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Contracts II Outline

Policing the Bargain
Status-Based Defenses: The law limits two kinds of persons from entering into contracts based on their legal
status: (1) Minors and (2) Mental Incompetents.
Void = there never was a contract
Voidable = there is a contract, but one party has a reason to avoid or disaffirm it
The party who has the power to disaffirm a voidable contract may also ratify or affirm it. But the
parties can do nothing to make a void contract valid.
Rationale behind Status-Based Defenses: Protection from exploitation. The core relief is incapacity, not
improper bargaining. So avoidance for incapacity is possible even when the other party did not try to take
advantage of the immaturity or disability.
A. Infancy
- Contract is voidable, but not void: the minor may disaffirm the contract at any time before
(1) reaching the age of majority, or (2) within a reasonable time, i.e., can’t wait 8 months to
pull out. Even a fully performed contract can be disaffirmed within a reasonable time.
- A minor is fully bound when: upon reaching age of majority, the minor (1) expressly
ratified the contract, (2) fails to disaffirm within a reasonable time, or (3) acts in a way that
affirms the contract
Objectively-based: based solely on the minor’s age and not his subjective attributes (like
intelligence) and transactional circumstances (like unfair bargaining).
Minor can incur liability: Most commonly for necessaries (goods or services reasonably
needed for a minor's livelihood) may be enforced, not on contract, but on a theory of unjust
enrichment (restitution).
Major parties can usually recover no more than the market value of the goods or
services, even if the contract price was higher.
Restitution: Traditionally, upon disaffirming a contract, a minor can get restitution of all
payments already made to a seller, but the goods must be returned.
An emancipated minor has greater liabilities for necessaries than one not emancipated.
Also, if he deliberately misrepresents his age. If a minor commits fraud, the court may
deny enforcement of the contract but hold the minor liable for tort of fraud.
Suppose paid $5000, sold it for $4000, seeks to void contract. Has to give back what
he has, $4000. Partial restitution.
- Also full restitution if the infant misrepresented their age and seeks to disaffirm
Executory contracts: If neither party has performed, disaffirmance simply terminates the
contract. If either party has given value, then the major party must always restore full value
to the minor. But the minor is only liable to return what is still left for the minor to perform.
Douglass v. Pflueger: Hawaii’s child labor law provides for the protections of the infancy doctrine
and renders inapplicable the general rule that contracts entered into by minors are voidable in the
employment context.
b. Common law rule is not absolute (minor who contracted is still bound in employment
context; nevertheless, arbitration agreement embedded in contract allowed contract to be
voidable due to insufficient alertness).
B. Mental Incompetence
- Contract is voidable, not void.
Recovery: For infants, the rule is partial restitution; but for mental incompetence, it is full
Subjective-based: Unlike infancy (a strict age limit), mental incompetency is based on the
major’s subjective state-of-mind at the time of contracting.
Burden on the allegedly incompetent party: prove (1) disabling mental condition and (2)
that is was in nature and severe enough to preclude an adequate degree of assent.
Unlike with infants, the other party is not “placed on inquiry” and the presumption is in favor
of capacity.
Test: the contract can be avoided if, at the time of contracting, the party was unable to
understand the nature and consequences of the transaction (Rsts 15(1) and (2)),
So, the basis of mental incompetence is lack of meaningful assent, not harshness of the
Performance: Rst 15(2) provides for termination of the power of avoidance to the extent that
the contract has been so performed, or circumstances have changed that avoidance would be
unjust. If the contract is avoided, the parties must be restored to the status quo ante.
Intoxication: Intoxication will give a party the power of avoidance only if: (1) she is so
intoxicated that she can’t understand the nature of her transaction; and (2) the other party has
reason to know that this is the case. Rst 16.
Ortelere v. Teachers’ Retirement Bd.: A contract can be declared void if (1) a party is unable to
understand the transaction and (2) the other party knew or had reason to know of the incapacity.
Cundick v. Broadbent: A contract entered into by a party claiming to be mentally deficient is not
void, but voidable by the mentally deficient person if that person lacked sufficient reason to
understand the nature and effect of his or her actions regarding the contract, unless there is evidence of
fraud or overreaching by the other party.
