BASIC ELEMENTS OF AN ENFORCEABLE PROMISE
A. Agreement
1. Mutual Assent
a. Misunderstanding
2. Bilateral v. Unilateral K
3. Offer
a. Creation of Offer
b. Terms of an Offer
c. Indefinite and Limited Promises
1. Illusory Promises
2. Indefinite Promises
d. Preliminary Negotiations
1. Type 1 Agreement
2. Type 2 Agreement
e. Termination of Offer
1. Rejection
2. Revocation
3. Lapse
4. Death
4. Acceptance – Common Law
a. Mailbox Rule
b. Acceptance by Silence (or Inaction)
c. Electronic Bargaining
d. Imperfect Acceptance (& Counters)
5. Acceptance – UCC Battle of Forms
a. UCC 2-207
B. Consideration or One of its Acceptable Substitutes
1. Consideration
a. Detriment to Promisor to Legal Benefit to Promisee
b. Bargained-For Exchange
c. Past Consideration
d. Nominal Consideration
e. Adequacy of Consideration
2. Consideration Substitutes
a. Promissory Estoppel (Substitute)
b. Equitable Estoppel
3. Pre-contractual Obligation – 87(2)
DETERMINING SCOPE OF WRITTEN AGREEMENT
A. Evidence Outside the Signed Agreement - Parole Evidence Rule
B. Interpreting Agreements (assume contract exists now)
a. Certainty & Ambiguity
i. Course of Performance
ii. Course of Dealing
iii. Trade Usage
b. Good Faith and Fair Dealing
RELIEVING A PARTY FROM A PROMISE
A. Misrepresentation - problem w/ bargaining process
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B.
C.
D.
E.
F.
G.
H.
i. Negligent Misrepresentation
ii. Intentional Misrepresentation
Obligation to Disclose - problem w/ bargaining process
i. Fiduciary Relationship: duty to disclose
ii. Confidential Relationship: duty for profit
Mutual and Unilateral Mistake - problem w/ bargaining process
i. Mutual Mistake
i. Conscious Ignorance Exception
ii. Unilateral Mistake
Duress - problem w/ bargaining process
Unconscionability - problem w/ bargaining process
Impracticability or Impossibility of Performance – perfect bargaining process, but problem after deal
Frustration of Purpose – perfect bargaining process, but problem after deal
Conditions
PERFORMING THE PROMISE
A. Interdependence of Promises – who performs first?
B. Interpreting Conditions
a. Time set for Performance (enforce K) v. Condition (protect against risk)
b. Avoiding Conditions
C. Breach & Substantial Performance – who breached first?
D. Adequate Assurance – who breached first?
E. UCC Perfect Tender Rule – who breached first?
REMEDIES
A. Expectation – gains prevented
a. Cost of Performance
b. Diminution of Market Value
B. Reliance – losses incurred
C. Restitution – benefits received
LIMITATIONS ON DAMAGES
A. Avoidable Damages
B. Calculating Lost Profits
C. Limits on Consequential Damages
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BASIC ELEMENTS OF AN ENFORCEABLE PROMISE
AGREEMENT
MUTUAL ASSENT
Mutual assent often invokes the machinery of Offer and Acceptance, but it does not have to.
1.
The formation of a contract requires a bargain in which there is a manifestation of mutual
assent as to the exchange and consideration.
a. RS §17 Requirement of a Bargain. (1) “Except as stated in Subsection (2), the formation of a
contract requires a bargain in which there is a manifestation of mutual assent to the
exchange and a consideration.
A. MISUNDERSTANDING / AMBIGUITY: Formation of contract depends on mutual assent. Issues can arise
in achieving mutual assent where is a misunderstanding between the parties. The clearest cases for
rescission are where there are “no meeting of the minds” or “latent ambiguity” in which neither party
knew the contract was ambiguous and therefore, were both equally at fault. There is no “sensible basis
for choosing b/w conflicting understandings.”
1.
Meeting of the minds: There is no manifestation of mutual assent where there is no meeting of
the minds.
a. RS §20 (1): No K when you’re agreeing to 2 diff meanings AND neither person knows/reason
to know the other’s meaning OR each has/knows to know the other meaning (laziness – they
have reason to know but didn’t check to clarify)
i. E.g. A knew that B was joking.
ii. PepsiCo – Commercial “jet” for 7 mill. Guy gets it. Pepsi refuses to give $. K is
unenforceable b/c reasonable person would not consider as a K so no MA
b. RS §20 (2) we go by the meaning attached by one party if one of the parties know of it.
i. E.g. A knows/reason to know of B, B doesn’t know/reason to know of A’s, then B’s
meaning governs.
ii. E.g. A & B draft up a K for sale of land while drinking. B refused $5 as consideration. A
sues B to enforce K. B refused b/c he said it was a joke. K is enforceable b/c B knew A
intended to be bound. A didn’t know this was a joke. So B’s meaning attaches.
c. Latent Ambiguity: When both parties agree to terms that reasonably appear to each of them
to be unequivocal, but are not, neither party can be assigned a greater blame for the
misunderstanding. A material misunderstanding by both parties precludes a contract
formation where both parties agree to the same term, but both reasonably assigned
different meanings to the same term.
i. Latent Ambiguity: Different & reasonable understanding about an unambiguous
material term –> not enforceable. (E.g. “Peerless” – 2 different ships.
ii. Patent Ambiguity: Different & reasonable understanding about an ambiguous term
on the face of the contract -> enforceable. (Sometimes, parties each, in good faith,
had a different understanding of an ambiguous term. E.g. “reasonable time.” -> this is
still a contract. Parties understood “reasonable, but Ct. will decide what constitutes
reasonable.)
iii. G Raffles v. Wichelhaus (Peerless). The parties agreed to the same words, but the
parties both reasonably understood a different ship. The seller understood that the
seller that it was the Peerless ship that left in Dec. whereas the buyer thought it was
the one that left in October. The name of the ship was a proxy of when the ship
would arrive. They were talking about two different arrival dates, which was
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2.
3.
important at the time. Held. There was no mutual assent b/c they didn’t agree on a
material term.
a. Note: Raffles is not a case of mutual mistake. (See Sherwood re
pregnant cow). Mutual mistake is when both parties share the same
erroneous conception of the actual case. (Had both the seller and
buyer thought the Peerless ship would arrive in December but the one
they wanted actually arrived in October, this would have been a
mutual mistake)
b. This case only applies to latent ambiguity, where parties think they’re
saying the same thing, but really are saying different things.
iv. G Flower City Painting Contractors v. Gumina Const. Co. (1979): Contract over the
scope of the painting when interpreting the term “building” between a subcontractor
(thinking “building” meant interior) and general contractor (thinking “building”
meant both interior and exterior per trade usage) was not enforceable. Applying the
doctrine of latent ambiguity, the court finds that (1) ambiguity was created by
multiple contracts and 2 different understandings, both of which were reasonable
and possible (2) a party is only bound by customary usage and practice if he has
“reason” to know of custom.
1. Note: Courts are split on whether parties are held to trade usage. Some
Courts think it is to the benefit to the newcomer to be held.
v. G Konic Int’l Corp. v. Spokan Compt. Servs. Inc. (1985)
Objective Theory of Contract: What you say, not what you intend. If the words and conduct of
one person, regardless of his inner intent, leads a reasonable person to conclude that the person
intended on entering a contract, and the other person understands the same, then a valid
contract is created.
a. G Embry v. Hargadine-McKittrick Dry Goods Co. (1907): Employer’s statement “Go back
upstairs and get your men out on the road” could be reasonably interpreted as an
agreement to hire his employee, even though it was not the employer’s intention to agree to
hire him. Held. The lower ct. erred in instructing that the jury that even if it believed Embry’s
events, the jury also had to find that the employer needed had to have intended to enter a
contract – this was wrong. It is what you say, not what you intend.
i. Default rule: if parties enter employment contract and don’t specify length of
contract, either party can terminate party at will. Either party can walk away. Law will
put in place missing terms.
A contract born out of a sham transaction is not enforceable.
a. G New York Trust Co. v. Island Oil & Transport Corp. (1929): There was a sham contract
entered into between a corporation and one of its subsidiaries. This sham transaction
indicated that the corporation owed the subsidiary money. A third party then bought the
subsidiary. After the purchase, the new owner tried to collect the supposed money owed by
the corporation. Held. The claims balances owed, which originated from a “sham”
transaction were not enforceable.
BILATERAL K VS. UNILATERAL K
Bilateral K: Promise for a promise. Hawkins; Groves; Acme Mills; etc.
Hypo : C promises to sell R photo for $400. R promises to buy photo for $400
Unilateral K: Promise for specific performance.
Hypo: C promises to sell photo for $400 if R gives her $400.
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Petterson is asked to perform by giving cash. Pattberg promises in return to knock money off the
mortgage.
A. In a unilateral K, the promisor making the promise is not seeking a promise, but specific performance in
return.
B. When is the offer revocable? There are 3 options: - Common Law
1. The offer is revocable at any time until performance is completed. Petterson v. Pattberg –
Common Law
2. The offer is revocable at any time until performance starts. RS §45.
3. The offer is revocable at any time until performance starts UNLESS the offer is supported by
consideration
4. The offeror may not be able to revoke the offer where the offeree has made substantial
performance.
C. When is the offer revocable?
1. An offer (in writing) that gives assurance that it will be held open is not revocable during the time
stated. If no time stated: reasonable but not any more than 3 months. UCC 2-205
Option K: Offeror invites performance and offeree has the option to render performance.
Brooklyn Bridge: A offers B to walk across the bridge for $100.
A. When is an option K created?
a. An option K is created when performance is completed. Old common law rule.
b. An option K is created once tender/invited performance starts. RS §45 Option K Created by
Tender.
c. An option K is a promise that meets the requirements for formation of a contract and limits the
promisor’s power to revoke the offer. RS §25.
B. Unilateral Option K: Promise exchange for performance.
a. A offers B to walk across the bridge for $100. Promise for performance. 1 promise.
C. Bilateral Option K: Exchange for a promise for a promise.
a. A offers B to walk across bridge for $100. A promises not to revoke offer in exchange for B’s
promise to pay to A $10. A’s promise - to not revoke. B’s promise - to pay $10.
D. Option K under RS §45: limited only to option K where performance starts.
a. If B completes the performance, the option contract turns into a new contract under which A
has to pay B to pay – option K has now become a unilateral contract.
b. Where an offer invites an offeree to accept by rendering a performance and does not invite a
promissory acceptance, an option contract is created when the offeree tenders or beings the
invited performance or tenders the beginning of it
E. Option K under RS §25: you have an option contract when there’s a promise that meets the requisite
requirements for formation of a contract and limits the promisor’s power to revoke an acceptance
F. Option under RS §87(1): An offer is binding as an option contract if it
a. (a) is in writing and signed by the offeror, recites a purported consideration for the making of
the offer, and proposes an exchange of fair terms within a reasonable time; or
b. (b) is made irrevocable by statute
G. Option K under RS §87(2): things that happen before offer is accepted or start of performance. (Can
get reliance damages)
a. Note: Petterson would have been protected under 87(2) and gotten reliance damages.
H. Option K under RS §32: in case of doubt about how to accept, an offer is interpreted as either - inviting
the offeree to accept by promising to perform what the offer requests OR by rendering the
performance as the offeree chooses.
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a. A says to B “If you mow my lawn, I will pay you $10.” B can accept either by (a) promising to
mow or (b) mowing.
OFFER
Mode of mutual assent – willingness to bargain and invitation to create a contract. What constitutes an offer
can change depending on whether it is a bilateral or unilateral contract.
a. RS §22: Mode of Assent: Offer and Acceptance:
i. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer/proposal
by one party followed by an acceptance by the other party or parties.
ii. A manifestation of mutual assent may be made even though neither offer nor acceptance ban be
identified and even though the moment of formation cannot be determined.
1. Note: It may be difficult to ascertain the exact moment of acceptance. The question is
whether the parties have reached a mutual assent
CREATION OF AN OFFER Was an Offer created?
A. Definition: An offer is made when a party gives the other party the power to accept a deal. Offer
creates in offeree the power to complete manifestation of mutual assent.
1. RS § 24 Offer Defined: an offer is the manifestation of willingness to enter a bargain, so made
as to justify another person in understanding that his assent to that bargain is invited and will
conclude.
2. UCC 2-206: An offer will be construed as inviting acceptance in any manner and by any
medium reasonable.
B. Elements of an Offer
1. Offer must be communicated.
2. Offer must specify performances and terms. Offeror may specify the manner and time for
acceptance.
i. Offer must contain terms that are certain definite terms.
3. Offer must be directed at person(s).
4. Offer must intend to invite acceptance (not an invitation to make an offer – this is an ad/offer
to negotiate) UCC 2-206
5. Offer must confer power to accept to other party.
6. Offer must engender the reasonable understanding (objective standard) that acceptance will
create the contract.
C. Intent is determined by an objective standard:
1. Language of the offer
2. If language is ambiguous or appears to be “indefinite”, courts can look to other factors to
ascertain intent: RS 2d §33. Certainty.
i. Previous dealings
ii. Usage and custom
D. Prelim Negotiations (Price Quote) are not offers.
1. RS §26 – not an offer if offeree knows the person making the offer DOES NOT intend to
conclude bargain.
i. “Would you consider” – not offer
2. Exception: prelim neg are not offers unless directed as specific buyer w/ terms
3. Construction Ks: SubK’s bid (offer) is “accepted” when GenK notifies Sub (Acceptance) but
GenK has freedom to select other SubK
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E. Proposals to negotiate are not offers. Proposals are tentative expressions of interest, an invitation to
make an offer.
1. E.g. “I wish to sell you my farm and will consider an offer of $1 mill.” – not an offer.
2. E.g. “I am willing to sell my farm to you for $1 mill.” – not an offer.
F. Advertisements are not offers, but invitations/notices/solicitations.
1. Advertisements are not offers, but an invitation to make an offer. The recipient makes an offer
by responding to the ad and the advertiser has the discretion to accept or reject that offer.
2. To interpret whether an advertisement is an offer or an invitation, Courts should interpret the
apparent reasonable intent in light of its language in context.
3. To interpret whether an ad is an offer or invitation, Courts can look to common practice in the
marketplace in determining whether a reasonable person would understand that the ad is an
offer or invitation.
4. If the statement merely indicates that the quantity/amount available to sell, statement is not
an offer, but a notice.
i. G Moulton (Seller) v. Kershaw (Buyer) (salt ad): Seller’s letter, which stated that he
was “authorized to offer” Michigan salt at 80-95 carloads at 85 cents/bbl, was not an
offer, but a notice, because it did not show that the buyer had the power to close the
deal. (1) the word “sell” is not used (2) they used general language proper to those
generally interested in the salt trade.
1. Buyer (Moulton) is actually the one that is making the offer. Seller (Kershaw)
does not accept. Kershaw claims that the letter is not an offer because the ad
does not specify quantity. Moulton sees it as an offer to buy a reasonable
amount.
a. Don’t want to accept Moulton’s argument because then we would have
to go to the jury and try to figure out if 2000 barrels is reasonable (lazy
reasoning by S. Ct)
b. Moulton’s return telegram trying to buy 2000 barrels ended with the
word “Answer”, which implies that he did not see it as accepting an offer,
but rather making one
ii. G Bridge City Family Medical Clinic v. Kent & Johnson: Unqualified acceptance of a
reasonably certain offer created a binding contract. Always an offer on the table
throughout this exchange. P sends final “I will settle for $19k” and they say ok. She can’t
get out of it now. Idk if this belongs in this section.
5. [Exception] If the terms of the ad are “clear, definite, explicit, and left nothing open for
negotiation, they qualify as offers.” If the ad specifies quantity, price or manner of sale, or can
be reasonably interpreted to be an offer; in other words, the language is so definite that the
read thinks he has the power to accept, the offer.
i. G Carlill v. Carbolic Smoke Ball Co. (1892): “If ball 3x/day for 2 weeks and you still
contract a cold, $100 will be paid to you.” Held. The ad was an enforceable promise as
opposed to mere puff. The ad created a binding unilateral contract. The language of the
ad and the nature of the transaction supports the conclusion that Smoke Ball did not
require notice of acceptance to be independent from the notice of performance. A true
construction of the ad reads that $100 will be paid to anybody who uses the smoke ball
3x/day for 2 weeks and who gets a cold caused by taking cold within a reasonable time
of using the smoke ball. Company needed to specifiy if explicit acceptance were
required.
ii. G Leftkowitz v. Great Minneapolis Surplus Store (fur coats. 1st come first serve.) Ad is
enforceable b/c clear + definite, leaves nothing open for negotiation The buyer simply
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appeared at the seller’s place of business at the appointed time and offered the stated
price. The parties do not have to agree on the precise method of payment. New
conditions cannot be imposed post-acceptance.
iii. G Nguyen v. Barnes & Nobles: The ad constituted a “clear, definite, and explicit” where
nothing was left open for negotiation because it specified (1) the item to be sold (HP
Tablet) (2) the price was clear and definite ($101.95) and (3) the manner of acceptance
(“BUY THIS ITEM/Add to Bag” then “check out”) was clear. There was nothing left to
negotiate. That creates the power of acceptance to Nguyen so that when he pressed
select, he accepted. Never said there was no acceptance, no ambiguity, once he
received the “thanks for your order, we’ll let you know when it is ready to ship” email.
iv. Petterson v. Pattberg: Pattberg will take $780 off the mortgage if Petterson pays in full
by May 31. Pattberg sold the mortgage to someone else before then so when Petterson
comes to pay, he refuses to accept. If Petterson had handed him the money before he
said that he was revoking the offer, then performance would have considered to have
begun and the offer would not be revocable.
TERMS OF AN OFFER What are the Terms of the Offer?
A. Vague or Ambiguous Terms - in an offer do not necessarily render the offer unenforceable.
a. Ambiguities will be construed in the favor of the offeree and reasonable person’s
interpretation.
b. If a party is made aware or noticed of the ambiguity in the terms of the offer, the burden is on
the party to inform the accepting party to clarify the ambiguity.
i. G Dickey v. Hurd. Offeror gave offeree until July 18 to “accept” but failed to specify
that to “accept” offeree needed to provide both notice and payment. (failed to specify
manner performance) Held. Offeror had the duty to inform the offeree to clarify the
ambiguity in the offer.
B. Open Terms - the more terms open, the less likely there it is that there was an offer. RS §33(3)
a. See UCC for open terms.
C. If terms are indefinite, the lack of definiteness prevents it from being an “offer.”
a. The terms of an offer must be reasonably certain by providing a basis for determining breach
and appropriate remedies. RS §33. Certainty.
i. In Moulton, the lack of quantity in seller’s communication prevents it from being an
offer.
TERMS OF AN OFFER - UCC - Statute of Frauds: Article 2 of the UCC governs the sale of goods.
b. Types of Ks under SOF: UCC 2-201(1) Statute of Frauds Provision
i. Sale of goods of $500 or more is not enforceable unless there is a writing + signature of
the seller. K is not enforceable for quantity of goods beyond what is specified in writing.
ii. Sale of land
iii. K to be performed more than 1 yr
iv. Wills
v. K to guarantee someone’s debt
c. Required Terms: The writing does not need to contain all the material terms, but must afford a
basis for believing that the oral evidence rests on an agreement. UCC 2-201 comment 1.
i. The only required term is quantity. There is no default rule for quantity. Everything
else has gap fillers. UCC 2-201 comment 1.
ii. Price, time and place of payment or delivery, the general quality of foods, or any
particular warranties may be omitted. UCC 2-201 comment 1.
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d. Gap Fillers
i. Custom practices or trade usage
ii. Course of dealings
iii. Course of performance
iv. Factual implication or circumstantial inferences
v. Language of K
vi. UCC
e. Open terms: Even if one or more terms are left open, the K does not fail for indefiniteness if the
parties intended to make a K. UCC 2-204 (3).
i. IF UCC 2-204 (3) applies, the Ct will use “commercial standards” or refer to custom &
usage of parties or their trade. The more terms the parties leave open, the less likely it is
that they have intended to conclude a binding agreement, but their actions may be
conclusive despite the omission.
ii. If parties did not agree on price, the court will put in the market price. UCC 2-305.
f. Firm Offers: An offer that gives assurances that it’ll be held open IS NOT REVOCABLE during the
time stated, or if not time stated, reasonable time, but not any more than 3 months. UCC 2205.
INDEFINITE OR LIMITED PROMISES:
A. Illusory promises are not enforceable. “I promise to perform if I choose.”
a. RS §2(1): A promise is a manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promise in understanding that a commitment has been made.
i. Comment e. Words of promise that makes the promise entirely optional (promisor
whatever may happen, or whatever course of conduct in other respects he may pursue)
do not constitute a promise.
a. Illusory Promise - If (1) the promisor retains an unlimited right to decide later and (2) the
promisor retains the unlimited right to decide the nature & extent of his performance.
i. G Davis v. Gen. Foods Corp.: D’s promise, “We will be glad to examine your idea, but
only w/ the understanding that it will be used by us and the compensation, if any, will
be solely in our discretion.” – illusory promise b/c it was too indefinite; promisor held all
the rights. P couldn’t have relied on this promise b/c the form & character leads
conclusion that P merely “trusted” the fairness of the promise.
1. Notes:
a. Did they promise to examine? Not clear. (a) promise but reserved the
right re terms OR (b) there is no promise at all.
b. Did Gen. Foods Corp. have total control: Yes, Gen Foods did not make
enough of a commitment.
2. Hypo 1: R to C “I promise to buy the $400 photo from you next Friday.” C to R “I
promise to sell you the $400 photo next Friday, if I feel like it when the time
comes.” No K under RS §2(1).
b. An alleged agreement in which parties are neither bound to do anything at any time is not a
contract.
i. G Nat Nal Serv. Stations v. Wolf: 1 cent/ gallon, wholesale gas at a discount sale to gas
station. No obligation to buy the gas from them, no length of term, just each side doing
as they please. No contract formed. There was a structure in place that will deal w/ all
future arrangements.
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c.
d.
e.
f.
1. If we have future agreements.... if offer to buy and Wolf accepts by agreeing to
sell, that new contract will contain the provision that any discount that wolf
receives will be passed along to Nat Nal. In this case there would be a promise
A contract is not illusory where there are clauses that give the power to terminate only to one
party (as opposed to both).
i. Laclede Gas Co. v. Amoco Oil Co (contract where only buyer had a right to cancel was
not illusory).
ii. UCC 2-201 Statute of Frauds.
1. Note: an oral promise rendered unenforceable by the statute of frauds is still a
promise & tat it provides consideration for written countenance. See RS 2d §78
“The fact that a rule of law renders a promise voidable or unenforceable does
not prevent it from being consideration.”
iii. UCC 2-607(1) Revocation, Breach, Burden.
Wood v. Lucy, Lady Duff-Gordon A promise to make reasonable efforts can be implied from the
entire K, even where the promise is not made expressly, serving as consideration, thus making
the K enforceable. Cardozo: Wood splitting profits 50-50 with Lucy implies reasonable efforts
will be made
i. UCC 2-306. Output, Requirements, and Exclusive Dealings.
1. (2) f agreement imposes an obligation upon the seller to use best efforts to
supply and an obligation on buyer to use best efforts to promote their sale.
2. Comment 5. Parties are bound, even when expressly, to use reasonable diligence
as well as good faith in their performance of the contract. Under the contract,
even though no express commitment was made, parties are still to use their
reasonable efforts and due diligence.
Where one party gave its own construction to the contract, fixed the length for itself, and made
a demand which there was no duty to accept, there is no enforceable contract.
i. Sun Printing & Publishing Assn’n v. Remington Paper & Power Co. K for paper to run
for 16 months, with buyer ordering 1,000 tons each month. Price for first 4 months
specified in K, with one price for the 1st month and a second price for the next 3. Held:
not enforceable b/c term was too indefinite. Successive option contracts are not
enforceable.
ii. UCC 2-204 (3): even though one or more terms are left open.... does not fail for
indefiniteness if the parties intended to make a contract and there is a reasonable basis
for remedy.
iii. UCC 2-305(1) Open Price Term (b): Even if the price is not settled, if parties intend to be
bound, then there is a contract. In this case, the price is a reasonable price at the time of
delivery if the price left to be agreed by the parties and they fail to agree. (3) When a
price left to be fixed otherwise than by agreement of the parties fails to be fixed
through fault of one party the other may at his option treat the contract as cancelled or
himself fix a reasonable price.
1. Today we would enforce the Sun Printing contract under UCC. There was an
industry custom here to reset each quarter. If you can conclude that the parties
intended to enter a contract, you can enforce.
Conditional Promise - You can have a K even when at the time the K is formed, you don’t know
whether performance will occur.
i. C to R “I promise to sell you for $400 my photo if the Louvre gets more than 10 million
visitors in 2022.” This is clearly conditional. This is a conditional promise – a promise
that I’ll do something if something happens. I have no control over this event. Other
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party has no control over this event. Have I promised enough? Yes. At this pt, you
committed to do something – to sell the photo, even though there is no guarantee that
it would be sold. This is a contract from the get-go. The consideration was a promise for
a promise. You can have a contract even if when the contract is formed, you don’t know
whether performance will occur.
1. Limited promise, only going to take effect if the condition occurs
2. You can show reliance even without beginning perofrmance
3. Where was the acceptance here? Whose performance?
4. Anticipatory repudiation. Had he repudiated before performance, there would
be a breach of the option contract.
ii. R to C: “I promise to buy your photo for $400 next Friday.” C to R “I promise to sell you
the photo next Friday if I still have it.” R is not promised enough. No promise.
1. Some courts will say this is like the above hypo because C has the freedom to
choose whether she has the photo come Friday
2. Other courts and RS 2d say that it’s a limited promise, C has a lot of discretion
but doesn’t have unlimited discretion
a. If Friday comes along and C still has it: C is bound b/c C is giving up the
option of selling it for more after Friday. If C still has it on Friday, but does
not sell to B, courts will say that there is a breach of contract.
b. If it’s Thursday and if C still has it: courts are split whether C is bound to
BR at this point.
i. Some courts will say that C is not bound on Thursday to sell to R
b/c C is free to sell it to someone else. C has control over that. At
this point, there is no promise to BR It is only until Friday rolls
around that there is a promise.
1. There is consideration under this interpretation b/c there
was a bargained for exchange. R was willing to take the
risk that C was going to sell it to someone else. Some
courts will say that C is bound on Thursday to sell to R. RS
endorses this.
INDEFINITE PROMISE - Promises that are too indefinite are unenforceable.
A. Definiteness/Certainty: An offer which appears to be indefinite may be given precision by usage of
trade or by course of dealing between the parties. RS 2d §33. Certainty.
B. Indefinite Terms: K might fail if term is too indefinite but not if the parties have mutual assent to
conclude binding K. RS 33
a. E.g. A sells land to B for $2k, $1k in cash and $1k “over 2 yrs.” Might be indefinite but still can
sue under K.
b. E.g. A to B “If you guys continue the way you’ve been, I’ll give you a fair share of my profits next
January.” Not indefinite but a factual Q.
i. Look at past history: was there profit sharing in past?
ii. Look at industry practice: does the fair share go in industry?
c. G Micro Capital Investors, Inc. v. Broyhill Furniture Industries, Inc.: K not enforceable b/c
terms of heating bill. Nothing to define what constitutes heating bill (does it include overhead
costs?). No third party account for the billing, the heating system used leftover wood so Broyhill
could be flubbing the number any way they pleased.
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i. It is a legitimate argument b/w the majority and dissent whether there was a contract or
not. There was a benefit transfer to Broyhill, which would serve as a proper basis for
restitution claim.
1. Prof disagrees with dissent
d. G Blinn v. Beatrice Community Hospital: (job offer from hospital in Kansas, employer until
retirement – “we have at least 5 years of work to do”) “We have a lot more work to do” No K
here because the phrase was ambiguous. The assurances were not sufficiently definite in from
to constitute an offer of a unilateral contract. (Recall Stewart v. Cendant Mobility – she relied
on it through PE and recovered).
i. What about promissory estoppel? If you make assurances that someone reasonably
relies on (pretty reasonable here), then you can recover under PE. Is PE a substitute for
consideration? In Nebraska it is an independent theory. Protect people who reasonably
relied upon.
1. This court said the important thing is reliance. He gets close to a promise and
that’s enough to create reliance
C. Vague Price Term – see UCC 2-204(3) for “Open Term” what happens when pricing mechanisms fail?
a. If there’s a vague price term BUT the parties have intended to be bound, we can enforce.
i. E.g. Retailer said that the rent would be “re-negotiated at prevailing rate.” Is “prevailing
rate” indefinite? No, K is enforceable b/c there was a practicable and objective standard
to determine what the prevailing rate is.
ii. E.g. K for shipping iron ore “regular net K rate for season” or “agreed on rate.” Modified
K over 32 yrs. Parties then couldn’t agree on the new rate and someone tried to void the
K. Held: K is enforceable w/ specific performance fills in reasonable rate intended to be
bound.
1. They’ve been in bed together for 32 yrs so obvi they intended to be bound.
2. Gives trial ct equitable jurisd to set price.
PRELIMINARY NEGOTIATIONS – Agreement reached but some things are left to do
2 Types of preliminary contracts: (1) Type 1 (2) Type 2
Type 1
Defn
Binding agreement
Terms
Parties work out all terms
Parties have clear intent to formalize all
terms.
Formalities are not observed.
Enforceability Type 1 agmts are always enforced
Type 2
Binding agreement to negotiate in good faith
Parties have open terms.
There is never a final agmt on all terms.
