.
o UCC § 2-718: A provision of the Uniform Commercial Code that covers liquidation and limitation of damages and
deposits.
 *Both the RST§356 and UCC 2-718(1) require that the damages be reasonable in light of the anticipated or actual harm caused
by the breach.
 Old Test: was a forward-looking test  at the time of the contract, did the parties choose an LD formula that reasonably
approximated the harm due to the breach? If it was far in excess of the harm, courts held that the LD operated as a penalty,
rather than a good-faith estimate of damages.
 Modern Test: courts now also look to the actual damages suffered by the nonbreaching party as a relevant factor under the
“anticipated harm” test.
 Two distinct types of fact patterns arose:
1) Actual damages > anticipated damages.
 Parties originally set anticipated damages to be high, but for whatever reason, the liquidated damages clause
turned out to approximate the actual damages quite well.
 Freedom of contract weighed in favor to enforce the liquidated damages clause instead of awarding the exact
amount of damages that could be established.
 UCC 2-718(1) and RST allow the reasonableness of the LD to be measured either by the anticipated harm
or by the actual harm caused by the breach.
2) Actual damages < anticipated damages.
 When the LD were reasonable in light of the anticipated harm but not the actual harm, the LD clause could
operate as a penalty, even though that was not the parties’ intention when they entered the contract.
 The UCC and Restatement, Second, formulations suggest that the liquidated damages clauses should
nevertheless be enforceable.
 General Rule: courts will enforce LD clauses even when the LD substantially exceed the actual damages in
the case.
 Exception: when the actual damages appear to be nonexistent, the penal effect (on breacher and resulting
windfall to the nonbreaching party) outweighs freedom of contract and it will not be enforceable.
 *Trend is probably toward enforcing liquidated damages clauses among sophisticated parties.
 *Policies at issue: the policy that favors freedom of contract vs. the remedial principle that limits recovery to
compensation.
Kent State University v. Ford (Ohio 2015)
 The majority concludes at the summary judgment stage that the liquidated damages clause at issue is
enforceable as written, while the dissent concludes genuine issues of material fact remain.
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2.
Kent State basketball coach signed a 4-year deal with an option of a 5thfor 200,000$ and a liquidation for
damages-After renegotiation two years later they up his salary bye 100000$ -Three years into his contract
the Coach from Kent State left for another University. By doing this he received a 400000$ increase in pay
per year.Issue PresentedWhether or not the original contract the Kent State Coach signed with its
liquidation clause can be enforced.How can they prove actual damages to the University caused by the
coaches departure.
ford signed 5 yr contract with kent state in ohio to work as head coach for the men's bball team
contract provided that if ford quit before end of term, he would pay school liquidated damages
in amount equal to his salary (300k), multiplied by number of years remaining on contract
kennedy, kent state's athletic director told ford that the contract would be renegotiated within a
few years
4 years before contract expired, ford left kent state and began coaching for bradley university
at annual salary of 700k...kent state filed suit in ohio against ford, alleging breach of contract
court enforced liquidated damages clause and awarded university 1.2M
ford appealed, arguing that liquidated damages clause in his employment contract was an
unenforceable penalty
was liquidated damages clause in ford's contract enforceable?
yes...state appellate court affirmed the lower court's award
clause was not a penalty - "there was justification for seeking liquidated damages to
compensate for kent state's losses" on for'd breach
Contractual Limitations on and Modifications of Remedy
 If the liquidated damages specified by the contract are low in comparison to the actual damages suffered by the nonbreaching
party, the nonbreaching party may ask the court to ignore the parties’ agreement.
Wedner v. Fidelity Security Systems, Inc. (Penn. 1973)
 Rule of Law: A contract provision between commercial businesses that limits a party’s recovery for
liability is enforceable unless there is evidence of unconscionability.
 Facts: Charles Wedner (plaintiff), the owner of a retail fur business, contracted for burglary protection
services from Fidelity Security Systems, Inc. (Fidelity) (defendant). The contract included a provision
limiting Fidelity’s liability for negligence or otherwise to the amount of Wedner’s annual service fee. The
contract identified such amount as “liquidated damages.” Because of Fidelity’s negligence in attending
to an alarm, Wedner lost $46,180 from a burglary. Wedner sued Fidelity. After a nonjury trial, the court
found in favor of Wedner but awarded damages of just $312, applying the contract’s limitation of
liability provision. Wedner appealed.
 Issue: Where a commercial contract for burglary protection services is breached by the provider,
resulting in losses of $46,180 to the purchaser, is a contract provision limiting the provider’s recovery to
$312 enforceable?
