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Contract Law - Swaine 2019

What Law governs?
Is there an Agreement?
a. Offer
1. Specific offeree
2. Reasonably certainty & definite terms
3. Intent to be bound
o Termination of an offer
b. Acceptance
1. Bilateral
2. Unilateral
3. Silence
c. Consideration
1. Benefit/Detrimental Test
2. Bargained-for Exchange
o Invalid Consideration
o Consideration Substituted Theories
i. Promissory Estoppel
ii. Promissory Restitution
iii. Non-Promissory Restitution
Defenses to Contract Formation
a. Statute of Fraud
b. Capacity and Fairness
1) Duress
2) Undue Influence
3) Misrepresentation
▪ Fraud in inducement
▪ Fraud in execution
▪ Nondisclosure / Fraud in concealment
4) Unconscionability
c. Mistake
1) Unilateral
2) Bilateral
d. Charged circumstances
1) Impossibility
2) Impracticability
3) Frustration of Purpose
4) Modification
a. Express Terms
o Gap Filler
o Parol Evidence
b. Implied Terms
Agreement to Agree
Covenant of Good Faith and Fair Dealing
iii. Different/additional terms
Is there a Breach?
a. Express Condition
b. Construction Condition
a. Expectation Damages
b. Reliance Damages
c. Restitution
d. Specific performance
Contract is an agreement that is legally enforceable between two or more person
• Basis: common law (relying on precedent made by judges, which may be rely on, reverse or
▪ Ex: services, employment, construction
• Statutes (UCC) applies to sales of goods (movable items), except for Louisiana
▪ Ex: buying/selling chickens, any form of commercial goods
▪ There are also mixed contracts
• International plane (ICSG) when businesses involved are by different countries
Is there a contract? Yes, skip to 4. Terms.
Create a power of acceptance in the offeree (Rest. 24)
If the offeror did not intend to conclude the bargain, it is only preliminary negotiations (Rest. 26)
1. Specific offeree
Ads is typically not an offer - only invitation to deal (Rest. 26 - comment b) (Lonergan v. Scolnick finding that communications using “form letter” and delay in response when time is of essence is only
preliminary negotiations, and hence did not qualify as a contract)
 Form Letter
Do not address clearly to the offeree alone using general language
Posted on newspaper
Exception: offer of a reward (Sateriele v. R.J. Reynolds - finding that RJR’s reward offer is
not invitation to offer but a unilateral contract that consumers can accept by saving C-Notes
and redeeming for rewards without any further negotiation because it 1) repeated use of the
word “offer,” 2) absence of the disclaim intention to bound, 3) it has full control over the
number of acceptances to the controlled quantity of C-Notes it offered)
2. Reasonably certain & definite terms (Rest. 33)
Requirement Contract: a buyer promises to buy from a certain seller all of the goods
the buyer requires
Output Contract: a seller promises to sell to a certain buyer all of the goods the seller
Basis for breach and remedy
→ Court must be able to ascertain what party’s obligations are and to determine whether those
obligations have been performed or breached.
3. Manifest an intent to be bound
Must be distinguished from invitations to begin negotiations
Objective approach (Lucy v. Zehmer - holding that there is an intention to be bound through
manifestation of conduct as an objective person standard) (Rest. 19)
Based on manifestation of intention (Rest. 21)
In case of misunderstanding: (Rest. 20)
No contract when: (neither party is at fault or both parties are equally at fault)
1) Parallel ignorance
2) Parallel awareness
ii. Contract operative by one party’s meaning:
1) One party doesn’t know nor has reason to know / one knows or has reason to
Exception: when two parties mean the same thing, that meaning prevails (regardless of what an
observant think - Rest. 201)
 Letter of Intent
A document outlining an agreement between two parties before the agreement is finalized.
If unambiguous: follow the plain meaning rule
If ambiguous on intention to be bound (Quake v. AA - finding that the letter that Jones sent to
Quake is ambiguous - both showing intention to be bound by authorizing work and intention
not to be bound by cancellation clause - so must remand to allow the parties to present other
evidence of their intent)
a) Could be interpreted as binding if it closely resembles a formal contract, of if it infers
that the parties intended it to be regarded as such (Rest. 27) (UCC 2-204(3))
b) Factors to determine whether Letter of Intent is enforceable is based on
whether the parties intended to be bound when they agreed in principle
(Quake v. AA) (Rest. 27 - comment c)
1. Whether the type of agreement involved is one usually put in writing
2. Whether the agreement contains many or few details
3. Whether the agreement involves large or small amount of money
4. Requires formal writing for the full expression of the covenants
5. Whether the negotiations indicate that a formal written document was
contemplated at the completion of the negotiations
6. If the negotiation is abandoned, what are the reasons?
7. Extent of assurance previously given by the party which now disclaim any contract
8. Other party’s reliance upon the anticipated completed transaction
c) Possible interpretation:
1. Intention to be bound when they signed letter of intent
2. No intention to be bound when they signed letter of intent
3. Minority: Bound themselves to negotiate in good faith to attempt to reach
agreement on a contract, while also reserving the right to terminate their
negotiations if they should be unable to reach agreement.
Afford an opportunity for experts to add to the total agreement
protections against various risks as they think necessary
Still morally free to withdraw when it appears that the experts have
raised a substantial issue on which they are unable to agree.
 Termination an offer (any time before acceptance)
1. Lapse of time
When would the duration of the offer run out?
When time for acceptance is fixed in the offer: start running from the time the offer was
b. When no time of acceptance is fixed: run out after a reasonable time
2. Revocation
a. Can he revoke?
Yes unless:
Option contract (Rest. 63b)
Exception: when there is an option contract, the power of acceptance is not
terminated by rejection, or counter-offer, revocation, or death/incapacity (power of
acceptance will be held open during the term of the option) (Rest. 37)
To terminate the option contract, the parties would need to make another binding
agreement, with new consideration on both sides.
Offer + consideration
Majority approach: consideration value must be received,
not mere recital (Berryman v. Kmoch) - finding that the
realtor was not bound to find buyers + since the option
contract was not paid, he did not provide consideration to
keep an option contract, therefore the offer is revocable at
any time.
Nominal consideration: acceptable because
this only mini-consideration to keep option
open, the actual value of the exchange is
not discussed yet
b. Minority approach: Rest 87(1)(a) - Formality: mere recital
of consideration, in writing and signed is sufficient
Offer + Pre-acceptance substantial reliance
Based on existence of an offer (Rest. 87(2)) (Drennan) * finding that the General contractor justifiably relied on the bid
that the Sub-contractor bid to them to compile their general bid
when there is silent on revocation term, unlike James Baird Co.
v. Gimbel Bros., and there was no reason to know that SubContractor has made a mistake because there are variation
between the bids, therefore PE is an irrevocable contract)
→ Make an offer irrevocable by creating an option contract
1. When Sub-contractor bid had “expressly stated
or clearly implied that it was revocable at any
time before acceptance” (James Baird v.
2. When General contractor involves in “bid
shopping” - trying to find another
subcontractor while continuing claiming that
the original bidder is bound / “bid shopping”
b. Clear assurance that results in a foreseeable negative change in
offeree’s position - more than an offer but less than a clear
promise (Pop’s Cones) - finding that the Resort’s multiple
assurance by saying that it is 95% done, should pack the old
location, letter of intent, etc. (Harvey v. Dow) (Rest. 90)
Analyze 4 elements of Promissory Estoppel:
1) Promise
Manifest objective assurance
2) Reasonable Expected Reliance
3) Actual Reliance
4) Injustice
→ Create a Contract
Beginning performance makes offer irrevocable by creating option
but does not bound the offeree to complete performance (Cook v.
Coldwell Banker) (Rest. 45)
b. Beginning performance makes offer irrevocable and bound offeree to
complete the performance to collect what was promised (Rest. 62)
Protect the offeror in justifiable reliance on the offeree’s
implied promise
Preparation is not sufficient, must tendering
Exception: If the preparation constitutes substantial reliance
ii. Offer irrevocable by seal (statute) - discussed in Normile.
b. Did he revoke?
Offeror acted inconsistent with his intent to make an offer (Rest. 42)
Offeree learned about offeror’s doing through a reliable source (Rest. 43)
Normile v. Miller - buyer offered and seller counter-offer. Buyer did not react to the
counter-offer until he heard that the seller had revoked her counter-offer by entering
into a contract with another buyer Segal. Court finding that Segal transaction was
valid and the Normile was not because a) seller did not enter into an option contract
with buyer, b) revoked her counter-offer before buyer can accept
Did he revoke in time?
 Mailbox Rule: Acceptance letter is effective upon dispatch. Others are
effective when they are received (rejection, revocation) (Rest. 63a)
Stated otherwise in contract
Subsequent acceptance letter will be effective when received
Does not apply to option contract: an option contract is accepted
when the acceptance letter is received (Rest. 63b)
3. Rejection
Terminate the offer even when the time expiration has not lapsed (Rest. 36)
4. Counter-offer
Does the term vary from offer to acceptance?