- Unlike on Ortelere, the court here applied the cognitive test, not the volitional test.
Kenai Chrysler Center, Inc. v. Denison: A ward under legal guardianship is precluded from
entering into a valid contract with another.
- Kenai had constructive notice (Guardianship is public knowledge) of David’s incapacity, so it
is not entitled to restitution.
Summary of Status-Based Defenses: A natural person who manifests assent to a transaction has full legal
capacity to incur contractual duties thereby unless he is under (1) guardianship, (2) or an infant, (3) or mentally
ill or defective, or (4) intoxicated.
Hypos: Can the following contracts can be ratified or affirmed?
1. An elderly man has been declared incompetent and a guardian appointed for him. During a time when
he fully understands the transaction, he purchases a computer that he wants to keep.
- No.
2. A woman is defrauded into purchasing a house. She decides she likes the house and wants to keep it.
- Yes.
3. A 17-year old buys a computer. The next day his parents suggest that he return it but he wants to keep
- Yes.
Process-Based Defenses: three kinds of defenses: (1) Duress, (2) Undue Influence, and (3) Misrepresentation
Rationale behind Process-Based Defenses: the victim should not be held accountable for her apparent assent
when it is not genuine, and the other party, having improperly induced it, does not have a compelling reliance
A. Duress
a. Contract is voidable, not void.
b. Test: (1) One party must make a threat, (2) which is improper, and (3) the threat must
induce the apparent assent, in that it (4) leaves the victim no reasonable alternative but to
Threat: an indication of intent to do or refrain from doing something so as to inflict
some harm, loss, injury, or other undesirable consequences that would have an
adverse effect on the victim’s person or personal or economic interests.
1. Threat has to be made by one of the parties (can’t be a non-party).
Improper: A threat is improper if the threatened behavior goes beyond the legitimate
rights of the party doing the threatening. A person can threaten legal discourse if they
are so entitled (as they usually are), but one cannot threaten criminal charges.
Inducement: whether the duress substantially overcame the free will of the other
party, leaving him no reasonable alternative but to contract. An alternative is only
reasonable if it is a feasible and practical means of evading the consequences of the
c. Remedy: the victim can choose to abide by the contract despite the duress, or may decide to
avoid it, claim restitution of any benefit conferred, and tender restoration of any benefit
received. If the act of duress is a tort, the victim is able to obtain damages in tort in addition to
any relief under contract law.
d. Modification of an Existing contract: Pre-existing duty rule and UCC 2-209.
Pre-existing Duty Rule: a party does not suffer a legal detriment by promising to do
what he is already bound to do under an existing contract (so, “new” consideration
has to be given to modify a contract).
Alaska Packers’ Ass’n: If parties enter a new agreement under which one
party agrees to do no more than he was already obligated to do under an
existing contract, the new agreement is unenforceable for lack of
a. The Fishermen could have said, ““we are going to quit unless you
agree to pay us more in exchange for us staying an extra week for
work.” That would have been a new consideration.
UCC 2-209: Abolished the requirement of consideration for a modification and
subjects it to a test of good faith.
1. Austin Instrument, INC.: A contract is voidable on the ground of
economic duress if it is established that the party making the claim was forced
to agree to the contract by means of a wrongful threat precluding the exercise
of his free will.
a. Alaska Packers had the chance to argue either no consideration or
duress. Loral, on the other hand, had to make it a duress case
because (1) sale of goods so no need for consideration, and (2) Loral
had already performed what it promised, so again, consideration was
thus given for the modification (consideration only applies to
promises not yet performed).
B. Undue Influence
a. Contract is voidable, not void.
b. Test: (1) the other, dominant, party had a relationship of dependency and trust and (2) that
party used its dominance unfairly to persuade the victim to enter into the contract.
Rst 177 confines the scope of Undue Influence to relationships of dependence and
trust (like an employer)
Odorizzi v. Bloomingfield School District: Where a dominant party to a transaction uses
excessive pressure to persuade a party whose weakened mental state makes him especially
susceptible to persuasion, the weaker party may rescind the agreement as obtained by undue
C. Misrepresentation
a. A misrepresentation is an assertion not in accord with the facts (Rst 159)
b. Three kinds: Fraud, Negligent, and Innocent.