 Holding and Reasoning (Watkins, J.): Yes. As a commercial sale, the transaction here is governed by the
Uniform Commercial Code (UCC). Although the provision at issue uses the term “liquidated damages,”
the substance of the provision is really a limitation of damages, which is different. If it were a true
liquidated damages clause, Wedner would be entitled to $312 even if his losses amounted only to $150.
This is not how the clause works, however. Thus, the better interpretation is that it is a limitation of
damages. The UCC addresses limitation of damages clauses differently than liquidated damages clauses.
To be valid, liquidated damages require a reasonable relationship between the damages stipulated and
the foreseeable harm. In contrast, UCC § 2-719(3) provides that a limitation of consequential damages is
enforceable unless unconscionable. A limitation applied to commercial losses is not prima
facie unconscionable. In this case, there is no evidence of unconscionability. The contract was entered
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into by private commercial parties with ample business experience. Prior to retaining Fidelity, Wedner
used a competing service provider under a contract with a similar limitation provision. Accordingly, the
trial court judgment should be affirmed.
Dissent (Cercone, J.): The opinion for affirmance misinterprets the UCC. Even though UCC § 2-719
permits the limitation of damages, that provision is made expressly subject to UCC § 2-718, which is
entitled “Liquidation or Limitation of Damages.” UCC § 2-718 does not distinguish between a liquidated
damages clause and a limitation of damages clause. Both are subject to the requirement of
reasonableness considering the anticipated or actual harm caused by breach. A comment to § 2-718
states that the stipulation of unreasonably small damages may warrant avoidance on the grounds of
unconscionability. Moreover, it is a general principle of contract law that an adequate minimum remedy
must be afforded for breach. Otherwise, the promise is illusory since the promisor can choose not to
perform without liability. If the limitation of liability in this case is enforced, the contract is illusory. The
judgment of the trial court should therefore be reversed.
Key Terms:
o Unconscionability: A determination that a contractual term was so procedurally or substantively
unfair and offensive that the harmed party should be relieved from its consequences.
o UCC § 2-718: A provision of the Uniform Commercial Code that covers liquidation and limitation
of damages and deposits.
The UCC contains special provisions on contractual modification or limitation of remedy:
 UCC 2-719. CONTRACTUAL MODIFICATION OR LIMITATION OF REMEDY
o (1) Subject to the provisions of subsections (2) and (3) of this section and of the preceding section on liquidation and
limitation of damages,
 (a) the agreement may provide for remedies in addition to or in substitution for those provided in this Article
and may limit or alter the measure of damages recoverable under this Article, as by limiting the buyer’s
remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming
goods or parts; and
 (b) resort to a remedy as provided is optional unless the remedy is expressly agreed to be exclusive, in which
case it is the sole remedy.
o (2) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, remedy may be had as
provided in this Act.
o (3) Consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable. Limitation
of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable but
limitation of damages where the loss is commercial is not.
SPECIFIC PERFORMANCE AND INJUNCTIONS
C. SPECIFIC PERFORMANCE AND INJUNCTIONS
1.
The Common Law’s Preference for Damages

2.
Inadequacy of Damages

Van Wagner Advertising Corp. v. S&M Enterprises (N.Y. 1986)
 Rule of Law: Specific performance is not a proper remedy where damages are adequate and equitable
relief would impose a disproportionate burden on the breaching party.
 Facts: Barbara Michaels entered into a contract to lease the façade of her building to Van Wagner
Advertising (Van Wagner) (plaintiff). The contract contained a provision under which the lease could be
cancelled if Michaels sold the building to a third party. Subsequently, Van Wagner contracted with a
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3.
third party to sell the space for advertising. The next year, Michaels sold the building to S & M
Enterprises (S & M) (defendant) and S & M cancelled the contract with Van Wagner. Van Wagner
claimed that the cancellation provision in its contract with Michaels should be interpreted to mean that
Michaels could cancel the contract before she sold the building, but once sold, the buyer could not
cancel the contract. Under this theory, Van Wagner brought suit for breach of contract, seeking specific
performance and damages. The trial court agreed with Van Wagner’s interpretation of the contract and
found in favor of Van Wagner for damages, but not specific performance. Both parties appealed and the
appellate court affirmed. Van Wagner appealed.
Issue: Is specific performance of a contract warranted where monetary damages can be adequately
assessed?
Holding and Reasoning (Kaye, J.): No. Specific performance is only proper if there is no other adequate
remedy available; it is not appropriate where monetary damages are adequate and specific
performance would impose a disproportionate burden on the breaching party. In the present case,
although the façade is unique, which can be a reason for awarding specific performance, all property is
unique to some extent, and “uniqueness in the sense of physical difference” does not itself mean that
specific performance is appropriate. On the contrary, the value of the unique qualities of the façade can
be fixed with reasonable certainty. The value of the building’s façade to Van Wagner is fixed in its
advertising contract with the third party. Therefore, the lower courts were correct in their
determination that specific performance is not appropriate in this case. However, while the lower courts
assessed damages based on Van Wagner’s third party contract up to the time of trial, that judgment is
modified to award damages to Van Wagner based on the entirety of its contract with the third party.