Parties have made an agmt, but only continue
to negotiate.
Type 2 agmts enforce when you can walk
away: Once there is a Type 2 agmt, parties
have a duty to negotiate in good faith towards
a final agmt.
A. Type 1: Binding agreement in which parties have agreed on all terms and intend to formalize the
terms, the formalization of which are never realized. Only thing that’s left is putting it on paper. If
either party walks away, other party gets expectation damages.
B. Type 2: “Agreement to agree.” Binding agreement to negotiate in good faith. (The terms in K not
binding). Not at the point of having a full enforceable contract
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a. If the parties have reached an agreement, but have not agreed to all material terms, the parties
have a Type 2 agmt.
i. Exam trap: Be careful. If there are no more terms for the parties to agree on (The parties
had specified all the relevant terms) then we do not have a Type 2 agmt.
1. G Main St. Baseball: The ltr of intent determines whether the agmt was Type 1
or Type 2. Held: Did not decide which it was. Basically, this is just the new
nomenclature of Type I and Type II agreements.
2. G SIGA Tech v. PharmAthene (seller’s remorse): SIGA needed funding. Pharm
wants merger instead of a license. Once SIGA gets gov’t approval, it will give
Pharm license in exchange for (1) $16 mil (2) royalties. Held: The licensing
agreement was a Type 2 agmt b/c the parites would have reached agreement on
the undecided terms but for SIGA’s bad faith.
b. Parties have a duty to negotiate in good faith towards a final and full agreement.
c. The failure to negotiate in good faith will expose the breaching party to damages.
i. G SIGA: SIGA changed the terms after learning that it got funds from NIH ($6 mil to
$100 mil; $10 mil based on milestones to $235 mil; more than doubled its royalties and
50% remaining profits)
d. Breaching party receives expectation damages under a Type 2. * On exam, argue both reliance
and expectation damages* (Assumption that but-for the breaching party’s breach, the parties
would have reached a final agreement)
i. Expectation:
1. G SIGA: Held: P entitled to full expectation damages b/c (1) SIGA had a duty to
make sure that the terms were substantially similar (2) there was a factual
finding that they would have reached an agreement but for SIGA’s bad faith
2. D acted in bad faith.
ii. Reliance:
TERMINATION OF AN OFFER Was the Offer Terminated?
Offeree’s power of acceptance may be terminated by any of 4 factors: RS §36 (Also acceptance terminates
offer obvi)
A. Rejection or counter-offer
B. Lapse of time: Offers do not last forever.
a. Common Law - If offeror fails to specify, a fact-finder will determine what amount is
“reasonable” i.e. what time is needed to receive, consider, and reply to the offer.
i. Fact-finder may also consider: relationship of parties, course of dealing, custom or
trade, means of communication, and stability of market. Ambiguous time: “within 5
days”
b. UCC 2-206: If the Seller does not specify the mode of acceptance and the Buyer accepts in a
“reasonable manner,” but doesn’t notify the Seller of the acceptance, the Seller may within a
reasonable time may treat it as having lapsed.
C. Revocation by the offeror; Unless the offer qualifies as an option or firm offer under UCC, offeror has
the power to revoke offer any time before acceptance. (See bilateral & unilateral for further
discussion) *revocation is different depending on what kind of K*
a. SEE RS 87(2)] FOR IRREVOCABLE OFFERS UNDER DETRIMENTAL RELIANCE
b. Revocation must be communicated to offeree. RS §43
i. G Morrison v. Thoelke (1963): On November 27, appellees executed a contract and
placed it in the mail to the appellants’ attorney in Florida. However, prior to its receipt
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in Florida, appellees called appellants’ attorney and cancelled and repudiated the
execution and contract.
c. Offer is revoked indirectly if the offeror takes action clearly inconsistent with the continued
intent to enter a contract and offeree obtains reliable info of this action. RS §46
i. G Dickenson v. Dodds: Option K. Seller offered farm. Buyer wrote a letter of
acceptance. Mom was supposed to deliver letter, but forgot. In the meantime, Seller
sold. Buyer indirectly found out but still tried to deliver letter of acceptance before
9am. Held. Offer was revoked, not enforceable.
1. Seller acts clearly inconsistent by selling to someone else w/ offer = revocation
2. Buyer was notified of the revocation = notice of revocation
d. Revocation of offer is effective only upon receipt or if offeree learned indirectly RS §42
((offeree’s power of acceptance is terminated when offeree receives from the offeror a
manifestation of not to enter).
e. Mail-Box Rule Acceptances takes effect when it’s out of offeree’s hands, regardless whether
the offeror got it. UNLESS:
i. the offeror specified the medium/manner RS §63;
ii. the acceptance wasn’t properly dispatched i.e. not properly addressed RS §66
iii. in Option K, not valid until received by offeror
1. Hypo #1: A sends offer to B, promising to sell good for $400 and asked B to
accept by return letter. On the day B receives letter, B puts “I accept” in mailbox.
Before A receives the letter, A calls B and revokes offer. Is there a contract? Yes.
2. Hypo #3: A sends B offer. B sends A rejection. B calls A to accept. But A receives
B’s rejection after acceptance. Contract? Yes. Per RS §40 (rejection or counter
offer does not terminate the power of acceptance until received by the offerer,
but limits the power...), B’s rejection is not effective until A receives it. If B
changed his mind and communicates the acceptance before, the contract
depends which one A receives first.
f. In sum, if the person receives the revocation after acceptance has been properly dispatched,
the revocation is invalid.
i. Hypo #2: A mails offer to B. A mails revocation to B. B receives 1st letter and puts
acceptance into mail. B then receives 2nd letter. Contract? Yes. B accepted before B
received A’s revocation.
D. Death of incapacity of the offeror or offeree
ACCEPTANCE – COMMON LAW
A. Definition: acceptance of an offer is a manifestation of assent to the terms thereof made by the
offeree in a manner invited or required by the offer. (mode of acceptance) RS § 50(1): acceptance of
offer defined.
B. Mode of Acceptance: Performance? Or Promise?
a. If the offer prescribes place, time and manner of acceptance, its terms must be complied with
in order to create a K. If it just suggests a permitted lace, time & manner, another method is not
precluded. RS §60
i. If offeror prescribes the only way in which his offer may be accepted, an acceptance any
other way is a counteroffer. Comment a.
b. If the mode of acceptance is not specified, in the case of ambiguity, the offeree can choose any
reasonable method of acceptance. RS §32.UCC 2-206
C. Performance as acceptance:
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D.
E.
F.
B.
a. An offer may invite OR require acceptance by made by affirmative answer OR by performance.
Unless otherwise indicated, an offer invites acceptance in any manner and medium reasonable.
RS §30.
i. The offeror is the master of his offer. RS 30 Comment b. The offeror is entitled to insist
on a particular mode of acceptance.
ii. Insistence on a mode of acceptance is unusual – language that refers to a particular
mode of acceptance is often intended to be a suggestion rather than limitation. So other
modes aren’t precluded. Comment b.
1. E.g. A sends written K to B. The K says, “you can accept this offer by signing on
the dotted line.” A writes to B and says “I accept your offer.” No contract.
b. If an offer invites acceptance by promise OR performance, the offeree accepts by tendering the
invited performance. Such an acceptance operates as a promise to render complete
performance. Effect of Performance where Offer Invites either Performance or Promise RS §62
c. An offer can be accepted by the rendering of a performance only if the offer invites such an
acceptance. RS §53.
When Acceptance takes Effect: Acceptance takes effect when the offeree has accepted in the manner
and medium invited by offer as soon as it is out of the offeree’s possession. RS §63. Mail-Box Rule
Time When Acceptance Takes Effect.
Unqualified Acceptances are valid acceptances
a. An acceptance that “mirrors” the terms in the offer are valid acceptance - “Mirror Image Rule”
i. Opportunistic Denial: Parties can use slight deviances to non-material terms as
opportunistic denial to get out of a deal (buyer’s remorse). UCC 2-207 (1) fixes this.
b. The acceptance must include all material terms to be valid.
c. Parties do not have to agree to every single term for there to be mutual assent if the
acceptance includes all essential material terms.
i. G Bridge City: Communications showed that the parties reached an agmt on price and
mutual release. While they did not reach an agmt on the actual form of the mutual
release, they did agree on the mutual release.
Qualified Acceptance (& Counters)
a. An acceptance that proposes additional or different terms from those offered is not an
acceptance but is a counter-offer. RS §59. Purported Acceptance Which Adds Qualifications
b. Last shot Rule Acceptance by performance on additional terms in confirmation – where the
form changes the deal materially by adding terms - was considered valid under the common
law. (UCC 2-207 changed this)
i. A & B agree to essential terms on the phone. A sends a form confirming but adds a
bunch terms –Performance occurs. Add’l terms in confirmation are valid by
performance.
c. “Last Shot Rule” Terms in the last offer on the table are the prevailing terms that become part
of the binding contract. Performance is treated as an acceptance.
i. If 1st form has term and 2nd form has different term, 2nd form controls.
ii. Ex. A’s form says, “warranty that all goods are authentic.” B’s form says, “no warranties
as to goods being authentic.” (counter) (Ps probably didn’t read each other’s forms). A
performs by shipping the goods to B. (acceptance) B accepts the goods. Warranty is a
material term. B’s terms prevail b/c B’s form was the last offer on the table. (B’s form
was a counter-offer).
Acceptance by Silence (or Inaction)
a. Silence or inaction cannot constitute acceptance.
b. UNLESS RS §69 is met:
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i. Offeree keeps benefit of services and knows that compensation is expected
ii. Offer invites acceptance by silence and offeree intends to accept by silenece
iii. They had previous dealings that makes it reasonable that offeree should notify the
offeror that he does not intend to accept.
b. E.g. A has insured B’s land for years. One yr, A sends B a renewal policy and bill for premium. B
retains the policy for 2 months and then refuses to pay the premium. B is liable for the
premium that accrued prior to rejection.
c. E.g. B has often ordered goods from A. Every week A has shipped he goods within a week and
just bills the goods on shipment. B orders again from A. A receives it but is silent. B relies on the
order and forbears ordering somewhere else. A is bound to fill the order.
C. ELECTRONIC BARGAINING
a. Cyber contracts: Try to enforce where the consumers have no choice but to agree.
i. Terms inside packaging:
1. ProCD, Inc. v. Zeidenberg: License wasn’t unenforceable just because it was
inside the packaging rather than on the outside. There was also a click-through
agreement. Like Carnival Cruise Lines in that agreement was given after
purchase. Judge Easterbrook assumes that license is Art.2 (agreed with by most
courts
2. Hill v. Gateway: Arbitration clause inside computer box. Ordered the computer
by phone and found the terms inside the box once the computer arrive. HELD:
Plaintiffs agreed to terms (ProCD). Don’t want to force people to read terms over
the phone.
3. Klocek v. Gateway: Similar facts but different judge. HELD: They are not bound
by the terms since Gateway did not put them on notice that they had only 5 days
to return.
a. 2-207- Offeror is really the buyer. When you have new terms offered by
Gateway, they’re going to be treated as additional terms under 2-207(2).
Nothing in 2-207 tells ust hat it only applies when there are dueling
terms.
b. When Gateway shipped the computer, it was an acceptance of the offer
from Kloceks to pay for the computer. Because the Kloceks are not
merchants, the terms can only become part of the contract if they were
expressly agreed to by the Kloceks, which they weren’t.
4. Most courts follow ProCD, Klocek is considered an outlier
ii. Click-through agreements: enforceable (“I agree.”)
iii. Browsewrap agreements: not enforceable in Specht (test of whether reasonable person
would be on notice to look for agreement, had to scroll down to even see the terms)
and Nguyen proximate to buttons you must clickthrough, but still not enough) but
enforced in Meyer (it popped up when registering).
b. Tracking numbers are not acceptances.
c. “Order Received” – Not an acceptance but acknowledging the receipt of the order
d. “Order processed” – maybe
ACCEPTANCE – UCC
A. Seller’s immediate shipment of goods or prompt promise = acceptance. UCC 2-206(1)
a. Buyer - Offer – order for shipment of goods
b. Seller- Accept – ship promptly or promise to ship (goods must be conforming)
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B. Seller’s Shipment of non-conforming goods is not acceptance if seller tells buyer that it’s offered only
as accommodation. If nonconforming + notification of accommodation = counter-offer UCC 2-206(1)(b)
a. E.g. A got notice of increase in price of drugs. A orders 1k vial (offer). A receives automatic
confirmation w/ tracking #. B orders 50 vials at a low price as accommodation and informed A
that the balance of shipment at new price unless A cancelled. K is unenforceable.
i. No acceptance of buyer’s offer
ii. Seller’s Accommodation was a counter0-offer
b. E.g. A orders 1 ton of Pink Lady apples. B ships A 1 ton of Fuji apples as accommodation. B’s
shipment was not an acceptance but a counteroffer.
BATTLE OF FORMS
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent within a
reasonable time operates as an acceptance even though it states terms additional to or different from those
offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or
different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants,
such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after
notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for
sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the
particular contract consist of those terms on which the writings of the parties agree, together with any
supplementary terms incorporated under any other provisions of this Act.
UCC 2-207
(1) The offer expressly limits acceptance to the terms of the offer. - finds an agmt even w/ add’l or diff terms.
(2) The additional terms materially alter the original offer
(3) An objection to the additional terms were given within a reasonable time – applies where the conduct of
both parties recognizes the existence of contract, even though their writings do not. (K is formed by conduct)
* You can go from 1 to 2, 1 to 3, but NEVER 1, 2, then 3 *
A. Is the acceptance expressly conditional on offeror’s assent to changes (= counteroffer)?
a. A written acceptance w/ add’l or different terms is a valid acceptance UNLESS the acceptance is
expressly made conditional on assent to the additional or different terms. UCC 2-207 (1).
(Burden is very high on the offeree to expressly say “We don’t have a deal until...”
iii. R sends purchase order “delivery via Trojan.” C sends acknowledgment “delivery via
Bruin.” R argues no K. Valid K under UCC 2-207(1) b/c R didn’t make acceptance
expressly conditional on terms of offer. If C had said “Yes, but no deal until
transportation is via Bruin” then no acceptance.
d. EXCEPTION: go to 2-207(3) -> if the parties act like there is a K, even without express assent,
then knock-out rule apples. K is valid on agreed written terms + UCC Gap fillers. UCC 2-207(3)
B. Additional Terms – 1st form silent on term and 2nd form has add’l term
a. If 1st form has terms and 2nd form is silent: the terms in 1st form control and become part of the
K. (no gap fillers) - no add’l terms here
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b. If 1st form is silent and 2nd form has additional terms: Exam trap – be careful. Summers and
White debate only come into play when there are different terms, not add’l terms.
i. Between non-merchants: the additional terms are to be construed as proposals under
UCC 2-207 (2) Additional terms do not become part of K unless
1. The additional terms are separately accepted or
2. The parties’ course of performance evidences implied acceptance of those add’l
terms.
ii. Between merchants: The add’l terms are part of the K unless they are material
alterations. UCC 2-207(2)
1. If add’l terms materially alter -> the add’l term gets knocked out
2. If add’l terms don’t -> add’l terms become part of K.
C. Different Terms - If 1st form has terms and 2nd form has different terms.
Rule of thumb – term is add’l if it adds and term is different if it contradicts the offer.
a. Between non-merchants: Add’l terms are proposals unless the parties conduct evidences
implied acceptance those add’l terms.
i. R faxes form to C that states “Seller warrants the goods are authentic.” C sends form
that states, “Seller makes no warranties as to the authenticity of the goods.” Is there a
contract and, if so, what are its terms? Valid under 2-207(1) b/c not expressly
conditional (I think? Not sure this is right)
b. Between merchants:
i. Summers/First-Shot Rule: 2-207(2) does not apply and the 1st form prevails.
i. White/Knock-Out Rule: Different” is treated as “additional” so run through 2-207(2)
applies anyway -> knocked out -> gap fillers (UCC 2-213, 2-314 for the different gap
fillers). Courts use this.
1. G Richardson v. Union Carbide: Seller and Buyer each had their own standard
indemnification clauses that conflicted w/ each other. Seller wanted
indemnification. Buyer pointed to its indemnification clause. Ct. knocked out
both and replaced w/ UCC gap-filler.
B. Examples:
a. Illustration 1 – C sends form offering to sell photo and form disclaims warranties. R sends form
accepting offer and form is silent on the issue of warranties.
i. Most agree no different or additional terms contained in R’s form
ii. Disclaimer is part of the contract. Decent argument on the other side
b. Illustration 2- R sends form to C ordering one photo for $400. C sends form that “accepts” but,
in bold writing, C states that her acceptance is conditional on R agreeing that there are no
warranties. R does not respond. C ships the photo, which R accepts.
i. No acceptance under 2-207(1)
ii. 2-207(3)- Parties act like there is a contract, so even without express assent, knock-out
rule applies. Contract is valid on agreed written terms + UCC gap fillers.
c. Illustration 3 – R and C agree on phone to a deal for photo for $500. C sends confirmation which
disclaims warranties.
i. Agreement under 2-207(1). Disclaimer evaluated under 2-207(2)
1. If R is not a merchant: drops out without further analysis.
2. If R is a merchant: drops out because disclaimer of warranties is a material
alterantion, see Comment 4 for examples
d. Illustration 1 - D and C, merchants, orally agree for purchase of beans for $10/lb. D sends a ltr
confirming that says, “prices subject to change.”
i. The parties have reached an agmt under 2-207(1).
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e.
f.
g.
h.
ii. “Prices subject to change” is an add’l term. It is a material alteration under 2-207(2). It
gets dropped out.
Illustration 2 – same facts but C has the right to reject beans. C says “I expect to order at least
100 lbs/week.” They do not discuss when shipment starts. D sends a ltr that says “shipment
begins in 30 days.”
i. The parties have reached an agmt under 2-207(1).
ii. Ambiguous whether 30 day provision is a material alteration under 2-207(2).
1. If it is a MA -> dropped out and C can reject beans. I
2. f not a MA, C cannot reject them on the basis that they are not the darkest
beans.
Illustration 3 – C offers to buy car for $100k. B accepts but that says “I will sell to you on the
condition that C return it to me for 1 day” – Do parties have agmt under 2-207(1)?
i. B’s statement “on the condition” means that B is making his acceptance expressly
conditional -> B’s statement is a counteroffer under 2-207(1) b/c it is not a definite
expression of acceptance. No K.
Illustration 4 – same facts but this time, B says “I will sell to you and you will return to me for 1
day”
i. B is an acceptance rather than counteroffer. (Doesn’t say acceptance is conditional on
return)
ii. Term becomes proposal under 2-207 b/c B&C are not merchants.
Illustration 5 – C offers to buy car for $100k. B accepts but says “I will sell to u on condition that
u return to me for 1 day.” C doesn’t say anything. B delivers car and C hands over cash.
i. B’s response was a counteroffer.
ii. But the parties went ahead and proceeded w/ performance of K so the parties have an K
under 2-207(3). (C’s handing over cash is performance. Performance is treated as
acceptance). -> K is enforceable on the terms the parties agree on, supplemented by gap
fillers. B/c there is no default rule for this, it gets dropped.
CONSIDERATION OR ONE OF ITS ACCEPTABLE SUBSTITUTES
Consideration or one of its acceptable substitutes are required for an enforceable K. A promise without
consideration is unenforceable.
CONSIDERATION
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Defn: Consideration is an element of exchange that makes a promise enforceable. It is the receipt of
Is there a bargained-for-exchange? (Or a conditional gift?) RS §71
A. Was there reciprocal inducement b/w the parties?
a. Did the promise objectively induce a reciprocal promise?
B. Was there a detriment to one party for the legal benefit of another? Or Was there any performance? RS §72
Ways to Argue No Consideration:
1. No reciprocal inducement
2. Nominal consideration
3. Gratuitous promise
something of value by the promisor from the promise.
A. Legal Benefit for Promisor to Detriment of Promisee: Consideration requires that there be an
exchange where there is a (1) promise that (2) induces a detriment to one party (meaning that it be a
motive) (3) and the other party has renounced other opportunities for the betterment in the faith that
the promise be kept.
a. Legal Benefit:
b. Legal Detriment:
i. G Hamer v. Sidway: Held: Consideration b/c nephew waived legal right to drink &
smoking even though the waiver “benefitted” him.
B. BARGAINED-FOR EXCHANGE: For a promise to be enforceable, the parties must have bargained (key
element of exchange) in a transaction. (Promise for promise OR promise for performance)
a. Bargain Theory: the key element to consideration is that an exchange occurs; a transaction has
occurred in which the parties bargained. This theory enforces a narrower set of promises than
looser notions of consideration b/c it is not enough that a benefit was received by the promisor
to the detriment of promise.
b. Defn: Consideration is the receipt of something of value from the promise. RS §17
c. Requirements of Consideration RS §71
i. The parties must have bargained for something that otherwise not occur (a
performance or return promise).
ii. To be considered a bargain: A return promise/performance is bargained for if it is
sought by the promisor in exchange for his promise. (Reciprocal inducement: a promise
that induces a reciprocal promise Consideration must involve a bargained-for exchange,
where the party is induced into entering in the agreement, regardless whether the
agreement, on its face, provides clause that appears to benefit the party.)
1. Exam Answer format: Knowing all the facts known to both A and B, would a
reasonable person (objective manifestation of her intent) conclude that A was
trying to induce B?
2. G Whitten v. Greeley – Shaw (formality mistress K): D drafted an gmt which P
signed w/o objection. It required P to perform various duties, including paying
her $500/month, reimbursements/etc. There was one clause that explicitly
imposed on Defendant (she was not allowed to call him w/o his permission), but
this clause was drafted and included by D, not O. Held: No consideration b/c the
only clause that might benefit P was put there by D and not P and therefore did
not induce P to enter into the agreement. Because P didn’t want it nor bargain
for it, he was not induced, and therefore there was no consideration.
3. G Military College Co. v. Brooks: F promised to pay full tuition for son’s school
later b/c he couldn’t afford it at the time, wanted to avoid a lawsuit and
damage to his credit. Son dismissed. School wants to enforce F’s promise. Held:
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Promise to pay full tuition was supported by consideration regardless of son’s
dismissal b/c F was induced to entering into such promise by postponing any
lawsuit. The son’s dismissal was completely irrelevant to this bargained-for
exchange.
4. G Sharon v. Sharon (mistress): P & D entered into an agreement whereby D
agreed to pay P $250 each month for the year. D admitted to entering the agmt
that he was induced by precluding her from bothering him. Held: Consideration
because D was induced.
iii. The performance may be:
1. an act other than promise
2. forbearance,
3. creation/mod/destruction of legal relation
d. Any performance which is bargained for is consideration, except as stated in § 73 and 74.
(Partial performance constitutes consideration) RS §72 – note: RS got rid of “benefit” or
“detriment” The requirement of consideration may be met by promising or performance.
i. In a Bilateral K, a promised performance is consideration. / consideration is always the
promise RS §75
1. A promise which is bargained for is consideration if, and only if, the promised
performance would be consideration.
ii. In a Unilateral K, the performance is consideration.
e. If there is a settlement agreement, there is another in dropping a claim, that promise is legally
enforceable on consideration even if the claim that was dropped was invalid. RS § 74
i. In order for a claim (that was dropped) to constitute valid consideration, you need 2
things: (1) some prospect that the claim might have value or (2) there was a fraudulent
exchange.
f. What is bargained for does not have to be the reason the promisor is making the promise; the
promisor can make a promise that is part bargain and part gift. So long as there is a form of
“bargaining” between the parties, the exchange is valid. RS §81
i. (1) The fact that what is bargained for does not of itself induce the making of a promise
does not prevent it from being consideration for the promise
ii. (2) The fact that a promise does not of itself undice a performance or return promise
does not prevent the performance or return promise from being consideration for the
promise
1. Hypo: R promises to buy from C an autographed I.M. Pei photo for $400. C
promises to sell such photo to R for $400.
a. What is the consideration for R’s promise?
i. Bargaining for C’s promise.
ii. C’s promise is consideration for R’s promise
b. What is consideration for C’s promise?
i. R’s promise
2. Hypo 2: C: I promise you, R, that if you give me $400, I will give you an
autographed I.M. Pei photo
a. What is the consideration for C’s promise?
i. The $400
3. Hypo 3: H: R, if you come to my house I will give you an IM Pei photo. R shows up
and H refuses to deliver. Is this enforceable?
a. No, because H isn’t getting anything out of it
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iii. G Hamer v. Sidway (Uncle Willie/Young Willie): Part gift/part bargain. Even though
there is a gift element, it’s enough that a performance was required to receive the git to
constitute a bargain.
iv. Dornslife USC: Rich guy gives $5 mill to USC. In the doc, it says to receive gift, multiple
and extensive conditions were imposed. Consideration b/c combo of bargain and gift,
which makes it a bargained for exchange.
v. A promises to buy from B a jersey for $400. B promises to sell jersey to A for $400.
Consideration. The consideration is the promise to sell and the promise to pay. There is
an exchange of promises (1 set of 2 promises)
vi. A promises to give jersey to B if B gives A $100. B gives him $100. Consideration. The
consideration is B’s performance – the act of giving A $100. Now there is mutual assent
and consideration to enforce A’s promise.
vii. B promises A that if A gives B the jersey, B will give him the $100. A gives the jersey. The
consideration is A’s performance – the act of giving the jersey. Now there is mutual
assent and consideration to enforce B’s promise.
viii. A promises to give B a jersey if B comes to A’s house. A refuses to deliver jersey. No
consideration. There is just a promised gift. There was a condition on the gift, but A was
not trying to get anything.
ix. A really wants to talk about conlaw with B and the opportunity to confront B about
conlaw. A knows that B wants a jersey. A promises to give B a jersey if B comes to her
house. B comes. A discusses conlaw with B. A fails to deliver jersey. Consideration. A got
the benefit of B coming. Part of A’s motivation for making the promise was to get B to
come to her house.
1. Note: the act is the same in previous Hypo But the act was bargained for (part
of the reason) in 2. The other situation, it was a pure and simple gift. Though it
was a conditional gift, the condition was just at A’s convenience – she wasn’t
looking for the condition. The 2nd hypo, A was looking to induce B to come to
her house. If A made in part a gift, that’s okay. Still enforceable.
g. Conditional Gift / Gratuitous Promise are gifts because it lacks consideration. There is no
bargained-for exchange. RS §71
i. Promises for charity are not enforceable without showing the existence of consideration
or reliance.
ii. The motivation of the promisor can be part gift and part bargained for exchange to
constitute valid consideration.
iii. To determine whether a gift is supported by consideration, was the motive (a) to give a
conditional gift or (b) to induce a return promise or performance?
1. Note: The act at issue is the same. The question is not the performance, but the
motive.
a. Bargained for exchange: is the person trying to get that performance?
b. Conditional Gift: Or is that performance just has to be done to get the
gift?
c. If you conclude that the motivation of promisor was part gift (as it was in
Hamer) that is enough to constitute valid consideration.
2. G Congregation v. DeLeo: DeLeo promised to give Congregation $25k. Doesn’t
ended up doing so. Held: No consideration b/c there was no evidence to suggest
that the Congregation’s promise to name him after the library induced the
decedent to make or renew the promise. Promise but no contract
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3. G Allegheny College: Lady wanted her name commemorated so she imposed
the condition that the gift be in her name on the donation. Held: Cardozo makes
up consideration here i.e., she wanted the college to remember her. So,
establishing fund in her name in exchange for $5,000. College’s acceptance of
$1k assumed a duty to commemorate. Promise is enforced. College did not
change position, so promissory estoppel is not going to work.
4. G Marmer v. Kaufman (pharmacy & certificates): Richard promised to pay Paul
$ b/c Richard felt bad about his sister screwing over Paul. Held: Richard’s
promise was gratuitous. No consideration b/c positive feelings of giving a gift
are insufficient. The reason for the promise was to make family amends, not tax
benefits. Family relations (a) did not detriment Paul nor benefit Richard so no
detriment to promisee and no legal benefit to promisor and (b) Paul gave
nothing for Richard’s promise, no matter how serious or bargained for so no
bargained-for-exchange.
5. RS § 79: If the requirement of consideration is met, there is no additional
requirement of
a. (a) a gain advantage or benefit to the promisor or a loss, disadvantage, or
detriment to the promisee;
b. (b) equivalence in the values exchanged; or
c. (c) mutuality of obligation
C. Nominal Consideration – In an effort to make a promise to make a gift in the future enforceable, the
promisor has given ~ $1. (Cts are split re whether promises supported by nominal consideration are
enforceable)
a. 1st RS - K supported solely on nominal consideration would have been enforced b/c the intent
of the parties should be vindicated.
b. 2d RS §71 – K supported solely on nominal consideration are not enforceable b/c the institution
of K theory is to enforce bargained-for exchanges, not the intent of the parties.
i. Exam Q: What is the goal of K theory? – Should K be enforced on parties’ intent? Or
should K be used as a device to increase social welfare to enforce bargains? You must
argue both ways. If you believe that the goal is to enforce what the parties want
(searching for intent) and tries to signify that they want their promise to have legal
effect by $1, it seems that nominal consideration would be enforceable.
ii. ($0.01 for $600) - No consideration.
c. If ~$1 is objectively not part of the exchange, (objectively did not induce the promise), then the
$1 is nominal (promise is supported by nominal consideration) and therefore, not enforceable.
i. G Fischer v. Union Co ($1 for deed): Daughter gave her dad $1 in exchange for dad
giving her the deed. Held: No consideration b/c $1 did not objectively induce Father to
give deed. $1 was a “joke.” The deed was a gift. The promise at issue was not made in
any measure to get the dollar bill.