Fraud: (1) Deliberate lie, (2) Concealment or hiding truth, and (3) nondisclosure or
keeping silent
1. This can be in words, written or oral, or even by conduct (non-disclosure, for
example). Rst 161: if party knows that disclosure is needed to correct a
previous assertion or to correct a mistake, then that is fraud if they don’t say
Negligent: Honest but careless
Innocent: Incorrect but blameless
1. Both of these do not carry the “deliberate lie” component of fraud, but there
is one important thing: Rsts 162, 163, and 164 say that when the element of
deliberate and knowing misstatement is absent, the materiality of the
misrepresentation becomes crucial.
c. Rationale: Contracts require mutual assent, so if a party justifiably relies on the others
representation of the facts, then they are assenting to those incorrect facts.
d. Remedies: On Fraud, disaffirmance and full restitution of all benefits conferred. But, under
tort law, a party can affirm the contract and get damages.
Swinton v. Whitinsville Sav. Bank: A seller may not be held liable for the mere failure to disclose a
defect in the property of which he is aware and of which the buyer is unaware.
- Most courts reject this. They go with Rst 161(b). If you fail to speak when you have a duty to
speak, then that is a misrepresentation:
Kannavos v. Annino: Knowingly disclosing partial facts about a transaction in such a way that the
disclosure is misleading constitutes fraudulent misrepresentation and is a basis for rescission of the
- The party asserting misrepresentation must show that he justifiably relied on the
misstatement. This requires him to show not only that he in fact relied, but also that his
reliance was justifiable.
Differences in recovery: In Swinton, the buyer of the home sued to recover in tort.
Alternatively, the plaintiff could have sued on the basis of misrepresentation. So, a victim of
misrepresentation can choose his or her remedies.
So the lesson of this case concerns the third element of misrepresentation defense (justifiable
reliance): you can act negligently yet your reliance can be justifiable. **
Justifiable roughly equates to “not reckless.” So, avoid recklessly believing a mistruth. Don’t
consciously disregard an obvious risk.
Vokes v. Arthur Murray, Inc.: A statement of opinion may be actionable as a misrepresentation where the
party stating his opinion possesses superior knowledge of the truth or falsity of the statement.
Standard: Misrepresentation is (1) fraudulent or (2) material (not opinion or prediction) and (3) that the
person unjustifiably relied on. What justifiable means is that you were not acting reckless when you believed
that misrepresentation.
- Typically opinions can’t give rise to a right to avoid a contract, but there are some circumstances where
a misstatement or prediction can (look at Vokes and 169 Rst).
- Fiduciary relationship
Misrepresenter purports to be an “expert” (vokes)
Substance-Based Defenses
Standard Form Contracts
Benefits v. Costs: Speeds up the contract time, reduces transaction costs, less “juridical risk” in that the
language is usually clear and to the point. Reduced uncertainty. But lack of negotiability can be a bad thing.
Sellers have a significant advantage in the contract they offer buyers (they determine the terms and language).
The big concern here is “overreaching” by the drafter of the contract (seller).
O’Callaghan v. Waller & Beckwith Realty Co.: Exculpatory clauses are generally enforced provided (1)
they do not violate settled public policy of the state and (2) provided the public interest in the relationship of
the parties does not militate against enforcement.
Klar: Focuses on assent
Galligan: Strictly construe the language of the contract against drafter.
- How does this differ from O’Callaghan? The language in the contract in O’Callaghan was very clear
that it exculpated the landlord.
Henningsen: Adhesion + Lack of Competition (to get a better deal) (if monopoly or collusion are present, the
court may choose not to enforce the one-sided over-reaching term).
Graham: Focus on adhesion + Unconscionable or Reasonable Expectations
- Not enforceable if terms do not fall within reasonable expectations and unconscionable or unduly
Rst 211(3)
Don’t apply any of these doctrines unless you really do have a one-sided term in a standard-form contract. So
don’t apply these unless you really have some overreaching term. Also, remember the limitations of each
(Henningsen, for example, only applies where there is monopoly or collusion).