Courts may refuse to grant specific performance when they consider the hardship of a specific
performance decree on the promisor  “It is well settled that the imposition of an equitable remedy
must not itself work an inequity, and that specific performance should not be an undue hardship.”
The Discretionary Nature of the Remedy

Campbell v. Carr (S.C. 2004)
 Rule of Law: Specific performance of a contract will only be granted where the enforcement of the
contract is equitable between the parties.
 Facts: Martha Carr (D) inherited a 108-acre tract of land in 1996. Carr had suffered from schizophrenia
and depression since 1986. Individuals with schizophrenia could experience delusions and hallucinations
and display grossly disorganized or catatonic behavior. Additionally, schizophrenia caused disorganized
thinking. Raymond Campbell (P) and his wife had leased the inherited property for approximately 30
years. Before selling the property, Carr contacted the Campbells to ask about the sale price of the land,
and the Campbells responded that the tax assessor’s agricultural assessed value of the land was
$54,000. The Campbells did not disclose that the tax assessor had calculated the fair market value of the
property at $103,700. The lower assessment was used as long as the property was being used for
agricultural purposes. Carr entered into a written contract to sell the property to the Campbells for
$54,000. However, Carr later felt that the price was unfair and refused to close on the transaction. Carr
then conveyed an undivided one-half interest in the inherited property to her cousin, Ruth Glover
(defendant). The lender for the Campbells noted that the property would likely sell for 25 to 40 percent
higher than the tax assessor’s fair-market-value assessment. Campbell sued Carr and Glover, seeking
specific performance of the contract. A real-estate expert testified that the fair market value of the
property was $162,000. The trial court granted specific performance to Campbell, and Carr and Glover
appealed to the South Carolina Court of Appeals.
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4.
Issue: Will specific performance of a contract only be granted where the enforcement of the contract is
equitable between the parties?
Holding and Reasoning (Anderson, J.): Yes. Specific performance of a contract will only be granted where
the enforcement of the contract is equitable between the parties. Specific performance is an equitable
remedy. Generally, the inadequacy of consideration is not sufficient to justify a refusal of specific
performance of a contract. However, if the inadequacy of consideration is combined with inequitable
and bad-faith actions, such as undue advantage, weakness of mind, incapacity, or sickness, then a court
may refuse to grant specific performance. The inadequacy of the consideration must be significant. In
this case, the contract price was significantly inadequate compared to the fair market value of the
property. Campbell had greater knowledge of the value of the property as lessees for 30 years.
Additionally, Carr’s schizophrenia and depression constituted weakness of mind. Together, these
considerations make granting specific performance inequitable. Accordingly, the judgment of the trial
court is reversed.
Injunctive Relief as an Alternative to Specific Performance

Systems and Software, Inc. v. Barnes (V.T. 2005) (pp. 941—45)
 Rule of Law: A non-compete agreement is enforceable if the restraint is no greater than needed to
protect the employer’s legitimate interest and if the employer’s need is not outweighed by the hardship
to the employee and the likely injury to the public.
 Facts: Randy Barnes (D) was a sophisticated consultant who accepted a position with Systems and
Software, Inc. (Systems) (plaintiff) as a regional vice president of sales. Systems was a corporation that
designed, developed, sold, and serviced customer-information systems for utility providers. Barnes
signed a non-compete agreement when he started working for Systems. The agreement prohibited
Barnes from becoming associated with any business that competed with Systems during his
employment and for six months after his employment ended. Approximately two years after taking the
position, Barnes left Systems and started a consulting group. The consulting group’s single client was a
competitor of Systems. Systems sued Barnes, seeking an injunction enforcing the non-compete
agreement. Barnes did not put forth any proof of hardship other than a blanket statement that he
would be unable to work for six months. The trial court granted relief to Systems and ordered Barnes to
refrain from consulting for any direct competitor of Systems. Barnes appealed to the Vermont Supreme
Court.
 Issue: Is a non-compete agreement enforceable if the restraint is no greater than needed to protect the
employer’s legitimate interest and if the employer’s need is not outweighed by the hardship to the
employee and the likely injury to the public?