D. Past Consideration – new promise based on consideration rooted in a previous promise.
a. [General] Promises based on consideration in past promises lack consideration and therefore
not enforceable.
i. Promissory Restitution: A promise that is based on a benefit that was previously
received by the promisor is only enforceable the extent that is necessary to prevent
justice. – Cts don’t enforce usually.
ii. R gave H an autographed Frank Gehry photo last year. H says: “In consideration of the
Frank Gehry photo you gave me last year, I promise to give an autographed IM Pei
photo. Not a contract because it is lacking bargained-for exchange in the promise.
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Clearly wants to make it legally enforceable by invoking “in exchange,” but there is NO
actual bargain. You cannot bargain for what you have already received.
iii. G Mills v. Wyman: F promised to pay for past care for son. (There was a performance
rendered and then a subsequent promise) Held: No consideration b/c benefit was in
the past so F had nothing to gain. Promise might be a moral obligation (not
enforceable). Court still think it’s important to not enforce promises to make a gift.
1. If Mills sued under RS 86, Mills still wouldn’t recover b/c Mills did not receive a
material benefit.
2. If Mills sued son, Mills would be suing under the theory of restitution.
b. [Exceptions] Debts that have run statute of limitations, debts discharged bankruptcy, and debts
incurred by minors are enforceable by moral obligation. RS §82
i. Statute of Limitations: A new promise that is based on an old promise is part bargained
for and part gift is enforceable up to the old amount of the old promise.
1. R promises to pay C $400 for a photo. C gives R jersey. R fails to pay. SOL is up. R
promises to pay $300. R’s promise is enforceable up to the amount of barred
debt. The original promise was for $400 and new promise is $300. This is not
reviving an old promise; this is enforcing a new promise.
ii. Bankruptcy: Promises to pay debt that has been discharged in bankruptcy and
discharges past debt, but debtors are allowed to reaffirm debt. RS §83. Basically, they
can make a new promise to repay the old debt. U.S.C. now governs with statutes.
iii. Minor: Promises by a person to pay a debt incurred while a minor is unenforceable. But
if you make a new promise, then that is enforceable. Aplplies to toher contracts
previously voidable but not voided prior to the making of the promise. RS §85
1. 5.5 yrs ago, daughter promised to pay C $400 for a photo. C gave her the photo,
but she didn’t pay. Daughter’s promise is not legally enforceable b/c she was an
infant. Daughter turns 25 and promises to pay $400. Promise is enforceable b/c
she reaffirmed her promise.
c. Material Benefit Exception - Subsequent promises where the promisor has received a material
benefit are supported by sufficient consideration, even though there was no prior request for
the material benefit. – some cts follow.
i. G Webb v. McGowin: W risked life/limb to save M’s life. M received material benefit of
saved life and promised to pay W until M dies. M dies and estate cannot pay (note – no
repudiation). Held: M’s promise is enforceable b/c M received the material benefit of
having his life saved
1. Note: This case is close to restitution but all that there is missing is the
expectation of payment.
2. Variation 1 – Dr. W comes across M lying unconscious in the street. Dr. W
provides medical services. M receives bill. M must pay. This is a classic case of
restitution b/c W has conferred a material benefit to M. It would be unjust for M
to keep services and therefore must pay reasonable value.
3. Variation 2 – Same facts as in the case, but this time, M never promised W. Can
W recover? No. Even though W saved M’s life, the law of restitution provides
recovery only where there is a reasonable expectation to be compensated for
services. Doctors have that presumption b/c they’re in the business of saving
lives. Here, W was only a volunteer and therefore would only be a gift; W was
not expecting compensation.
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4. RS 3d Restitution § 2(3): No liability in restitution for an unrequested benefit
voluntarily conferred unless the circumstances of the transaction justify the
claimants’ intervention in the absence of contract.
a. Need to make sense of Mill v. Wyman and Webb v. McGowin
i. Mills like the Dr. in the class restitution case. Sure there was
expectation of payment, but restitution needs benefit conferred
to them (the father). Voluntarily conferred=no restitution.
Subsequent promise show that it is NOT a voluntary benefit.
ii. Mills: benefit not given (father)
iii. Webb: not in business of giving those benefits (voluntary)
iv. Promise can take care of second situation, but not the first
because benefit is conferred in that case.RS makes a big
distinction between people who voluntarily do something v.
someone who expects to be paid for services.
1. Restitution: does the person expect payment?
a. If only Good Samaritan=NO restitution
b. Everyone agrees that Mills v. Wyman is the law. Except for RS § 86
ii. If a promisor is moved by a material benefit previously conferred, some courts will
enforce the subsequent promise to the extent necessary to prevent injustice. RS §86 –
follows Webb.
1. A promise is not binding under subsection (1) if:
a. the promisee conferred the benefit as a gift or for other reasons the
promisor has not been unjustly enriched;
b. or to the extent that its value is disproportionate to the benefit
iii. G Harrington v. Taylor: P saved D’s life. D promised to pay for P’s injury. D made a
couple payments and stopped. D didn’t want to fulfill promise - repudiation) Held: Does
not follow Webb/ RS §86; the promise was unenforceable even though D clearly
materially benefitted. McGowin NEVER disavowed his promise
E. Adequacy of Consideration – Not objective measure. Courts do not judge adequacy of consideration,
rather whether there was consideration in the form of bargained for exchange.
a. Adequate Consideration – inappropriate question posed. Courts do not judge the adequacy of
consideration, rather whether it was something the promisor wanted in exchange for the
promise.
b. Sufficient consideration – necessary question posed.
i. Mere inadequacy of consideration does not invalidate a K.
1. G Batsakis v. Demotsis (drachmas): Rapid inflation in Greece. P used drachmas
to purchase 5 gallons of olive oil (shit ton of calories), which is arguably valuable.
Held: P must pay entire principal amount of $2,000 even though P only received
the equivalent of $25 US. Cts will not get into the value of an exchange b/c it is
leery of getting into the subjective minds of the parties.
CONSIDERATION SUBSTITUTES
A. PROMISSORY ESTOPPEL: PE is an independent basis to enforce promises that would otherwise not be
enforceable b/c of a lack of consideration. Doctrine of PE provides a remedy to alleviate the plight of
those who suffer injustice as a result of their good-faith reliance on unfulfilled promises of others.
(Most promises are enforced on consideration supplemented by PE).
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Exam Format:
“This raises an issue of PE.” Under RS §90, the issue is whether the promisor reasonably foresee that the promisee
would reasonably rely on it?
a. [General rule] If a party has made assurances to the other party, who reasonably relies on those
assurances to her detriment, that party is estopped from arguing that the promise is
unenforceable. That promise is enforceable under the doctrine of PE.
i. G Ricketts v. Scothorn: (Note: before RS §90) Grandpa promised to give granddaughter
that she never has to work again / yearly payments, so she quits her job. (He dies. Estate
does not want to enforce promise. Held: Equitable estoppel, cannot revoke promise if
promisee foreseeably relied on the promise.
ii. G Siegel v. Spear (furniture insurance): (Note: before RS §90) D said he would store P’s
furniture for him for free and get insurance for him. P delivered the furniture, but D
never got the insurance. Warehouse burned down and P’s furniture with it. Held: There
was no bargained-for exchange. The promise to get insurance for the furniture was
gratuitous. However, b/c performance began, once the furniture was delivered, D was
obligated to obtain the promised insurance.
iii. G Seavey v. Drake: Father orally promised to give land to son. Son, relying on this
promise, made various improvements to the land, paid taxes, etc. Problem of statute of
frauds since contract of land must be in writing. But partial performance such as in this
case nullifies the two concerns that created statute of frauds (force parties to create
evidence for certain important transactions and if we don’t have written evidence juries
will reward people who get on stand and lie). Facts of the reliance can only be explained
by existence of the promise. Expenditures by son constitute equity/consideration of
promise, thus enforceable.
iv. G Kirksey v. Kirksey: Widow is invited by brother-in-law to come move into his house.
So she moves a far distance with her kids and moves in with him. After a while, he
moves her into a shitty little house and then kicks her out altogether. HELD: Promise
was gratuitous, consideration doesn’t matter here.
v. Hoffman v. Red Owl: Hoffman wanted a Red Owl franchise. Red Owl said Hoffman “just
needed $18k in capital.” The deal kept changing b/c Hoffman kept changing what he
would be contributing. These are more like preliminary negotiations. There was
encouragement and assurances, never a promise or offer, but is treated as an Option to
open franchise store.
a. Red Owl’s representations “just needed $18k in capital.” = promise
b. “Just needed $18k” + other assurances = reasonably induce Hoffman
c. Hoffman moved and spent $ = detrimental actual reliance
d. Hoffman layman and Red Owl big company = injustice
e. Invoke §90, nonetheless, saying that Hoffman reasonably relied on the
promise of an eventual offer.
f. Basically, Red Owl did something to harm Hoffman so Hoffman should
recover.
g. No courts follow Red Owl to the extent that it elides over the question of
whether there was a promise made by Red Owl
b. To rely on PE to enforce a promise, P must show that P reasonably relied on D’s PROMISE to
P’s detriment. RS §90 (Needs a promise!)
i. RS §90 PE can be invoked when a party is relying on a PROMISE to create a unilateral K
so there is performance.
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ii. RS §90 enforces promise at the start of performance. Under RS 90, beginning
performance automatically creates an option.
1. G Gimbel v. Baird: D subcontractor submitted a bid but realized that he
underestimated the amt of linoleum needed and withdrew the offer. P
submitted their bid using D’s bid and formally accepted two days after the offer.
HELD: there was never a promise to keep offer open so no case, and we
shouldn’t use section 90 (PE) because that was really designed for gifts
2. G Drennan v. Star: (enforced on an implied promise). Pretty much the opposite
of Gimbel I think
3. G Stewart v. Cendant: P’s husband was let go from company in reorganization,
she went to ask if it would be a problem if he got a job with a competitor.
Company said no, so she stayed on rather than finding a new company. Then
they started limiting her duties and wanting her to sign an agmt, which she
refused, and then was fired. Raz says this is a great §90 case b/c (1) Cendant
wasn’t making a gift (2) it was clear that there was no consideration b/c she
didn’t give up anything (her employment), but the promise was enforceable on
detrimental reliance (promissory estoppel).
4. Garwood Packaging v. Allen: P relied upon $2 million investment in failing
company. HELD: no promissory estoppel because there was no actual promise.
Reliance must be reasonable, and P should have known that since several
investors were not interested that there was a strong chance to deal wouldn’t
happen and they shouldn’t have relied on it. Saying deal would happen “come
hell or high water” doesn’t actually mean a promise.
5. Kolkman v. Roth: Oral agreement that P could live on land for free if he farmed
the land and raised the cattle. HELD: Normally falls within statute of frauds but
court allows promissory estoppel as an exception where there was (1) a clear
and definite promise, (2) that the promisor was aware that the promisee would
rely on the promise, (3) that the promisee suffered substantial detriment in
reasonable reliance on the promise, and (4) that injustice can only be avoided by
enforcement of the promise. *On final: say courts are split on this issue. If they
take it out of the statute and follow cases that allow it to take out, this is what
happened. If you follow cases that don’t, this is what is going to happen. *
B. EQUITABLE ESTOPPEL: (Defense) If a party makes a statement of fact (as opposed to a promise to do
something) and in litigation asserts a different fact, P is estopped from raising that defense. “You are
estopped from making that material representation”
a. Statement of fact must be about an existing fact, not a promise of future performance or an
expression of opinion.
b. G Prescott v. Jones: (Note: before RS §90) D said, “If I don’t hear back from you, I’ll give you
insurance.” Never got insurance. P didn’t say anything. Fire happened. Held: Insurance K
unenforceable. P Couldn’t rely on EE b/c insurance co. never made a statement of fact & silent
acceptance is invalid.
c. G Mahban v. MGM Grand Hotel: A provision in lease stated that either party had a right to
terminate within 180 days. A fire occurred and they had to close the hotel. MGM sent a letter,
“You can start getting ready” before 180 days was up. M incurs cost getting ready. MGM
invokes to back out of the lease. Held: Lease is enforceable. MGM is estopped from enforcing
provision b/c MGM’s letter implicitly said, “we’re not invoking” (factual representation) and M
detrimentally relied on that representation.
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PRECONTRACTUAL OBLIGATION
A. Liability for pre-contractual negotiations
a. Parties are negotiating a deal & have reached a prelim agmt -> Type 2 agmt
b. One party has made reliance investment based on the prelim agmt
c. The other party terminates negotiations w/o making good faith efforts - Type 2
B. Representations, not necessarily promises or offers, that (1) reasonably induce another party to (2)
detrimentally rely on and actually rely on will be treated as a binding option K to the extent that it is
(3) necessary to avoid injustice.
a. RS §87(2). An OFFER which the offeror should (1) reasonably expect to induce action (and
does induce) of a substantial character on the offeree before acceptance is binding as an option
K (cannot be revoked) (2) to the extent necessary to avoid injustice
i. Note - RS 87(2) and UCC 2-205 are used enforce a promise to not revoke an offer. Once
we have offer, if we have reasonable reliance, that offer is now an option contract. If
offeror tries to pull out, it’s a breach. Offeree gets damages.
ii. PE can be invoked on an OFFER, which means that the party has not started
performing.
iii. Not enforcing the offer, but that it cannot be revoked.
iv. Consideration is not required.
v. RS §87(2) is “squishier” in terms of when the offer is binding. It is only binding to the
extent that it is necessary to avoid injustice. – more latitude to decide the amt of
recovery
1. G Hoffman v. Red Owl: Hoffman wanted a Red Owl franchise. Red Owl said
Hoffman “just needed $18k in capital.” The deal kept changing b/c Hoffman kept
changing what he would be contributing. These are more like preliminary
negotiations. There was encouragement and assurances, never a promise or
offer, but is treated as an Option to open franchise store.
a. Red Owl’s representations “just needed $18k in capital.” = promise
b. “just needed $18k” + other assurances = reasonably induce Hoffman
c. Hoffman moved and spent $ = detrimental actual reliance
d. Hoffman layman and Red Owl big company = injustice
2. G Petterson v. Pattberg: could have been enforced under RS §87 b/c Petterson
relied on an offer.
3. G Drennan v Star Paving: mistake in the bid, too bad so sad
a. SubK bids on GenK = unaccepted offer
b. GenK used bid in his own bid. = unaccepted offer, but it is still binding
b/c SubK reasonably expected to induce action and GenK detrimentally
relied.
c. SubK told GenK that he made a mistake = tried to revoke, but it is not
revocable under 87(2) anymore b/c this offer is now a BINDING OPTION
K.
4. G James Baird Co. V. Gimbel Bros:
C. Remedies: Most cts enforce expectation damages since the adoption of RS §90 though a minority
award reliance damages. Cts have discretion to award lesser damages.
a. Expectation Damages: Majority. Awards lost profits.
i. G Drennan: Expectation damages were proper. (cost of work by replacement
contractor)
b. Reliance Damages: Minority. Does not award lost profits. Reliance is not a substitute for
consideration, but a whole different theory to award damages.
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i. G Goodman v. Dicker (franchise agmt): Dicker spent $ preparing thinking its application
would get approved for the franchise. Goodman said that it would give him radios.
Dicker Held: Reliance damages only; no profits were awarded.
1. Illustration 8 to RS §90 endorses this outcome.
ii. Hypo – A repudiates promise to give B good. Mkt price is $400. B incurred reliance in
$25. B can recover $25
iii. Exam note – if you have PE, you should argue both expectation or reliance damages. In a
world where there is promissory estoppel, where it is uncertain whether there would be
profits, reliance damages end up being the same as expectation damages.
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DETERMINING SCOPE OF WRITTEN AGREEMENT
EVIDENCE OUTSIDE THE SIGNED AGREEMENT – Parol Evidence Rule
PAROLE EVIDENCE RULE RS §213
RS §213(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent
with them (2) A binding completely integrated agreement discharges prior agreement to the extent that they
are within its scope.
The parol evidence rule determines whether parties can admit extrinsic evidence to interpret an agmt. There
are 2 levels Integration and Consistency.
A. Summary of Parol Evidence Rule: Exam trap – if the K expressly incorporates prior discussions (“per our
discussions”) every court will thus look at those discussions in ascertaining the terms of the deal is in
writing, Parol evidence is automatically applied so no need to discuss further. Parol evidence can always
be used to interpret terms in a K.
a. Integration
i. Completely Integrated – no terms are left out. Written agmt is a complete exclusive
agmt.
ii. Partially Integrated – some term is left out. Can introduce consistent add’l terms.
b. Consistency
i. Willston – look to written agmt 1st. Presumption that it is complete.
1. If term within the scope, then not admissible
2. If term not within scope, then collateral agmt. (but it cannot contradict the agmt).
ii. Corbin – look to extrinsic term and parties conduct to determine whether the written
agmt is complete.
1. If partial: if term is consistent, then admissible.
B. An integrated agreement is a writing constituting a final expression of one or more terms of an
agreement. RS §209(1) To determine whether there is an integrated agreement, the court applies the
parol evidence rule. RS 209(2).
a. Integration: There are 2 types of integrated agreement (1) a completely integrated agmt and a
(2) partially integrated agmt. RS §210
i. Completely Integrated (CIA)– a binding (i.e. enforceable) integrated agmt adopted by the
parties as a complete and exclusive statement of the terms of the agmt. RS §210
1. If it does not omit any consistent additional agreed term, parties have a CIA. RS
216
A. If the parties have a CIA, prior agreements to the extent that they are
within its scope are discharged. (Parties cannot introduce extrinsic
evidence that is within the scope of a CIA.) RS §213, Mitchell v. Latch
i. If the parties have a CIA, they cannot introduce consistent add’l
terms. RS §216
ii. Parol Evidence Rule will bar all evidence all prior contemporaneous
negotiations except where the matter is outside the scope of the
contract. (It is a collateral agreement.) You can show evidence of
collateral agreement.
B. If the parties have a CIA, evidence of prior agreements that are NOT
within its scope (collateral agreements) ARE admissible. “collateral”
means not within the scope of the agreement.
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i. Example 1 – A & B orally agree for the sale of land, hotel, and
furniture. The K only talks about the sale of land and hotel. (No
term re personal property).
1. If the K is binding + CIA as to the entire transaction -> agmt
as to furniture is discharged.
2. If the K is binding + CIA only as to the real property -> Agmt
as to furniture is admissible
ii. G Mitchill v. Lath: Icehouse. Laths owned a farm they wished to
sell. Across the road there was an icehouse. Mitchell, seeking to
purchase the land, demanded icehouse be removed. Laths orally
promised to remove it, in consideration for purchase of the
farm. Relying on the promise, Mitchill purchased the home for $8,400.
The house was never removed, and removing it was not stated in the
contract. Mitchill sues. Held: The Laths are not liable. Using the
Williston approach, the court asks whether one would expect external
evidence to be in the K. Since the answer w
1. There was a CIA. Oral agmt re icehouse not admissible. Test:
To show that there is a collateral agreement, there are 3
prongs:
i. Collateral: Yes, it is collateral.
ii. Must not contradict express or implied
provision of agreement: There was no
contradiction of express term, but implied
term.
iii. Must not ordinarily expected to be part of
the agreement: If such an agreement were
made, it would have been included in the
writing.
ii. Partially Integrated (PIA)– an integrated agmt other than a completely integrated agmt.
RS §209. Can introduce evidence of consistent additional terms. RS §216.
1. The parties have a PIA if the agreement omits a consistent additional term that is
(1) agreed to separately OR (2) that would be naturally omitted from the writing.
A. Naturally Omitted Terms: common if the writing is on a standardized
form that does not lend itself to the insertion of add’l terms e.g. leases
or conveyances
2. If the parties have a partially integrated agmt, all prior evidence that is
inconsistent with the final agreement is not admissible. (If parties have PIA, they
can introduce evidence of consistent additional terms)
A. Example 1 - A owes B $1,000. They orally agree that A will sell to B land
for $3,000 and that the $1,000 that A owes will be credited against the
price (so that B would only owe $2,000). They sign a written K that only
says that A will sell to B the land for $3,000 without any mention of the
offset of debt.
i. Written agreement is not CIA b/c it omits a consistent add’l agreed
to term (offset of $1k debt to the price of $3k) so evidence of the
oral agmt is admissible.
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B. Example 2 – A and B sign a standard form of written agmt for the sale of
goods. It has a blank spot ofr time and place of delivery that is left blank.
They orally agreed that it would be within 30 days at the buyer’s place.
i. Written agmt is not CIA b/c it omits a consistent add’l agreed to
term (within 30 days at buyer’s place0 so evidence of tha oral agmt
is admissible.
b. Two Schools of Thought: competing theories underlying how privileged the written agreement
is.
i. Corbin’s approach: Majority - Writing is just evidence of intent (bring everything in): it
would be up to a jury to decide what the actual agreement between the parties. Gives
weight to writing but comes to court w/ the presumption that people often do stupid
things and leave stuff out. If you think that some juries may be swayed by the equity in
the case, there’s a danger that juries will find things that never existed.
1. Look at the evidence. Considering that evidence, is the contract complete
understanding b/w the parties. If the court determines that the contract is not
intended to be the full and complete agreement, then we bring in the jury to hear
the oral evidence. Corbin is looking for actual agreement b/w parties. Did the
parties intend it to be whole thing?
2. UCC-202 “...may not be contradicted by evidence by any prior contemporaneous
agmt....” only applies to prior or contemp agmt. Can apply to written or oral
evidence. Parties will try this through integration clause. Ct then must determine
whether the parties intended it to be a complete and final agmt.
3. G Masterson v. Sine: Dallas and Rebecca Masterson owned land. They sell it to
Dallas’s sister and her husband, the Sines. Deed gives Mastersons an option to
repurchase at the same price anytime within the next ten years. Mastersons file for
bankruptcy and a trustee takes over the estate. Trustee wants to buy/sell land; general
rule that options of this nature can transfer to third parties. Mastersons remember oral
agreement that only they could exercise the option, as they wanted to keep land within
the family. Everyone agrees the oral agreement happened. Held: The trustee cannot
exercise the option. Using Corbin approach, Traynor examines evidence external to the
written agreement, which strongly suggests oral agreement was made.
A. Holding: (Corbin approach) Any parol evidence must be examined to
determine whether the parties intended the subjects of negotiation it
deals w/ to be included in, excluded from, or otherwise affected by the
writing.
4. Hatley v. Stafford: Stafford Farm agreed to rent Mike Hatley 52 acre property for
purpose of growing wheat. Stafford retained the right to buy out Hatley at a price not to
exceed $70 per acre for purpose of developing mobile home park. D exercises right, but P
demanded $400 claiming that was the fair market value of the wheat crop. P alleged
that the written agreement was not complete, as it was supposed to apply only for 30 to
60 days. Held: Following the Corbin approach, the court admits examines external
evidence to determine
A. Is there an integrated agreement?
i. Yes
B. Complete or partial?
i. Partial
C. Is it inconsistent?
i. No, following Hunt Foods; Luria Brothers goes the toher way
32
D. Court way swayed by the fact that it wasn’t drafted by lawyers and was just a
very short agreement
E. NOTE: some courts will find that limitation on condition (i.e. the 30-60 day
limitation) is inconsistent
ii. Williston’s approach: only NY - Writing is of seminal importance. We should give very
important weight on writing. The Court should simply keep its obligations within the four
corners of the document. Williston really privileges the writing. Comes into court w/ the
presumption that the writing contains the whole contract.
1. Looks at the contract itself:
2. Does not look at the evidence that the party is seeking to introduce. Nowhere in
the court’s analysis, should the court look at the proffered testimony.
3. Asks whether it would be “naturally” be in the contract. Does not ask whether
these parties intended to be in the contract.
4. Hypo 1- How would the ct determine what “jersey” means? Extrinsic evidence? In
some situations, we allow evidence of prior negotiations to come into court.
5. Hypo 2 - $400 v. $500?: you cannot contradict a writing.
6. Hypo 3 – jersey in a box Hovie and Raz agreed it was to be framed:
7. G Estate of Stanley Kauffman v. Rochester Institute of Technology Issue:
Whether the March 22, 2004, letter that all past and future works were “works
made for hire” (don’t belong to person who did them, but the person who
employed the person) [argued that Kaufman never really intended to give up
contract rights] Holding: follows Williston approach. Contract is unambiguous so it
is completely integrated. NY still follows Williston approach.
c. Merger / Integration Clauses: Clauses that say “there are no representations, promises or agmts
b/w parties except those found in writing.”
i. If the parties agreed to the merger clause -> it is likely that the written agreement is CIA.
1. If CIA -> consistent additional terms are excluded even if they would naturally be
excluded anyway.
2. If CIA -> merger clause doesn’t control the scope of the CIA
ii. G End Line Investors v Wells Fargo Bank Facts: written contract had no such provision
but had an integration clause. Application:
1. Integration: yes. Some courts think integration is just a clause. Some think it’s just
an intent for complete contract
2. Complete or partial: Complete
3. Collateral? No, it fails Mitchill requirements 2 (Must not contradict express or
implied provision of agreement) and 3 (Must not ordinarily expected to be part of
the agreement)
4. What about PE? Barred by integration clause
d. Inconsistent Terms: Whether or not the binding written agmt is partially or completely agmt, the
terms in the binding agmt superseded inconsistent terms of prior agreements. RS 213.
i. Parties cannot introduce evidence of terms to contradict the writing (as long as it’s a
binding agmt) RS 215
C. Writings don’t prove themselves. Agreements and negotiations prior to the adoption of the writing are
admissible to establish: RS 214
a. that the writing is not an integrated amt
b. that it’s either completely integrated or partially integrated
c. to interpret the meaning of the writing (to clarify an ambiguous term)
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d. to demonstrate evidence of fraud. (even w/ an integration clause)
2 (a) - Is it completely
integregated? Yes
(Continue)
RS §210
3 (a) - Is the add'l term
within the scope of the
written agreement?
Yes. Evidence NOT
admissible. All prior
agreements
DISCHARGED. RS 213
No. Evidence is
admissible.
1- Is there an integrated
written agreement? Yes
(Continue)
RS §209
2 (b) - Is it a partially
integrated? Yes
(Continue)
RS §210
3 (b) - Is the add'l term
"inconsistent" with the
written agreement?
Yes. All
INCONSISTENT prior
agreements are
discharged.
RS §215
No. Evidence IS
admissible.
RS §216
Step 1: Integrated Agreement – Is the writing a final expression of one or more terms of an agreement?
Step 2: How Integrated – Determine how integrated the agreement is. Does the writing omit any terms?
Step 2 (a): Completely Integrated – The writing does not omit any terms.
Step 3(a): Scope – Is the add’l term within the scope of the writing?
If yes, then evidence of the add’l term is NOT admissible. A binding completely
integrated agreement discharges prior agreements to the extent that they are within its
scope. You can’t introduce evidence of anything else within scope of the agreement.
If no, then you have a collateral agreement, meaning that the agreement is not within
the scope of the agreement. Evidence is admissible per Mitchell.
Step 2 (b): Partially Integrated – The writing omits consistent, additional terms that are (a) agreed to
for “separate consideration” or (b) would be “naturally omitted”
Step 3 (b): Consistency – is the add’l term “inconsistent” with the writing? If yes, evidence of
the add’l term is admissible to supplement the partially integrated agreement.
1. Hypo 1- How would the ct determine what “jersey” means? Extrinsic evidence?: In some situations,
we allow evidence of prior negotiations to come into court.
2. Hypo 2 - $400 v. $500?: you cannot contradict a writing.
3. Hypo 3 – jersey in a box Hovie and Raz agreed it was to be framed:
II. Legal Framework
a. UCC 2-201: SOF requires writing for certain types of contracts.
b. UCC 2-202: “...may not be contradicted by evidence by any prior contemporaneous agmt....” only
applies to prior or contemp. Agreement. Can apply to written or oral evidence. Parties will try this
through integration clause. The court must determine whether the parties intended it to be
complete and final agreement. This reflects the Corbin approach. Not many states follow this
approach, but NY follows Willston approach.
INTERPRETING AGREEMENTS (assume contract exists now)
The issue now is what does that contract mean? Parties dispute on what they mean. There are a couple issues:
(1) who decides what the contract means?
A. Certainty & Ambiguity
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a. General Context: Judge decides not by taking testimony but just using common sense – context
in which the contract was made and what was reasonable interpretation.
i. “A question of interpretation of a written agreement is to be determined as a question
of law.” RS 2 §212(2)
ii. Oral contracts – Jury decides what was said and how a reasonable person would
understand what was said. Hawkins - the issue was whether a reasonable person
understand the language to constitute a promise?
ii. Contracts in Writing: memorialized in writing. Judge decides
b. Judge/jury division of authority in interpreting contracts: Up to Jury to decide what the contract
meant. The meaning would have been interpreted by judge but the parties disputed whether
the statement was made and whether it was an opinion or a promise. Could only overturn if no
reasonable juror could find it.
D. Standardized Agreements: A party who makes regular use of standardized form of agreement does
not ordinarily expect his customers to understand or even read the standard terms b/c the purpose of
standardized agreements is to eliminate bargaining over details of individual transactions. RS 211
a. Standard terms may be:
i. Superseded by separately negotiated or added terms. RS §203
ii. Interpreted against the draftsman RS §206
iii. Subject to the overriding obligation of good faith RS §205
iv. Subject to the power of the court to refuse to enforce an unconscionable K or term RS
208.
b. If the adhering party would not have accepted a K if he had known that the K contained a
particular standard term, that term is not a part of the agreement. Cts can look to prior
negotiations or inferred circumstances. RS §211
i. E.g. the term is bizarre or oppressive or the adhering party never had an oppty to read
the term or if the term is hidden.
ii. E.g. A delivers good to B and receives a receipt from B which has terms in it. A accepts it
and is bound whether or not A reads it.
iii. E.g. A checks in coat and receives a receipt that is 3 inches long and 2/45 inches wide. It
has “K” written on it but the terms in small print. A does not read it or know of term
until later. Terms are not part of agmt.