An offer by the offeree concerning the same subject matter but different terms than the original
offer will terminate the power of acceptance and will create a new offer (Rest. 39) (Rest. 59 - a
conditional acceptance based on assent to the additional terms is also a counter-offer)
UNLESS the offeror intended a contrary intention (Rest. 39b)
Normile v. Miller (finding that seller made a counteroffer by returning the original
offer with multiple corrections and added new terms)
Inquiry will not terminate the offer (“would you consider lowering your price?”)
5. Death/incapacity (Rest. 48)
Revocation, rejection, or acceptance is received when the writing comes into the possession of the person
addressed (Rest. 68)
When offer does not specify, can either accept as a returned promise or return performance (Rest. 32)
Returned promise
 Different term
Do the terms vary? (from offer to acceptance)
Is contract for sale of goods?
Yes. UCC 2-207 (Battle of the Forms)
No. Mirror Image Rule → offer rejected + power of acceptance terminated
Exception: when there is an option contract (power of acceptance will be
held open during the term of the option)
ii. Unilateral (Common Law ≠ Restatement)
Majority approach: Beginning performance makes offer irrevocable by creating
option but does not bound the offeree to complete performance (no mutuality of
Cook v. Coldwell Banker - finding that the employee has made substantial
performance in reliance to the offeror’s bonus, which is a substitute for both
consideration and acceptance, is an option contract than the employer cannot
revoke. (Rest. 45 - does not require substantial performance - simply
beginning performing)
Offeree’s performance is both consideration and acceptance of the offer
Rest. 45 - comment e: Only offeror is bound, the offeree is not bound to
complete performance
a) If there is explicit reservation of power to revoke based on
conditions outside of offeror’s control, then Court may not find a
breach (Storti v. UWash)
b) If it is a condition within offeror’s control, then it is illusory
promise (Sateriele v. RJR - finding that if the termination clause
applies to ALL catalogs instead of certain (but not all), then the
promise is illusory because it gives the offeror an unrestricted
b. Minority approach: Beginning performance makes offer irrevocable and bound the
offeree to complete performance to receive the promise (Rest. 62)
Silence (Rest. 69)
General rule: do not constitute acceptance but in some limited circumstances silence may result in
the formation of a contract
1) If the offeree gives the offeror the impression that silence will be considered an
acceptance (previous dealings)
2) When the offeror has told the offeree that silence will constitute acceptance
3) Offeree takes the benefits of offered services when they have reasonable
opportunity to reject
Electronic and “Layered” Contract
1. Shrinkwrap terms: The purchaser orders a product over telephone, Internet, or store. After removing the wrapping, the
purchaser has an opportunity to inspect the product and review the contract terms. There are two scenarios:
If purchaser is dissatisfied with the product/terms: return within a certain number of days.
If does not return within that period, the purchaser agrees to the terms.
A. Easterbrook / Rolling approach (UCC 2-204) - there is only one contract from the beginning
Buyers are not bound contractually until they received both the product and the seller’s term of
sale, and then decide within reasonable time.
When a buyer places an order, it is NOT YET an offer. The seller, as master of the offer, may
invite acceptance by conduct when shipping the product. A buyer may accept by performing the
conduct the seller proposes to treat as acceptance.
DeFontes v. Dell, Inc. - finding that although the consumer has three chances to
review the T&C: i) hyperlink on website, ii) reading T&C in the invoice, iii)
reviewing copy of terms sent along with the packaging - none was conspicuous
enough to give rise to a contractual obligation.
Dye v. Tamko Building Products - Tamko invited purchasers to accept its contract terms by
opening and retaining the shingles through clear display on exterior wrapping of the package,
a reasonable means of acceptance-by-conduct. The home-owners, through their roofer agents,
validly accepted those terms.
B. Klocek Approach (UCC 2-207) - contract with proposal for additional terms that was not binding
unless expressly agreed to by the buyer
The buyer is the offeror, the contract is formed when the seller accepted the payment and promised to
An agreement affixed to the packaging is a proposal for additional terms that was not binding unless
expressly agreed to by the buyer.
Any terms proposed by the seller that materially altered the contract would not automatically become
part of the contract, even between merchants.
→ Both parties are bound when the seller accepts payment. Buyer may lose the right to cancel the sale
within the time.
Step-Saver Data Systems v. Wyse Technology
2. Clickwrap terms: before completing the purchase of the product, the buyer must click a button labeled “I agree,”
“submit” or some equivalent phrase.
Often must scroll through the seller’s term of sale before clicking the agreement button
Cannot complete sale if the buyer refuses to accept
3. Browsewrap terms: transactions involve information made available by Internet providers on their websites. The term
on the website states that by using the site the user agrees to the provider’s term of use.
User is not required to scroll through the terms or click any agreement
The user’s agreement to the term is implied from browsing the site
→ User does not need to clearly assent
→ Leads to conspicuous issue of whether assent is given or not
Long v. Provide Commerce, Inc. - The hyperlinks and the overall design of the ProFlowers.com web would not
have put a reasonably prudent Internet user on notice of Provide’s Term of Use. Plaintiff therefore did not
unambiguously assent to the subject arbitration provision simply by placing an order on the website. It is the
responsibility of the website owner to put users on notice of the terms they wish to bind consumer.
Bright Line Rule
Because of the nature of the browsewrap term, no affirmative action is required.
The validity of a browsewrap agreement turns on whether the website puts a reasonably prudent user on inquiry
notice of the terms of the contract.
Depend on two federal cases (Specht and Nguyen)
i. Specht: a consumer’s clicking on a download button does not communicate assent to contractual term
IF the offer did not make clear to the consumer that clicking download button would signify assent
(based on a reasonably prudent buyer)
ii. Nguyen: It is not enough to rely on proximity of the hyperlink to enforce a browsewrap agreement, but
must include something to capture the user’s attention and secure her assent (ex: explicit textual notice
that using the website is agreeing to the terms)
CONSIDERATION (Rest. 71 - 90)
1) Benefit/Detrimental (Hammer v. Sidway) - finding that since the nephew refrained from his rights to
drink, use tobacco, swearing and playing cards until 21, he suffered from a legal forbearance and
therefore constitute consideration.
i. Benefit to promisor
ii. Detriment to promisee (preferred)
Legal forbearance: the promisee does something he is under no legal obligation to do or refrains
from doing something that he has a legal right to do.
Gifts generally are not consideration
Gifts with condition: consider BOTH benefit AND detriment
2) Bargained-for Exchange (Pennsy Supply v. American Ash) (Rest. 71) - finding that Pennsy and
American Ash did not need to bargain for the disposal cost as terms of the agreement to be qualified
as bargained-for exchange under consideration.
Whether there is mutual inducement: return promise/performance was sought for
Does not require bargaining (negotiation process)
Consideration as Inducing Cause (Rest. 81)
Having mixed motives does not prevent it from being valid consideration
When the promise from promisor does not induce a return performance/promise, the
returned performance/promise can still be consideration on its own (creating a unilateral
Modification (Common Law ≠ UCC)
Common Law: a contract modification is unenforceable if there is no new consideration
(modifying extra tasks)
b. UCC 2-209: contracts modifications sought in good faith are binding without consideration
 Invalid consideration
Sham consideration (Dougherty v. Salt) - finding that the aunt writing down “value
received” for a conditional gift to the 8-year-old boy is still not consideration.
b. Past performance / Preexisting Legal Duty (Rest. 73) (Plowman v. Indian Refining Co finding that the payment made to laid off employees was conditional gifts from gratuity
because there was no consideration for past performance. Travelling to pick up the check
is not consideration because it was a condition to obtain the gift)
Exception: A similar performance is consideration IF modified (differs from
what was required)
Travelling to receive the gift is only condition to a gift/conditional gift
(Tramp example)
Inadequacy (Dorhmann v. Swaney) - finding that the exchange of a middle name to
obtain the properties of $4 million is grossly inadequate.
General rule: if the requirement of consideration is met, there is no
additional requirement for: (Rest. 79)
1) Benefit/Detrimental test
2) Equivalence in value exchanged
Exception: unless the amount is so grossly inadequate
that it shocks the conscience (comment (e))
Gross inadequacy + other factors (duress, undue
influence, etc.) is an indicator that it is a sham
3) Mutual obligation
 Distinguish: Nominal consideration (Common law ≠
Common law Majority approach: will make an option
contract if the option is in writing and proposes fair terms
(Berryman v. Kmoch) and must be paid.
b. Restatement Minority approach: recital is sufficient whether the nominal consideration is in fact paid is
irrelevant (Rest. 87(1)).
d. Illusory promise (Marshall Durbin v. Baker) (Rest. 77)
The presence of an illusory promise does not destroy the possibility of a contract.
Instead, it may create the illusory promise that can be accepted by performance
to form a unilateral contract.
No consideration if promisor has an alternative choice (entirely optional)
1) Requirements and Output Contract
2) Conditional Promises: if the condition is no entirely
within the promisor’s control
3) Right to cancel/withdraw
4) Every alternative choice involves legal detrimental or not
within promisor’s control
A. Promissory Estoppel / Detrimental Reliance (Rest. 90)
Create a contract.