Williams v. Walker-Thomas Furniture Co.: When an element of unconscionability is present at the time
of contract formation, the resulting contract is not enforceable.
- “Unconscionability” = (1) the absence of meaningful choice on the part of one of the parties to a
contract, combined with (2) contractual terms which are unreasonably favorable to the other party.
- Whether a meaningful choice is present in a particular case depends upon a consideration of all
the circumstances surrounding the transaction. These circumstances can include (1) gross
inequality of bargaining power, as well as (2) the manner in which the contract was entered.
Lambert said to look on page 661 for the TEST: unconscionability has both a
procedural and substantive element:the former focuses on oppression or surprise due
to unequal bargaining power, the latter on overly harsh one-sided results.
Here, unconscionability was used as a defense (Walker-Thomas was suing for replevin). But it
can be used offensively.
Procedural unconscionability = fraud, duress, misrepresentation; substantive
unconscionability = concerning the actual terms of the contract. You have to show both.
Takeaway: if facts or terms of the deal are hidden from you, then you lack meaningful assent.
What Is The Promise?
What Promises are Part of the Deal?
Parol Evidence Rule: prohibits courts from admitting external evidence that contradicts or modifies the
written contract
Gianni v. R Russell and Co.: Preliminary negotiations and verbal agreements are merged into and become
part of a subsequent written contract. Parol evidence will be excluded where it is clear that the written contract
was intended to be the entire and complete agreement between the parties.
Steps: (1) Start with writing. (2) Then ask, “is the writing an integrated agreement?” An integrated agreement is
a writing or writings constituting a final expression of one or more terms of an agreement. So, if the answer is
“no,” then the parol agreement is not discharged and the evidence would be admissible. (3) If the answer is
“yes,” then we have to ask, “is it completely or partially integrated? If not completely integrated, then it is
partially integrated, and ask yourself, “is the parol agreement consistent with the final agreement?” (4) If not
consistent, then the parol agreement is discharged and evidence is not admissible. If it is consistent, then it is
Masterson v. Sine: When an agreement is partially integrated, parol evidence may be used to prove elements of
the agreement not in the writing.
Gianni says that if the parties, absent fraud or mistake, have put their oral negotiations in writing, the
writing is the only evidence of the agreement. Here, Masterson makes an exception to partially
integrated agreements, where certain terms are silent or ambiguous.
- In short, if the writing is full, complete, unambiguous, and clear, the rule excludes all parol
evidence. So, if the written agreement is complete and final and clearly expresses every term in
the agreement, then it is completely integrated.
- Parol evidence is admissible to supplant or explain terms that are not included in the final
writing or that are not sufficiently explained, so long as the evidence does not contradict
anything in the final writing.
- Dissent made a good argument: (1) Integrated, (2) Partially Integrated, (3) But not
consistent because in California, when you grant someone an option, that option IS
assignable. So we read that into the contract.
Look at hypo on page 37 of main document
Bollinger: A court of equity has the authority to reform a written contract in order to conform it to the mutual
understanding of the parties, even if one of the parties denies that a mistake was made. (Plaintiffs satisfied the
heavy burden of proving mutual mistake by introducing evidence that the defendant initially complied with the
terms omitted).
- The mistake must be real or actual and not feigned or hypothetical. The evidence shows that Central,
at least initially, had used the layering process sought by the Bollingers. That the parties had intended to
make this layering process part of their agreement is corroborated by Central’s act of using the same
process on the land of Bollingers’ neighbor.
White City Shopping Center v. PR Restaurants: Unambiguous words in a contract must be construed in
accordance with their ordinary and usual sense.
Plain meaning rule, Two-Step Process: (1) decide whether the contract is ambiguous. (2) if not ambiguous,
use the plain meaning rule. If ambiguous, extrinsic evidence may be admitted.
All courts agree that if a term is found by the trial court to be ambiguous–capable of more than one
meaning–extrinsic evidence must be allowed.