 Holding and Reasoning (Reiber, C.J.): Yes. A non-compete agreement will be enforced if the restraint is
no greater than needed to protect the employer’s legitimate interest and if the employer’s need is not
outweighed by the hardship to the employee and the likely injury to the public. Covenants against
competitive employment run counter to public policy favoring the right of individuals to engage in the
commercial activity of their choice, and will be enforced with caution. The legitimate interests of the
employer go beyond the need to protect trade secrets or confidential information. Employers often
have protections for their trade secrets and confidential information through state and federal laws.
Other legitimate interests include the protection of customer relationships and employee-specific
goodwill. In this case, Barnes obtained inside knowledge about the strengths and weaknesses of
Systems’ products. Additionally, Systems served a small client base. Thus, the loss of any single customer
could be significant. The agreement is thus not unduly restrictive. Barnes was a sophisticated consultant
who agreed to the non-compete agreement upon beginning work with Systems. There was no indication
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of unequal bargaining power. Barnes did not provide any proof of hardship other than the statement
that he would be unable to work for six months. This unsupported statement is insufficient to grant
relief from the contract, which was voluntarily entered into by Barnes. Systems’ interest in guarding
against the use of its goodwill by Barnes justifies the complete ban on competition for six months.
Monitoring the actual use of goodwill by Barnes is essentially an impossible task. Therefore, the terms of
the non-compete agreement are enforceable. Accordingly, the judgment of the trial court is affirmed.
Key Terms:
o Covenant not to compete: An agreement where one party agrees that upon termination of his
services, he will not engage in a similar trade or profession in unfair competition with his former
employer or principal.
RESTITUTION
D. RESTITUTION AS A REMEDY UPON BREACH OF CONTRACT

1.
Rescission and Restitution

Worcester Heritage Society, Inc. v. Trussell (Mass. 1991)
 Rule of Law: In the absence of fraud, rescission of a contract is inappropriate where there is only a
breach of contract and not a complete repudiation, and the breach is not so material that it goes to the
“essence” of the agreement.
 Facts: In 1984, the Worcester Heritage Society (Society) (plaintiff) conveyed a vacant, rundown house to
Trussell (defendant) for $20,100 and a promise from Trussell to do a complete historic restoration. The
exterior restoration was to be completed in one year. If it was not, the Society had the option of hiring
its own workers to complete the exterior restoration at Trussell’s expense. Trussell worked diligently on
the exterior of the house, but about a year and a half after the conveyance, Trussell lost his job.
Consequently, for financial reasons, the already somewhat slow progress of the exterior renovation
slowed even further. In 1989, the Society sued for rescission of the contract. The trial court found that
the exterior renovation was 65-75 percent complete and denied the Society’s request for rescission,
opining instead that it should hire its own workers as contemplated in the contract. The Society
appealed.
 Issue: Is rescission of a contract appropriate if the party has not materially breached the contract?
 Holding and Reasoning (Armstrong, J.): No. In the absence of fraud, rescission of a contract is
inappropriate where there is only a breach of contract and not a complete repudiation. Rescission will
only be warranted where the breach is of such a material and substantial nature that it is held to go to
the “essence” of the agreement. Here, Trussell has not committed a material breach of the contract.
Trussell paid the purchase price for the house, invested additional money and substantial personal labor
in the exterior restoration, and the restoration, according to the trial court’s factual determination, is
65-75 complete. Thus, although the restoration was not complete within one year as the contract called
for, Trussell’s breach is not material and does not warrant rescission. There is no reason why the remedy
that the contract envisioned in the case of a delay (the Society hiring its own workers) would not be
appropriate in this situation. The trial court is affirmed.
 Key Terms:
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o Material Breach: A failure to perform a contractual obligation that is important enough that it
undermines the agreement and warrants allowing the other party to terminate the contract and
bring suit for damages.
2.
Restitution to the Party in Breach

 UCC 2-718. LIQUIDATION OR LIMITATION OF DAMAGES; DEPOSITS
o (2) Where the seller justifiably withholds delivery of goods because of the buyer’s breach, the buyer is entitled to
restitution of any amount by which the sum of his payments exceeds
 (a) the amount to which the seller is entitled by virtue of terms liquidating the seller’s damages in accordance
with subsection (1), or
 (b) in the absence of such terms, twenty per cent of the value of the total performance for which the buyer is
obligated under the contract or $500, whichever is smaller.
o (3) The buyer’s right to restitution under subsection (2) is subject to offset to the extent that the seller establishes
 (a) a right to recover damages under the provisions of this Article other than subsection (1), and
 (b) the amount or value of any benefits received by the buyer directly or indirectly by reason of the contract.
...
THE RIGHTS OF NONPARTIES
A. THIRD-PARTY BENEFICIARIES
1.
The Intent to Confer Power of Enforcement on the Third Party
 General Rule: Contract rights/obligations only binding on the parties (not binding on or enforceable by those who are not
parties to the contract).