E. Rules for Interpretation: (go in order by probative value) (1) Course of performance (2) Course of
dealing (3) Trade Usage.
a. Judges look toward parties’ conduct, including their business relationship and familiarity of
each other’s practices, leading up to the promise.
i. G Weber Manufacturing Technologies, Inc. v. Plasan Carbon Composits, Inc. (lengthy
business relationship and familiarity of D’s capabilities). There is a difference b/w
opinion and promise (Hawkins v. McGee – doctors often give opinions. Not a promise).
Not everything is a promise.
1. “trade puffing” statement does not create express warranty, it’s an opinion. Prof
doesn’t like the term because it sounds like you’re lying, thinks it’s more of a
neutral thing
ii. Under UCC 2-313 Express Warranties.
b. Course of Performance - (this is the best way) How did the parties treat the term at issue
during the life of the contract? The parties’ behavior gives us strong evidence as to what that
term meant. UCC 2-202; RS 2d §202(4) (look these up)
i. E.g. Your lack of objection the first 5 times... you are changing your interpretation midcontract. Failure to object means you get stuck with that interpretation.
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ii. UCC 1-103(a): Using parties’ prior actions w/ each other. And if conflict between A and
B, you go with A.
c. Course of Dealing - Sequence of Conduct concerning previous transactions b/w the parties to a
particular transaction that is fairly to be regarded as est. a common basis of understand for
interpretation their expressions and conduct. UCC 1-103(b); RS 2d §202(5) (look up)
i. Look at the same 2 parties but ask not how they interpreted but rather how did they
interpret that term/provision in prior contracts.
1. If in prior contracts you treated as meaning X, you meant the same in the
subsequent contract.
d. Trade Usage - if none of the ^. Can still be used but not as strong or probative as the course of
performance or dealing. You can always include trade usage but if there’s a conflict, course of
performance or dealing will control. People in a given trade usually speak in a specialized
vernacular. We should interpret contract considering that vernacular. Cts look toward industry
standards. UCC 2-202; RS 2d §202(5) (look up)
a. UCC 1-303 (c) Trade Usage *Note: rejects Frigaliment. NY standard. Doesn’t have to be
universal.
b. UCC 2-202: Terms set forth inwriting may be explained or supplemented by course of
dealing or usage of trade or by course of perforamnce
c. G Frigaliment Importing: Trade usage must be universal. Chicken meant young
chicken. While it is easy to adopt this rule, it is often difficult to determine what
constituted trade usage. In this case, both parties put on evidence.
d. G Flower City (newcomer wasn’t charged w/ trade usage)
F. Plain meaning v. purpose:
a. Lease provides that shopping mall owner will not sign another lease to allow any business into
the mall that generates more than 10% of its revenues from “sandwiches.” Lessee runs a Panera
store. Lessor leases a space to Qdoba. Are tacos, burritos, and quesadillas “sandwiches”? Under
plain meaning, no. But if purpose was to avoid competing for people who want filling stuffed
between a layer of carb on each aide, then maybe it fills the same role.
b. Hegel v. The First Liberty Insurance Corp.: an unambiguous term will be given its plain meaning
in the context of the entire contract. “Structural damage” did not need to be defined as
“physical damage” because that’s the only type of damage a home can withstand, so that
means “physical damage” is not the correct definition. So pick the one that actually makes
sense in the plain meaning; here, “damage that impairs the structural integrity of a building.”
Words in a contract cannot be superfluous.
G. Good Faith and Fair Dealing – Common law courts read every contract as if each party promised to act
in good faith during the course of their contractual relationship. You can find duty of good faith in two
places (1) RS §205 and (2) UCC 1-304. The duty to operate in good faith IS THE RULE. You can try to
define what it is in your contract, but you cannot contract away good faith – this would be considered
void. It doesn’t matter whether what the source is.
a. Default Rule: There is a default duty of Good Faith and Fair Dealing in all contracts. General
duty to perform contract in good faith. There is no obligation prior to forming a contract, unless
you’re in a Type 2 agreement. Before a Type 2 agreement, there is no contract. It is the prelim
agreement that creates the obligation.
i. RS §205: Duty of Good Faith and Fair Dealing. Every contract imposes upon each party
a duty of good faith and fair dealing in its performance and its enforcement.
ii. UCC 1-304 Duty of Good Faith. Every contract or duty with the UCC imposes an
obligation of good faith in its performance and enforcement
b. The obligation to act in good faith extends even after parties have signed their contract.
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i. G Market Street Associates Ltd. Partnership v. Frey: 25-year lease. P 34 entitles lessee to
request lessor to finance costs of construction of additional improvements of at least
$250,000. Lessor agreed to give reasonable consideration to providing the financing, and both
shall “negotiate in good faith.” Option for lessee to buy if not agreement on financing. Lessee
write letters requesting financing but fails to mention P34. Gets no response. Then requests buy
back. Posner remands, suggesting this may have been bad faith.
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RELIEVING PARTY FROM PROMISE
MISREPRESENTATION & OBLIGATION TO DISCLOSE
Assume that we had offer, acceptance, consideration, know what the contract means but now we must ask
whether there was a defect in the bargaining process that allows a party to get out of the deal (avoid the
contract or rescind the contract).
MISREPRESENTATION
I.
Misrepresentation: Misrepresentation can be a ground for rescission of contract or damages in tort.
Not liable for opinion. If there is a misrepresentation, as a matter of contract law, what the other party
gets is the right to avoid or rescind a contract. K goes away and parties are put in the same position. If
$ exchanges hands, P who gave up $ can recover under theory of restitution.
a. Was the representation an opinion or a promise? Opinion or Promise? Promise: did people
rely?
b. Three Distinct Legal Theories: (1) Negligent or Innocent Misrepresentation (2) Intentional
Misrepresentation (3) Breach of Promise.
i. Negligent Misrepresentation that renders the contract voidable. RS §§ 159-173. Remedy
is rescission.
1. G Johnson v. Healy: Builder (Healy) sells home to buyer (Johnson). During
negotiations, Healy stated that the house was “made of the best material, that
he had built it, and that there was nothing wrong with it.” Prior owner had put
the improper fill in. Healy didn’t know about the improper fill. Johnson bought
the house and wanted to maintain COA against Healy under what he said. Judge
Peters held that P could not collect tort damages because the misrepresentation was
innocent. However, she used UCC 2-313(1) to convert the misrepresentation into an
express warranty, allowing P to collect expectation damages.
a. “Made of the best material”: Opinion or misrepresentation?
i. RS §168 re when does an assertion become an opinion? You can’t
be liable for your opinion.
1. Held: An opinion.
b. “There is nothing wrong with it”: misrepresentation? Maybe. Is it
fraudulent or innocent? It is innocent. Can’t get tort damages.
i. This is a material, innocent misrepresentation. This created a 3rd
type of liability by taking what is arguably an opinion and turns it
into an express warranty. Assuming that this is a statement of
fact, you cannot get tort damages because this becomes negligent
misrepresentation. We do that in cases of sale of goods UCC 2313. Ct wants to extend that concept outside of the UCC. Ct does
this and allow Johnson to recover expectation damages. Most
other courts probably won’t do that.
c. Getting Expectation Damages, borrowed from UCC: P wants expectation
damages, the value of performance over diminution of market value.
Court finds that the proper measure of damages is diminution of market
value.
i. In the sale of goods: UCC 2-313(1) converts affirmation of fact or
promise re goods that is the basis of bargain becomes an express
warranty. In other words, UCC 2-313 turns all representations into
warranties. It is taking a representation (statement of fact) and
38
turning into a warranty (a promise). Here, the Court cites to UCC
even though this does not have to do w/ sale of good because all
you can get under contract law is rescission (but P doesn’t want
rescission). Normally, you get damages only in tort. (In tort law,
we look at the degree of culpability on tortfeasor’s part. You can
recover damages for intentional misrepresentation. You can also
recover damages in cases of negligent misrepresentation, but it is
very hard to recover under innocent misrepresentation.)
ii. Intentional Misrepresentation (Tort of Misrepresentation): generally, no action for
innocent misrepresentation. Remedy is tort damages
iii. Breach of promise. 2-313, Remedy is expectation damages.
1. LAUSD v. Great American Ins. Co. : School district did not disclose condition of
stucco (contractor had to replace rather than repair).
a. Can’t be misrepresentation because contractor is not seeking to rescind
the contract, he wants compensation for extra costs to replace the stucco
b. Best treated as breach of warranty. Failure to disclose as a promise that
you didn’t know anything about the stucco. Must pay expectation
damages
II.
Obligation to Disclose: There is no general duty to disclose during negotiations.
a. There is no duty to disclose the obvious.
i. G Case re painting.
b. [General Rule] There is no duty to disclose information to the opposing parties during
negotiations.
i. There is no duty to disclose (not a misrepresentation to fail to disclose) when both
parties have equal access to information. There is no privilege to lie.
1. G Laidlaw v. Organ
a. Facts: Feb. 19, 1815, Organ learns the treat of Ghent has been signed.
The treaty is important b/c it can and will increase the value of tobacco.
The blockade will go away, which opens the market. Organ knows that
once this becomes public knowledge, the price will go up. Organ goes to
Laidlaw and purchases tobacco. The news of treaty becomes public.
Laidlaw becomes upset and doesn’t deliver to Organ.
b. Issue: Did Organ lie? No.
c. Holding: Organ did not have the duty to disclose to Laidlaw that this price
will go up.
d. Reasoning: Organ cannot lie, but this is not what he did.
c. [Exception to the general rule] are when the parties are not dealing at arm’s length. When the
parties are not dealing at arm’s length, the obligation to disclose is necessary to correct a
misimpression that you created and when required by fair dealing.
i. There is a heightened disclosure obligation when the parties have a fiduciary or
confidential relationship. You must treat the other party as if you are the other party.
1. Fiduciary Relationship: duty to disclose to treat each other as if they would want
to be treated. Usually in business relationships. E.g. Principal/subsidiaries.
2. Confidential Relationship: There is a heightened disclosure obligation when the
parties have a “confidential” or “special relationship,” familial relationship,
which may extend to duty to profit.
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a. G Jackson v. Seymour: 3rd party offers $275 for 30 acres for Seymour’s
land. Jackson asks Seymour to buy her acres. Jackson agrees and pays
$275. Jackson relied on her brother, having confidence in him. At the
time, neither party knew the true value of the land, which contained
valuable timber. “A short while” later, Seymour discovers timber on
Jackson’s former land, and begins to harvest it a year later. Jackson finds
out and sues.
i. Misrepresentation or Fraud on part of brother: Court rescinds
contract. No actual fraud, but constructive fraud due to close
relationship and heightened duty to disclose. Failure to disclose
about the value of the thing being bargained for after the contract
has been made.
ii. Variations on Jackson: Can Seymour get out of the contract?
1. What if the facts were the same except the parties were
not related: No fraud, Seymour cannot get out of contract.
2. What if the parties are not related, Seymour knew of the
timber but made no statements re existence of timber? No
fraud, Seymour cannot get out of contract.
3. Parties are related, Seymour knew of the timber but did
not disclose: Probably fraud, Seymour can get out of the
contract. When you have a familial relationship, you may
have heightened disclosure obligations. With familial
relationships, there is an assumption that your family is
not out to screw you.
b. RS §173: If a fiduciary makes a contract with his beneficiary relating to
matters within the scope of the fiduciary relation, the contract is voidable
by the beneficiary, unless
i. it is on fair terms, and
ii. all parties beneficially interested manifest assent with full
understanding of their legal rights and of all relevant facts that the
fiduciary knows or should know.
d. Sellers, but not buyers, may be a duty to disclose private information that is held exclusively by
the seller.
i. G Walt Disney Example: Walt Disney wanted to build a theme park (the happiest place
on earth). Disney used third parties. Bought land from farmers and did not disclose its
intent to build the theme park. After the land is purchased, the farmers sued for
rescission on the grounds of failing to disclose. Held: Farmers lost. Disney Co. does not
have to disclose information (i.e. building theme park) to the farmers.
ii. G Home not so sweet: Owner places home for sale. Owner did not disclose to buyer
that there was termite damage in the basement. Owner sues for rescission on the
grounds that there was no disclosure of termite damage. Held you do have a duty to
disclose. Failure to disclose will allow other party to rescind the contract.
1. Seller’s information: There is private information held exclusively by one party.
But in this case, it is the seller’s information that is withheld whereas the Walt
Disney example, the private information was held by the buyer.
e. [Exception] In the limited situation of buying and selling house, the seller does have a duty to
disclose the latent (thing you can’t see) defects to the buyer. How far the courts will go to push
that duty to disclose are split.
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i. Legal Framework:
1. RS §159: “A misrepresentation is an assertion that is not accord with the facts.”
2. RS §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
3. RS §161: A fact that you know is equivalent to the assertion that it does not exist.
Failing to disclose the fact that you have termites is the equivalent to saying that
there are no termites in the following cases: only where he knows that the
disclosure of the fact is necessary to present some previous assertion from being
a misrepresentation or from being fraudulent or material (it must be a big deal).
a. E.g. selling homes and defects, bank loans.
4. What happens if you do fail to disclose? RS §264(1) provides the remedies. It
says that the contract is voidable.
5. RS §162:
a. (1) A misrepresentation is fraudulent if the maker intends his assertion to
induce a party to manifest his intent and the maker
i. (a) knows or believes that the assertion is not in accord with the
facts, or
ii. (b) does not have the confidence that he states or implies in the
truth of the assertion, or
iii. (c) Knows that he does not have the basis that he states or implies
for the assertion
b. (2) a misrepresentation is material if it would likely induce a reasonable
person to manifest his assent, or if the maker knows that it would be
liekly to induce the recipient to do so
6. Rs §164: A misrepresentation make a contract voidable if
a. (1) a party assented due to reasonable reliance on either a fraudulent or
material misrepresentation by the other party or
b. (2) a party assented due to reasonable reliance on either a fraudulent or
material misrepresentation by a third party, unless the other party to the
transaction in good faith and without reason to know of the
misrepresentation gives value or relies materially on the transation.
MUTUAL AND UNILATERAL MISTAKE
To get out of K under either mutual or unilateral mistake, the party must show:
1. the mistake at issue went to a basic assumption;
2. that the mistake had a material effect; and
3. the party seeking to avoid the K did not avoid risk of loss. (Was he unreasonably risky?)
I.
Mutual Mistake Doctrine: Shared belief mistaken about the substance of the agreement.
a. Where parties share a mutual belief about a substantive term of the agreement that is
mistaken, the K is rescindable.
i. G Sherwood v Walker. “Replevin for a cow.” Sherwood wanted to buy one of Walker’s
cow. Seller thinks that cow was barren. Cow was actually 3 months pregnant. Walker argues
that he doesn’t have to sell the cow b/c the parties had made a mutual mistake and the
actual item changes the substance of the contract. Both parties thought the cow was
barren. (Though dissent that Sherwood did not know she was pregnant but thought that
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b.
c.
a.
a.
she could be made to breed). Both parties had a bilateral contract. Court strikes down
contract on gorunds of mutual mistake.
1. Sherwood didn’t want to argue unilateral mistake because he didn’t want to be
accused of lying, plus it would be hard to prove.
2. Note this is a different mistake than in G Raffles (two beliefs about two
different ships. They were talking about different things) but here there is a
shared belief that was a mistake (they were talking about the same thing, but
both mistaken).
3. “Substance of the thing”
ii. Hypo: Raz sells 100 shares of stock at $100/share. Amazon offers $200/share. Can Raz
rescind the contract on the grounds of mutual mistake? No. We understand that Raz took
the risk that things might happen to make more value. Unforeseen risks.
1. The question is who bears the risk that the parties are mistaken about the fertility
of Rose, the cow?
The mistake must be material.
i. RS §152(1): Mistake has a material effect (must affect the exchange) and basic assumption
(this must be a big deal). It is voidable
Conscious Ignorance Exception: K is rescindable when parties make a mutual mistake UNLESS
the adversely effected party bore the risk of loss of the mistake.
i. Under RS § 154: a party bore the risk when:
1. When the risk is allocated to him by agreement of parties.
2. When he is aware that he has “limited knowledge” but still contracts anyway
3. Kull- never consider purposes. Sherwood v. Walker was correct since Walker was
still in possession of the cow. If Sherwood had already taken the cow, then he
would be able to keep it.
4. Posner- which party is better able to protect against the loss by finding out about
the loss in the first place
G Eisenberg v. Hall: P bought a bust and warrior from seller, thinking that they are old. P was a
“self-proclaimed” expert. P argues mutual mistake and wants the K to be rescindable. “We both
were mistaken as to a basic assumption of the contract. The mistake has a material effect on
the contract.” Issue: Who bears the risk here? Holding: based on the facts in the record, there is
enough here to support that Buyer consciously ignored the risk of the mistake (had bought stuff
from him before that turned out to be forgeries). As a matter of the law, the court cannot say
that there was a mutual mistake.
i. Normally, the seller has the risk (When you are selling you have
better access to the information).
ii. But the issue here is limited knowledge. Buyer bears the risk of
loss when you act and you know you don’t have enough
information.
iii. P did this several times before.
a. “Limited Knowledge” Application to Sherwood: what if sold as is, then
the risk is to the seller. Walker is aware that he has a limited knowledge
but treats it as sufficient.
5. When it is “reasonable [for the court] to [allocate the risk to him]”:
Two approaches to when it is “reasonable” to allocate risk:
i. Kull approach– Never reasonable for the court to allocate risk.
Law should leave well enough alone. Walker should win because
he finds out Rose was pregnant but still possesses the result. Let
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II.
the gains fall where they are. Applauds the outcome. Had
Sherwood gotten control over Rose, Rose should stay with
Sherwood. Sherwood has possession, leave things where they are.
ii. Posner approach – Which party is better able to protect against
the loss. You should fill gaps in contracts the way parties would
have filled them. The party better available to protect against the
loss i.e. to find out the true state of Rose’s fertility should bear the
risk of loss. “Reasonable” Application to Sherwood: In Sherwood,
which party is better able to find out that Rose is with calf?
Walker. He is better able to figure out b/c he has possession of
Rose.
Unilateral Mistake: Only one P made a mistake, you must add the requirement that the K was
unconscionable:
1. the mistake at issue went to a basic assumption;
2. that the mistake had a material effect; and
3. the party seeking to avoid the K did not avoid risk of loss.
4. enforcing the K would be unconscionable.
a. When only 1 party makes a mistake, basic assumption that has a material effect AND
enforcement of it would be unconscionable, or the other party reasonably knew about the
mistake or caused it, then the K is rescindable.
i. RS §153 Unilateral Mistake: Where a mistake of one party at the time a contract was made
as to a basic assumption on which he made the contract has a material effect on the agreed
exchange of performances that is adverse to him, the contract is voidable by him if he does
not bear the risk of the mistake under the rule stated in § 154, and (a) the effect of the
mistake is such that enforcement of the contract would be unconscionable, or (b) the other
party had reason to know of the mistake or his fault caused the mistake.
ii. Hypo- Raz sees jersey “On sale, $35” (Hovie meant $350). Raz goes to clerk, hands the
jersey, and clerk charges $35. Hovie wants to undo the sale. Yes, undo. There is no mutual
assent because Hovie never intended to make the contract for $35.
1. Note: If Raz didn’t know the market price, then you have mutual assent. There
would be a contract in this case because Raz had no reason to know of the
mistake. The seller must try to get out under unilateral mistake.
iii. G Elsinore Union Elementary School v. Kastorff: General contractor makes a clerical error
in computing its bid. Error results roughly 10% of the bid. School asked whether he was sure
that it was correct. He didn’t have his papers with him. He said yes but found out later that
it was a mistake. He tells school board of mistake before it has released other bidders.
Board refused to release him. Held: K is rescindable. Enforcing K is unconscionable b/c
board could have rectified the situation w/o any harm to anyone. Had the board relied (e.g.
released all other bidders and D wasn’t willing to do work), it would have been different.
This is not a situation like Hovie situation i.e. board known or should have known, the Court
is simply saying that on these facts, it would be unconscionable to force him.
iv. G Seymour:
1. Why wasn’t Seymour a mutual mistake case? The sister filed an Amended
Complaint trying to add the complaint that there was a mutual mistake. Had she
been successful, she would have been successful b/c (1) no timber on the land
was a basic assumption of the K. (2) timber caused land to be 10x more valuable
(2) there was a confidential relationship here. The risk of loss should fall on the
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brother. He was a farmer, business man, so obvi he was better equipped to
calculate risk. The Court actually found constructive fraud; didn’t want to
overturn lower ct’s decision for not allowing the amendment of the complaint.
This is a better case for mutual mistake rather than fraud.
v. The key Q is how to decide who bore the risk of loss:
1. Kull said let’s not think about this bc the parties did not anticipate that they
would mistaken this. So leave things the way they are (and allow the windfall
gains to occur)
2. Posner says we want to create incentives to avoid loss in the first instance.
Nobody benefits when we have a mutual mistake so let’s put the risk of loss on
the party best able to figure out the state of affairs. This person is usually the
seller bc seller would be in a better state.
DURESS
generally – “improper threat” some defect in bargaining process such that one party can argue “I should get
my money back.
A. Elements Required to Prevail Under Duress: (1) Deprivation of Free Will (2) No Other Reasonable
Alternative (3) Cannot rely on normal contract remedy by accepting breach
a. No reasonable option: P claiming duress must show that he has have no meaningful option
(cases talking about free will, no reasonable option.
i. To rely on “duress,” the injured party must show that it was the other contracting party
who caused the duress, not the surrounding circumstances.
1. Zuckerman v. Metropolitan Museum of Art (The Actor): Leffman’s owned
significant assets. Nazis forced sale of house, business, and real estate to entity of
gov. Zuckerman’s keep Picasso painting, sell it for less then it was worth to get out of
Europe. Although they were under duress, the court held they could not recover
because the duress was not inflicted upon them by the counterparty
b. Improper threat: P claiming duress the lack of meaningful option stemmed from an improper
threat made by the other side in the K.
i. §RS 175(1) If a party’s manifestation of assent is induced by an improper threat by the
other party that leaves the victim w/ no reasonable alternative, the contract is voidable
of the victim. Issue is “BY THE OTHER PARTY” here.
ii. RS §176. What counts as an improper threat? (1) tells us what kinds of threats are per
se improper. E.g. crime, tort, criminal prosecution, use of civil process and the threat is
made in bad faith or threat is a BOD of good faith and fair dealing. (2) type of threat that
leads an unequal bargain.
B. Sufficient Consideration vs. Adequate Consideration:
a. Adequate Consideration: inappropriate question posed.
b. Sufficient Consideration: necessary question posed.
c. Minimal consideration does not invalidate a contract.
i. G Batsakis v. Demotsis: (drachmas): Demotsis promises to pay $2k at 8% interest at end of
war in exchange for 500k drachmas. Demotsis claims he was under duress resulting from
war. Court upholds K. Will not investigate value of exchange, as ppl make this up in their own
minds. No improper threat that infringed upon Demotsis’s free will was made by the
counterparty. Moreover, not clear it was such a bad deal. The exchange rate b/w drachma
and dollars was 139:1 so there was rapid inflation in Greece. She used it to buy 5 cans of
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olive oil, so she got a shit ton of calories. Courts are reluctant to look at sufficiency of
consideration and are leery of substituting their judgment after the fact.
ii. G Embola v. Tuppela (Alaska): Found sufficient consideration, even though the chances
of the bargain were unlikely. He was of sound mind, so was not made under duress.
COERCIVE RENEGOTIATION
Problem of Renegotiation: A situation can arise when one party makes a K where it exposes itself to behavior
by OP.
A. A K that is renegotiated through coercion is unenforceable.
B. When is the renegotiation coercive? Is the party trying to extort? Or is the party adjusting for changed
circumstances?
a. Old common law: modification to K is new promise so parties needed “fresh consideration.”
i. Petterson v. Pattberg – the deal there was “if you pay me the $, I will take $780 off of
the mortgage. Ct said that there was no acceptance of the offer but assume there was
acceptance – could there have been an argument that there was no consideration for
the promise to accept to mortgage -$780 bc you are already under obligation to pay the
mortgage. You changed a small detail.
b. UCC 2-209(1): Says the relevant Q is whether the modification done in good faith. (But it is hard
to be asking in good faith where nothing has changed so there must be changed circumstances
to justify renegotiating.)
i. No consideration is required for the new negotiation. “(1) An agreement modifying
a contract within this Article needs no consideration to be binding.”
c. UCC 1-304: Every K under UCC imposes an obligation of good faith in its performance and
enforcement. It is hard to imagine where there would be good faith to modify where there is
no changed circumstance....
d. RS § 89. Says the relevant Q is whether the modification was made in response to changed
circumstances and whether the modification itself was done in good faith. “A promise
modifying a duty under a contract not fully performed on either side is binding
i. (a) if the modification is fair and equitable in view of circumstances not anticipated by
the parties when the contract was made; or
ii. (b) to the extent provided by statute; or
iii. (c) to the extent that justice requires enforcement in view of material change of position
in reliance on the promise
C. Old Common law - Coercive renegotiation vs. Mutually Beneficial: relies on consideration as
justification. There is no sufficient consideration where A coerces the other B to agree to a promise
that A is already legally bound by. You cannot promise what you already promised to do. There is no
“consideration” b/c taking advantage of a party by coercing does not confer any new benefits.
a. G Alaska Packers Ass’n v. Domenico (remote island and fishermen): Alaska Packers was fish
trust. Contract fishermen for $50 plus 2 cents per fish. Fisherman arrive in Alaska. Demand new K for
$100 plus two cents a fish. APA agreed b/c they could not get other workers there. Court said no new
consideration for new contract and was thus void.
i. This argument is stupid because you can easily invent new consideration
ii. Today, the court would just say the renegotiation was done in bad faith
iii. Is the modification the result of changed circumstances and is the new modification
fair? Maybe. the nets are important.
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b. G Linegnfelder v. Wainright: There was no new contract b/c D was already bound to design
and supervise and was not doing anything different or new in the new K. There was no
consideration because P did not receive any new benefit. Agreement was made b/c D took
advantage of P’s circumstances.
D. Economic Duress - To prevail under economic duress, the injured party must show that in addition to
being deprived of free will and reasonable alternative, it could not have accepted the breach and sued
for damages (no actual choice but to agree).
a. G Austin Instrument Inc. v. Loral Corp. (Navy K for special parts): Loral receives $6 million K from
Navy. Austin receives a subK for 23 parts out of 40. Loral receives a second K from the Navy. Austin
wanted to be subK’d for all 40 parts in the second K. Austin then threatened that if it did not receive
subK for all 40 parts and an increase in price for the parts in the first K, it would cease delivering the
parts under the first K. Loral seeks alternatives but can’t find any. Can’t sue because they need the parts
or they would lose contract. Court finds this is economic duress.
b. G Merry Gentlemen, LLC v. George and Leona Productions, Inc. (Movie release): Dispute over
which cut to be shown at Sundance. K gave right to MG to decide, at least according to MG. Keaton
threatens not to go to Sundance if his cut is not shown. Court held this was economic duress. Keaton
was contractually obligated to go to Sundance, and once he refused, MG had no choice but to
renegotiate because otherwise the film would not be shown at Sundance. Unlike fish case, the
damages are very speculative so even more incentive to agree to the modification. That
agreement was a product of duress. Never a trial here.
c. G Smithwick v. Whitley (possession of land): Agreement to an increase in price per acre after P
possessed the land and improved upon it was not made under duress because P could have
sued for specific performance - there was an alternative here.
d. G Wolf v. Marton Corp. (“improper” threat to sell home): Threat to sell home to undesirable
purchaser, though within the buyer’s legal right, can be deemed as wrongful such it induced
duress b/c it was specifically selected for the sole purposed of injuring the other party.
E. Examples
a. Hypo 1 – H agrees to build R’s den for $100,000. After H has spent $50,000, R says, “I’ll only pay
$80,000. I know you won’t sue me because your attorney’s fees would be more than $20,000. H
agrees and and completes the den. R pays H $80,000 and H sues for $20,000. Yes, renegotiated
under duress. H should recover because R was not acting in good faith.
b. Hypo 2 – H agrees to build R’s den for $100,000. Next recession hits. R says, “I can only pay
$80,000. H agrees to new price. H completes the den. R pays H $$80,000. H sues R for $20,000..
In 1st situation, Raz was taking advantage of the fact that H could not sue. He had no
alternatives. Nothing changed. Hovie needed money now. But here, there was a change:
changed circumstances. The world looks very different (doctrine commercial of impracticability
is NOT THIS CASE). H and Raz in response to change renegotiated the terms of K in good faith.
This will be upheld. See RS §89.
c. Austin v. Loral: When Loral let out bids. Austin threatened not to form K. Would result in Loral
not finishing its K w/ Navy. In both cases, while Alaska packers could sue fishermen and vice
versa, that option is likely not efficient. If Austin breached its K with Loral, it would not be liable
for damages that Loral would have to pay for breaching its own K. So the remedy is not helpful.
d. Packer –– fishermen negotiated a market wage and could have insisted upon more. When they
get to pyramid harbor, they can threaten not to work and extort. the common law would say
when there’s a new promise made to adjust an old K, the q is whether the other side given
“fresh consideration” in exchange for that promise? This is a stupid test b/c it is easy to create
consideration when we want to (simply have to alter the conditions a little bit.)