Q: Whether D made a promise to P on which P acted to his detriment?
1. Promise
A promise can be based on express promise as well as conduct.
General promise can be supported by conduct to “gap filler” definite terms (time,
location) (Harvey v. Dow) - finding that there is sufficient evidence for a promise
because her brother voluntarily helped her build the house and get the permit for her
house and father told her he would execute a deed to her for the property even though
there is no express promise because he has objective manifested his intent to confirm
his general promise to convey land to Teresa.
A promise must happen before the change in position was announced/take place (the promise
needs to induce the detrimental reliance) (Hayes v. Plantations Steel)
2. Reasonable Expected Reliance
“Going above and beyond” duty may disqualify expected reliance (King v. BU) finding that indexing is extreme for the scrupulous care that King required for the
bailor - bailee relationship, and thus maybe beyond reasonable expected reliance.
Ex: Promise/Assurance may induce expected reliance (Aceves v. US Bank) - finding
that the Bank’s assurance to “work with her on a mortgage reinstatement and loan
modification” induced her to forego the ability to switch from a Chapter 7
bankruptcy to a chapter 13, which may allow her to keep her estate. It is also
reasonably relied on because US Bank reasonably expected her to so rely and it was
foreseeable that she would do so.
3. Actual Reliance
Does the reliance need to be detriment?
Detriment scale:
Promisee worse off than if promise was not made
Any change if initially detrimental (seem like sacrifice)
Any change if that action would not have been made but for the promise (Katz v.
Danny Dare) (Aceves v. US Bank)
Any change in position is enough
4. Injustice
The presumptive remedy is to give P what they gave up
Who gains what? Is it unfair?
 Is it a charitable subscription or marriage settlement? (Common Law ≠ Restatement)
Majority approach (Common Law: King v. BU): D still need to supply
consideration, either under Contract or Reliance theory
b. Minority approach (Rest. 90b): do not need to supply consideration
B. Restitution
I. Promissory Restitution
General rule: A promise based on moral obligation without legal consideration is only valid to
cases where at some time or other valid consideration existed.
(Mills v. Wyman) - finding that since the promise of reimbursing for the medication
that P bought to take care of his son is invalid because the father does not earn
benefit from it.
Exceptions: A promise is made enforceable when:
1) Action is on a renewed promise when Statute of Limitations run out (Rest. 82)
2) Promise to perform a voidable obligation (Rest. 85)
3) Promise to pay a debt discharged by bankruptcy (Rest. 83)
4) Material benefit rule: (Webb v. McGowin) - finding that when P diverted the block
and saved D from serious bodily harm, even without D’s request, he has conferred a
material benefit (receiving safety in exchange for monthly payment for the P, who
was seriously injured and could not work as consideration). (Rest. 86)
1. Material benefit conceived by Promisee
Example: Emergency services and necessaries (comment d)
2. A promise is made in recognition of the benefit received
In Emergency case, essentially back-date
promise to just before the act
Is the promise invalid? (comment f)
Act was a gift
Act was a preexisting duty
Promisor himself has not been enriched
Given back value is disproportionate to the benefit
3. Binding to the extent necessary to prevent injustice
Non-Promissory Restitution
Is there unjust benefit?
1. Benefit received
2. D has knowledge of that benefit
3. D has accepted or retained the benefit
4. It would be inequitable for D to retain the benefit without paying fair value
for it based on circumstances
Has there been exhaustion of remedies? (Commerce Partnership
8098 v. Equity) - finding that the Subcontractor can only recover
restitution from the owner when the Sub has exhausted remedies
against the general contractor + the owner has not paid the general
contractor for the work performed.
Yes: Go to b) Did P acted officiously?
No: NPR inapplicable. Pursue alternative remedy
Has the restitution been paid?
b. Did P act officiously?
Yes: Go to c) Is it an Emergency?
No: Can claim recovery for unjustly enrichment under restitution (Rest.
1,2 of Restitution)
Is it an Emergency? (Section 116 of Restatement of Restitution)
P acted officiously with an intent to charge (Professional
competent service) Section 20 of Restatement of Restitution:
limit restitution recovery to protect the health of others to
providers of “professional services” - unless Emergency
The service was necessary to prevent bodily harm
P has no reason to know the other would not consent to
receiving them, if mentally competent
D cannot give consent (mental impairment/extreme youth)
(Credit Bureau Enterprise v. Pelo) - finding that charging for
the medical service provided to a bipolar patient is justified
because the patient cannot give out valid dissent, therefore can
claim recovery for unjustly enrichment) •
Yes: NPR inapplicable
No: P can claim NPR
A. STATUTE OF FRAUD (Rest. 129 - 139)
 Severability (Crabtree v. Elizabeth Arden Sales Corp) - finding that the signed portion contained
parties, position that the employee will take place, salary, the duration of employment is validly
supplied by an unsigned memo that said, “two years to make good.”
Multiple documents taken together through oral testimony may constitute a signed writing sufficient
to fulfill the statute of frauds if all documents refer to the same subject matter or transaction, and at
least one is signed by the party to the charged with the contractual obligations. (Rest. 132)
CAUTION: Memo can be submitted even if it is not directly related to the contract, or if it
repudiates or cancels the contract, or assert that it is not binding because it was not in writing
(Rest. 133)
Two elements:
1) A contractual relationship between the parties
The unsigned writing must “refer to the same transaction as that set forth in the one
that was signed”
Both Restatement and UCC take a lenient view of what may constitute a “signature”
(may be a symbol made or adopted with an intention, actual or apparent, to
authenticate the writing) (Rest. 134)
These contracts are unenforceable unless there is a written memorandum or an applicable exception:
1. Marriage contracts
Provide consideration by marrying the other party
2. Over one-Year contract: A contract that must be performed longer than one year (the one-year
provision) (Rest. 130)
Refers to performance fully within one year, NOT termination within one year
Contracts of no duration are not within the statute of frauds
A contract that states it cannot be performed in less than one year is within the statute if it is
by express term
As between Statute of Frauds and Promissory Estoppel, PE would prevail (Rest. 139)
Alaska Dem Party v. Rice
Factors to determine whether enforcement of the promise is valid for injustice to be avoided:
(Rest. 139(2))
1. The availability and adequacy of other remedies (cancellation or restitution)
When P has rendered partial performance to an unenforceable
contract because of Statute of Fraud, Court will ordinarily grant P a
remedy in restitution for the reasonable value of that partial
2. The definite and substantial character of the action or forbearance in relation to
the remedy sought
3. The extent to which the action or forbearance corroborates evidence of making
and terms of the promise, or the making and terms are otherwise established by
clear and convincing evidence
4. The reasonableness of the action or forbearance
5. The extent to which the action or forbearance was foreseeable by the promisor
3. Land Contract: A contract for the sale of an interest in land (Common law ≠ Restatement)
Other interest, not necessarily sale, such as easement, mortgage, leases
Beaver v. Brumlow (finding that when D has substantially performed on the oral agreement
to improve the land, cashed in 401-K retirement plans, and total of $85K investment into the
land, which objectively manifest the reliance that an outsider reasonably conclude that the
contract exists, even though Land contract should be in writing, is sufficient to grant specific
Common law: Unequivocal referable test - Two factors that Court looked for:
1) taking possession of the land
2) making valuable, permanent, and substantial improvements to the property
Doctrine of specific performance (Rest. 129): the promisee is in reasonably reliance
on promisor’s continuing assent and has changed position so that injustice can be
avoided only by specific performance.
4. Executor – administrator contracts: A contract of an executor or administrator to answer for a duty
of his decedent
5. Sale of Goods contracts $500+. Exceptions:
Contracts for the sale of specially manufactured goods for $500+ (when performance begun)
ii. Non-injured party admits that contract was made
iii. Payment has been accepted goods have already been received
6. Suretyship: A contract to answer for the duty of another
Narrowed down by common law to only between the creditor and debtor
Exception: the promisor’s main purpose is to further the
promisor’s own economic advantage (main purpose rule)
Inapplicable when the promisor who has guaranteed payment of another’s debt did so for his
economic advantage, rather than out of solicitude for the debtor’s well-being.
B. CAPACITY AND FAIRNESS (Rest. 161 - 177)
What is the contract at hand?
What is the relationship?
What is one party trying to get out from?
What is the effect on the contract?
1. Duress (Rest. 175(1)): voidable contract (will be binding unless disaffirmed and may be
expressly or implicitly ratified by the victim)
(Totem Marine Tug v. Alyeska Pipeline) - finding that Alyeska committed duress because they
intentionally forced Totem to accept $97K instead of the total of $260K invoice AND sign the
release as Totem’s only option to avoid bankruptcy.
1) Improper wrongful/coercive acts/threat by the other party (Rest. 167)
Crime, tort
Breach of duty of good faith and fair dealing
Resulting in unfair terms / would harm the recipient
Use of people for illegitimate ends
Example: refusing to honor the existing contract / a
threat to breach the contract or to withhold payment of
an admitted debt (Alaska Packers Association v.