 Exception: Third-party beneficiary doctrine
 Third-Party Beneficiary Doctrine
o *This is a narrow exception
o Under specified circumstances, a nonparty may sue to enforce a contract made for his benefit.
o To invoke the doctrine, a nonparty must show that:
1. the contract is beneficial to him, AND
2. when the parties entered the contract, they had the purpose of giving the third party the power to enforce that
benefit (the parties to the contract must have intended to confer a direct cause of action on the nonparty)
 Thus, these third-parties are called “intended beneficiaries”: third parties who are given rights of
direct enforcement.
 Intended beneficiaries are distinguished from “incidental beneficiaries”: where a contract
incidentally creates an advantage to someone who was not a party to it.
o *The power of enforcement by independent action is the hallmark of a contract for the benefit of a third party.
 RESTATEMENT, SECOND §302. INTENDED AND INCIDENTAL BENEFICIARIES
o (1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise is an intended beneficiary if
recognition of a right to performance in the beneficiary is appropriate to effectuate the intention of the parties and
either:
 (a) the performance of the promise will satisfy an obligation of the promisee to pay money to the beneficiary;
or
 (b) the circumstances indicate that the promisee intends to give the beneficiary the benefit of the promised
performance.
o (2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
 RESTATEMENT, SECOND §304. CREATION OF DUTY TO BENEFICIARY
o A promise in a contract creates a duty in the promisor to any intended beneficiary to perform the promise, and the
intended beneficiary may enforce the duty.

Lawrence v. Fox, 20 N.Y. 268 (1859) (pp. 957):
o FIRST AMERICAN CASE TO ESTABLISH THIRD-PARTY BENEFICIARY DOCTRINE
o Rule: a contract can create rights in a third-party beneficiary, enforceable by the beneficiary’s
direct cause of action against the promisor.
o Facts: Fox entered into a contract with Holly under which Holly lent $300 to Fox. Fox agreed to
repay the loan to Lawrence, to whom Holly was indebted in the same amount. (That is, the
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borrower agreed to repay the loan not to the lender himself, but to the lender’s creditor.) When
Fox failed to pay, Lawrence sued him.
o Fox’s Argument: Fox raised the defense that Lawrence had no standing to sue because he was
not a party to the contract—there was no privity between them.
o Holding and Reasoning: The court dismissed this defense on the basis that parties to a contract
have the power to create a right of enforcement in a nonparty.
Seaver v. Ransom, 224 N.Y. 233, 120 N.E. 639 (1918) (pp. 957):
o THIRD-PARTY BENEFICIARY DOCTRINE EXTENDS OUTSIDE DEBTOR-CREDITOR RELATIONSHIP
o *Answered the question of whether the doctrine articulated in Lawrence would apply where there
was no debtor-creditor relationship between the promisee and the beneficiary.
o Rule: an intended beneficiary has an independent right of enforcement, whether or not the
beneficiary is a creditor of the promisee.
o IN ORDER FOR A THIRD-PARTY TO ENFORCE A CONTRACT MADE FOR HIS BENEFIT, THERE MUST BE
SOME LIABILITY TO HIM ON THE PART OF THE PROMISEE
o Facts: a husband promised his dying wife that he would provide in his will for her niece to inherit
their house or its value. When the husband later died, it was found that he had not made the
promised disposition in his will. The niece sued his estate to enforce the promise that the
husband had made to his wife.
o Holding and Reasoning: The court applied and extended Lawrence, holding that there was no
reason in law or equity to confine the doctrine to cases in which the beneficiary was a creditor of
the promisee. The crucial factor is that the contract was made for the benefit of the niece. She
was the only person who was damaged by the breach, and no one else had any incentive to
enforce the promise.
The difficult issue with Third Party Beneficiary Doctrine: is deciding if the parties intended to grant this power—whether the
third party was indeed an intended beneficiary or merely an incidental beneficiary.
o Often contracts do not spell out this intent expressly, so it must be inferred.
o *In the absence of express intent, it is easier to infer intent where the promisee owes some obligation to the beneficiary.
Kmart Corp. v. Balfour Beatty, Inc., 994 F. Supp. 634 (D. V.I. 1998) (pp. 958):
o THIRD-PARTY BENEFICIARY DOCTRINE  INFERRED INTENT
o Rule of Law: Unless otherwise agreed between a promisor and promisee, a beneficiary of a
promise is an intended third-party beneficiary if recognition of a right to performance in the
beneficiary is appropriate to carry out the intent of the parties and either the performance of the
promise will satisfy an obligation of the promisee to pay money to the beneficiary, or the
circumstances indicate that the promisee intends to give the beneficiary the benefit of the
promised performance.
o Facts: Kmart, a tenant in a shopping center, sued a roofing company, Balfour Beatty Inc. (BBI), for
breach of a contract entered into between BBI and the owner of the building (Kmart’s landlord).