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UNCONSCIONABILITY
We have seen cases where consent will not be respected b/c it could have procured by fraud or
misrepresentation or a product of duress or mutual mistake. In all these situations, there something was
wrong in the bargaining process. Here, unconscionability is another doctrine.
A. Ks are rescindable on the grounds that the K is “unconscionable.”
a. RS §208: unconscionable. (but doesn’t define what unconscionable is). “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.”
B. The doctrine of unconscionability has both a (1) procedural and (2) substance aspect:
a. Procedural unconscionability: Was there a problem with the bargaining itself? Not enough to
invalidate K by itself. Needs to be something wrong w/ the substance.
i. G Waters v. Min Ltd. (annuity policy, drugs): Agreement to sell annuity policy, worth
$189,000 cash or $694,000 over the life of policy, for $50,000, of which P received
$18,000. Coerced by boyfriend, who got her on drugs, and acted as agent for
defendants without telling her. Procedurally and substantively unconscionable b/c there
was a gross disparity in consideration (D took no risks and P had no advantages +
disparity in values) and circumstances surrounding the agreement (drugs, maxed credit
cards, no counsel). Procedure here seems problematic. Not enough to set aside K. But
since substance was unconscionable as well, this was not enforceable.
1. BF and Waters – confidential relationship. You cannot take advantage of
someone. He didn’t tell her that he was acting as an agent of the D. Should have
the court gone through other doctrines? Like fraud?
ii. RS §177: Undue influence. If party’s manifestation of assent is induced by undue
influence by the other party, contract is voidable by the victim. IF party’s manifestation
of assent is induced by a nonparty to the transaction, contract is voidable by victim
unless other party to the transaction relies in good faith and without knowing about the
undue influence either gives value or relies materially on the transaction.
b. Substantive unconscionability: Does the substance of the K unreasonably favor one side? Most
courts think what makes a good K.
i. G Batsakis: $2000 v. $25: seems bad at first blush but she was able to purchase 5
gallons of oil with it. Maybe it wasn’t a bad deal after all. “Go look for bad deals” not
ideal. Still any modicum of power where things are really bad. (Running through other
doctrines – duress? Failure to disclose? Misrepresentation? And can’t invalidate yet.
Then unconscionability. Takes in)
1. Exam tip: through unconscionability in the end. Do not start w/ unconscionability.
ii. Arthur Murray Dance Studios: 2000 hours for $ - no one would ever use the hours for
the dance studio: Weren’t lied to. Nothing was misrepresented. NO duress. They were
taken advantage of.
B. Elements Required to Rely on Unconscionability: There is unconscionability where there is (1) an
absence of meaningful choice of party 1 and (2) the terms are unreasonably favorable to P2.
a. “Meaningful choice”: examinee all the surrounding circumstances (1) gross inequality of
bargaining power and (2) manner -> knowledge of terms in such a way that the party as a
reasonable opportunity to inspect any hidden material terms.
i. Where there is little bargaining power -> little choice.
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ii. Where there is knowledge of terms -> objective manifestation.
b. “Unreasonably favorable”: consider terms in light of circumstances. Look at general
commercial background and needs.
i. G Williams v. Walker-Thomas Furniture Co. (cross-collateralization clause re furniture):
When determining what is “unreasonably favorable,” the courts should look at whether
the terms are so extreme as to appear unconscionable according to the mores and
business practices of time and place. Walker-Thomas Furniture is a rent to own
store. Williams had purchased household items in the past and had a $164 balance. Purchased
stereo for 514.95. Contract included a cross-collateralization clause, in which everything
Williams bought could be held as collateral. Under DC law, there was a $300 exemption from
levy. But by signing clause at end of K, Walker could get hands on everything without
exemption. Court held this to be unconscionable (these clauses are now outlawed by fed gov).
1. Also unconscionable because store knew she only got $250ish a month from gov
to support herself and her 7 children but sold her a $500 stereo anyways.
c. RS §2-302: If the court find the contract or any clause unconscionable then the court may
refuse to enforce the contract, or may enforce remainder of contract without unconscionable
clause, or may limit the application of any unconscionable clause to avoid any unconscionable
result. Parties will be afforded a reasonable opportunity to present evidence as to its
commercial setting, purpose and effect aid court in determining unconscionability
C. Unconscionability and standard forms: Often in standard form contract situation, we police terms not
by unconscionability or consent, but where a party to an agmt has reason to believe the other party
assenting would not do so if he knew that the writing contained a particular term.RS §211.
a. G Orcilla v. Big Sur Inc (Quick cash loan in English): Teodora obtained a $525k refinancing of
mortgage on their San Jose home. Interest rate was 8.99% for first two years. Varied after that with a
cap of 14.99%. Monthly payments were more than monthly income. Agent told Teodora that she could
afford the modification. And contract was in English even though plaintiffs did not speak English well.
Court held that K was unconscionable, but argument that they could have used fraud.
b. G Rent-A-Center v. Jackson (agreement to arbitrate, delegation provision): it is hard to use
unconscionability to get out of an arbitration clause. This was a 5-4 decision. It shows how proarbitration the Court is today. You would have to have an arbitrator rule that arbitration is
unconscionable, which is unlikely to happen.
D. Theory/Underlying Concepts: Ppl differ on how much priority unconscionability gets. Do we really need
unconscionability? Isn’t there a misrepresentation & isn’t that enough?
a. Paternalistic in nature
b. Proxies for the idea that the parties simply do not know what was in her own best interest
c. struggle b/w interfering individual private choice and promoting efficacy and redistribution.
IMPOSSIBILITY OR FUSTRATION OF PERFORMANCE
Before, we’re asking whether there was something wrong in the bargaining process? Here, we have perfect
bargaining process, but after the deal is struck, something happens that radically changes the nature of
performance. When can the party(ies) can say “this is not what I signed up for, I want out.”
Warning: This a very circumscribed doctrine. The background rule comes from Paradine v. Jane, Jane leased
land from Paradine. Jane takes possession. Rupert kicks Jane off the farm for 3 years, Jane stops paying
Paradine, Paradine sues Jane. Court says “pay up.” You promised to pay 3 years rent, you will pay 3 years rent.
It doesn’t matter about Rupert.
Yoda principle: There is do, there is no try.
IMPOSSIBILITY / IMPRACTIBABILITY OF PERFORMANCE: exception to the Yoda principle.
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A. 3 classic situations where courts will discharge a K on grounds of impracticability:
a. death of party necessary to K.
b. prohibition by gov’t
c. destruction of item or structure Taylor v. Caldwell.
B. If death of a party that makes performance impracticable, (necessary to K), that party’s obligation is
discharged.
a. Hypo – R and H enter K. H will give R singing lessons. K $400. After K is signed but before lessons
begin, H becomes famous. Market price is now $50k for singing lessons. Can H get out of the K?
No. That would be laughable. The risk H takes is that the service or product will be worth more
in the future.
i. “Without fault” cannot be economic risk. Risks happen all the time.
b. Hypo – same K, same price. H dies. Can R sue H estate to recover? Does the death of a party
excuse performance? Yes. His obligation under K is either “excused” or “discharged.”
c. Hypo – same K, same price. R dies. Can H sue R? Yes. H’s death no way for the K to be
performed but with R’s death, the K could still be performed. R not necessary to pay $400. H
necessary to provide lessons.
d. RS §262 existence of the person necessary for the performance of a duty.
C. Performance must be impossible or impracticable.
a. Hypo – C and R enter K for sale of photo for $400. The Gov’t outlaws the sale of such photos. R
sues C for expectation damages.
i. RS §364 if performance impracticable by gov’t order, the regulation is an event the
nonoccurrence of which was a basic assumption.
b. G Taylor v. Caldwell (hall for concert) Taylor signs contract with Caldwell to use music hall for four
concerts. Hall is destroyed by fire without fault of either party. Taylor had spent money in preparation
for concert, sues for reliance damages. Court says Taylor cannot recover, as there is an implied
condition that the parties shall be excused if performance becomes impossible. (This is just like
Dempsey). At the time, the law put a high burden when seeking lost profits. The Ct. says that in
the absence of the existence of hall, the K is subject to the implied condition (something that
must occur before another side performs under the K). There is a term in there that says if the
thing is destroyed, we have excuse. This is the 3rd deviation from strict rule of performance.
Taylor cannot recover.
i. Note re condition: “If women win Olympics, then I’ll buy”: “if” creates the condition.
c. Hypo – standard K. C and R agree that R will buy photo in the store from C for $400. C’s store
was destroyed by fire. R sues C for expectation damages: R cannot recover
d. Hypo – A and B agree that A will sell and B will buy a jersey for $400. A fire destroys A’s store
including the jersey. A planned to use the one in the store. B sues A for expectation damages.
(not a specific jersey. Just a regular jersey). Can A get out of the K? No. K doesn’t specify a
specific item. A must get another one to fulfill or pay B expectation damages. A can still satisfy
K by selling any jersey. A planned to use the one in the store.
i. UCC-2-613 goods identified (specific goods) and suffer casualty w/o fault f either party
and the loss is total, the K is void. This follows Taylor v. Caldwell but is limited to
specified items.
ii. RS § 263: if the specific thing is necessary, its failure to come into existence.... is an
event the non-occurrence of which was a basic assumption of which the K was made.
iii. RS §261-64: gives us 3 different common law ways (death, prohibited by gov’t
regulation, destruction of specific item), the duty to render performance is discharged
unless the language or circumstances indicate the contrary. 261 address impracticable.
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iv. UCC 2-615: talks about impracticability. This attempts to reconcile common law
exceptions and draw a larger principle from that. What these 3 things have in common,
they render the performance impracticable. (The struggle is how far Cts will go in
defining what is “impracticable.” Cts cannot stray too from these items.
FUSTRATION OF PURPOSE
A. Frustration of purpose cases: Not impossible to perform, but the whole purpose of the K no longer
exists. You can still perform K but the whole reason for the K has disappeared.
a. Courts require a total frustration.
b. G Krell v. Henry (flat for viewing coronation): Henry and Krell enter K in which Henry was to pay 75
pounds to Krell for room in which he could view coronation. Henry paid 25 pounds in advance. Before
remaining 50 was due, coronation was cancelled. Krell sues Henry, seeking the remaining 50. The court
held that the K’s principal purpose was substantially frustrated to the point where it could be void.
i. RS §265: After K is made, where a party’s principal purpose is substantially frustrated
by an event the non-occurrence of which was the basic assumption was made, the
remaining duties are discharged.
B. In determining whether the non-occurrence is “basic assumption,” foreseeability is just a factor; it
must be the case that (1) the particular risk of the non-occurrence of the event was foreseeable and
(2) it was pretty foreseeable in order to discharge obligation.
a. G Opera Co. v. Wolf (Opera concerts 4 performances in Hall): P K with D. P to provide
performances. D to provide the venue. Power outage and D could not provide the venue. D in
BofK by failing to provide the venue. Opera Co. sues, seeking its expectation damages (had the
K not breached, P would have received the last payment). Held: if Wolf could (1) foresee a
power outage occurring and (2) it was foreseeable, and the parties failed to include a force
majeure clause (if it rained, contact is off), then Wolf must be held to the K. Someone has to
take the fall.
i. On remand will say that Wolf Trap should have known and provided for this event and
they are not going to get out of the contract
ii. Was performance impracticable? Yes.
iii. Was electricity a basic assumption? Courts are saying that if something is incredibly
foreseeable and the K did not specify for that the occurrence of that event would call off
the obligation to perform, we will infer that the show must go on.
iv. If there is an event that you could have provided for in the contract but didn’t, we’ll
assume you wanted to take liability for it
1. If parties knew it was a risk AND failed to contract around it through a force majeure clause -> show
must go on. (A failure to include a force majeure clause when the parties should have had one will
not excuse your breach).
2. If parties DIDN’T know it was a risk (b and failed to contract around it -> show can be cancelled
v. Foreseeability is just a factor. Everything is, to some extent, foreseeable. But was this
particular risk foreseeable and how foreseeable was this risk.
b. G World of Boxing v. King (drug boxing match): Jones tested positive again, precluding his
participation. Parties can no longer proceed w/ the boxing match. King argues that it does not
have to pay damages b/c it was unexpected that Jones would be stupid enough to do the same
thing. Held. King assumed the risk and must pay damages
i. Application RS §261:
ii. Was Jones’ availability a basic assumption? Yes. His availability is a basic assumption.
iii. Was the risk of him taking drugs the parties were aware of? Yes.
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iv. Did the parties contract for this risk? Yes. There was a provision designed to make sure
that Jones would not test positive again. The parties tried to guard against this risk by
preventing it from occurring but failed to guard it in the case that in spite of it, the risk
occurs. The parties were very much aware of the risk of Jones taking drugs but failed to
write a force majeure provision. Therefore, the parties bore the risk.
What if Jones had died? Then the parties would have gotten out. In the 1st
situation, the event was so foreseeable, the failure of providing for it is the
parties’ fault. But in the 2nd situation, the parties had no idea that Jones might
die. Nothing language in the K suggests otherwise.
What if Jones had never doped, but you have the knowledge that some athletes
do? Probably still could have foreseen that it was a possibility since the
agreement called for mandatory testing
C. Can relieve both parties from their obligations under the K. (before the force majeure clause only
relieved one party from performance – the frustrated party).
a. G Facto v. Pantagis (there was a force majeure clause. Wedding and power outage): Facto
contracted with Pantagis to provide banquet hall for wedding reception. The power went out, and
reception ended early. Facto sued for breach of contract, seeking reliance damages. The court holds
that Facto receives no damages due to force majeure clause. However, Facto does not have to pay since
he was relieved of obligations as well.
i. This case is important because it shows us what happens to obligations of other side
(Facto’s obligation to pay):
1. Application to Krell] Prior to discharge, 1 party started
performance
b. Hypo – H contracts to build a cottage for R. H starts 90% of performance, but lightning strikes
and the cottage is destroyed. Is H excused? No. Can H recover from R? No, not without an
excuse. H can just rebuild the cottage.
c. Hypo – H contracts to add a den to the cottage. 90% complete and house was destroyed by
lightning. Yes. Destruction of a specific item. He can’t add den to a house that doesn’t exist.
Prior case, he can just rebuild the entire house.
i. Can R recover from AH No. Here, H obligations are excused.
ii. Can H recover from R? Yes, but only for benefits conferred. When K is discharged, and
you’ve conferred a benefit. You can recover under theory of restitution. Once the wood
is in the house, that wood is Raz’s. All that work is Raz’s. Raz benefitted. Sure, Rothy got
rid of it, but Raz still benefitted. However, Raz cannot recover from stuff she relied on
(bought some super cool wallpaper to put in the den, but that den is still in her office
and not put on the wall yet). The theory of restitution is recovery from benefit
conferred. Had she put it on the wall, at that point, it becomes Raz’s wallpaper.
d. Hypo – R and H contract for H to build a den. R pays $10,000 deposit for a total K price of
$100,000. So H hires a structural engineer and spends $3,000. (H confers benefit on R and R now
incurred reliance damages). Fire. Both parties discharged from K. H doesn’t have to build den. R
doesn’t have to pay B $100,000.
i. What kind of action can R bring against H? Restitution. R gave $10,000 to H
ii. Can H subtract $3,000 from R that he spent on reliance? No clear answer
1. G Guns n Roses: Action of restitution. Whether Guns N Roses deduct from restitution what you
spent in reliance?
2. RS § 272: You can subtract reliance damages from the restitution amount that you owe.
a. Under RS §272, H can subtract $3,000.
b. What if H spent MORE than $10,000?
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i. RS §377 says no. While you can deduct your reliance expenditures from restitution amount
you may owe to the other party, you do not have an independent theory where you can sue
that party (“please pay me my reliance.”)
3. Courts are split on whether you subtract reliance damages from restitution. Both parties can sue
each other, but all courts will never allow you to recover reliance on an independent theory.
D. Increases in costs almost never get you out of a K.
a. G Westinghouse v. Alcoa: Westinghouse wanted to sell equipment for nuclear power plants.
Uranium is regulated by gov’t. Westinghouse guaranteed a price for uranium in order to induce
the power co to buy their equipment. Westinghouse is not in the business of enriching uranium
(this was really fucking stupid) so it took the risk that the price of uranium could sky rocket.
(Today you’d be a derivative K) Price of uranium increased five fold. Damages would have been
$2 billion. Westinghouse gets sued and argued that it should be relieved of K b/c economic
impracticability. Held: no relief. Westinghouse is on the hook for $2 billion.
b. G Alcoa: Alcoa makes aluminum. Makes 16 yr term w/ 5 five option to renew to run for 21
years. You could set the price today but you need a formula to increase the price over 21 years.
Hired an economist to do so. He looked at historical costs of aluminum and predicted future
costs of alumninum. The problem w/ the index had a very small component of energy (main
components of producing aluminum). The energy price sky-rockets. So Alcoa’s cost of making
alumninum sky rockets but the price stays the same. Alcoa was going to lose hundreds of
millions of dolars and argues that it is impracticable to perform. Held: Alcoa is on the hook to
perform.
REMEDIES FOR FRUSTRATION AND IMPRACT: In both situations (frustration and impracticability): what
remedies are available? No remedy for BoK bc obligations are excused so we turn to restitution, where one
party may have conferred a benefit prior to discharge. That party can use restitution to get that benefit back.
(Henry gave 25 lbs to Krell. Henry can bring restitution action against Krell to get it back.
What happens when the parties having to give restitution has made expenditures in reliance? RS allows the
party to deduct what it has spent in reliance.
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PERFORMING THE PROMISE
INTERDEPENDENCE OF PROMISES
A. Order of Performance:
a. A party does not have to perform before he can recover. (no longer good law)
i. G Nichols v. Raynbred
b. A party who is required to perform first is in need of protection against failure by the other.
c. If parties can perform at the same time, they are required to do so.
i. RS §234: Default Rule: There is a presumption of simultaneous exchange. (1) Where all or
part of the performances in bilateral Ks can be done simultaneously, they’ll be treated
simultaneously unless otherwise language or circumstances otherwise specified. (2) If
the performance takes time, then that party must perform first.
B. 3 Types of Covenants G Kingston v. Preston (business and sufficient security): Held: P promised to help
D for a year and D would hand over business once P posted a security bond. P didn’t post bond and sued when
D didn’t hand over business. Court held for D because promises were dependent and simultaneous, and P didn’t
fulfill its condition. D is excused from performance. Preston’s promise is dependent on Kingston’s
promise to provide security to Preston. (If the 2nd promise isn’t forthcoming, you don’t have to do
your duty). This case established that there are 3 types of covenants: (1) “Mutual and Independent” (2)
“Conditional and Dependent” and (3) “Simultaneous Conditions”
a. Mutual and Independent Obligations: 1st party breach does not excuse the 2nd party from
performance.
b. Dependent Obligations (where 1 party must perform before the 2nd party): The 1st party’s
breach does excuse the 2nd party’s performance. One party’s breach of contract excuses the
non-breaching party from performing, only if the non-breaching party’s obligations were
dependent on the breaching party’s obligations.
c. Simultaneous Conditions (where both parties must perform simultaneously): The nonbreaching party who is ready and prepared to perform may sue the breaching party, even
though it is unclear who was to perform first.
i. Restators use the doctrine of condition RS §238. where all or part of performance under
a bilateral K are due at the same time, it is a condition of each P’s duty to perform so
that the other party either renders present ability to performance, offer performance.
(there is a condition on my promise that you are ready to fulfill your promise)
1. Applying RS: Preston’s duty to convey business is conditioned on Kingston’s
showing willingness and ability to provide sufficient security. If Kingston does not
provide, the condition has not been met and Preston does not have to fulfill
obligation to sell.
ii. Time of Essence turns performance into conditions!
1. G Addie v. Kjaer (Virgin Islands): buyer failed to show up at closing meant seller did
not have to offer clean and marketable title. Seller’s failure to tender clean and
marketable title meant buyer had no obligation to pay. Court ruled that both parties
were discharged because neither was willing to perform. Their obligations never ripen.
Not that they breached. They were never obligated to perform. Seller obligation
to convey clean title was conditioned on Buyer showing up with money. Buyer’s
obligation only ripened if the seller conveyed clean title. Buyer gets tehir deposit
back as restitution.
iii. Hypo – If A shows up w/o jersey, B does not have to pay. If B shows up w/o money, A does
not have to give jersey. Both performances are conditioned on the other’s performance.
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C. Contractual Condition Precedent: If a party’s performance is dependent on a prior performance of a
party, the non-breaching party’s performance is a condition precedent and performance will be
excused unless that condition is satisfied.
a. Promises will be construed as dependent unless the circumstances of K compel a
determination that the promises are independent. Where it is reasonable to assume that the
performance of one promised act will come after the performance of the other promise, the
promise to perform the latter act may be considered independent.
i. Condition: RS 2nd §224: Defines Condition. a condition is an event, not certain to occur,
which must occur, unless its non-occurrence is excused, before performance under a K
becomes due.
ii. RS §233 Effect on Other Party’s Duties of Failure to Offer Performance
iii. G Price v. Van Lint: D agreed to loan money to P to buy land and P agreed to hand over
mortgage deed by certain date. Both parties knew it would take some time to execute
deed. Court found promises were independent and D was obligated to loan money regardless of
if P rendered deed on-time. If deed had come in on time, P would have to hand over D to get
loan. Interdependence is relative to the facts
Held: Promises were independent bc the circumstances show there was reasonable
expectation of delay. Price awarded damages.
1. On Dec 23, is Lender’s obligation conditioned on Borrower providing the deed? It
depends when the deed comes back. If the deed comes back prior to Feb. 1, then
on Feb. 1, the Lender’s obligation is conditioned on the Borrower’s giving the
deed. If the deed does not come back by Feb. 1, then Lender’s promise is not
conditioned on Borrower promise to give the deed because Borrower cannot give
up the mortgage until he gives the deed.
b. If a party demands the other party to perform something not required by the K and threatens
if the other party does not perform this condition, the party demanding will not perform its
contractual duties, then it is likely that a party demanding is making an anticipatory breach.
Chamberlin v. Puckett
BREACH – when party’s performance is conditioned on other party’s substantial performance.
Breaching party cannot sue under the K.
A. BREACH: (Defn of breach) RS §235. (1) full performance of a duty discharges duty (2) when
performance is due, any non-performance is a breach.
a. Hypo 1: A ks B to build den 20 ft. A must pay every other week. (progress pymt). B is building
den. A measures and it is not 20 ft (11 ft). Was there a breach? Yes.
b. Hypo 2: same facts. 16 ft. (needed 20 ft) A sues B. Applying RS §236: a claim for total breach is
based
B. Repudiation: §250: Repudiation can be made by:
a. A statement by the obligator to the obligee that the obligor will commit a breach that would of itself
give the obligee a claim for damages for total breach under §243, or
b. A voluntary affirmative act which renders the obligor unable or apparently unable to perform w/o such
a breach
c. Hathaway v. Sabin: Operahouse owner thinks that musicians won’t be able to make it to perform
because of a snowstorm so he calls off the preparations but then they do and they aren’t able to
perform. Sabin liable because they did show up so he must pay them
C. MATERIAL BREACH / SUBSTANTIAL PERFORMANCE: Material breach = no substantial performance.
*Substantial performance doesn’t apply to UCC*
a. If a party performs 2nd, that party’s performance is conditioned on the 1st party’s substantial
performance (not perfect performance).
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b.
c.
d.
e.
f.
i. If 2 parties form a K in which A is to perform first and B is to perform second, a condition
precedent to B is A’s substantial performance.
If imperfect performance meets the “essential purpose of the K,” party has substantially
performed. (Unless the parties agree that every detail comply with specifications) - only left
undone a portion that is immaterial/trivial.
In a bilateral K, there be no uncured material failure by the other party to render any such
performance due at an earlier time. The other party doesn’t have to render their performance.
A material breach does not automatically excuse non-breaching party. Non-breaching party
still has to allow breaching party opportunity to cure.
If the breach was material, non-breaching party can suspend its performance, allow breaching
party to cure, and claim compensation for loss suffered.
i. If small -> keep performing and will settle damages later
ii. If big -> if nonb party losing a lot of value, then nonb party can stop performance.
1. If breach remains uncured (time/impossibility) party can sue for total breach b/c
party’s performance is conditioned on there being no uncured material
breaches §237.
Determining Material Breach RS §241: to determine whether failure to render is material, the
following circumstances are significant:
1. The extent to which the injured party will be deprived of the benefit which he
reasonably expected;
2. The extent to which the injured party can be adequately compensated for the part of
that benefit of which he will be deprived;
3. The extent to which the party failing to perform or to offer to perform will suffer
forfeiture;
4. The likelihood that the party failing to perform or to offer to perform will cure his
failure, taking in account of all the circumstances including any reasonable assurances;
5. The extent to which the behavior of the party failing to perform or to offer to perform
comports w/ standards of good faith and fair dealing.
Curing may turn it to substantial performance, mitigate damages or in some cases lead to
another material breach.
i. G K& G Constr. Co. v. Harris. Held: Workman promised to perform in a “workmanlike
manner”. He hits house with bulldozer. Company withholds payment. Harris walks off
the job. Harris’s failure is a material breach; he he was not performing in a workmanlike
manner when he hit the house. K&G ended up in a different place that it expected. This
is an easy case of material breach.
a. Step 1: Is this a material breach? Yes, Harris hitting the wall is a material breach.
b. Step 2: Is this material breach a “total breach?”
A. Total breach: cost of damage + cost to finish job
1. A “total” breach in K&G would be K&G suing Harris both for damage
caused by bulldozer + whatever it takes for someone to finish the
job (total expectation D).
B. Partial breach: cost of damage + keep on working
1. Partial breach is only based on part of perf. K&G asking for the
damage to the wall.
c. Step 3: How long does the breaching party have to cure the material failure?
A. RS §237 tells us each P’s depends on uncured material failure
B. RS 242
1. Material or not?
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a. If not, injured party still has to perform
i. Partial breach, does not allow you to
terminate the contract
2. Material, partial or total?
a. Only a total breach will allow oyu to ddeclare the
contracts at the end
b. You can always treat it as partial. You still don’t
have to make the payments; you’re just not
exercising your right to terminate the contract now
d. Step 4: how long do you have to wait until discharge?
A. Look at RS 241; reasonable time to cover; language (“time is of the
essence”) indicates that day of performance is important which means
that the breaching party has no time to cure. These rules give a choice to
the non-breaching party. If you are the NB party and there is a material
failure and the K makes clear that this MF could be a total breach you
don’t have to say it’s a total breach. It could be that K&G could have
kicked Harris off the job site. At that point, we have a material failure.
Harris says he will not cure it. K&G could have kicked him off and sued for
the entire breach. But K&G didn’t do that. It waited and gave Harris the
option of curing the breach. K&G had a choice. It is only when Harris
walks off the job then it becomes from partial breach to total breach.
ii. G Jacob & Young v. Kent: not a material breach. K specified a certain brand of pipe.
Architect didn’t certify for final payment b/c different pipe used but essentially the
same. K said any work that is defective or not fully in accordance will be rejected.
Despite this, held: substantial performance (interpreted as promise not condition) b/c
Cardozo said based on common sense, parties wouldn’t have wanted the house to be
torn down; they’d want damages.
g. If a party substantially performs, the breaching party is entitled to recover as restitution under
K minus the defects in his imperfect performance.
iii. When the non-breaching party is suing in restitution, the non-breaching party can
choose b/w Market value of Service rendered OR Increase of Property Value.
iv. When the breaching party is suing in restitution, the breaching party can only recover
b/w the lesser of the 2.
1. G Strouth v. Pools by Murphy (kidney pool): D was hired to construct a kidneyshaped pool. During construction, D built an almond shaped pool. Held: No
substantial performance b/c P wanted a special pool shape. D was the 1st
uncured material failure. D was in material total breach. Therefore, D cannot
recover under K. D’s only remedy is restitution.
a. Variation 1: K b/w Murphy and Strouth for $20k. Murphy materially breaches.
Strouth hires Roth as a cover to finish the job. Roth delivers a perfect pool for
$15k:
A. Strouth expected to pay $20k.
B. Strouth got their pool for $15k.
C. Strouth’s expectation damages - $0 just like Acme Mills
D. Murphy’s restitution damages - $5k b/c Strouth received a benefit from
Murphy.
b. Variation 2: Same facts but now Roth delivers a perfect pool for $25k.
A. Strouth expected to pay $20k
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B. Strouth got their pool for $25k.
C. Strouth’s expectation damages: $5k
D. Murphy’s restitution damages - $0k b/c Murphy conferred no benefit on
Strouth.
2. G Plante v Jacobs: (My cold call case) Stock plans w/o specifications. D built
house with defects w/ small defects and a misplaced wall. Held: (1) D
substantially performed b/c K did not specify details. (2) D entitled to recover:
(a) small deviations – cost of repair (b) large deviations – cost of diminution of
market value
1. G Jacobs & Youngs v. Kent (Reading pipes): J/Y to build house for Kent. K specified
“Reading Pipe”. Other brands were used. D refuses to issue certificate for final
payment. The court held that J/Y had substantially performed because the pipes they
used were the same, despite different brand. Held: Breaching P substantially
performed b/c the defect is trivial.
A. Parties can choose either cost of repair or diminution in value, except
when it would be disproportionate. Here, diminution in market value is
$0, cost of repair is very high. Cardozo says you get diminution in market
value.