For unambiguous terms, it is for the judge, not the jury, to say what the terms mean. Most judges
would use the “plain meaning” rule, which is what the next case is about.
Liberal Rule: This rule weakens the “plain meaning” rule. Under this view, evidence of prior negotiations is
admissible. . . for the limited purpose of enabling the trial judge to determine whether the language in dispute
lacks the acquired degree of clarity.
- Next case illustrates this
Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co.: The trial court applied the plain
language test to exclude such evidence. The agreement was clearly meant for “all” rather than for third persons.
But the Supreme Court applied Traynor’s “liberal relevance” test, which allowed the contractor to admit
extrinsic evidence. Why? because the agreement was reasonably susceptible to both the proffered meaning.
- The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not
whether it appears to the court to be plain and unambiguous on its face, but whether the offered
evidence is relevant to prove a meaning to which the language of the instrument is REASONABLY
Hypo on page 42 on main document
Greenfield v. Philles Records, Inc.: A written agreement that is complete, clear and unambiguous on its
face is the best evidence of the parties’ intent and must be enforced according to the plain meaning of its terms.
- The 1963 contract’s silence regarding licensing and sales for use in movies, television and compilation
albums does not make it ambiguous. Consequently, the written agreement must be enforced according
to the plain meaning of its terms. The terms of the 1963 contract grant full ownership of the master
recordings to PRI, subject only to the Ronettes’ royalty rights. Therefore PRI was entitled to exercise
full ownership rights in licensing and selling rights to the Ronettes’ master recordings
Rst 212 says that extrinsic evidence can be used in a fully integrated agreement if needed to explain the
meaning of a term.
The Greenfield court used the following case for the proposition that “extrinsic evidence of the parties’ intent
may be considered only if the agreement is ambiguous.”
W.W.W. Associates, Inc. v. Giancontieri: When a contract is unambiguous and complete, it will be
enforced according to its terms and extrinsic evidence regarding the terms is not admissible. Whether a contract
is ambiguous is a question of law.
Methods of Interpreting Ambiguous Contracts
Ambiguous = subject to different meanings
Fill in “canons of construction” here
Raffles v. Wichelhaus: There is no contract if there is a mutual misunderstanding by both parties as to
the meaning of a term of an agreement.
- Where there is a latent ambiguity as to meaning, parties may offer parol evidence to explain the terms.
In this case, the evidence shows that Wichelhaus meant one Peerless ship and Raffles meant another.
Thus, there was no meeting of the minds and, hence, no binding contract.
Restatement § 201: If one party knows or has reason to know that the other party attached a
different meaning to a term, and the other party doesn’t know or have reason to know that the parties
attached different meaning, then the more innocent party’s interpretation controls.
- If neither party knows or has reason to know that each attached a different meaning, then
neither party is bound and the court will supply a reasonable value for the unagreed-upon
Colfax Envelope Corp.: A contract can be rescinded for mutual mistake only if the parties were equally
blameless or equally at fault for their mutual misunderstanding of the essential term. In such cases, there is no
non arbitrary basis for choosing between the conflicting understandings of the parties and the contract can be
rescinded because there was no meeting of the minds.
- Unlike in Raffles, Colfax should have realized that the term “4C-60 Press-3 Men” was unclear and
could have meant 60 or less rather than 60 or more. Colfax gambled that its interpretation was correct
rather than clarifying the term, and therefore Colfax is not entitled to rescind the contract.
Remedies for Breach of Contract
Klein v. PepsiCo: Where damages can be recovered and are adequate to remedy the breach, specific
performance may not be awarded. Rst 359
- Is there a way to make Klein whole? Yes. He has only had to pay an extra $400,000. All he needs, really,
is $400,000 to be made whole. Where damages can be recovered and are adequate to remedy the breach,
specific performance may not be awarded.
Although the plane was unique (which often warrants specific performance rather than damages), the
court found that a $400,000 would make Klein whole.
- Other reasons for SP:
- Damages are also hard to prove with reasonable certainty
- Specific performance is regularly (most of the time) given for disputes over land (b/c
land is unique)
- A negative injunction is an order from the court saying, “thou shall not engage in a
competing performance.”