2) Inducing involuntary assent
Whether the threat induces the assent.
3) Circumstances permitting no alternative (Rest. 175 - comment b)
Example of alternatives: availability of legal action, alternative sources of
goods, services, or funds, or toleration if the threat is minor.
Economic duress
a) Majority: if the duress is not caused by defendant party but because
of the injured party’s own economic trouble, then court is
sometimes reluctant to review the contract (there must be a causal
link between coercive acts and circumstances of economic duress)
b) Minority: It is enough that one party takes advantage of the other
side’s dire circumstances without having caused the financial
An available alternative or remedy may not be adequate where the delay
involved in pursuing that remedy would cause immediate and irreparable
loss to one’s economic or business interest
2. Undue Influence (Rest. 177) (Odorizzi v. Bloomfield School District) - finding that there is
undue influences because the discussion happened at his apartment, right after he was
released from arrest, refusing for him to meet with lawyers, under threat of publication that
will bring him humiliation, while he was under such severe mental and emotional strain.
1) Unfair persuasion [“excessive pressure”]
Changes the way the person would ordinarily decide (vulnerable state of mind)
Discussion at unusual or inappropriate time
Consummation in unusual place
Demand that business be finished at once
Extreme emphasis on consequences of delay
Use of multiple persuaders by dominant side against single servient party
Absence of third-party advisers to servient party
Statement that no time to consult financial advisers or attorneys
2) Domination; OR
3) Confidential/special relationship
Is the party vulnerable? (contextually or in relation to the other party)
Victim depending on the idea that the other party is looking for their
best interest
3. Misrepresentation / Fraud in Inducement (Rest. 164) (Syester v. Banta) - finding that the
invitation to buy dance lesson was a misrepresentation because the dance studio intentionally
made wrong statements and promised that she could be a professional dancer and awarded
Gold Star course + the victim justifiable relies on this because the studio possesses skills and
judgment in dancing.
Contract integration through disclaimer or merger clause does not bar the buyer’s action to
rescind the contract on the basis of fraud
1) Fraudulent OR material in character (Rest. 162)
Fraudulent: consciously/intentionally made falsely
b. Material in character: if the assertation will probably induce a reasonable
person to agree
2) Justifiable reliance
i. State of opinion
Usually opinions that concerns quality, value, authenticity are not
misrepresentation when it expresses a belief, without certainty, as to the
existence of the facts. (Rest. 168)
Exceptions (Rest. 169)
Opinioner does not honestly believe it
The Opinioner knew of facts that contradict his statements
When relying is justified because of confidential relationship
Reasonable belief in special skills or judgment
Opinee is particular susceptible to a misrepresentation of that type
3) That induces recipient’s assent
Counter-argument: showing that the victim was not induced or that she is
not susceptible to the misrepresentation
Result: Contract voidable
 Fraud in inducement v. Fraud in execution
Fraud in inducement
Occurs when the victim intended to make the contract but was told
a false statement regarding the terms or obligations of the
The party knows what he is signing but does so as the result of
Make a contract voidable
b. Fraud in execution (Rest. 163)
Occurs when the victim was tricked into signing a contract under
circumstances in which the nature of the writing could not be
The party is deceived as to the nature of the writing
Make a contract void
4. Fraud in execution (Park 100 Investors v. Kartes) (Rest. 163) - finding that there is fraud in
execution because Park 100 induced the Kartes to sign a personal guaranty of lease, which
they did not want to, by concealing it as “Lease Agreement” and did not correct the Kartes
when he had a chance to. Although parties have a duty to read, but this is alleviated when the
other party commits fraud.
1) Fraud or Material misrepresentation
i. Fraud: actively/intentionally make statements not in accord with facts or has
reason to know the basis to induce assent
ii. Material misrepresentation: failure to disclose a material fact that a
reasonable person would want to know to induce assent
2) Justifiable Reliance
Special relationship
Duty to disclose even when there is no special relationship:
i. When necessary to correct a prior assertation
ii. Correct an effect of a writing
3) That induces recipient’s assent
Can introduce Parol evidence to show an “excusable ignorance of the written terms
which may be proven by presenting evidence that someone secretly changed an
important term of the contract before the ignorant party signed it, and that the
ignorant party lacked a reasonable opportunity to learn of the change before signing.”
Results: Contract voided
5. Nondisclosure / Fraudulent concealment (Rest. 161) (Hill v. Jones) - finding that even
when there is an integration/ “as-is” clause, parol evidence is always allowed to show fraud.
Here, the seller failed to disclose a material fact of termite history that could change the
buyer’s decision. Although the buyer has a duty to ask, this duty is alleviated when the seller
knows/should have known because they have more information)
1) Is there a nondisclosure?
2) Is the nondisclosure of material fact or fraudulent in nature?
Fraud: actively/intentionally conceal to induce assent
b. Material misrepresentation: failure to disclose a material fact that a
reasonable person would want to know
Exception: when the information is too expensive to acquire, then
there is less duty to know and inform
There is obligation to disclose non-material facts if the buyer asks
Failure to use reasonable care (duty to read, duty to ask) may be bad
for injured party
3) Justifiable Reliance
Fiduciary or trust/confidence relationship: the term of the contract must
be fair and must be fully explained to the other party. If the terms are not
fair, beneficiaries can void the contract (Rest. 173) (Rest. 161(d))
In the absence of relationship, where a material fact is known to one party by
virtue of his special position and could not be readily determined by the
other, the know party must disclose
Example: seller v. buyer of a house
Nondisclosure or concealment would amount to a breach of good faith
(Rest. 161(b))
1) Difference in intelligences of the parties / relationship
2) Manner in which information was acquired
3) Fact was not readily discoverable or not
4) Is the buyer or seller fail to disclose?
5) Type of contract
6) Importance of the fact not disclosed
7) Active concealment
4) That induces recipient’s assent
Results: Contract voidable because there was no manifestation of assent (Rest. 163)
6. Unconscionability (Rest. 208) (Williams v. Walker-Thomas Furniture - finding that the store
was 1) using adhesion contract to force the consumer to buy (who has less bargaining power)
while aware of their financial position, into signing for an unfair contract that 2) unreasonably
favor the store, such as the ability to repossess all items) (Higgins v. Superior Court) - finding
that the Agreement and Release drafted by the television defendants, 1) having 24 single
spaced pages that has even small font for Release page and no clear signal of Arbitration
clause, with complex legal terms, with the instruction of flipping through the pages and sign
the initials within 10 minutes, 2) that bounds only the Higgins to arbitration clause is
Evaluate at the time the contract is made
Court can either:
Void the contract
b. Enforce the remainder of the contract without the unconscionable term
Limit the application of the unconscionable term to avoid any unconscionable result
➢ Two-prong test
Sliding scale: the more substantively oppressive in the contract term, the less evidence of
procedural unconscionability is required to come to the conclusion that the term is
unenforceable, and vice versa
Procedural unconscionability (absence of meaningful choice) - quasi-fraud or
Focuses on factors of surprise and oppression, with surprise being a function of the
disappointed reasonable expectations of the weaker party
a) Party’s knowledge
b) Reasonable opportunity to understand the terms of the contract
Are the terms inconspicuous or incomprehensible?
“Take it or leave it” in nature?
c) Were important terms hidden?
d) Bargaining power
Even if given consent (meaningful choice), it is immaterial (ex:
financial status, educational background, work experience)
Some court will conclude that adhesion contract satisfies procedural
unconscionability, but not in Higgins court (only an indication of
procedural unconscionability)
ii. Substantive unconscionability (terms unreasonably favor one party)
Overly harsh or one-sided results
Lack of “bilateral” application
Legal question to be resolved by the Court
1. Unilateral (Rest. 153, 154) (BMW Financial Services. V. Deloach) - finding that BMW
should bear the mistake because although it is not “neglection of a legal duty,” it was
reasonably concluded that but for its failure to flag that the case is in litigation to the agency +
waited nearly a month to inform Deloach of the mistake, there would have been no mistake.
This change in amount also upsets the expectation of the parties, breaching the promise to act
in good faith and fair dealing. The amount that BMW got back was not unconscionable or
overly harsh outcome to BMW.
An error concerning a basic assumption on which the contract was made, that is made by only
one of the parties to a contract.
1) A unilateral mistake
2) About “basic assumption” of contract
Is the mistaken fact the primary reason that the parties entered into the
agreement in the first place?
Basic assumption: affecting the core and material terms → Rescission
Collateral mistake: affecting the peripheral → cannot rescind
3) “Material adverse effect” on mistaken party?
Make it more valuable for one party and less on the other
4) The mistaken party does not bear the risk (Rest. 154).
a) Risk allocated by agreement;
b) Party was aware of limited knowledge, but went ahead;
c) Court assign risk to that party
5) Enforcement would be unconscionable OR non-mistaken party had reason to know
of other’s mistake (palpability - the mistake is so obvious that the non-mistaken party
should have realized)
Nature of P’s mistake
Is it a mechanical error (mistakes in calculation) or
mistakes in judgment as to the value of an object?