D. PARTIAL / IMMATERIAL BREACH: Effect of partial failure. If the breach was immaterial, non-breaching
party does NOT discharge non-breaching party’s duties but can collect damages (cost to remedy or
diminution but not future on the whole K (§236)). The breaching party will owe to non-breaching party
expectation damages, but the K continues going as planned. No material failure=substantial
performance
a. RS §235: any failure of performance is a breach.
b. RS §237: it is a condition of a party’s performance that there is no uncured material failure on
the part of the other party. The implication of that is that if there is an uncured material failure,
the second party can suspend performance.
c. K&G v. Harris:
i. Breach: Harris had promised to perform in workman like manner and failed to do so. RS
235. It affected K&G’s obligations under K in that it doesn’t have to pay Harris b/c a
condition of K&G’s performance is that Harris does not have an uncured material failure.
RS 237.
ii. Partial breach: cost of damage to the wall + keep on working (chance to cure the
material failure). K&G does not have to pay Harris until Harris cures the material failure.
E. TOTAL / MATERIAL BREACH: Total breach is when breaching-party cannot cure material breach. The
non-breaching party can treat it as a partial breach if it wants to, but if there is a total breach, this
means that the non-breaching party has no obligations under K and can sue breaching party for full
expectation damages (offset by restitution damages).
a. When can you say things are so bad that things are dead?
i. When you go from big to total breach: when there is no time left to cure material
breach. Once there is a total breach, the nonb party’s performance is no longer
suspended, it is completely discharged. It does not have to do anything.
1. K&G v. Harris: K&G did not need to pay Harris until Harris cured the material
failure. But Harris walked off the job, so it did not cure the breach. As such,
K&G’s obligation to pay Harris is completely discharged.
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b. TOTAL BREACH - RS §243 A breach by non-performance gives rise to a claim for damages for
total breach only if it discharges the injured party’s remaining duties to render such
performance. A material breach does not automatically excuse non-breaching party.
i. Non-breaching party (1) has a right to terminate K (2) its duty to perform excused (3) it
can recover damages for all performance not rendered plus damages from full K (future
damages)
ii. Non-breaching party has that power but still has a risk: What happens after the fact that
something you thought was material breach is ruled nonmaterial? E.g. Harris ran over
K&G’s iPhone. This will not be enough to suspend performance. 2nd risk: Even where
you say that there is a material breach, there is no rule re how much time does the other
party have to cure it.
c. One party’s total failure to perform relieves the other party from failure to perform.
i. G Nicholas: one party’s failure to perform does not affect the other party’s obligation
to perform. This is crazy. (old rule)
ii. G Kingston v. Preston: Kingston’s failure to perform relieves Preston’s obligation to
perform.
iii. G Addie: neither party was ready to perform, each party’s failure to perform made it so
that the other party did not need to perform. Seller did not need to offer clean title bc
Buyer did not need to pay. Vice versa. This is reflected in RS §238 (Condition)
d. Anticipatory repudiation is a total breach. Where a party repudiates a duty before his
performance is due, his repudiation is a total breach and thus discharges the other party’s
remaining duties to render performance. RS 253.
Flowchart Steps (Only applies outside of UCC. In UCC world, we have “perfect tender” rule)
NO
CONTINUE
PERFORMANCE
IS THERE A
BREACH?
YES
YES
NON-BREACHING
PARTY DOES NOT
OWE
PERFORMANCE.
TOTAL BREACH
but can treat as
partial
YES
IF CURED, BOTH
PARTIES CAN
CONTINUE
PERFORMANCE
CAN THE
BREACHING
PARTY CURE THE
BREACH?
IS THE BREACH
MATERIAL?
NO
NO
PARTIAL BREACH. BOTH P
CAN STILL CONTINUE
PERFORMANCE.
i. Is there a breach? Look at K and look at what K requires.
1. If no, continue performance.
2. If yes, is it material? (Look at RS §241)
a. If not a material breach (just breach), then both parties continue
performance b/c this is a partial breach. The breaching p will owe to
nonb party expectation damages, but the K continues going as
planned.
b. If yes, material breach, then nonb party does not owe performance
i.e. its performance is not due bc a condition of its performance was
that there is no material breach.
i. If breach cured, then both can continue performance.
ii. If breach is so bad that it cannot be cured or curing is no
longer possible, then we have a total breach. The nonb party
can treat it as a partial breach if it wants to, but it is a total
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breach, which means that the nonb has no obligations under
K and sue breaching p for full expectation damages. The nonb
p can treat it as a partial breach even though it is a complete
breach; it usually does this if it thinks it can reach a
satisfactory arrangement with breach p.
ADEQUATE ASSURANCES – Comes up when the question of anticipatory repudiation comes up. Doctrine of
Adequate Assurance was designed to help people who must perform first but not sure whether the other
party will perform their obligation.
A. Previous Common Law: Anticipatory Repudiation - 1st party’s simple fears that the other party will not
perform, though entirely reasonable, does not count as repudiation. 1st party will still be obligated to
perform.
a. G Acme Mills and Hathaway v. Sabin
B. UCC 2-609: 1st party can request in writing that the 2nd party can perform when time for perf comes
due.
C. RS §251 & §268: outside sale of goods, common law, party reasonably believes that op will not
perform is free to ask for assurances.
ii. Both situations: failure to give adequate assurances is treated as express repudiation. (Before
you could always ask, but now the other side must respond. Now, their failure to respond is
repudiation and breach) This matters b/c it makes the difference as to who breached first.
e. §251: if reasonable grounds arise to believe that K will be breached, party may request adequate
assurances for performance, and if reasonable, suspend performance for which he has not already
received the agreed exchange, until he receives assurances. Failure to assure can be treated as
repudiation
i. In court, must prove (1) reasonable grounds for insecurity and (2) whether assurances were
adequate
f. §268 : A party’s prospective failure to perform due to impracticability or frustration discharges the other
party’s duties or allows him to suspend performance unless the party assumed the risk in the K.
i. Illustration 1 – Acme Mills – Farmer Johnson hears thru the grapevine that Acme is broke & is
scared Acme won’t pay up. Johnson sells to someone else. Johnson has breached first. The rumor
does not give him the right to antic. repudiate.
ii. Illustration 2 – M & C K for installation of expresso machine. M hears from J that C’s coffee shop
project is falling though. M calls C to cancel K. M cannot treat this conversation as an anticipatory
repudiation by C. C has not expressly repudiated & under the facts C could go on with the project.
Marion is thus in total breach when she “cancels the contract.”
UCC “PERFECT TENDER” RULE: A buyer may reject goods that do not conform to the K in every aspect,
including quality, quantity, or delivery. UCC §2-601.
A. UCC§ 2-601. Conformity does not mean substantial performance; it means complete performance.
(Substantial compliance ≠ conformity)
a. If goods or tender of delivery fail in any respect to conform to the K, buyer may in GF,
i. Reject in whole;
ii. Accept in whole OR
iii. Accept any commercial unit or units and reject the rest. However, acceptance of any
part of a commercial unit is an acceptance of that entire unit. (See UCC 2-606)
1. Order for 100 cases of wine. Accept 2 cases and reject 98 cases.
2. Order for 100 cases of wine. Acceptance of 2 bottles of wine is an acceptance of
that 1 case of wine. Reject the remaining 99 cases.
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DETERMINING WHETHER GOODS CONFORM:
A. What were the warranties?
a. UCC 2-314 Implied Warranty of Merchantability (applies to merchants)
i. Unless excluded or modified – a warranty that the goods are merchantable is implied in
the K for the sale.
ii. The goods must at least pass w/o objection in the trade.
b. UCC 2-313 Express Warranty (applies to all sellers)
i. Any affirmation of fact or promise made about the good and becomes part of the basis
of the bargain creates an express warranty that the goods shall conform to that
affirmation/promise.
B. What were the terms of the K?
C. What were the circumstances, course of dealing, course of performance, or trade usage?
REJECTING THE GOODS / RIGHT TO CURE:
A. UCC 2-602 Method of Rejection - tells you how buyer rejects. The most important part is that buyer
must notify seller that buyer is rejecting the goods. You can’t just be quiet.
a. Rejection of the good must be within a reasonable time after the delivery/tender. It is
ineffective unless the buyer seasonably notifies the seller.
b. After rejection by the buyer and if the buyer has, before the rejection, taken physical
possession of the goods, the buyer is under a duty after rejection to hold them with reasonable
care at the seller’s disposition for a time sufficient to permit the seller to remove; or
c. UCC 2-711 IF the buyer is rightfully rejecting, buyer has a security interest in the goods or
control of any payments for them = expenses incurred, may hold such goods and resell them.
B. UCC 2-605 Waiver of Buyer’s Objection - In telling the seller you’re rejecting, if you don’t tell the
reasons for rejecting AND they are reasons that seller could have cured, the buyer has waived those
objections. Buyer must explain why buyer is objecting.
a. The buyer’s failure to state a particular defect which is ascertainable by reasonable inspection
will preclude him from justifying a rejection or sue for breach if:
i. If the seller could have cured if stated “seasonably” OR
ii. b/w merchants: after rejection, seller has made a request in writing for a full and final
written statement of all defects
1. * When time for cure is past, the seller is entitled upon request to make a final
statement of objections He has to make it clear to the buyer what is exactly is
being sought.
C. UCC 2-508 Right to Cure - After the rejecting, the seller can cure its tender. Buyer either accepts them
or if not in good faith -> buyer in breach
a. Before Time for Performance – Seller may notify the buyer of his intention to cure and may
within K time, make a conforming delivery.
i. Example: if K delivery date is June, but Buyer tells Seller that he needs the shipment
earlier in the month and Seller does ship accordingly -> new K term for delivery has
been cut down by the supervening modification -> time for curing must be based on the
modified time for delivery.
b. After Time for Performance – Seller may notify Buyer of his intention to cure and then be given
further reasonable time IF Seller has reasonable grounds to believe would be acceptable w/ or
w/o money allowance (e.g. discount)
i. Reasonable grounds:* Seller MUST have reasonable grounds to believe that the tender
would be acceptable.
1. Prior Course of dealing
2. Course of Performance
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D.
E.
F.
G.
H.
3. Trade Usage - Seller is charged w/ commercial knowledge that would force him
to comply strictly.
4. Particular circumstances w/ making K.
UCC 2-604 Rejection but No Response from Seller – If the seller gives no instructions within a
reasonable time after notification of rejection, the Buyer can:
a. Store the goods for the seller’s account
b. Reship them
c. Resell them for seller’s account w/ reimbursements.
i. ^ none of the above constitutes acceptance.
UCC 2-606 Method of acceptance - when buyer accepts the good when:
a. After reasonable opportunity to inspect signifies to Seller that they are conformity or that
Buyer will take them anyway OR
b. When Buyer fails to make an effective rejection after reasonable time to inspect; OR
c. When the buyer acts inconsistently w/ the seller’s ownership.
d. Acceptance of a part of any commercial unit is acceptance of that entire unit.
UCC 2-607 Effect of Acceptance; Notice of Breach; Burden of Est. Breach after Acceptance
a. Buyer must pay K price for accepted goods.
b. If Buyer accepts w/ the knowledge of their non-conformity, acceptance precludes rejection of
those accepted goods and rejection cannot be revoked UNLESS the buyer reasonably assumes
that their non-conformity would be seasonably cured)
i. Acceptance does not impair Buyer’s ability to recover for the non-conformity (can keep
and sue Seller)
ii. Revocation of acceptance of goods is unavailable for any non-conformity known to the
buyer at the time of acceptance.
c. Burden is on buyer to prove non-conformity
UCC 2-608 Revocation of acceptance - Buyer can only revoke acceptance of goods for defects that
could not have been found at the time of acceptance + defect must substantially impair value of goods.
a. Latent Defect: If Buyer finds out there is something wrong with the goods, it must be
something that buyer could not have learned at the time of acceptance.
b. Substantial Impairment of Value: If the defect was something only discovered later (latent
defect) -> buyer can revoke acceptance only if defect substantially impairs the value of the K.
i. Cannot seize on a trivial defect in order to invoke acceptance in the way you can use a
minor defect to reject the good in the first instance.
ii. Just bc buyer cannot revoke acceptance does not mean buyer is out of luck to the extent
that the goods don’t live up to K. Buyer can still sue for damages.
iii. G Printing Cntr of Texas v. Supermind Pub. Co.: Books, which were printed in the
wrong color, wrinkled, and art which off-center, were properly rejected by Buyer. Buyer
did not reject in bad faith. Express warranty was created when buyer was shown sample
of newsprint to be used (2-313). Implied warrant of merchantability (2-314)
iv. Prescott & Co v. JB Powles: Contract for 300 creates of onions. Seller could only ship
240 b/c US gov took rest of space on ship. Buyer rejects b/c they wanted 300 crates and
seller has to resell at a loss, sues for damages, difference b/t contract price and resell
price. Court said not a breach of contract b/c contract required 300 crates.
SUMMARY OF UCC PERFECT TENDER RULE:
a. Acceptance – Buyer accepts when Buyer fails to reject after opportunity to examine goods. 2606
i. If accepts in whole -> Buyer must pay the K price but can still recover Expectation
Damages under UCC 2-714 (diff b/w value of goods warranted and goods receive) 2-607
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ii. If accepts in part and rejects rest OR reject in whole - > Buyer must notify Seller of
defect. (See below) 2-601
b. Rejection - Buyer can reject for any non-conformity in good faith 2-601
i. Good Faith / Waiver - Buyer must tell Seller of defects or else Buyer waives objection &
right to sue for breach. 2-605
1. Right to Cure: Seller has a right to cure but must tell Buyer.
a. Prior to performance - Seller has all the way up until time for
performance to cure. 2-508
b. After performance – Seller still has reasonable time (no delay) to make
conforming tender if he believes that the goods will be accepted. 2-508
ii. If Seller doesn’t cure or if Seller doesn’t cure within reasonable time (Seller doesn’t give
instruction) -> Buyer can resell the good/reship them/keep them, but this doesn’t mean
that Buyer has accepted. Buyer can sue for breach. 2-604
c. After acceptance – Buyer can only revoke acceptance and reject goods if the defect was not
apparent at the time of acceptance AND the defect isn’t trivial. 2-608
i. Also if he reasonably thought that the seller would cure and they didn’t or if he
accepted the seller’s assurances that there were no nonconformities
ii. If Buyer can’t revoke -> Buyer can sue for damages under 2-714 (diff b/w goods
warranted and goods received)
DAMAGES
A. UCC 2-708 Seller gets diff b/w Mkt Price at time & place of tender and K price unless this amt is
inadequate for Seller. If this is the case, Seller gets profits.
a. (1) “the measure of damages for non-acceptance or repudiation by the buyer is the difference
between the market price at the time and place for tender and the unpaid contractprice
together with any incidental damages provided in this Article (Section 2-710), but less expenses
saved in consequence of the buyer's breach.”
b. (2) If the measure of damages provided in subsection (1) is inadequate to put the seller in as
good a position as performance would have done then the measure of damages is the profit
(including reasonable overhead) which the seller would have made from full performance by
the buyer, together with any incidental damages provided in this Article (Section 2-710), due
allowance for costs reasonably incurred and due credit for payments or proceeds of resale.
B. UCC 2-709 Seller’s Action for Price – If Buyer fails to pay K price, Seller may recover the price of K price.
a. (a) price of goods accepted or of conforming goods lost or damaged within a commercially
reasonable time after risk of their loss has passed to the buyer; AND
b. (b) price of goods identified to the contract if the seller is unable after reasonable effort to
resell them at a reasonable price or the circumstances reasonably indicate that such effort will
be unavailing.
C. UCC 2-712(2) Buyer gets diff bw cost of cover and K price, together w/ any incidental or consequential
damages.
D. UCC 2-713(1) When buyer does not cover, gets diff b/w mkt price and K price, together with incidental
and consequential damages
i. Acme Mills- resulted in nothing
E. UCC 2-714(2) If buyer receives goods, but not as warranted, buyer gets diff b/w value of good as
warranted and value of good received, together w/ incidental or consequential damages.
F. UCC 2-715 (1) Incidental Damages – include expenses reasonably incurred in inspection, receipt,
transportation....... (2) Consequential – any loss resulting from genl or particular requirements and
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needs of which seller at the time of contracting had reason to know and which could not be reasonably
be prevented by cover or otherwise.
INTERPRETING CONDITIONS
Parties agree that a particular set of performances will not become due unless a particular uncertain event
occurs. (Until the condition occurs, obligation to perform is suspended).
A. Rationale: Structuring transactions this way allows parties to allocate risks of denial or inaction. If a
buyer does not wish to assume this risk, the buyer can use a condition as an escape clause.
a. Hypo 1 – C says to R “if I get a photo, I will sell it to you for $400.” R says deal. C fails to get
photo. Photo goes up to $600. R cannot sue C because she never promised to get the photo.
b. Ex. 2 – K b/w Seller and Buyer. Buyer will buy property if permit is approved. Buyer’s obligation
to purchase property ripens when the permit is approved. Permit is not approved. Buyer wants
to proceed with the sale anyway. Seller refuses. K will be enforced. The condition was purely for
the Buyer’s benefit and did not affect Seller’s obligation.
B. Promise v. Condition: To determine b/w promise and conditions is a matter of interpretation.
a. Promise – an undertaking to act/refrain in a specified way at some future time.
b. Condition – an event that is not certain to occur. Uncertainty of the happening of an event is
necessary.
C. Conditions in Bilateral/Unilateral K:
a. You can have conditions in a bilateral K – promise to pay if condition X is satisfied exchange for
promise to pay.
b. If Option K - Optional K by their nature are conditional b/c performance is conditional the other
side’s rendering of performance.
D. Avoiding the Effect of Conditions through Interpretation: There is a general presumption against
construing a contract to create conditions precedent. (Preference for treating not as a condition).
a. If you can’t make up your mind, don’t treat it as a condition. We have a preference of treating
something as a promise. Do you want to interpret a K such that a party will lose all their rights
under the K? Obvi not. When in doubt -> treat as promise.
i. RS §227(1) in resolving doubts (if you’re not sure) whether an event is made a
condition, an interpretation is preferred that will reduce the obliger’s risk of forfeiture
unless the event is within the obligee’s control, or the circumstances indicate that he
has assumed the risk.
b. It is not enough for a K to have conditional language. Conditional nature must be apparent from
the language used.
i. G Howard v. Federal Crop Ins. Corp: 5b had conditional language. 5f didn’t. FCIC knew
how to write a condition precedent in by virtue of 5b. It didn’t do that with 5f. Held: 5f
was not a condition.
1. Forfeiture: a decision such that one party loses all that is invested in the deal so
far. Party is not losing expectation – it is actually losing something.
E. Time for Performance v. Condition: The passage of time is not regarded as a condition. If a provision
in a K calls for performance upon the occurrence of so certain an event, then it is not a condition but
merely fixes the time for performance.
a. Do not mistaken uncertain event as a means of setting the time for performance. It could be
that the parties assume that it will occur, but are uncertain when it will occur.
b. If an event could be treated both as a condition and a term fixing time for performance, K will
be interpreted in light of purpose using the language of the K.
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i. “Pay when Paid” Illustration 1: K b/w owner and GenK. K b/w GenK and SubK. Subk to
perform. GK’s obligation to pay SubK will be due “within 10 days of payment for work by
the owner.”
1. Condition interpretation – GenK’s obligation to pay SubK not due until GenK gets
paid
2. Term fixing time for payment interpretation – GenK’s obligation to pay is due 10
days after the due date for owner’s payment.
3. Ct’s decision – Not a condition. B/c SubK did not deal w/ owner directly (and
thus did not have oppty to evaluate owner’s creditworthiness) SubK should not
have to assume the risk of not getting paid. Absent very clear language that
shows that SubK assumed the risk of owner’s nonpayment, K will be
interpreted as term fixing time for payment. [general preference against reading
conditions into K]
ii. “Paid when Paid” Razz’s Hypo – K b/w A & B. B will build den for A for $10k. B is general
K. C is subK for $1k. The K b/w B and C contains a “pay when paid.” C will do work. B will
submit a request to A for a progress payment based on C’s work to date. B will pay $ to
C. (This saves B from paying out of pocket. C does the work). But A doesn’t pay B (B can
sue A). C sues B.
1. B will argue that her paying C was conditioned on A paying B. B will argue that
“pay when paid” will be a condition, the obligation will only ripen when A pays B.
2. C will argue that this wasn’t a condition. It may be a promise or might not, it is
only a timing mechanism. Who is going to bare the risk of A’s insolvency?
a. If we treat it as condition, C takes the fall.
b. If we treat this as a timing mechanism, B will bear the risk. B will have to
pay C. B has the ability to see A’s financial ability.
c. Courts will not treat the “pay when paid” clause as a condition.
F. Avoiding the Effect of Conditions through Impracticability or Estoppel.
a. Impracticability: If a party failed to satisfy a condition because fulfilling the condition was
impracticable, non-occurrence of that condition will be excused entirely (cannot re-start
condition after impracticability is over) as long as it is not material.
i. G Semmes: Condition of insurance’s obligation to pay Semmes that he gives notice of
the loss. Shortly after loss, the Civil War breaks out, Semmes can’t give notice. Held:
Condition is excused entirely b/c performance was impracticable. (Insurance company
cannot re-start condition i.e. “you have a year” after Civil War is over)
ii. G Royal Globe v. Craven: Condition 1: The condition precedent of insurance’s
obligation to pay was that she give notice 24 hrs after accident. Condition was not met.
During the 24 hrs after accident, she was in no position to give notice. Therefore, the
condition is excused because it was impracticable. Held: condition excused b/c fulfilling
condition was impracticable.
iii. enXco Development v. Northern States Power: Builder failed to get a necessary
certificate, so the second contract, which was nto to start until after the first was
completed, could not begin. Case of temporary impracticability under §269. Suspends
but does not discharge the duty or prevent it from arising.
b. Estoppel: If one party, through conduct, insists that they will not assert the condition AND the
other party detrimentally relies as a result, that party is estopped from asserting condition.
Therefore, condition is excused.
i. G Royal Glob v. Craven: Condition 2: Insurance must be notified “promptly.” Craven
relied on estoppel and argued that b/c insurance paid part of the claim and took steps
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and acted like insurance was considering the claim. (This is not promissory estoppel)
Held: Craven did not rely on insurance’s actions to her detriment (Craven didn’t do
anything or refrain from doing anything). In order to rely on estoppel, you must have
relied on conduct.
1. Estoppel: If A, though conduct, appears as though A is not going to assert the
condition against B, A should be estopped from asserting that condition.
a. Application: Craven tried to argue that she had the reasonable belief that
the insurance co. was not going to assert the right to not pay because of
her failure to satisfy the condition. Ct. disagrees; by the time the
insurance started its investigation, Craven had already lost all her rights
so she didn’t rely.
b. Note: Had there been no 2nd condition, then Cts will say “reasonable
time” This only works for nonmaterial conditions. If the condition at issue
is a big part of the contract, it will not excuse the K. Here the condition is
that the insured actually pay premiums. If she cannot pay, even if insured
have a credible case that she couldn’t pay, that will not allow us to excuse
that condition.
G. Avoiding the Effect of Conditions through Doctrine of Prevention: Where a party’s breach of
nonperformance materially contributes to a non-occurrence of a condition of one of his duties, the
non-occurrence of the condition is excused. RS §245
a. Prevention Doctrine: If the promisor (making obligation that conditioned on some event)
prevents the condition from happening, the non-occurrence of the condition will be excused.
i. Note: This is one way in which a party who is disappointed that a condition hasn’t been
fulfilled by pointing to the other party and say that they caused the condition to be
fulfilled to non-occur, then the party will be excused).
b. G Cox v. SNAP: SNAP’s obligation to pay COX’s put option was conditioned on SNAP’s issuance
of stock. SNAP said it would issue stock, but never did. SNAP tried to argue that b/c it never
issued stock (its own breach) it didn’t have to pay COX’s put option. Held The non-occurrence of
the condition is excused. SNAP’s actions materially prevented the condition from being
fulfilled. Therefore, the Ct excused non-performance of that condition. (The condition goes
away)
WAIVING CONDITIONS
EXPRESS CONDITIONS – WAIVER, ESTOPPEL, AND CONDITIONS OF SATISFACTION
Waiver: “not enforcing condition.” Estoppel is similar in that reliance is added.
When an express condition hasn’t been fulfilled, the party who failed to fulfill can try to get out of the K by
arguing excuse, waiver, estoppel, and §229 in add’l to doctrine of prevention.
A. Enforcement of express conditions are strict. Express conditions (not construed conditions) must be
fulfilled exactly and cannot be satisfied by substantial compliance. (if term is ambiguous on its face,
Cts. have more leeway to interpret the express cond.)
c. Note: NEVER use “material breach” and “condition” in the same sentence. Material breach will
out-rule condition. We are talking about excusing a condition that hasn’t occurred. Mat
a. G Commercial Resource Group, LLC v. The JM Smucker Co. There was an express condition – if
terminate, then write by Jan 1. Smucker substantially complied i.e. tried but wrote to the wrong
address. Held: Smucker held to renew lease. Smucker not found to have satisfied condition or
that condition was excused.
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b. Ex 1 - To get a mortgage, A must get a loan for $300k. Best A could do is $299k. Held: Condition
not satisfied. B/c condition was express, it will not be enough to count as satisfaction of the
condition.
c. Ex 2 - To get a mortgage, A must get a loan for $300k “on market terms.” A comes up w/ $300k,
but there is a dispute whether it is “on market terms.” Held: Ct. has more leeway to interpret
whether A has satisfied this.
B. Waiver: The party must indicate that it is not going to insist on the condition.
a. UCC – 2-209 Waiver of Condition
b. Rescinding Waiver: You cannot rescind a waiver if time for performance of condition has
passed. If waiver was made prior to the occurrence of the condition and it was within the
control of the promisee, the promisor can rescind the waiver by notifying them if: RS §84
Waiver of Condition
i. Notification was received within reasonable time to carry out condition or extension is
given AND
ii. (b) The rescission is not unjust b/c or reliance AND (If time hasn’t passed but there is
detrimental reliance, you CANNOT RESCIND) If time has not passed, the law is that the
party can revive conditions so long as there has been no prejudice.
iii. Promise is not binding apart of rule in 1.
1. This section applies to conditions that are more likely to be procedural or
technical. E.g. conditions that relate to timing or manner of return performance.
2. E.g. A insures B’s house. The policy says that it’s only payable if B gives written
notice of any loss within 30 days after it occurs. Fire happens but B gives oral
notice. A says this is sufficient. A has waived the written condition. A can’t rely
on B’s failure to give written notice
3. E.g. Condition on employment is no drinking. A drinks but B says “we don’t care
about drinking.” B waived condition.
C. Estoppel: one party has said or done something AND the other party has relied on it to her detriment.
(adds reliance to waiver)
a. Hypo: Two years ago, Hovenkamp bought a new car. He paid $50,000, so he borrowed $40,000
from Rasmussen. Hovenkamp pledged the car as collateral for the loan
i. Altman last month approached Craig about her buying the car for $30,000. Craig knew
that Rasmussen had lent money to Hovenkamp. Craig contacted Rasmussen about his
loan. Rasmussen said that Hovenkamp did not owe gim anything.
ii. Hovenkamp sold the car to Craig. He did not pay Rasmussen.
iii. Rasmussen sues Craig, asserting that the car is collateral for his loan nad that
Hovenkamp still owes him $25,000 and that Hovenkamp is no longer making payments
on the loan
D. Conditions of Satisfaction - When a term in a K is an express condition and has not been fulfilled, the
party who is not going to get the benefit of the other side’s performance can argue: There are 5 things
to argue that even if a condition hasn’t been fulfilled I should be entitled to other party’s performance.
a. Excuse (impracticability) under RS §271
b. Prevention – the party prevented from the condition from being fulfilled so the other party can
still recover
c. Waiver – closely intertwined w/ estoppel. The party must indicate that it is not going to insist
on the condition.
i. E.g. Party can waive its right to insist on arbitration.
d. Estoppel – closely intertwined w/ waiver where one party has said or done something AND the
other party has relied on it to her detriment.
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i. Both Waiver and Estoppel could be in play in a single set of facts.
ii. Difference: there might be a heightened standard with waiver. In estoppel, you need the
other party to have changed its position in reliance on the statement. If you’ve waived
something and the other party hasn’t relied on that waiver, you can go back and reinstate the condition. Once we have reliance by the party who otherwise would be
precluded from performance bc shes not fulfilling the condition, the waiver cant be
undone.
1. Excuse and Prevention – are basica K doctrines.
2. Waiver and Estoppel – they apply throughout law. Nothing in K law that gives us
waiver and estoppel. The.
e. RS §229 A condition that hasn’t been fulfilled and it is a nonmaterial condition of the K, the Ct
can just throw it out. We normally think that if a K requires a condition, the parties must follow
that. This is sometimes applied to insurance cases. Cts are very hesitant to apply this outside of
insurance situations
i. Craven could argue that she would lose her rights under the contract and ask to throw
that part of the contract away.
E. There is no doctrine of substantial performance when it comes to conditions.
a. Commercial Resource Group v. The JM Smucker Co.
b. A builder who does not complete a project in accordance of the K, but comes close to K, has
substantially performed. There was no condition in this case.
F. When condition of satisfaction: Reasonable v. good faith.
a. Reasonably satisfied: We are going to ask whether a reasonable person would have been
satisfied with that performance. If RP satisfied, we will deem condition as satisfied even though
the party is subjectively not satisfied.
b. Good faith: If the nature of performance is subjective in that different people would honestly
disagree whether condition is satisfied, we review the party’s objection only by good faith.