BBI moved to dismiss the suit on the grounds that Kmart was not a party to the contract.
o Holding and Reasoning: The court found that Kmart was an intended beneficiary of the contract
under RST §§302 and 304. The court based this finding on the language of the contract,
interpreted in context, mainly: (1) Kmart was the sole or major tenant of the building and had
been fully involved in the design and construction of the building; (2) the contract provided that
construction schedules must comport with Kmart’s requirements, (3) the drawings to be used
must be submitted to Kmart, and all warranties were to be executed in its favor; (4) in executing
the contract for the construction, the landlord was acting pursuant to a commitment that it had
made to Kmart to erect the building. Under these circumstances the court held that the parties
reasonably must be taken to have conferred an independent power of enforcement on Kmart.
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Masad v. Weber (S.D. 2009)
 Rule of Law: Under South Dakota law, a non-party to a contract may enforce the contract as a thirdparty beneficiary if the contract was made expressly for the benefit of the non-party.
 Facts: Randall Masad (P) was an employee of Catering by Marlins, Inc. CBM contracted with the South
Dakota Department of Corrections (D) to provide food services to the inmates at the South Dakota State
Penitentiary. The contract contained several provisions relating to prison security that would be
provided to CBM. While working for CBM in the prison, Masad was attacked and severely injured by an
inmate who had not been properly supervised. Masad and his wife sued the State, claiming that the
State had breached the contract provisions relating to security. The State filed a motion for summary
judgment, which was granted by the trial court. Masad appealed to the South Dakota Supreme Court.
 Issue: Under South Dakota law, may a non-party to a contract enforce the contract as a third-party
beneficiary if the contract was made expressly for the benefit of the non-party?
 Holding and Reasoning (Severson, J.): Yes. A non-party to a contract may enforce the contract as a thirdparty beneficiary if the contract was made expressly for the benefit of the non-party. See South Dakota
Codified Law § 53-2-6. Various individuals may receive benefits from a contract, but the only people
entitled to enforce the contract are the individuals for whose benefit the contract is expressly made.
The intent to make a contract inure to the benefit of a third party must be clearly manifested. A person
seeking to enforce a contract as a third-party beneficiary must show that the contract was entered into
by the parties directly and primarily for the person’s benefit. In this case, the contract between CBM and
the State was not made for employees of CBM as third-party beneficiaries. Nothing in the contract
provided that the agreement was primarily for the benefit of CBM employees. Rather, the contract was
primarily for providing food service to the State’s prisoners. The contract provisions relating to security
allocated responsibility and risk among CBM and the State. Although CBM employees would obtain a
benefit from the security, the agreement was not expressly made for the benefit of CBM employees.
Therefore, Masad cannot enforce the contract as a third-party beneficiary. Accordingly, the judgment of
the trial court is affirmed.
 Key Terms:
o Third-Party Beneficiary: A nonparty who receives the benefits of a contract and who may possess
the right to sue under the contract.
Wolfgang v. Mid-America Motorsports, Inc. (10th Cir. 1997) (pp. 963):
 Facts: Wolfgang, a racing car driver, was injured when he crashed his car during a practice race and it
caught fire. Because the firefighting capability at the track was inadequate, he was not rescued from the
burning car in time and suffered injury that could have been prevented by proper firefighting
precautions. He sued the racetrack for negligence, and also sued the organizer of the event, World of
Outlaws, on the theory that he was the intended beneficiary of its contract with the speedway, under
which it had the right “to cancel any event due to unsafe racing conditions.”
 Plaintiff’s Arg.: Wolfgang contended that by reserving the contractual right to ensure safe racing
conditions, the organizer had assumed the duty to drivers to make sure that conditions were safe.
 Holding: The court found that Wolfgang was an intended beneficiary of the contract between the
racetrack and the organizer, and that he therefore had a direct cause of action against the organizer for
compensation for his injuries.
 Reasoning: the intent of the parties to the contract must be determined to decide if drivers were
intended beneficiaries of the contract. Although the language of the contract did not expressly state
that drivers were intended beneficiaries of the contract, the intent to confer this status could be readily
inferred from the fact that the organizer had the contractual right to cancel events if racing conditions
were unsafe. This interpretation was bolstered by the testimony of the organizer’s president, in which
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he admitted that it had the responsibility to drivers and members of the public to ensure that racetracks
were safe.
NOTE: Third-party beneficiary doctrine is sometimes used under circumstances in which there might be an alternative cause of action
in tort for negligence. In such cases, principles of tort liability are closely interwoven with the contract issues.