Is it a failure to act in good faith? fraud, cheating, OR
disappointing the expectation of other party (Rest. 157)
If unconscionability: analyze procedural and substantive
b. The delay in discovering the mistake
D’s reasonable reliance on the mistake
Did the non-mistaken party suffer any loss?
d. Forfeiture of the mistaken party
What is the impact of the mistake on the mistaken party?
→ If yes to 5): Grant rescission
→ If no to 5): Deny rescission and enforce contract as is.
2. Mutual mistake (Rest. 152, 154) (Lenawee County Board of Health v. Messerly) - finding
that when both parties are unaware of the septic tank, that made the whole house inhabitable,
and there is an As-Is Merger Clause (“Purchaser has examined this property and agrees to
accept same in its present condition. There are no other or additional written or oral
understanding”), then the burden to bear this risk is assumed by the buyer when they signed
for the house.
1) A mutual mistake?
Both parties erroneously assume about a fact that turn out not to be true
2) About “basic assumption” of contract?
Basic assumption: affecting the core and material terms → Rescission
Collateral mistake: affecting the peripheral → cannot rescind
3) “Material effect” on exchange of performance?
Make it more valuable for one party and less on the other
→ Voidable by the adversely affected party UNLESS he bears the risk of the mistake
Clerical errors: When the mutual mistake consists of the failure of the written
contract to state accurately the actual agreement of the parties, reformation of
the contract to express the parties’ mutual intent is the normal remedy.
Mutual mistake: The court can act on discretion to determine which
blameless party should assume the loss resulting from the mistake they share
(Res. 154(a))
4) The adversely affected party does not bear the risk
Party might bear risk because:
Risk allocated by agreement;
Example: As-is Merger clause
b. Party was aware of limited knowledge, but went ahead;
Seller’s knowledge
Conscious ignorance: if seller realize that something is off but
rather not know and do not want to further the problem (Hill v.
Court assign risk to that party
▪ A party failing to perform its legal duty
▪ The mistake was the result of his failure to act in good faith
and in accordance with reasonable standards of fair dealing
1. Impossibility (Rest. 162 - 164)
Require for “objective impossibility” - the thing promised could not be performed at all
Rest. 262. Death or incapacity of person necessary for performance
Rest. 263. Destruction, deterioration or failure to come into existence of things
necessary for performance.
2. Impracticability (ability to carry out the performance) (Rest. 261)
Extreme increase in the cost of extraction justified D’s nonperformance (it is very difficult to
convince Court to excuse contract based on significant increase in cost of performance)
Make it sufficiently different from what the parties had both contemplated at the time of the
contract as to be “impracticable”
(Hemlock v. Solarworld) - finding that there is NO impracticability because market
changes, regardless of whether the actual reason is illegal or not, is an anticipated
reason for the set price in the beginning.
 Release / “Force majeure” clause: provide for excuse where performance is
prevented or delayed by circumstances “beyond the control” of the party seeking
 Superior Risk Bearer (Economic Theory - Posner): in the absence of a contractual
provision, the risk should be assigned to the party who is in the best position to
prevent the event from occurring, to minimizes its consequences at the lowest cost.
3. Frustration of Purpose (value of the performance) (Res. 265)
The value of the OTHER’s performance is now meaningless because of a supervening change
in extrinsic circumstances.
1. Unexpected (foreseeability) and important event (upsetting “basic assumption”)?
Mutual profitability/economic distress/continuation of existing market condition is
not a basic assumption
Unless the change is too drastic that would drive a company to bankruptcy
Drastic changes in the market nor illegality of the intervening cause is basic
Yes: proceed to (2)
Was event fault of party seeking relief? (Rest. 266)
No, proceed (3)
3. The party seeking relief bears the risk of that event’s occurrence (in contract or
No, proceed (4)
Did event make that party’s performance impracticable -- substantially more difficult
or expensive? (If yes, performance excused for impracticability.)
Did event substantially destroy value of other party’s performance? (If yes,
performance excused for frustration.) (Mel Frank Tool v. Di-Chem Co.) - finding
that there is no frustration of purpose because Di-Chem can still use the storage for
storing non-hazardous chemicals even when the City ordinances forbid the storage of
hazardous chemicals at this site.
Need to completely destroy the value of performance to be excused
For a new contract to be enforceable, there must be new consideration
1) Is there any change (small or modest addition to/alternation of performance is enough) to the original
bargained-for exchange consideration?
Yes: There is new consideration
No: Invalid consideration. Go to 2) Exception.
Go to Invalid Consideration
A contract that obligates a party to perform what he or she has a prior existing duty
to perform under an earlier agreement is not enforceable for lack of consideration
(Alaska Packers Association v. Domenico - finding that modification to the contract
to pay the fishermen $100 instead of $60 as agreed lacks new consideration because
the fishermen did not have to do anything more than what they were supposed to do
under the original contract where they should be doing whatever the captain requires)
(Rest. 73. Performance of Legal Duty)
2) Is there any exception to the modification without new consideration?
Exception for Modification:
1. Unforeseen circumstances (Rest. 89(a)) - a promise of modification is
binding if “fair and equitable in view of circumstances not anticipated by the
parties when the contract was made.”
May be applicable even if the unforeseen circumstances would
not fully qualify for excuse based on the impracticability
doctrine (just more expensive, taking longer)
2. Reliance (Rest. 89(c)) on a promised modification as basis for enforcing a
modifying agreement despite the absence of fresh consideration
Simply performing its duties as promised under the original
3. Mutual release
A rationale is “fictitious” when the “rescission” and new contract
are simultaneous.
If both destroys the preexisting duty, and then can be liberated to do
contract 2
If there is duress then not enforceable
1) Do the parties attach the same meaning to the terms?
Yes - These are the terms governing (Rest. 201(1))
No - Go to (2)
2) If parties disagreeing on meaning of an express term:
1. No contract when:
i. Parallel ignorance (Rest. 201(3))
➢ Unless Court chooses to fill in the gap. Go to Gap Filler. (Frigaliment
v. BNS) (Joyner v. Adams) - finding that both sides did not have the
same understanding of the phrase “completed development.” Both
sides have equal bargaining power, and both participated in the drafting
so the interpretation against the drafter did not apply. Need to know
what the parties intended through Gap Filler. The court did not
consider parallel ignorance situation and grant no contract option.
ii. Parallel awareness
2. Contract operative by one party’s meaning
One party doesn’t know nor has reason to know > one knows or has reason to know
(Rest. 201(2))
Determine who has reason to know: Go to Gap Filler.
 GAP FILLER (Four-corner < Plain Meaning Rule (patent ambiguity) - only look to evidence when the
meaning of the word is ambiguous < Latent Ambiguity - will look at all evidence before deciding whether there
is ambiguity).
Should only turn to extrinsic evidence when there is no clear meaning in the text because Courts don’t like and
is skeptical of extrinsic evidence (Common Law ≠ Restatement)
Plain Meaning Rule
Common Law: Patent (intrinsic) Ambiguity: only look to extrinsic evidence when there is
ambiguity on the face of the term
i. Is there ambiguous on the face of the contract? (Frigaliment v. BNS)
Yes: Use Gap Filler tools (Interpretation of the Contract)
b. Restatement/Corbin (Modern Approach): Latent (extrinsic) Ambiguity → Analyze all evidence
admissible unless Parol Evidence prevents (i.e. when contract terms contradict the interpretation)
and THEN decide whether the term is ambiguous or not (Rest. 210(3))
Parol Evidence (Rest. 213)
1. What is the level of integration?
Completed integration: complete and exclusive final version of all the terms
(Rest. 209) (Rest. 210)
Indication of completed integration
Legal obligation, material terms and items
ii. Merger Clause
iii. Parties expressly deem it is a contract (not memo / letter of
b. Partial integration: an integrated agreement other than a completely
integrated agreement that includes final statement of some of the terms
2. Use + Permissibility of evidence
Completed integration
Explain only
Cannot add or contradict terms (Thompson v. Libby) (Rest. 215)
b. Partial integration
Add or explain only
Cannot contradict terms
3. Exception (Rest. 214)
1) Explain ambiguity
Common Law: Plain meaning rule (Gap Filler only when there is
ambiguity within the four-corners of the contract)
b. Restatement’s view: can admit evidence for interpretation but must
stop short of contradiction. Two steps:
i. Considers evidence that is alleged to determine the
extent of integration
ii. “Finalizing” the court’s understanding by using the
parol evidence rules to filter out extrinsic evidence that
would vary or contradict the meaning of the contract.
Gap Filler (Taylor v. State Farm Mutual Insurance Co.)