G. Examples
a. Fact pattern: Razz agrees to sell Blackacre to Dean for $100k and Dean agrees to buy Blackacre
for $100k. K is in writing. Closing is on July 1.
b. Hypo 1 - Dean doesn’t show up on July 1 but shows up on July 2 w/ $. Raz says deal is off. No
time of essence clause. How would we interpret K w/o TOE clause?
i. Dean is late. Dean didn’t show up July 1 as promised. Is this a promise or condition? Or
both? This is just a promise.
ii. Did he breach? Any deviation from promise is a breach. If we say it’s a promise, we say
he breached. Yes. If it was a condition, then he’s out of luck.
iii. Was showing up a day late a material breach, given that Dean was trying to cure the
breach? You could say that this was not material i.e., matter of convenience. Then it is
not a material breach, which means that Raz still must perform. If Raz fails to perform,
then Raz is in breach.
c. Hypo 2 – now K has TOC. Now this is a condition. TOC turns performance into conditions.
Remember Addie. There the parties don’t show up on date of closing. Deans out of luck.
d. Hypo 3 – TOC. On June 15, Dean calls Razz and asks whether closing can be moved to July 15.
Razz says sure. Is this an enforceable modification? Yes, he waived. Waiver is a concept. Yes,
verbal and voluntary. Does conduct lead us to believe that parties have waived?
e. Question - What if Raz calls up Dean on July 5th and says “on second thought, let’s stick to July
1.” This is not gonna work. Once you have waived a condition and time of performance of
condition has passed, the waiver is done.
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f. Hypo 4 – same phone call. Raz waived on June 15. Raz calls Dean on June 16 and says “2nd
thought, lets stick w/ July 1.” Still a waiver b/c he already waived. Can Raz undo the waiver? You
can undo waiver if time has passed and there’s been no reliance. Think about Joco Roco.
g. Go back to Hypo 3 – asked for a waiver bc he was gonna get inheritance. He didn’t rely on
waiver. Did nothing different. You don’t have to show reliance if the time has passed. If,
however, the time has not passed, the law is that the party can revive conditions so long as
there has been no prejudice. In Joco Roco, even if my actions in filing the lawsuit and going
through discovery counts as a waiver, I want to go forward and enforce agmt to arbitrate. The
agmt to arb. is still there. Let’s stay proceeding and rely on promise to arbitrate. Ct says you
can’t do that bc D has relied on your waiver. Notion about prejudice is not to make waiver
effective, but rather the person who waived rights says she wants to undo that wiaver you can
only undo that wiaver as long as other side has not been prejudiced by your waiver. Going back
to Hypo 5 – can Raz retract? Do we know whether Dean relied? It depends on whether Dean
relied. Had the Dean bought something else, he has clearly been prejudiced bc he doesn’t have
the cash. OTOH, Dean has done absolutely nothing. Same position on June 16 as he was on June
15. In that situation, we will say that waiver is no longer effective.
h. Common example: a lot of construction Ks specify that any modifications must be in writing.
Replacing wire. GenK pays for it mult. Times. It looks like that condition that all modifications be
in writing has been waived. But the owner can always revive condition by saying going forward
we will live by it. Owner can say to GenK that the parties go back to writing. GenK can’t say
“no.”
i. Four ways to get around failure to meet condition:
i. Doctrine of prevention under §245
1. If one party prevents meeting of condition
ii. Doctrine of impracticability under §271
1. If it is impracticable to comply and the condition was not a material part of the
agreement, it is excused
iii. Doctrine of disproportionate forfeiture under §229
iv. If leading up to the nonoccurrence of the condition, one party either waived the toeher
part’s obligation or gave them reason to believe that they weren’t going to rely on it,
then it’s estopped
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LIMITATIONS ON DAMAGES
AVOIDABLE DAMAGES
A. Duty to Mitigate – Common Law: After repudiation of K, the non-breaching party has a duty to
mitigate its damages and not continue to act and recover damages for completion of the entire K. (It
cannot take actions that will increase damages under K).
a. Note: Duty to mitigate is not an affirmative duty. P cannot recover damages P could have
avoided.
B. If non-breaching P fails to mitigate, non-breaching P cannot recover damages that s/he could have
avoided.
a. RS §350 Damages are not recoverable for loss that the injured party could have avoided w/o
undue risk, burden, or humiliation.
b. G Rockingham Co. v. Luten Bridge Co. (bridge): County awarded contractor K to build a bridge.
K price was $18,301.07. Contractor began building a bridge and spent $1900 on labor and
material. County repudiated but contractor finished the bridge anyway. Contractor sued for
expectation damages. Held: Contractor was not entitled to recover expectation damages.
Reversed for a new trial. After contractor received notice of the county’s repudiation, the
county had a duty to mitigate damages. Contractor did not have a right to continue
constructing the bridge and is therefore precluded from recovering damages.
i. Note: Non-breaching party’s primary concern is making profits; if NBP continues to do
useless work, this takes away time spent earning other profits. Had there been no duty
to mitigate, P could have recovered the entire K price.
c. A agrees to buy 50 jerseys from B. B goes out and procures the jerseys. A rejects the jerseys b/c
A does not want them anymore. B closes business. What are B’s damages? The closing of the
business is on B, not on A, b/c it’s not foreseeable. It’s not foreseeable b/c its efficient. This was
not a risk that A undertook. The risk of closing the business is a risk that B undertook.
C. Efforts to mitigate must be reasonable. (Burden is on breaching party to show that the non-breaching
party’s efforts to minimize damages were unreasonable)
a. Whether someone acted “reasonably” when mitigating is “undue risk, burden, or humiliation”
language in RS §350
b. Reasonable efforts do not require non-breaching party to accept inferior, non-comparable
alternative.
i. To determine whether the alternative is inferior: (2 approaches)
1. Factual diff b/w options - Some factual difference is enough to be “inferior”
2. Act reasonably - Factual difference is not enough. Employee must act reasonably
a. Parker v. 20th Century Fox Film Corp (acting job): P was offered a leading
role in both productions (musical vs. western) at the same rate of pay. P
did not get approval rights in the 2nd film. P sued for damages. Held: P
acted reasonably in rejecting 2nd role. No duty to mitigate b/c 2nd job was
inferior. Maybe rights were a big deal.
i. Note: The difference b/w majority (some factual difference that a
jury could believe is enough to win on MSJ) and dissent (no, the q
is whether employee acted reasonably) is the question.
b. Billetter v. Posell: Employee wasn’t required to perform the same work
for less pay in mitigation of damages.
c. Hypo 1 – USC wrongfully fires Raz. UCLA hires Raz. Raz refuses to take the
job. Are Raz’s damages reduced? It depends. If factual diff -> inferior. If
act reasonably -> may need to consider other factors like tenure,
distance, etc.
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c. Reasonable steps require affirmative steps.
i. In re WorldCom, Inc. (endorsement): P sued D for $8 mill in damages. D argued should
be $4 mill. Held: P had a duty to mitigate. Michael Jordan was not a lost volume seller
so he was not relieved of his duty to mitigate. He was not a lost volume seller b/c
evidence showed that even though he had the capacity to be one, he had no intention
of selling again (marketing his services as product endorser). D also met the burden in
showing that P did not take reasonable steps to mitigate damages b/c P did not take any
affirmative steps. P argued that he was excused from taking affirmative steps b/c doing
so would dilute his image/brand. Ct. disagreed b/c P was not confronted b/w the choice
of selling a sub-standard product and doing nothing.
1. Note: Q is what exactly P could have done given the breach? There are now a
subset deals P can take now.
D. If the non-breaching party is a lost volume seller those who have the capacity to enter both Ks – the
breached one and add’l ones), they are relieved from the duty to mitigate bc they have unlimited
resources or production capacity and would have the benefit of both contracts if the 1st K was not
breached. WorldCom. Neri was our classic lost volume seller.
a. If the non-breaching party can show that efforts to mitigate would force him w/ the choice b/w
selling a sub-standard product and doing nothing, they are relieved from duty to mitigate.
E. DUTY TO MITIGATE – UCC – Old Friends
a. UCC 2-706 - Seller’s remedies on resale: when buyer breaches and seller resells, seller gets diff
b/w K price and resale price. Seller has mitigated his damages by reselling the goods.
b. UCC 2-708 - If seller doesn’t resell goods, then buyer can sue under K and the damages will be
the difference is b/w K price and market price b/c seller could have sold it back into the market
but he didn’t. (Buyer pretends that Seller has resold price)
c. UCC-712 – Buyers remedies based on cover – Buyer can go out and cover. By covering, buyer is
mitigating his damages. Measure of damages will be cover price and the K price (how much
more did the buyer have to pay for the goods?)
d. UCC-713 If buyer does not cover (shuts down), then the measure of damages will be assuming
that buyer did cover. Can only recover b/w market price of good and K price (pretend that it
sold it back on market).
e. UCC-715 – Consequential Damages: you get CD that could not been reasonably recovered
otherwise.
CALCULATING LOST PROFITS
A. Breaching party cannot deduct profits earned from another party if the non-breaching party is a lost
volume seller.
a. Normally, the non-breaching party’s income from new business would mitigate the damages
owed to the non-breaching party, but b/c lost volume seller’s second sale would have occurred
even if D did not breach the 1st K. the profits from the 2nd sale would not mitigate the damages.
(Non-b party would have incurred income anyway so breaching party can’t point to it and
deduct this amount from its damages that it owes to the non-b p).
B. In case of anticipatory repudiation, the Non-Breaching Party needs to recover both its expected profits
(P) plus the fixed costs that it was going to recover through his K. 2 methods:
a. Recoverable lost profits = (Net profit of that K) + (% of fixed profit attributed to that K)
b. Recoverable lost profits = (K price) - (variable cost)
i. Variable costs – costs incurred only bc of this K.
ii. Fixed costs – costs would pay irrespective of K
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1. P (profits) = K (K price) – C (Costs)
2. C = f (fixed costs) + v (variable costs)
3. P = K – (f+v)
4. P = K – f – v
5. P - f = K – v (added f to both sides)
iii. Hypo - Recoverable profits is $300.
LIMITS ON CONSEQUENTIAL DAMAGES
A. Defn: Consequential damages
B. To recover consequential damages (lost profits), the non-breaching party must show that they were
reasonably foreseeable.
C. To determine whether damages were reasonably foreseeable, (1) the damages must be naturally
arising OR (2) if not, that both parties had contemplated at the time of the K that the particular
damage would be expected as a result of the BoK. “Hadley Rule”, RS §351, and UCC 2-715.
a. RS §351 - “ Damages are not recoverable for loss that the breaching party did not have reason
to foresee as a probably result of the breach when the K was made. Loss may be foreseeable
as a probable result of a breach because it follows from the breach (a) in the ordinary
course....”
i. The mere circumstance that some loss was foreseeable or even that some loss of the
same general kind was foreseeable, will not suffice if the loss that actually occurred was
not foreseeable.”
ii. (3) Up to the sense of the judge, no guidance
b. Naturally arising: The lost profits must be naturally arising / “natural and probable” result of
the breach in the ordinary course of things.
i. To determine whether they were reasonably foreseeable, courts must look to the
nature, purpose, and particular circumstances of the K.
ii. The actual loss must be foreseeable, not that some loss of the same general kind
would be foreseeable.
iii. Breaching party does not have to foresee the breach itself or the particular way the
breach would occur, only that the loss from a breach was foreseeable and probable.
1. Difference b/w tort law
a. Tort – injury has to be foreseeable, but all damages are recoverable.
b. K – breach does not have to be foreseeable. Once there is a breach, then
at that point, we ask whether the damages are foreseeable.
c. If not naturally arising, then non-breaching must show that beaching party must have reason
to know of any “special circumstances” that would result in the unusual or extraordinary
damages.
i. Breaching party may have reason to know if it was put on notice.
1. Mere Notice – mere notice of probable action or interest to the breaching party
is enough. Hadley
a. Hadley v. Baxendale (shaft): Held: P not entitled to lost profits from mill
being shut down after delay in delivery of shaft. D (Engineers) had no
reason to know that a delay in the shaft would cause the mill to shut
down and lost profits to incur. The statement that the shaft must be
returned “immediately” was insufficient to put engineers on notice.
i. Standard is basically “Would a reasonable person with this
knowledge have understood what the likelihood of this was”
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b. Sunnyland Farms, Inc. v. Central New Mexico Electric Cooperative Inc.:
Tomato factory not entitled to recover lost profits b/c electric co failed
to pass mere notice test b/c while they knew that P might need
electricity to grow tomatoes, they had had no reason to know that P
would likely start fires (P’s negligence) or that electricity would be used
to put out fires. (Even if some damage to the crop was foreseeable, the
particular damage that occurred was not.)
i. Court is rejecting tacit agreement test, you have to show not that
if you turn off the power, bad things will happen, but show that
you knew that there could be a fire that could not be put out
because of the incompetence of employees.
2. “Tacit Agreement” - Mere notice to the breaching party of “some interest” or
“probable action” is not enough to put the breaching party on notice to recover
lost profits. Parties must have tacitly consented to be bound by more than
ordinary damages.
a. RS Comment a to §351 “Parties need not make a tacit agreement” ....
b. Globe Refining Co. v. Landa Cotton Oil Co. D was supposed to fill P’s
tankers w/ crude oil. P had to incur certain expenses. D repudiated. P
sued for loss of use of its tankers which included (1) inability to make
promised sales to its own customers (2) expenses associated w/ having
to get more expensive oil from another source. Held: P not entitled to
recover all the damages. P only entitled to recover minimum damages
b/c it was not reasonably supposed at the time of the K that D was on
notice that the failure to deliver the oil would result in all these extra
damages. Parties must explicitly agree.
c. Bi-Economy Market Inv: Held: P entitled to recover. Parties bargained
for the benefit that D had reason to know of. The whole purpose of
business interruption insurance is to get money to keep the business
going. Insruance company must have agreed to be aliable for the closure
of the business if they don’t pay. And there was an add’l performancebased provision that provided that D had to act promptly.
D. P must show that the amount profits must not be remote or speculative and may be shown w/
reasonable certainty.
a. RS 352 Damages are not recoverable for loss beyond an amount htat the evidence permits to
be established w/ reasonable certainty.
b. Proving lost profits depends on the nature of the transaction. If it’s complex & extends into the
future or based on the loss of other transactions, it depends on whether P is a well-established
business or not. if P is a well-established business, P can prove by pointing to past
performance. If P is new, then P can show through expert testimony/evidence. RS §352
Uncertainty as a Limitation on Damages Comment b. Proof of profits.
c. Evidence must reasonable, not precise.
i. No sales history -> insufficient evidence. Extrapolation from different regions was
unreasonable.
1. ASK Chemicals LP v. Computer Packages, Inc. P could not recover lost profits
b/c profits were too remote/speculative b/c P’s evidentiary submissions were
insufficient. Failed to submit detailed evidence. P tried to extrapolate data from
sales in one region of the world to another.
a. Other: Hours/labor estimate for that particular K.
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ii. P’s newness is a “factor” to consider when calculating damages, not a rule against
awarding damages.
1. MindGames Inc. v. Western Publishing Co.: New game manufacturer was not
entitled to recover lost profits or renewal fee b/c it was a new business. Lost
profits in new businesses are often too speculative and uncertain. Game
manufacturer failed to provide any evidence to produce even a rough estimate.
Game’s claim of lost royalties on intellectual property are like those earned of a
book or movie, which is too uncertain.
2. Freund v. Washington Square Press, Inc: Royalties would not be ascertained w/
adequate certainty. P entitled to nominal damages only bc D only owed to P the
percentage of sales from the publication, not the actual
manufacture/binding/delivery of books etc. Had the K been so, P might have
been able to recover cost of replacement/completion.
E. Emotional Damages: To recover damages for emotional distress under BoK, P must show that the
parties formed a K meant to secure the protection of personal interest, rather than showing that
mental distress was reasonably foreseeable.
a. RS §353 Emotional damages will be excluded unless the breach also caused bodily harm or the
BoK is of a kind that serious emotional disturbance was a particularly likely result. Very
narrow scope
i. Valentine v. General American Credit Inc. Terminated employee was not permitted to
recover mental distress from “being deprived of her piece of mind” for not having job
security. The goal of K law is first economic. K cannot compensate for all types of losses.
That is what tort law is for.
F. Punitive Damages: not recoverable under BoK unless conduct constituting breach is also a tort for
which punitive damages are recoverable. RS §355.
G. UCC – Land
a. UCC 2-712(2) Buyer gets diff bw cost of cover and K price, together w/ any incidental or
consequential damages.
b. UCC 2-713(1) When buyer does not cover, gets diff b/w mkt price and K price, together with
incidental and consequential damages
c. UCC 2-714(2) If buyer receives goods, but not as warranted, buyer gets diff b/w value of good
as warranted and value of good received, together w/ incidental or consequential damages.
d. UCC 2-715 (1) Incidental Damages – include expenses reasonably incurred in inspection,
receipt, transportation....... (2) Consequential – any loss resulting from general or particular
requirements and needs of which seller at the time of contracting had reason to know and
which could not be reasonably be prevented by cover or otherwise.
e. Tacit Agreement - Comment 2 2-715
REMEDIES
Remedies
Damages are the effect of legal enforcement.
RS §344. Purpose of Remedies.
(a) “Expectation Interest” of being “put in a good a position as he would have been in had the contract
been performed.”
(b) “Reliance Interest” of being “reimbursed for loss caused by reliance on the contract by being put in as
good as a position as he would have been in had the contract not been made”; or
(c) “Restitution Interest” of being “restored to him any benefit that he has conferred on the other party.”
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EXPECTATION – Gains prevented. Profits Lost.
A. Putting P in as good as a position that P would have been had K been performed. RS §347 and §344(a)
a. Note – We want to capture the value of the injured person’s expectation – The value of his
expectation might be close to the market or greater than the market.
i. Hawkins v. McGee
i. Hairy hand case
ii. If one party breaches a contract, the non-breaching party may recover damages
based on the difference between the value of the contract as fully performed and the
actual value of the non-breaching party’s present condition, plus any incidental
damages reasonably foreseeable to all parties at the time of contract formation
iii. Damages:
i. Choosing expectation here: putting plaintiff in as good a position as he would
have been in had the defendant kept his contract
ii. Cannot recover cost of surgery because if the contract were fulfilled, he
would have paid it. Cannot recover for pain and suffering because Hawkins
agreed to undertake the pain and suffering when he agreed to the surgery
i. Damages were the difference between “perfect hand” and actual
hand
1. Difference between what Hawkins could have earned with a
perfect hand and with the hand he has is one way to calculate
cost of damages
2. Or try to calculate quality of life differences
3. Other possible measure?
a. §344(b): “Reliance interest is his interest in being
reimbursed for loss caused by reliance on the contract
by being put in as good a position as he would have
been had the contract not been made”
i. Basically, difference between the hand he had
before and hand he has now344
iv. Hypo: With current roof, house is worth $500,000. Asks Hovenkamp Construction
how much a roof is. HC asks if you want a good roof or a great roof, you say great
roof, HC says you need USC shingles, which will cost $10,000. Go to real estate agent,
who assures you that if you spend the $10,000 and get the new roof, the value of the
house will go up to $520,000. HC starts working, makes a mistake, and uses Bruins
shingles instead, which makes house worth $512,000. You sue HC
i. Expectation damages: $8,000
B. P has a right to damages based on his expectation interest measured by: RS §347
a. Loss in the value of him of the other party’s performance caused by its failure PLUS
b. Incidental or consequential loss caused by breach
c. Any other cost that he has avoided by not having to perform
C. The non-breaching party reserves the right to ask for (1) dim of market value or (2) cost of completion.
The only time we take away cost of completion is if that number is “out of whack”: “clearly
disproportionate. RS §348
D. Diminution of Market Value - The diminution in the market price of the property. (aims to
compensate, not overcompensate)
a. Damages limited to difference bw K price and Mkt value of goods.
b. Entitlements and obligations are cut off and determined at the date set by the K.
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c. Look to the value of performance to the non-breaching party rather than gain to the party in
breach. (The fact that the farmer gained by the breach bears no relevance to the analysis of
whether the injured party was harmed. We don’t care about the effect of the breach to the
breaching party)
i. Acme Mills – Farmer John promises to sell to Acme Mills $50/bushel. Farmer John hears
through the grapevine that Acme might be bankrupt. Farmer John sells someone else
for higher price. On delivery date for Acme Mills, the price of wheat drops to
$40/bushel. Acme sues.
i. Acme’s expectation = to buy at $50/bushel K price
ii. Acme ended up = can buy at $40/bushel
Mkt Price
iii. Acme’s Expectation Damages = $0
(-$10)
ii. E.g. – Farmer promises to sell to Buyer 100 bushels for $50/bushel (Total $500). Price
drops to $40/bushel on delivery date. Buyer refuses to buy from Farmer. Farmer sues
Buyer for $500. Farmer is entitled to diff b/w K price ($50) and Mkt price ($40) = $100.
i. Farmer’s expectation = $500
K price
ii. Farmer ended up = can sell on mkt for $400 Mkt Price
iii. Farmer’s Expectation Damages = $ 100
i. We wouldn’t let Farmer recover entire $500 bc he could sell it for $400
and end up w/ $900 in total ($500 from Buyer’s breach and $400 from
selling the same wheat on the mkt)
ii. So Farmer gets $100. He could sell the wheat back on mkt for $400. So in
total, he has $500, which was the K price.
d. Construction cases: (value of land as-is) – (value of land it would have been) Peevy
E. Reasonable* Cost of Completion - The reasonable cost of completing performance or of remedying
the defects.” - as long as the costs are not clearly disproportionate to the actual loss in value suffered.
RS §348
a. When there is a personal value to the non-breaching party (& that breaching party knew) that is
not reflected in the market value, the cost of completion may be the most appropriate
measure of damages.
i. Groves v. Wunder Co. – large cost of completion. Groves leased land to John Wunder
and Wunder promised to leave the property at uniform level. Wunder boy breached and
removed gravel. Wunder boy argued that dam were limited to mkt value of land instead
of cost of completion to put the land at uniform level. Held: entitled to cost of
completion.
i. $60,000
Cost of Completion
ii. $12,160
Mkt Price w/o defect
i. Hypo: Own an iMac computer and turns out on/off button doesn’t work
properly. Take it to John Wunder Tech Co., says it’ll cost $50 to fix. Agree
and give the computer to him. Wunder unintentionally breaks the
computer. Wunder is a good friend of Tim Cook and asks him to help and
asks how much it would cost to fix the computer. Cook says it would cost
$5000. A new computer costs $2000.
i. Should recover $1950
ii. Marsh hypo: Wunder promises to turn Grove’s front yard into marsh for
$17,000, but he does not show up. Cost of getting a substitute landscaper
is $25,000. The marsh would reduce the value by $25,000.
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i. Groves should recover $8,000 to pay for the difference in costs to
hire the substitute landscaper
ii. Difference between this hypo and the iMac hypo is that Groves
specifically values the marsh more than anything else. In the iMac
hypo, one computer is the same as the other.
1. What would a reasonable party, in the place of the
breaching party, know about what the plaintiff values in
the contract?
iii. What if Groves values the marsh more than $25k?
1. Doesn’t matter because Groves can capture all the value
by paying the substitute landscaper to complete the marsh
b. If a case is limited to tearing down a structure, then it makes more sense to give market value
than cost of performance.
i. If defective or partial performance is rendered: (value that the performance would have
had if there had been no breach) – (the value of such performance as was actually
rendered)
i. In principle, this requires a determination of the values of those performances
to the injured party himself and not their values to some hypothetical
reasonable person or on some market.” RS 347 Comment b.
F. The decision to apply either diminution of value or reasonable cost of completion measure of damages
is a reasonable inquiry, whichever one a fact-find determines of which that would make the injured
party whole.
a. G Landis v. William Fannin. Trier of facts picks what is reasonable. Green siding, custom home
case
i. Landis shows us what counts as clearly disproportionate is up to the factfinder. Landis
shows us that reasonable minds can differ-> jury will decide. The factfinder found that it
wasn’t disproportionate, so they are entitled to the cost of completion.
i. Cost to replace improper siding: $66,906.24 (cost of completion)
ii. Loss of market value with improper siding: $8,500 (diminution in market value,
cost of painting over with solid stain)
iii. The jury decides. There was enough evidence to show that the value wasn’t
clearly disproportionate. Landis’s goal was to create (1) custom-built house and
(2) the specific aesthetics. They wanted a specific design and agreed to choose
any material. The semi-transparent color was specifically chosen to achieve the
rustic look. Because Landis had a special value on the siding, the loss of market
value is not enough to fully compensate the Landis’.
ii. Best argument for the builders is that the cost of the repair is 20% of the value of the
house, which is very disproportionate to the cost to repaint the siding in the solid stain
b. Peevyhouse v. Garland Coal. Peevy leased land to Garland. Garland was to fill the pits in and
smooth the surface. Held: The Peevys were limited to diminution to market value.
i. Unlike Landis, court implicitly concluded that there was no question that the cost
of completion was clearly disproportionate.
i. Cost of completion to level: $29,000
ii. Diminution of market value: $300 (market value of Peevy’s land as is)(value of Peevy’s land had Garland leveled it)
i. The chosen measure because evidence shows that cost of
completion was clearly disproportionate
ii. Prof thinks this decision is hard to justify
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c. Acme Mills v. Johnson. Farmer Jon promises to sell to Acme Mills $50/bushel. Farmer John
hears through the grapevine that Acme might be bankrupt. Farmer John sells to someone else
for higher price. On delivery date for Acme Mills, the price of wheat drops to $40/per bushel.
Acme sues
i. Acme’s expectation: to buy at $50/bushel (contract price)
ii. Acme ended up: can buy at $40/bushel (market price)
iii. Acme’s expectation damages: $0 (saving $10/bushel)
i. Just because there is a breach doesn’t mean there are damages
EXPECTATION - UCC
A. Cover – Party that is not breach can take actions to lessen harm caused by breach.
a. Buyer’s Right to Cover w/o UCC: Missouri Furnace re forward K: Seller entered a forward K w/
Buyer for 1 full yr. Seller breached “we’re not going to perform in the future.” Seller owed
Buyer $39k/ Mkt price of forward K was less
i. Held: Buyer covered at its own risk. – This is wrong. Today we have UCC 2-712.
b. UCC §2-712 Buyer’s Right to Cover: (K price – Cost of Cover) + (Incidental & Consequential
Damages) – (Expenses Saved).
i. Measure reasonable action of covering at the time, not after the fact (must be good
faith).
ii. Buyer may cover in good faith without unreasonable delay if the seller breaches.
1. Must have covered in good faith. It doesn’t matter whether covering turns out to
be more expensive than contract but can’t be unreasonable compared to mkt
price.
2. The buyer is not required to find cover but he is limited in his award if significant
damages could have been avoided by cover.
c. UCC §2-713 If Buyer Doesn’t Cover: (K price – Mkt price valued at the time Buyer learned of the
breach) + (incidental damages) – (expenses saved)
i. Acme Mills- resulted in nothing
ii. Comment 5- provides a remedy which is completely alternative to cover and pplies
only when and to the extent that the buyer has not covered
d. UCC §2-716 Buyer’s right for Specific Performance –
e. UCC §2-706 Seller’s Right to Cover: (K price – resale price) + (incidental damages incurred by
resale) – (expense saved from breach). Seller’s resale including contract for resale
i. We encourage Seller to engage the same: sell the good back into the market. To the
extent the Seller gets less than the contract price, Seller will get the difference + cost
incurred by the resale (Neri: cost incurred). The only difference between Seller and
Buyer is the issue of loss of profit that wouldn’t have otherwise occurred.
ii. Under the conditions stated in 2-703
f. UCC §2-708 Seller’s right to Lost Profits: (1) (K price – Mkt price) and (2) If remedy in (1) is
insufficient to put seller in a position it would have been, S is entitled to recover lost profits.
Seller’s damages for non-acceptance or repudiation
i. The loss of a prospective profit, where the seller has an unlimited supply of standard
priced goods, is an expectation damage. Neri v. Retail Marine Corp (1972): stands for (1)
Lost value of profit and (2) restitution. Lost volume seller. Retail Marine argues that they
are entitled to lost profits thtat they incurred by having to sell the boat to another
customer, when they could have made the profit of 2 boats had the Neris not
repudiated.
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g. UCC §2-709 Seller’s Action of Price: If buyer refuses to pay, seller can recover the K price of the
good if seller is unable to resell.
h. UCC §2-710: Seller’s Right to Incidental Damages; Seller gets incidental damages in all cases
(Neri – cost of storage)
i. UCC §2-718 Liquidated Damages: Codifies restitution for Buyer. Buyer can sue to get $ back,
whether or not there was K or not.
i. Buyer get the goods, inspects the same, and is defected in some way. Buyer keeps. This
is still a breach on part of Seller. Measure of expectation damages: (how much good
promised worth) –(goods received)
ii. Neri – Buyers paid deposit for boat and breached. Despite breach, buyer is entitled to
get their deposit. But this doesn’t preclude the Seller from going after Buyer for K
damages.
RELIANCE – Losses incurred. Lost investment.
Proxy for Expectation damages.