2.
Non-Clients as Third-Party Beneficiaries of a Contract Between an Attorney and a Client
 A malpractice claim, like the negligence claims in Masad and Wolfgang, could be both a tort and a breach of contract:
o Tort actions based on malpractice:
 For a third party to succeed in a tort action based on malpractice, he would have to show that the attorney’s
negligence violated a duty of care not just to the client but to the third party personally.
o Contract actions based on malpractice:
 For a third party to succeed in a contract suit, he would have to show that he was the intended beneficiary of
the contract between the attorney and client.

3.
Noble v. Bruce, 349 Md. 730, 709 A.2d 1264 (1998) (pp. 964—65):
o Facts: the beneficiaries of a will sued the testator’s attorney on the grounds that the attorney
was negligent in providing estate planning advice and services to the testator. The beneficiaries
alleged that as a result of the attorney’s incompetence, the bequests attracted significant estate
and inheritance taxes that could have been avoided.
o Plaintiff’s Arg.: sued in tort for negligence, and alternatively in contract. Although there was no
contractual relationship between the beneficiaries and the attorney, the beneficiaries argued
that they were intended third-party beneficiaries of the contract.
o Tort Claim: NO TORT CLAIM
 The court followed the established rule that a nonclient cannot sue an attorney in tort for
economic loss caused by the attorney’s negligence.
 This rule is based on the policy that to allow a nonclient to sue an attorney for negligence
exposes the attorney to uncontrollable risks of liability and undermines the attorney’s
duty of undivided loyalty to the client.
o Contract Claim: NO CONTRACT CLAIM
 The court rejected the contract claim as well, for 2 reasons:
 No intent to confer an independent right of enforcement: no indication, express or implied,
that the parties had any intention of conferring an independent right of enforcement on
the testamentary beneficiaries. The mere fact that the beneficiaries were intended to
benefit from the will did not, in itself, lead to the inference that they were also intended
beneficiaries of the contract.
 Strong public policy concerns: Recognition of liability to nonclients, in the absence of
clearly expressed contractual intent, could undermine the attorney-client relationship.
Concerns about potential liability to nonclients could motivate attorneys to focus too
strongly on avoiding this liability, to the detriment of the client’s interests. In addition,
the possibility of being accountable to nonclients could create a conflict of interest and
compromise the attorney’s duty of loyalty to the client.
Members of the Public as Third-Party Beneficiaries of Government Contracts
 Because private parties usually enter into contracts to serve their own interests, where most contracts between private parties
are concerned, any benefit to a third party is more likely to be incidental than intended.
 The same is true for government contracts, despite the fact that government activity is intended to serve the general public
welfare, so one might assume that it would be easier to find that members of the public are intended third-party beneficiaries
of government contracts:
o Sussex Tool & Supply, Inc. v. Mainline Sewer & Water, Inc. (Wis. App. 1999) (pp. 966—67):
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Rule of Law: A member of the public can acquire the status of an intended beneficiary
only if the language of the contract or its context makes clear the intent to confer an
independent right of enforcement on members of the public who benefit from it.
Facts: The Village of Lannon hired Mainline to install a sewer and water system. Under
the terms of the contract, Mainline promised to “provide vehicular access at all times to
the properties affected by this project.” Mainline did not maintain the access as required
by the contract. After the project was completed, Sussex Tool, whose business had not
been accessible during portions of the project, sued Mainline for profits allegedly lost
from the disruption of its business.
Plaintiff’s Arg.: Sussex Tool was a third-party beneficiary of the contract between
Mainline and the village.
Holding: The court of appeals upheld the trial court’s dismissal of this cause of action. It
held that Sussex Tool was merely an incidental beneficiary of the contract.
Reasoning: Government contracts are invariably made on behalf of the public, so intent
to benefit members of the public is routinely present. However, this does not mean that
members of the public are intended beneficiaries of government contracts with a right to
enforce them. The contract in this case indicated no such intent.
4.
Vesting of Rights in the Beneficiary and the Power of the Original Parties to Modify the Contract
 Although parties can usually agree to modify terms of a contract after it is created, where the contract creates a third-party
beneficiary, the right of parties to modify terms/terminate the contract must end at some point.
 General rule: the parties to the contract can agree to modify or terminate it at any time until the benefit vests in the third party.
However, once the benefit has vested—that is, has accrued to and become settled upon the beneficiary, the parties to the
contract lose the power to alter or eliminate it.
 RST §311 sets out a rule applicable to all intended beneficiaries:
o RESTATEMENT, SECOND §311. VARIATION OF A DUTY TO A BENEFICIARY
 (1) Discharge or modification of a duty to an intended beneficiary by conduct of the promisee or by a
subsequent agreement between promisor and promisee is ineffective if a term of the promise creating the
duty so provides.