2) Subsequent agreements made AFTER the finalized agreement
3) Oral conditions (Rest. 217)
The whole agreement’s effectiveness is based on an oral condition
4) Illegality (Rest. 214(d))
Evidence to show that the agreement is invalid for any reason, such as fraud,
duress, undue influence, mistake, illegality
Go to Defense
i. Fraud
Fraud in Execution always accepted
b. Fraud in Inducement
1) Majority: parol evidence is excused in cases of
fraudulent inducement even when the writing is
completely integrated or contains a merger clause
2) Minority: Sherrodd v. Morrison-Knudsen Co. - The
allegation of fraud must not directly contradict the
express terms of the contract
Ex: Merger Clause, Signed Agreement, when party
has taken steps to preclude the fraud claim
5) Equitable remedy / restitution
Court only allow reformation of contract when party can show a “clear and
convincing evidence: that the parties really did intend their written
agreement to contain the term in Question.
6) Collateral Agreement (Rest. 216)
Do not expect this kind of evidence to be within the integrated contract
Not separate and independent in character
Warranty is not a collateral evidence because it is directly related,
and a reasonable person would expect it to be within the agreement
(Thompson v. Libby)
 INTERPRETATION TOOLS (Rest. 202 - 203)
A. Text-oriented
1) Use ordinary and technical meanings, as appropriate
2) Words are known by the company they keep
3) Expressing one excludes the others
4) If you use specific terms, then general terms are the type that specific terms indicate
B. Intent-oriented
1) Purpose of the parties
Parties have conflicting interests, so it is difficult to determine the common purpose
2) Interpret contract as a whole
Try to make it reconcilable so don’t make things out of context to make it consistent
3) Interpret contract to make it valid
Reasonable, lawful, and effective in nature
4) Specific governs over general
Where there is conflict between two provisions, then you choose the ones that focus on the
details in question over the general provision
5) Handwritten trumps the printed
If parties have negotiated, then presentation gives more deliberation
C. Extrinsic evidence of intent
1) Course of performance
Interaction between the parties with respect to the same contract at issue
Like Course of dealing, but particular to this contract only
Restatement 202(4), UCC 2-208
2) Course of dealing
Concerns evidence between the particular parties to the transaction (Rest. 223)
3) Trade usage
Regularity within a place, could be regional but conventionally is general for a trade so that
you can justify the expectation in every given context (Rest. 222)
D. Principles not related to intent
1) Interpret ambiguities against the drafter (Rest. 206)
To repair for the harm that the drafter may have worked to their benefits
Exception: Cases that do not reveal any disparity of bargaining power between the parties
(Joyner v. Adams)
2) Interpret contract to favor the public interest
Grants of public franchise
Covenants for property in which there are discriminations
If you encounter this problem, then you may interpret this as a way to avoid the problem
Implied Term: a term that court does not find in the parties’ agreement, but that the court holds should be
“implied by law” - made a part of that agreement by operation of the rules of law rather than by agreement of
the parties.
Supply terms that parties would probably have agreed to
Rely on public policy and fairness
 Missing terms - Agreement to agree (Common law ≠ Rest/UCC)
Common law
Majority approach: If courts can supply reasonable terms (“gap filler”) for those that
are missing, these terms will be supplied only where they are consistent with the parties’
intent (Rest. 204) (Rest. 27)
Go to Gap Filler.
b. Minority approach: contract not enforceable until ALL essential terms are included
Terms must have future ascertainment (formula, method)
Courts do not decide ambiguity between parties
If an essential term is missing for future agreement, there is no legal obligation
until such future agreement.
Walker v. Keith - finding that the renewal lease for a small lot was not enforceable for
uncertainty because the rental price was based upon future agreement as the date of the
renewal, and they did not agree to a new price)
Renewal options in lease is not an exception
ii. Restatement
Letter of intent
Prior negotiations before a formal agreement can be contract through mutual assent (Quake Construction, Inc. v.
American Airlines) (Rest. 27)
Unless indicate that it is only preliminary negotiation by parties through a clear intent not
to be bound
Go to Parol Evidence to find out parties’ intentions
iii. UCC
2-204(3). Formation in General: can be a contract even when missing terms as long as:
Parties intend to make contract
Basis for remedy
b. UCC 2-305. Open Term Price: The parties can conclude a contract for sale even when the price is not settled yet
(“price to be set by seller at time of delivery”) as long as there is good faith in dealing and intention to be
 Implied covenant of Good Faith and Fair Dealing
Covenant of Good Faith and Fair Dealing
Both UCC 1-304 and common law Rest. 205 imposes a duty of good faith and fair dealing on each
party to a contract with respect to performance and enforcement
Protect the “reasonable expectations” of the contracting parties considered in light of
background contexts
Avoid putting one party at the mercy of the other
Usually no contradiction with Parol Evidence Rule because the implied covenant does not
seek to alter or override an express term
Implied good faith seeks to 1) consider parties’ expectation of parties, and 2) purpose for
which the contract was made
Bad Faith
Two-step analysis and merchants must abide by both of the standard
b. Common Law / Restatement
Bad faith: it is an unreasonable behavior if it allows interference in the intent to
deprive the other party of the “fruits of the contract” as to violate their expectation
Circumstances that can introduce parol evidence:
1) When a term, not expressly set forth in contract, must be added to
reveal parties’ expectation (implied obligation to use reasonable effort)
(UCC 2-306(2))
Reasonable Effort
A promise to use reasonable effort requires more from context
(Wood v. Lucy, Lady Duff) - finding that the contract was NOT
illusory and have valid consideration because although P did not
bind himself to anything, his action implied that there is
consideration by fulfilling his “exclusive” obligation such as 1)
account on monthly payments for fees, secure IP protection, split
profit 50/50
Include: good faith, reasonable based on abilities of the
party, the means available to it, and the expectation of other
party, or diligence
An implied obligation to use reasonable efforts will prevent
a somewhat indefinite promise from being illusory.
2) When there is concern that a party may have used a contract term in bad
faith that needs compensation
Seidenberg v. Summit Bank - finding that D was acting in
bad faith when D frustrated P’s expectation of being allowed
to work until retirement age and D used insufficient energy
to create leads, and deprived P of expected profits despite
the express contractual terms.
→ Implied good faith requires that parties do not intentionally frustrate the
purpose of entering into the agreement.
Bargaining power is an important factor though not
determinative (Sons of Thunder - finding that although the
contract expressly stated that contract’s term is 1 year and
was terminable on 90’s day notice, D was breaching good
faith when it prayed on P’s lack of sophistication and
desperate financial straits).
→ Go to Parol Evidence to find the true intentions/expectation of parties
when entering the agreement.
3) When there is concern about a party’s discretion expressly granted in a
contract’s term
Satisfaction Clause
Majority Approach (Objective Approach) (Rest. 228):
satisfaction is judged by a reasonable person standard when the
contract involves commercial quality, operative fitness, or
mechanical utility (Morin Building Products Co. v. Baystone
Construction, Inc.) - finding that an aluminum wall for a factor,
despite the contract reserve the right to reject the work to D, should
be judged using an objective standard of a reasonable person, even
when it involves personal aesthetics, especially when the new wall
is subject to the same flaw.
b. Minority Approach (Subjective Approach): when it comes to
“personal aesthetic,” satisfaction depends on the owner’s good faith
The performing party must recognize this is subjective
Hard to show evidence that it is acting in bad faith
Does not need the contract to be MADE in bad faith; only
require the subsequent in the execution to be in bad faith
➢ Go to Parol Evidence (Locke v. Warner Bros) finding that even when the contract is based on
personal aesthetic, D should not have bad faith in
deciding to upset P’s expectation but should be
“honest” dissatisfaction. Evidence of explicitly
telling Locke that her work would not be made
into films is evidence of bad faith allowed by Parol
1) Is there an express condition to a party’s performance in the contract? (Rest. 224)
Is the express condition stated in unambiguous language (such as “if,” “unless,” and “until”)?
Yes: requires strict compliance
If condition fails, the obligor is discharged from further obligations
If in doubt, Restatement prefers an interpretation that a term or event is not an express
condition in order to reduce the risk of forfeiture (Rest. 227) → only a promise unless
its occurrence was a material party of the agreed exchange (Rest. 229).
Look to parties’ intent.
ii) Is it a promise/constructive condition?
Yes: require only “substantial performance”
If condition fails, the breach does not necessarily discharge the obligor’s performance
and may only give rise to damages.
2) Has the condition been excused by:
Contract Defense
Go back to Defense
EnXCo Development Corp v. Northern States Power Co. - finding that
impracticability is not an excuse to nonperformance of getting an EPCA license
before the “Long-Stop Date” because EnXCo had had 29 months and EnXCo was
assigned the risk in the contract.
b. Disproportionate Forfeiture (Rest. 229)
Severe loss: what is the overall effect on both parties of allowing this condition not to occur?
Was there risk assigned to the injured party?
EnXCo Development Corp v. Northern States Power Co. - finding that there is no
disproportionate forfeiture because EnXCo still get to keep all the invested
equipment, and the contract is between equal parties, and based on an express
termination clause in the contract. Simply Northern States got a windfall because of
EnXCo’s failure to act is not enough to justify disproportionate forfeiture.