A. Putting P in as good as a potion that P would have been had they not acted in reliance on the
contract. Basically as if the contract had never existed
B. Reliance damages = (Costs incurred in necessary preparation for performance) – (amount breaching
party can prove w /reasonable certainty that injured party would have lost had performance been
completed) RS §349
a. Reliance -. A & B K for a party. A spend $ preparing for the party. Party is canceled due to B’s
breach. A gets $ spent preparing for party. “I would not have spent this money if I knew the
party wasn’t going to happen.”
b. Expectation – A & B k for a party. B promised that A would have made $ off the party. Party is
cancelled due to B’s breach. A gets the profits
C. Reliance damages are capped by expectation damages.
a. Hypo - A decides to sell law review articles and enters contract with B. A spends $1,000 on
interior designs (in reliance). B breaches. A would have lost his entire investment had the
project gone through.
i. Reliance damages would be $0. ($1,000 – lets say $1 mil loss)
D. The burden is on breaching party to show with reasonable certainty that had the K been fully
performed, that there would have been a loss. Then the breaching party can deduct that loss from the
reliance amt. RS 349
a. G World of Boxing v. King King argues that reliance damages should be capped at tix sales b/c
WOB stood only to benefit from tx sales. Held: WOB is entitled to reliance damages but is to
deduct $75k in revenue from the tix sales. King couldn’t prove w/ reasonable certainty that
WOB was going to lose $.
i. The Ct. rejects King’s argument that reliance damages should be capped at $98,607
(value of tickets that WOB had to refund) b/c King argues that WOB stood only to
benefit from ticket sales already realized b/c there are at least 2 other benefits WOB
would have enjoyed:
1. Revenue during and after the fight: TV broadcast, promotional and advertising
activity
2. Future benefits: re-broadcasting, continued business relationship, positive track
record.
ii. To cap reliance damages, breaching party must show that the losses were inevitable.
Here, WOB’s investment in the bout was not fated to be a losing investment.
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b. G Dempsey – Dempsey was to get $300k, $500k at least 10 days before fight, 50% net profits
over $2 mill, and 50% movie rights. Dempsey repudiates.
i. Wants an injunction to keep Dempsey from fighting Tunney and try to force him to fight
Wills
ii. Expectation Damages: Coliseum wants lost profits (classic expectation) but it cannot
prove w/ reasonable certainty.
iii. So it wants $ incurred in reliance:
1. Expenses incurred in Indiana litigation – no
2. Attt fees – No
a. “American rule” each side bears its own attorneys’ fees. In civil rights law,
prevaliding side can get their fees paid for. Can be changed by contract
3. Expenditures before Dempsey K – No
a. Since Wills contract was signed before Dempsey, Dempsey not
responsible for any fees given to Wills
b. Cts are split whether P can collect expenses prior to K
4. Expenditures after Dempsey K – Only the travel expense to get Dempsey take his
physical plan and the $ for railroad facilities if it can show that they were
incurred in furtherance of the general plan. Could get wages but not salaries if it
can be shown they were incurred in reliance. $ paid to Weisberg was not
recoverable b/c it depended entirely on the success of the exhibition.
c. Hypo – based on Dempsey
i. Gross gate receipts
$2 million
ii. Costs:
1. Wills
$50k
2. Dempsey
$800k
3. Rental, publicity, etc $650k (with $100k of this incurred prior to signing
Dempsey)
4. Total Costs
$1.5 million
iii. Net Profits:
$500k ($2 mill – $1.5mill)
iv. Expectation: Demsey breaches and all receipts are returned.
1. Profits
$500k
2. Spent:
$1.5 million
3. Expectation damages $2 million
v. Reliance: $1.35 million b/c Wills was signed before Dempsey so ($1.5 mill - $50k and
$100k) (Reliance here was total costs incurred in reliance)
d. G Albert v. Armstrong. Albert sued Armstrong’s breach for sending the refiners back.
Armstrong counterclaimed against Albert b/c they claimed that Albert’s failure to deliver to
deliver 2 of the refiners caused them harm. Albert breached by failing to deliver the refiners.
Armstrong wants to sue for expenses incurred on Albert’s promise to deliver the refiners: cost
of laying the foundation $3,000.
i. Albert argues that Armstrong’s expectation damages are negative: “Had we delivered
the refiners, you would have lost even more.” – Ct says that the burden is on Albert to
prove that Armstrong would have lost money. Then we can deduct those losses from
the $3,000 that Armstrong spent. But Albert couldn’t prove, its on the hook for it.
ii. Held: Armstrong is entitled to: (net earnings of the refiners w/ value of scraps) – (cost of
refiners $25,500 + cost of installation $3,000)
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E. Burden doesn’t shift over to the breaching party until the nonbreaching party can satisfy the causal
link.
a. G Merry Gentleman: Movie sucked. Merry blames Keaton b/c he failed to prep it in a timely
fashion and promote it up to par. While Keaton might have breached, he did substantially
perform. The alleged breaches had to do w/ the quality of the movie as opposed to nonperformance. Therefore, the causal link wasn’t as direct. Merry can’t claim that all its
expenditures were caused by the link.
i. Merry can’t say that the investments it made were completely worthless. (Reliance –
you got to prove that you wouldn’t have incurred the losses if the project hadn’t fallen
through b/c of the other party. It might have fallen through anyway had Keaton done a
great job).
F. Examples
a. Hypo 1 – C sells photos. R is willing to pay $500. Mkt price is $400. C and R make a contract for
$300. R incurs reliance exp of $50 for the jersey. G offers H $325 for it.
i. R’s expectation damages = $100
ii. R’s reliance damages = $50
b. Hypo 2 – same facts but this time G offers C $800. – social welfare would increase if C took this
offer b/c everyone gets what they want. C still nets. So sometimes breach is good
c. Hypo 3 – same facts but this time G offers C $375
i. R’s expectation damages = $100
ii. R’s reliance
RESTITUTION – Outside of K law. Essence of claim is that the plaintiff has bestowed a benefit on the
defendant. Neris bestowed the benefit of the deposit on Retail Marine and now they want it back
Exists outside of K law. The paradigmatic case is Greys Anatomy – if Dr renders services, you must compensate
her for her services even if you die. Under restitution, you must provide compensation even in the absence of
a K. Restitution is not a subset of K law. Tort law is about the law of harm. Restitution is about the law of
benefit. When you receive a benefit, when do you have to give that benefit back when it is unjust?
A. Restitution damages tends to be less robust
a. Hypo 1 – Roth and Raz K for $100k for den. Roth spent $30k. Raz kicks her off the job. What can
Roth recover? Expectation. Or Reliance. Or Restitution.
b. Hawkins v. McGee
i. Expectation: perfect hand v. worse hand
ii. Reliance: Not so good hand v. worse hand
iii. Restitution: whatever fee he paid Dr. McGee
B. When can parties bring a restitution claim? In the cases below, it is the case always the non-breaching
party is bringing the suit but finds that restitution offers a larger recovery than suing under the K to
recover expectation or reliance (except for RS §39)
a. When the underlying K is unenforceable, a party may bring a restitution claim.
i. Boon v. Coe - Oral K (lease land for 1 yr) is not enforceable per Statute of Frauds.
ii. Kearns v. Andree – Parties had indefinite promise so agmt is unenforceable. Promised to
get a mortgage. Buyer backs out. Seller sues and wants to enforce K. But not
enforceable b/c did not specify what the terms of the interest rate of the mortgage
would be.
iii. Farash v. Sykes. – Oral agmt for 2 yr lease. Not enforceable per SOF.
b. When it is difficult to prove expectation or reliance damages, a party may bring a restitution
claim.
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1. When the non-breaching party had a “losing” K. (Mobil Oil v. US; US v. Algernon
Blair: Gen breaches by not paying so sub ceases work. Court said it didn’t matter if sub
would have lost restitution awards the reasonable value of services measured by mkt
price at the time the services were rendered NOT discounted by loss)
c. Where the party has deliberately breached the K and our normal K remedies are not sufficient
to adequately compensate the non-breaching party, the non-breaching party can force the
breaching party to “disgorge” the profits received from the breach. RS 3d §39
i. Usually in cases where a party has committed 1st material breach and cannot recover
under K, so it’s only hope is an action under restitution.
1. Britton v. Turner
2. Vines v. Orchard Hills, Inc.
C. “Doing and Giving” Problem: when underlying K is unenforceable, but D has received a benefit.
a. A party is entitled to restitution only if he has conferred a benefit to the OP by way of part
performance or reliance. RS §370
b. G Boon v. Coe: Oral K (lease land for 1 yr) is not enforceable per Statute of Frauds. P wanted
damages for time for travel. P not entitled to damages. P cannot recover restitution damages.
i. Today we would invoke RS §139: reliance can take a K out of statute of frauds if that
reliance is reasonable and foreseeable. Cts are split whether they follow RS §139.
1. Promisor must reasonably expect
2. Court has huge discretion- can not enforce if it believes NOT unjust to NOT
enforce/ can also limit the remedy
3.
(1) A promise which the promisor should reasonably expect to induce action or
forbearance on the part of the promisee or a third person and which does
induce the action or forbearance is enforceable notwithstanding the Statute of
Frauds if injustice can be avoided only by enforcement of the promise. The
remedy granted for breach is to be limited as justice requires.
4. (2) In determining whether injustice can be avoided only by enforcement of the
promise, the following circumstances are significant:
5. (a) the availability and adequacy of other remedies, particularly cancellation
and restitution;
6. (b) the definite and substantial character of the action or forbearance in
relation to the remedy sought;
7. (c) the extent to which the action or forbearance corroborates evidence of the
making and terms of the promise, or the making and terms are otherwise
established by clear and convincing evidence;
8. (d) the reasonableness of the action or forbearance;
9. (e) the extent to which the action or forbearance was foreseeable by
the promisor.
c. G Kearn and Farash: in both cases, owner made changes to property at the request of the
buyer under a K that was ultimately deemed to be legally enforceable. K was not performed.
i. In applying RS §370: there would be no recovery of restitution b/c when owner altered
property in Kearns, this was the owner’s property (not buyer)
ii. In Farash, when improvements were made, this was still the owner’s property. There
was no benefit to the owner. However, there was
iii. Explaining Kearn and Farash:
1. They are wrong. See Boon v. Coe.
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2. Tort-like theory akin to promissory estoppel. RS §90. In both situations, P relied
on statements made to make the improvements.
3. Just one-off cases
4. Expanded notion of “benefit”: at the time of action, there was no benefit but
they expected that a benefit would be incurred.
a. K – Buyer would buy and benefit expected after sale
b. F - Lessee would take possession and get benefit from possession
D. Losing Contract: When breaching party was saved losses from breach. (It’s odd for breaching P to win)
a. Hypo - Raz and Roth den for $100k. Roth started working and made a mistake in calculating
the profits. She’s spent $120k. Raz doesn’t want den and kicks her off. It would have cost Raz
$60k to complete den according to specification.
i. Roth’s EP: Where Roth is now vs. Roth would be had she completed. Expectation
damages are $40k
1. Now: out $120k (Currently Roth is out $120k)
2. Without breach: she would have lost $80k (Had she completed, Roth’s total
expenses would be $180k in expenses and $100k K price)
ii. Roth’s reliance: $40k b/c Expectation damages cap reliance damages.
1. $120k – expected loss ($80k)
iii. Roth’s restitution: there are 4 different ways to measure restitution damages. She has
conferred a benefit.
1. Full Restitution (Restatements and Algernon) - $120k
a. RS ? - Injured party is entitled to restitution for any benefit that he has
conferred to other party. The injured party has a right to restitution.
i. Had Roth finished den, spent $180, all she gets is K. But b/c Raz
breached,
b. RS 371 - can be measured at reasonable value of what it would have cost
him to obtain it from a person in the claimant’s position (cost to hire
someone else) or the property increase.
c. RS 373 comment d. - People are all over map about this.
2. Cap at K price - $100k b/c Roth never expected to recover more than $100k
anyway. Other people argue that Raz, the breaching party, should not limit the
non-breaching party’s damages.
3. Cap at Expectation - $40k b/c Roth made a bad deal. Raz’s breach should not
relieve her of the risk that she voluntary agreed to bear. If we don’t cap
expectations, Roth has an incentive to induce Raz to materially breach (b/c she
would get full restitution damages). Roth would be able to perform less if she
recover full restitution after other party’s breach.
4. Loss- Sharing - $100k [K price] x ($120k /$180k) [work completed]
a. G Kehoe v. Rutherford – P can recover the product of K price and the %
of the work completed.
b. This result is attractive bc there is no ‘discontinuity’ on full performance.
With full restitution, her damages increase every day until she completes
K. That’s weird b/c her $ she can recover is greater before she actually
completes. That would not happen under loss sharing.
iv. There is a $80k loss. How do we allocate that loss b/w Raz and Roth?
1. Under full completion, Roth bears loss.
2. Under full restitution, Raz bears the loss. (She loses nothing. Reimbursed for
everything and loses $80k b/c Raz expected to pay $10k)
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3. Under full restitution capped by K price, Raz bears loss up until Roth has spent
the K price. After that it falls on Roth.
4. Under restitution capped by expectation, Roth bears the loss.
5. Under loss sharing, the loss is split, with more that Roth does, the more loss she
bears up until full performance she bears the loss.
E. RS 3d §39 – (1) The breach at issue must be deliberate. (2) the benefit normally received under
expectation damages would not normally compensate the party. (Maybe the loss was too uncertain)
(3) that it is just to force breaching party to disgorge any profits that it made b/c of breach.
a. Justice Scalia: RS §39 is not the law b/c to recover restitution, a benefit must be conferred.
Here the non-breaching party has not conferred a benefit on someone else.
i. Some say that RS 39 is a bad idea
b. Restatators: This simply recognizes results in other cases – Laurin in which prior to
reconveyance, the seller removes gravel. The market value of the land was the same regardless
of the removal of wooden gravel. The Ct. said the breaching party got a value of the wooden
gravel. The market might not have been good at valuing the wooden gravel. There was (1) a
deliberate breach i.e. seller took the gravel off the property (2) our system of finding value is
imprecise and therefore will not adequately compensate nonb party i.e. both value of property
was the same. But there was a loss. Therefore there is RS 39 restitution case.
i. We only invoke RS 39 where expectation damages do not put non-breaching party had it
would have been if performance occurred.
c. Enslin v. The Coca-Cola Company. D lost P’s data. Can bring action under RS 39.
i. The promise that was breached: Keep information secure. Coca-Cola argues that there
was no promise.
ii. The breach was deliberate: Coca figured how much it would cost to protect data and it
was too expensive, so it chose not to secure data.
iii. Cannot show damages w/ certainty: the data was stolen so it is difficult to demonstrate
damages.
d. Hoffman v. L & M Arts Health System, Inc. – Red Rothko. Confidentially clause to keep “all
aspects” of transaction confidential. It was a public auction and catalogue included pictures of
her in front of painting. P sues for breach of confidentiality. Lower ct awarded P’s damages
against middleman, not against Buyer/Seller.
i. What would P’s expectation damages would have been? Emotional distress. $0.
ii. What are P’s RS §39 restitution damages?
1. Ct. says that there was no breach of confidentiality. But even if there was a
breach, P cannot recover under RS §39.
2. P cannot recover under RS §39 b/c Texas would not apply RS 39.
iii. There is no way to reconcile both Hoffman and Enslin. RS §39 is a new principle.
F. Restitution to Party in Breach: party in breach can recover in restitution Neri – Neris breach but sought
to recover under UCC 2-718(2) & (3) had a right to restitution to get deposit back subject to (3) that
says we will not allow right of restitution to lessen seller’s expectation damages.
a. UCC 2-607 a breaching seller can recover in restitution.
i. Raz K with Hov to have Hov sell Raz 4 jerseys at $400/each, 1 shipped a month, but
payment after shipment. Hov sends 1 jersey and Hov stops sending (breach). Raz has 1
jersey. Hov (seller) can bring 2-607(1) against Raz (buyer) to recover in restitution the
amount of 1 jersey.
b. Britton v. Turner- created right of restitution for party in breach.
i. Britton K with Turner for 1 yr employment. Payment at the end. Britton walks off the
job. Britton has breached. Britton (breaching party) sues Turner (non-breaching party).
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ii. If we do not allow restitution here, the party who tries to complete the K but fails is
worse off than the party who never tries at all.
1. 1st case - Assume that Turner can replace Britton for the same cost at any time. If
Britton walks off immediately after K, Turner gets $0 expectation damages b/c he
can replace at the same price.
2. 2nd case - But here, Turner hires someone else for 2.5 months and pays them
$25.
3. In 1st case where Britton doesn’t try, Britton loses nothing (Britton loses less
when he doesn’t try). 2nd case, Britton really tries, but loses the value of his labor
and Turner pays only $25 (Britton loses more if he tries than Turner). More
logical to allow Britton to recover value of services, but not more than K.
c. Hypo – Raz and Roth den for $100k. Roth spends $60k and walks off the job. It would cost Raz
$80k to complete the job. What are Roth’s damages in restitution? It depends on what Raz
does. How much has Raz’s wealth increased?
i. RS 374(1) if party justifiably refuses (Raz not paying), the party in breach (Roth) is
entitled to rest for any benefit shes’ conferred in excess of the loss she’s caused by her
own breach. Comment b. Since Roth is responsible is posing the problem, doubts will be
resolved against her....
1. Raz spends $80k to complete: Roth can recover $20k. (He benefitted by $20k)
d. G Vines v. Orchard Hill. K price for condo was $78,800. Vines put down 10% which the K
specified as liquidated damages. Vines breached. Vines wants to recover security deposit.
i. Issue 1: Can Vines recover under restitution? Yes.
ii. Issue 2: Can Vines recover liquidated damages as restitution? In NY, that 10% damage
clause is enforceable i.e. Vines cannot use right of restitution to get around it. However,
in Connecticut, the law is different. Cts will respect guess at damages in advance if that
attempt was a good faith estimate of damages at the time of K or turned out to be good
faith after the fact. Under this rule, we should enforce clause b/c 10% is norm when
sellers breach housing Ks. In Conn if your liq dam clause was good faith + reasonable at
time K but in fact, no damages actually occurred, then the clause will be stricken. Held:
remanded to figure out whether damages actually occurred bc Orchard did sell the
house but that sale happened way after the breach occurred. Need to look value at the
time of the breach.
LIQUIDATED DAMAGES
Cts will sometimes strike down provision of K not b/c there is a defect in bargaining process, but rather that
the clause is designed to penalize the breaching party.
CONTRACTING UP
A. RS 356 – Liquidated damages are enforceable if:
a. The amount estimated is reasonable either at the time of contracting or at the time of injury
b. It is difficult to prove loss.
c. A term fixing an unreasonably large liquidate damages is enforceable on grounds of public
policy.
B. “Unreasonably large” – RS 356 (b): Test of penalty - determine whether the amount is unreasonably
large:
a. Anticipated or Actual Loss Caused by Breach
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i. “Actual Loss”: If amount approximates the actual loss from that particular breach, the
amount is reasonable, even though it may not be able to approximate losses from other
breaches; OR
1. Cts are split on whether we look to actual loss.
ii. “Time of contracting”: If amount approximates the loss anticipated at the time of
making the K, even though it can’t approximate actual loss.
b. Difficulty of Proof of Loss
i. If difficult of proof of loss is great, considerable latitude is allowed in approximating
anticipated/actual harm.
ii. If difficult of proof of loss is not great, less latitude is allowed.
iii. If no loss at all, then the provision is unenforceable.
iv. If you are in a market where it’s easy to figure out damages, it’s going to be hard to get
liquidated damages because courts are going to say that you can always estimate actual
damages. More leeway in a thin market (Dempsey)
c. Adverse to Public Policy – Drafters wanted this to be an independent ground.
i. Illustration 4 - Could have a clause that was a reasonable attempt to estimate daages,
but turns out there is no damages. In this case, you strike down the clause.
C. UCC – 2-718(A) same thing but calls for greater flexibility in evaluation of damages clause.
a. Liquidate damages will be valid if reasonable to the extent that either
i. The harm the parties anticipate will result from the breach at the time of contracting OR
ii. The actual damages suffered by the non-defaulting party at the time of breach
D. Examples
a. Hypo – Craig offers to sell Raz photo for $400. Raz says he’s interested but cannot bear
disappointment, so Craig says that he’ll pay Raz $2,000 if she fails to deliver. Raz agrees to the
deal. Craig fails to deliver. Is that clause enforceable?
i. No, since it’s not based on reasonable damages, but emotional distress
b. Hypo 2 – R enters into a contract to buy a house from G for $500,000. Contract has a liquidated
damages provision for damages of $50k. R breaches. Is clause enforceable?
i. Yes, good faith asking.
ii. G sells house next day to H for $600k.
1. Expectation damages are $0. But can he still get liquidated damages? Courts are
split; some say yes; other says if they show there’s no loss, they’ll strike it down.
E. Compensatory, not Punishment: Liquidated damages cannot be used as security for performance or
punishment for default.
a. If manifestly inequitable -> penalty
b. Pacheco v. Scoblionko: Father paid in advance for son to go to summer camp, needed to
withdraw before May 1st to get refund, withdrew on June 14th so no refund. HELD: This clause
was designed to disincentivize parents from withdrawing children, could not prove that this was
reasonable anticipation of damages. Not enforceable.
c. Hypo: What if we added to the Dempsey contract in the Chicago Coliseum Club case the
following language: “If Dempsey refuses to fight Wills for any reason other than injury, he will
pay the Chicago Coliseum Club $500,000”
i. If they could prove lost profits in this amount, courts would allow it.
ii. What if the amount was $10 million?
1. It’s a disincentive to withdraw. Courts would never enforce. Why? Some people
will say courts are jealous fo their power to set damages; they believe it’s within
the domain of the court to assess damages. Or when people enter a contract,
they expect performance, not breach. They underestimate the likelihood that
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F.
G.
H.
I.
J.
they will breach and therefore do not fully assess liquidated damages. Problem is
that this is certainly not true in every case, such as when both sides are
represented by competent counsel. Different from most contract cases because
courts will look at the substance/context.
d. Wilt v. Waterfield: Contract to sell farm for $19k, liquidated damages clause for $1900. Seller
sells to 3rd party for $26k. Buyer wants expectation damages for $7k (similar property cost).
Sellers says liquidated damages clause limit recovery to $1900. Court says damages apply to all
breaches and we can imagine a trivial breach here $1900 would be too high. Striking the clause
down as a penalty, even though that’s not the case on these facts.
i. Most courts today are not going to ask about some hypothetical breach, but focus on
actual breach
Jones Test: valid enforceable liquidated damages if:
a. Damagers would be uncertain as to amount and difficult to proof
b. The K as a whole is not unconscionable
c. the K is consistent w/ the parties’ intention that damages that that amount should follow the
breach.
i. G Samson Sales v. Honeywell: Malfunctioning security system in jewlery store. $50
liquidated damages vs $68,303 property loss. This was “manifestly disproportional” to
either the consideration paid by P or the possible damages “reasonably foreseeable”
from D’s failure to notify police of theft. ∴ parties could not have intended that $50
would follow. Invalid clause
1. P would not have paid $10,500 for a “mere recouping” of $50.
Camelot Test: valid enforceable liquidated damages if:
a. Injury caused by breach must be difficult or impossible to accurately estimate
b. Parties must have intended to provide for damages rather than a penalty
c. The sum stipulated must be a reasonable pre-breach estimate.
Difficult to Estimate
a. G Muldoon v. Lynch – Delivery of her husband’s memorial delayed by 2 years, penalty of
$10/day. D didn’t suffer actual damages in the failure to deliver by a certain date -> “comfort
damages”. No damages that could be measured or compensated by money.
b. G Yockey v. Horn – Business reputation might have been significantly damaged
Intend for Damages vs. Penalty
a. G Autauga Quality Cotton Ass’n v. Crosby: Breach of cotton coop agreement. 2 bases indicative
of intent to penalize rather than to compensate:
i. Text of provision
1. “Highest price / lb” no matter how small the corp amount is. – doesn’t evidence
to measure actual loss.
a. Bears no relationship to actual loss.
b. Why “highest” as opposed to “average” or “median” or “lowest”
c. Intended to bump up the damages and maximally deter breaches
ii. Testimony - Intended not to estimate actual loss but to discourage breach
1. “Disincentive for [D] to not perform, to breach K.”
2. “It should have some attempt toward making [P] whole, but I don’t know that it
is trying to approximate actual loss.”
Reasonable Pre-Breach Estimate – requires some “hindsight comparison of actual harm prescribed by
the K.” Grossly disproportionate amount usually indicative of failure.
a. G Autauga Quality Cotton Ass’n v. Crosby: 2 bases to find that P failed to satisfy prong:
i. Fatally ambiguous
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1. “Price” set by “date of breach” – never defined what the date of breach would
be. P offered eight different breach dates. (Failed to specify when to value on NY
mkt)
ii. Lacked hindsight comparison.
1. Grossly disproportionate liquidated amt - $1,696,610 is more than 80% than
total sales for their entire year’s earnings ($2m092,015) and three times their
net earnings ($592,015.89)
CONTRACTING DOWN
A. When you write a K to limit damages, the test is whether the clause is unconscionable
a. RS 346 a term that fixes an unreasonably small amount as damages may be enforceable as
unconsc
b. UCC 2-718 Comment 1: An unreasonably small amount may be stricken under the section of
unconsc.
c. UCC 2-719: You can limit or alter damages as you can see fit, but you cannot give nothing.
3 Points by Raz:
A. Cts will scrutinize attempts to contract for damages to see if the clauses provide for too much
compensation. See RS 256 / UCC 2-718(1). Cts differ on whether you can ask whether the provision
was a good faith estimate of actual damages, whether an otherwise valid clause will be eliminated if
the breach caused no damage to the other party, and whether a clause can be invalidated bas on how
it would apply in other circumstances.
a. Some cts even if they validate may nevertheless strike the clause if no actual damages occur.
i. 10% damages clause but no actual damages. Ct can strike down as penalty.
ii. Was this clause a good faith attempt at measuring damages in all possible breaches?
They look at the clause and determine what possible breaches it may recover. The
concern is that the parties are setting too high.
B. Courts are much more circumspect in looking at attempts to limit damages. They basically apply
traditional contract doctrines here.
C. American cts will order specific performance only where damages are inadequate.
SPECIFIC PERFORMANCE
When K forces a party to do what it promised to do. Let the non-breaching party insist that breaching party try
again. Parties can still get expectation damages. Not a cure, but part of damages.
A. A party not in breach can get SP only if money damages are inadequate to put breaching party in
position had there been no breach. RS §360, 2-716(1).
a. Typical Cases where SP is ordered.
i. Sale of Land – Mkt value does not capture the value of the land to the non-breaching
party.
ii. Sale of Goods – If the good is of unique nature (like art or antique) such that there is no
substitute market for it, then SP is appropriate.
iii. Hypo: G is selling a house that IM Pei once stayed in. R enters into a contract to buy the
house for $500k. G breaches. All agree that the market value of the house is $500k. Can
R get specific performance?
1. Expectation damages: $0. But R is harmed by this breach. Lots of subjective value
because IM Pei once stayed there. He should get specific performance. Normally
think that land is a specific good. People buy land and houses because it has
special value for them. Even at market price, prospective values it higher.
iv. Test will always be whether the thing being sold is unique. RS §359(1)
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a.
Factors in determining if specific performance required ((§360)
i. No market substitute (§360, 2-716(1))
ii. I,e, holdings of land are unique
iii. Sometimes goods can be unique
iv. Difficulty in proving damages with reasonable certainty
v. Likelihood that damages can be collected
b. G Reed Foundation Inc. v. Franklin D. Roosevelt Four Freedoms Park, LLC – Engravement of
name on monument. Can’t calculate monetary damages on this.
i. Can’t write a contract that would require specific performance in a situation where the
court would not independently order it. Can’t create your own remedy for specific
performance
1. You can get around this by adding an arbitration clause and pick an arbitration
provider that will order specific performance.
2. Prof thinks specific performance isn’t a bad thing, courts just don’t like it
B. Arguments against SP: Land is not unique if party places $ on it. We can grant SP not to protect buyer,
but third party’s interest.
a. K b/w R and G - R valued house at $600,000.
b. K b/w R and H – $500,000
c. Giving R $100,000 seems adequate
C. A promise to render personal service will not be specifically enforced. RS 367(1)
D. A promise to render personal services exclusively for one employer will not be enforced with a
negative injunction against serving another if the forced continuance is undesirable or will leave the
employee without other reasonable means of making a living. RS 367 (2)
a. G Lumley v. Wagner. K to sing for a season K forbade her from singing for anyone else. But D
signed a K with Guy. While Ct can’t force her to sing, it can order her prohibiting her from
signing for Guy (negative injunction), which will liekly result in her deciding to sing for the first
guy after all
b. G Fitzpatrick – Guy promised caretaker that if she stayed with him for the rest of his life, she
would get a lifetime estate in his will. Reneges and forces her out of the house. Should
Fitzpatrick receive a negative injunction against Michael, forbidding him from hiring another
caretaker? Not according to RS 367 2
c. Hypo – Raz has tenure. Dean fires Raz w/o cause. Violates K w/ university. Can Raz get an order
reinstating him in job?
i. If you follow RS 2nd - No b/c this is a personal service K therefore no specific injunction.
To reinstate job, this would be a specific performance. USC would not be barred from
hiring anyone else. Someone must teach K.
ii. However, if you’re an academic (you deal w/ students and not the employer) there is a
strong argument b/c there’s disruption.
GAP FILERS – UCC *note to reader – I didn’t finish my outline (totally okay!) but this would have been helpful
for the exam*
DEFAULT RULES – RS
1. Time for performance is reasonable.
2. Mode/Manner of acceptance is whichever the offeree chooses.
3. Employee Ks are at-will.
4. K is interpreted as promise, not condition.
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