 (2) In the absence of such a term, the promisor and promisee retain power to discharge or modify the duty by
subsequent agreement.
 (3) Such a power terminates when the beneficiary, before he receives notification of the discharge or
modification, materially changes his position in justifiable reliance on the promise or brings suit on it or
manifests assent to it at the request of the promisor or promisee.
5.
Defenses Available to the Promisor Against the Beneficiary
 The beneficiary becomes entitled to no more than the performance promised, delimited by any qualifications and
conditions provided for in the contract  thus, the beneficiary acquires the right to that performance subject to any
contractual defenses.
 Therefore, if there was fraud, duress, mistake, breach, impracticality, etc. the promisor can avail himself of these defenses in a
suit by the beneficiary.
 In addition, the promisor can raise against the beneficiary any claim or defense that arises from the beneficiary’s own conduct.
 Exception to rule that a beneficiary acquires no greater rights than the promisee had: vesting
o A subsequent contract between the promisor and promisee to modify/cancel the contract binds the parties and may be
raised by the promisor against the promisee.
o However, the subsequent contract does not bind the beneficiary if the contract was entered into after the right has
vested.
o The promisor may only raise a defense against the beneficiary if it arises out of the contract itself.
6.
The Promisee’s Rights of Enforcement
 Restatement, Second §305
o (1): “A promise in a contract creates a duty in the promisor to the promisee to perform the promise even though he
also has a similar duty to an intended beneficiary.”
o (2): this subsection makes clear that although the promisor may owe the duty to both the promisee and the beneficiary,
the duty to the promisee is discharged to the extent of performance to the beneficiary.
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Restatement, Second §307
o Provides that either the promisee or the beneficiary may seek specific performance of the promise where that remedy
is appropriate.
o *This leaves open the question of whether the promisee may sue the promisor for damages.
In re Marriage of Smith & Maescher (Cal. 1993)
 Rule of Law: A party to an agreement that is expressly designed to benefit a third party may obtain
specific performance of the agreement.
 Facts: Donald Maescher (D) and Daphne Smith (P) entered into a separation agreement in 1976, ending
almost 11 years of marriage. The separation agreement required Maescher to make child-support
payments for each of their two children until the children turned 18 years old. The agreement also
required that Maescher pay for college for each child. Maescher paid for college for the oldest child,
Peter, for the first three years. However, Maescher declined to pay for Peter’s fourth year of college in
advance. Maescher only agreed to pay for the fourth year’s tuition if Peter attained a B average during
the year, as Peter had not been making good grades. Peter was unable to obtain financial assistance
from the college, and Smith paid for the fourth year’s tuition, which was approximately $11,000.
Maescher provided a gift of $10,000 to Peter at the end of the year and suggested that Peter repay
Smith for his tuition. Smith refused to accept the $10,000. Instead, Smith sued Maescher, alleging
breach of the separation agreement. The trial court ordered Maescher to reimburse Smith for the fourth
year’s tuition. Maescher appealed to the California Court of Appeals.
 Issue: May a party to an agreement that is expressly designed to benefit a third party obtain specific
performance of the agreement?
 Holding and Reasoning (Work, J.): Yes. A party to an agreement that is expressly designed to benefit a
third party may obtain specific performance of the agreement. While a third-party beneficiary may
enforce an agreement made expressly for the third party’s benefit, a contracting party may also enforce
the agreement. If the benefit to the third party is a debt of the promisee, the promisee may be able to
obtain monetary damages. However, if the third party is simply a donee beneficiary, the promisee will not
be able to obtain monetary damages, because the promisee has no economic interest in the performance
of the contract. The promisee can still enforce the contract, but the enforcement of the contract must
be through an action seeking specific performance. In this case, Smith did not owe a debt to Peter.
Smith was not obligated to pay the tuition. Therefore, Peter was a donee beneficiary. Consequently,
Smith could not obtain a money judgment against Maescher for breach of the third-party-beneficiary
contract. Accordingly, the judgment of the trial court is reversed.
 Notes
o The distinction between creditor and donee beneficiary is important here:
 Donee beneficiary: a third-party beneficiary of a contract to whom the promised
performance comes without cost as a donation/gift.
 Creditor beneficiary: a third-party beneficiary of a contract to whom the promised
performance comes from a debt or obligation to the promisee.
o The basis for allowing damages to a promisor where the beneficiary is a creditor is that if the
promisor does not pay, the promisee remains liable.
o By contrast, because a gift cannot be enforced against the promisee, nonpayment of the gift
does not result in damages to the promisee.
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