Waiver (Rest. 84)
Obligor waives the condition that obligee must do before obligor’s performance
Obligor may be under a duty to perform despite the nonoccurrence of that condition
Material conditions are not waivable, unless other party (obligee) has given
consideration for waiver or obligee’s reliance (based on obligor’s expression of
intention not to insist on it, followed by the obligee’s reliance on that manifestation
of intention)
If both parties’ obligations are conditioned this thing occur, then either one of them
can invoke the non-occurrence as a ground to invoke. Both have to waive that in
order for them to clear the contract over. If only one side waives, and the other
insists, then have to examine who is at issue here
d. Prevention (Rest. 245)
The obligor/promisor wrongfully hinders or prevents the condition from occurring
When the condition is somewhat within the obligor’s control, the obligor is likely to
have the obligation to attempt to cause the condition to occur (good faith)
Example: inaction or wrongfully preventing the obligee from fulfilling his
Is the breach of an express condition or constructive condition implied by rules of contract?
a) Express condition: Strict compliance → the other party can stop performing.
Some courts only apply strict compliance for material terms
Some courts hold that under strict compliance, materiality is not a factor
b) Constructive condition: Analyze the nature of the breach. Go to ii)
ii. Is it a material breach? - Analyze Rest. 241.
(a) the extent to which injured party will be deprived of benefit which he reasonably
(b) the extent to which the injured party can be adequately compensated for the part
of that benefit of which he will be deprived;
(c) the extent to which the party failing to perform or to offer to perform will suffer
(d) the likelihood that the party failing to perform or to offer to perform will cure his
failure, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to
perform comports with standards of good faith and fair dealing.
Yes: Material Breach - Go to iii.
No: Partial Breach (Rest. 235) → Still must perform - but can get
damages (Jacobs & Young v. Kent)
iii. Is it a total breach? Ask three question:
1) Would the delay prevent the making of substitute arrangements by the non-breaching party?
2) Does the contract emphasize the importance of performing without delay?
If there is a “time is of essence” clause that requires performance before a certain
date, then treat as express condition
3) Is the breacher's conduct unreasonable?
No: Material Breach (Rest. 241)
→ Other side may suspend performance (Rest. 237)
Yes: Total Breach (Rest. 242)
→ Other side may terminate (Rest. 243)
Sackett v. Spindler - finding that even though the buyer never expressly
repudiated the purchasing contract and even often expressed willingness to
perform, his delay in making payment justified the conclusion that it was
unlikely that buyer would commit to the contract. Therefore, the seller could
terminate the contract when the seller has committed a total breach.
 Anticipatory Repudiation (Truman L. Flatt & Sons v. Schupf)
When the time for performance has not yet arrived, but the likelihood of nonperformance appears
a) By notice: Requires a clear manifestation of an intent not to perform the contract on the date of
performance - must be a definite and unequivocal. (Rest. 250)
b) By conduct: must indicate that performance is a practical impossibility (ex: insolvency/bankruptcy)
→ Treat as though it is a breach
One may rescind anticipatory if the other party has neither: (Rest. 256) (UCC 2-611)
Materially relied upon it; nor (changed his position in reliance on the repudiation)
b. Provided notice that it considers the contract repudiated as final.
a. Expectation Damages
A non-breaching party is entitled to damages that put the non-breaching party in the position it would have
been had the contract been fully performed.
i) Can he prove the loss with certainty?
Yes: Expectation damages
No: Reliance / Restitution Damages
General Damage + Special Damages
Incidental loss
Expense saved from breach
𝐺𝑒𝑛𝑒𝑟𝑎𝑙 𝑚𝑒𝑎𝑠𝑢𝑟𝑒 𝑓𝑜𝑟 𝑡𝑜𝑡𝑎𝑙 𝑏𝑟𝑒𝑎𝑐ℎ = 𝑙𝑜𝑠𝑠 𝑖𝑛 𝑣𝑎𝑙𝑢𝑒 + 𝑜𝑡ℎ𝑒𝑟 𝑙𝑜𝑠𝑠 − 𝑐𝑜𝑠𝑡 𝑎𝑣𝑜𝑖𝑑𝑒𝑑 − 𝑙𝑜𝑠𝑠 𝑎𝑣𝑜𝑖𝑑𝑒𝑑
(contract price - cost of replacement/completion) + consequential loss
(value of what party expected - the value she received) + consequential loss
Loss saved by mitigation effort
Duty to mitigate
a. General Damages
Cover contractual loss (difference between market price and contract price)
Loss in value / General Damages calculation
If the loss in value to the injured party is not proved with sufficient certainty, damages may be
measured by: (Rest. 348(2))
1. Cost-to-complete damages
General rule - (contract price - cost of replacement/completion)
Especially for cases of defective or unfinished construction work
If there is any windfall gain by the nonbreaching party made in reasonable
effort, the breaching party must also bear this cost.
Handicapped Children’s Education Board v. Lukaszewski - finding
that the employee must also bear the windfall gain that the employer
had in hiring a more qualified teacher as a replacement to the
employee’s termination of the contract)
i) Would applying this led to “unreasonable economic waste” or disproportionate
gain to the nonbreaching party?
Yes: use Diminution-in-market value test
No: Analyze Cost-to-complete damages
Why Cost-to-complete approach?
1) The non-breaching party can expend the damages to receive the
bargained-for performance (giving the injured party the benefits of
the bargain)
2) Actual injury to P may not be reflected in the market value
(personal use), which may ultimately uncompensated the plaintiff.
2. Diminution-in-market value damages
Should only applied where the breacher’s action was unintentional and constituted
substantial performance in good faith.
i) When there is economic waste or disproportion gain to nonbreaching party
Yes, go to ii)
ii) Was the breaching party acting in good faith?
Yes: step ii) (Jacobs & Young v. Kent - finding that the contractor was
acting in good faith and only accidentally installed a different pipe instead of
the Reading pipe, and the tearing down of the mansion would lead to
economic waste, they are allowed to use Diminution-in-market value
No: Use cost-to-complete damages (American Standard v. Schectman finding that since the contractor Schectman breached the contract in bad
faith by explicitly not following the contract’s specification by leaving the
subsurface foundations undone when the contract wants its removal, they
should be liable for the cost of completion instead of the diminution-in-value
of the property because of the breach, which is $3,000)
Why Diminution-in-market value damages?
Efficiency ground (Posner): Award of cost-to-restore damages
overcompensates the owner
Counter-argument: Even when there is overcompensation or
economic waste, if the D acted in bad faith OR if P chose to use the
recovery money for other purposes, it is still justified. (American
b. Special Damages (consequential loss)
Example: Loss of profits, loss of product, collateral contracts, business reputation, loss of
operating revenue
Limitation on availability of damages
1. Causation
Damages that flow directly from a given type of breach are always recoverable
2. Foreseeability
Hadley Test: D is only liable for foreseeable damages that the breaching party could have
contemplated at the time of contract formation (Rest. 351)(UCC 2- 715(2))
Hadley v. Baxendale (finding that the carrier is not liable for damages that is
unforeseeable to him, such as the closure of the mills due to the delay shipment of a
broken crank shaft because there may be other possibilities, when the millers did not
clearly communicate this consequence at contract formation).
In delivery case: if there is a delay, the damage is the rental cost of replacing
the delivering product during the time the goods have not yet arrived (loss of
use value of having the goods)
Contract law encourages parties to disclose all possibilities (both parties should take
into consideration what possibilities might happen before entering the contract)
3. Certainty (the amount of damages cannot be speculative) (ex: lost profits situation) (Rest. 352)
If not naturally foreseeable, the consequence must be reasonable certainty
Disclosure doctrine: the nonbreaching party must establish their damages with
reasonable certainty (ex: using past profits, expert) but don’t need the actual amount
Minority approach: Tactic agreement test - the nonbreaching party must show that
not only the special circumstance was brought to the attention of the other party, but
also that the other party “assumed consciously” the liability in question
New business rule: courts have become more laxed to allow new business to recover
lost profits that they can prove with reasonable certainty,
Collateral contract
An injured party can recover lost profits from a third-party, collateral
Floralfax International, Inc. v. GTE Market Resource - finding
that loss of profit was foreseeable and although GTE knew about
Bellarose’ potential of losing profits, it entered into the contract
with Floralfax and assumed the responsibility to pay Floralfax
consequential damages and lost profits if Bellarose breached.
4. When justice so requires (Rest. 351(3))
If there is a big difference between consequential damages and contract price, court will limit
the damages to a specific ratio.
5. Contract
Contract itself may establish the limit of damages by providing value or saying that there are
no consequential damages recovery
 Duty to mitigate
i) Can the nonbreaching mitigate the loss?
The nonbreaching party has an obligation to take reasonable steps to reasonably minimize
their loss arising from the breach
If unclear, the nonbreaching party must ask for reassurance if it suspects that the breaching
party lacks authority
Once party receives the other party's breach
The nonbreaching party must stop
immediately to avoid more loss
Why should stop performing contract
The nonbreaching party can sue for damages
incurred up to the time of the breach
Why should complete contract
Stopping performance even when the contract is breached might
lead to spiral breaching on the nonbreaching party with sub-
Accruing more damages would lead to waste
without compensation
contracts (employees/sub-contractors)
Earn some profits to make it salable later as mitigation
Even if the remedy is not profitable, if the nonbreaching party
makes a reasonable but unsuccessful attempt at mitigation, they
can still count this as [Other Loss] (Rest. 350(2))
Rockingham County v. Luten Bridge Co. (finding that Luten Bridge Co. could not recover for
the full amount of the bridge that it has completed AFTER the notice for breach is received)
ii) Does the mitigation fall into any of these exceptions?
1) Without undue risk or humiliation (Rest. 350(1))
2) Same mitigation opportunity available to both breaching and nonbreaching party
Majority: the nonbreaching party still have an obligation to perform the reasonable effort
Minority: If neither party did, the default party cannot assert that the nonbreaching party failed to
mitigate loss (Wartzman v. Hightower) - finding that Hightower did not have a duty to mitigate
the loss from the failure of their business when Wartzman can also invited the financial expert
but did not.
Exception to exception: Even if the remedy is not profitable, if the nonbreaching party
makes a reasonable but unsuccessful attempt at mitigation, they can still count into recovery
as [Other Loss] (Rest. 350(2))
iii) Example of duty to mitigate
a. Construction contract
The injured contractor must stop working once the contract is breached
b. Employment contract
In a wrongful firing of an employee, the employee can choose to mitigate by looking for a
comparable job.
Majority approach: burden of proof is on the employer (as wrongdoer) to prove that
there is a replacement that the employee did not find.
Minority approach: it is the employee’s burden to show that there is no comparable
Sale of Goods
Buyer is required to attempt to find substitute goods when a breach of contract occurs.
b. Reliance Damages (Rest. 349)
Put nonbreaching party in the position he would have been had the contract never been made (make victim
whole again)
Apply when the expectation damages cannot be proved with certainty: measure out-of-pocket expenditures
that P had to spend, and maybe forgone opportunities/gain P would have made had she not relied on the
promise of the Defendant.
𝑅𝑒𝑙𝑖𝑎𝑛𝑐𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝐸𝑥𝑝𝑒𝑛𝑑𝑖𝑡𝑢𝑟𝑒𝑠 𝑚𝑎𝑑𝑒 𝑓𝑜𝑟 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑎𝑛𝑐𝑒 − | 𝒍𝒐𝒔𝒔 ℎ𝑎𝑑 𝑡ℎ𝑒 𝑐𝑜𝑛𝑡𝑟𝑎𝑐𝑡 𝑏𝑒𝑒𝑛 𝑝𝑒𝑟𝑓𝑜𝑟𝑚𝑒𝑑 |
Breacher has the burden of proof
| Contract price - market price |
Wartzman v. Hightower Productions, Ltd. - finding that the law firm was in breach because it failed to
sell stocks to fund the promotion where it could foresee that the full performance is required for success
of the venture. The damages based on reliance of the law firm’s action to invest, acquire shareholders,
Walser v. Toyota Motor Sales - finding that Court has the discretion to limit the recovery to only out-ofpocket reliance in thinking that the letter of intent was an assurance that they would be granted the
Toyota dealership when there are still some finalization and requirements to be done + Toyota promptly
revokes the assurance within 2 days. Therefore, the recovery should be limited to the difference between
the actual value and the amount paid for the property.
 Limitations on recovery for reliance damages (Rest. 352(a))
1. Causation
2. Foreseeability
3. Certainty
4. When justice so requires
At Court’s discretion:
Allow expectation damages, no matter what the promise is (reliance is enough to
seal the deal)
General - Subcontractor case: Drennan - usually award expectation
because this is on the verge of a contract, but Court stops short at PE
Awarding general contractor injured by the breach of
subcontractor’s bid even when there is no formal
contract. Calculated: “breacher’s bid - cost of finding a
Minority: Some courts do not allow a party to recover for reliance costs
incurred before the contract was made.
b. Limit to reliance damages (to prevent putting the nonbreaching to be in a better
position they were in/overcompensate)
The promisee was partially responsible for his failure to bind the
promisor to a legally sufficient contract
Reliance evaluation:
1) Uncertainty
2) Disproportionate of expectation damages to amount reliance damages
The contract price should limit the recovery only of essential
reliance damages (cost of performance the contract)
Should not limit the amount for collateral transactions
(“incidental reliance”)
5. Equal opportunity to mitigate the damages
6. Losing Contract (Rest. 349)
Recovery should be offset by “any loss that the party in breach can prove with reasonable certainty
the injured party would have suffered had the contract been performed”
Burden is on the Defendant to show that contract would have been a losing one.
Restitution Interest (Rest. 371) (based on the gain of the defendant)
Targeting the value that it has conferred to prevent the breaching party from gaining the benefits.
The unjust enrichment by the breaching party must be made with reasonably certainty
𝑅𝑒𝑠𝑡𝑖𝑡𝑢𝑡𝑖𝑜𝑛 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 = 𝑣𝑎𝑙𝑢𝑒 𝑡ℎ𝑒 𝑏𝑟𝑒𝑎𝑐ℎ𝑖𝑛𝑔 𝑝𝑎𝑟𝑡𝑦 𝑟𝑒𝑐𝑒𝑖𝑣𝑒𝑑 𝑶𝑹 𝑖𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝑖𝑛 𝑝𝑟𝑜𝑝𝑒𝑟𝑡𝑦 ′ 𝑠 𝑣𝑎𝑙𝑢𝑒
what it would have costed for a replacement / Contract price
 Why Restitution > Reliance (Market value restitution)
Restitution aware may result in a higher payoff to the plaintiff than would reliance/expectation because
the damages does not take in loss from a losing contract
For losing contract, while reliance may be easier to show because of clear expenses, the loss had contract
been performed may drive recovery to 0.
US ex rel. Coastal Steel v. Algernon Blair - finding that the subcontractor was justified in
terminating the performance when the Defendant - General contractor refused to pay for the
crane rental because it was a material/total breach. Even when the contract will turn out to be a
losing one, the recovery on restitution ground is to prevent unjust enrichment, so the
subcontractor should be able to recover for its labor and use of equipment.
Full performance Exception (Rest. 373(2)): Under market price, when one party has performed 100%
and the only thing left for the other party is to pay, the market price is limited to the price of the contract.
→ The party must recover on Expectation damages rather than restitution ground.
 Mutual discharge
If the performance obligations imposed by the contract has been “discharged” by Rest 375 (Statute of
Frauds), 376 (Restitution when contract is voidable because of lack of capacity, mistake,
misrepresentation, duress, undue influence, breach of fiduciary duty), 377 (restitution when contract is
discharged due to impracticability, frustration of purpose, or failure of condition)
→ Either or both of the parties may be entitled to restitutionary relief
Restitution for Breaching Party (Rest. 374)
Restitution Interest = value of performance - loss caused by the breach
a) Majority: permitting the breacher to recover on restitution ground minus the damages from any loss
that the breacher did to the contract.
Example: Breaching party made a deposit and later on decided that they don’t want to perform
They should be able to get back what they invested
Will be whichever is less:
i. Value of benefit conferred
ii. Defendant’s increase in wealth
iii. Cannot recover more than contract portion where it can be determined
b) Minority: full rendition of the entire performance contracted for was a condition precedent to the right
to recover any of the promised compensation, either “on the contract or on restitution basis” (Stark v.
d. Specific performance
Alternative to expectation damages
Most common with unique goods, difficult-to-replace items, and land
City Stores Co. v. Ammerman - finding that City Stores is entitled to specific performance,
i.e. making Ammerman make a space for it at the department store when Ammerman
breached the contract with City Stores to rent to Sears on the ground that it would be more
Sometimes used when expectation damages wouldn’t be fully compensated
Expectation damages fail to account for subjective evaluation of unique goods
Even if rare, if something is traded regularly, objective value can be ascertained
However, market value can only say how much next bidder would pay, which would not
fully reflect the value for unique goods
An option contract may be enforced through specific performance if its terms are sufficiently definite
1) Are there definite terms?
Special relief will not be denied merely because the parties have left some matters out of their
agreement, particularly when parties have agreed on all material terms.
2) Would the injured party be remediless?
3) Difficult of supervising the performance > importance of the remedy?
 Land or Goods
Factors for Specific performance:
1) Adequacy of remedy at law
2) Lack suitable substitute (uniqueness) (Rest. 360)
Difficulty of procuring a suitably equivalent substitute performance
3) Collectability
Unlikelihood that a damage award would be collectible
4) Definiteness
Cannot prove the damages with certainty
5) Hardship in supervision
Building contracts are unlikely to be specifically enforced, both because of the difficulties
of supervision and because construction services can readily be purchased on the market
with a money award in damages.
 Personal Services
Court is very reluctant in giving out specific performance
1) How fungible is the service?
Yes: if can be easily replaced, then can hire a replacement
No: Specific performance resemblances indentured servitude