UCC § 2-716(1), which provides, "Specific performance may be decreed when the goods
are unique or in other proper circumstances."
Walgreen v. Sara Creek: Damages are the normal remedy for a breach of contract, but a permanent
injunction may be more appropriate if the plaintiff shows that damages are inadequate based on balancing the
costs and benefits of the alternatives.
It is very difficult to determine the amount of monetary damages associated with lost profits and good
will for a store following the introduction of a competitor. Walgreen rightly objects to the compelled
production of its sales figures and financial projections for use in calculating damages on the ground
that this data is proprietary and confidential. Without other useful measures for calculating damages, a
permanent injunction is the most efficient and cost-effective remedy.
Note: The exclusivity clause: Walgreens was protected from any other pharmacy or store with a
pharmacy from competing with it in the mall
Efficient breach= we don’t always want people to keep their promises (if the cost of performing the
obligation is greater, by all means breach the contract and just pay the victim the amount that will make
them whole).
Expectation Interest: Put the victim of the breach economically in the position she expected to be in had the
contract been performed.
Measuring Expectations
Usual remedy for breach of contract is expectations interest: an award of expectation damages is a sum of
money that will put the promisee in the position he would have been in had the promise been performed.
- You expect to get the value of performance promised by the other party. Incidental loss is the cost of
getting a substitute performance when the other party fails to perform. Consequential loss is the . . .?.
Then subtract out the victim’s damages that the victim is able to avoid from the other party’s breach.
Rst 347: How to Calculate:
(a) the loss in the value to him of the other party's performance caused by its failure or deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
Formula: LVP (loss in value of performance) + IL (incidental loss) + CL (consequential loss) - CA
(cost avoided) - LA (loss avoided)
Vitex Manufacturing Corp. v. Caribtex Corp.: In calculating a seller’s damages, overhead expenses should
not be treated as costs which are deducted from gross profits, and consequently from the damages award (they
shouldn’t be included in lost-profits expectation damages).
- Caribtex argued that the cost should have been higher because the $10,136 (costs avoided) didn’t
include overhead cost. The point is that overhead costs can’t be cost-avoided.
Hypo on Consequential Cosses: B has a contract to buy 10,000 widgets from S for $10,000. S then breaches
the contract, telling B he had the widgets but was going to ship them to another buyer in a couple of weeks.
When S breached, B went to the widget market and bought 10,000 widgets for $12,000. However, because of
the delay caused by S, B's assembly line had to stop for three days and he lost $3,000.
- The loss of $2000 is a direct loss, and the loss of $3000 is a consequential loss. Hadley v. Baxendale says
that the first type of loss is always recoverable because it always results from the breach. But the
second type of loss is recoverable only if the non-breaching party can prove that a reasonable person in
the shoes of the breaching party would have known at the time of making the contract that the loss
would likely result from breach (i.e., foreseeability).
Hypo on Identifying Remedies: After making a contract with Contractor to build a swimming pool for
$15,000, Owner gives Contractor a down payment of $1,500 and spends $1,000 on construction of an
equipment shed for the pool. Contractor breaches the contract. Owner decides not to build the pool. What are
Owner's losses?
Reliance losses are those the plaintiff has spent in reliance on the promise; here that is $1,000.
Restitution losses are the value of the benefit the plaintiff has conferred on the defendant; here that is
If she does not have the pool built, Expectancy is the difference between the market value of the pool
and the contract price of what she was promised.
Hypo on Avoidable Losses: B has a contract to buy 10,000 widgets from S for $10,000. S then breaches the
contract, telling B he had the widgets but was going to ship them to another buyer in a couple of weeks. When S
breached, B dawdled for a commercially unreasonable time. If he had acted reasonably, he could have bought
10,000 widgets for $12,000, but because of his delay, he bought the 10,000 widgets for $13,000. B seeks
damages of $3,000. Because of his delay in covering:
- B had a reasonable opportunity to mitigate. If he had acted reasonably, his damages would have been
Limitations on Damages
Rockingham County v. Luten Bridge Co.: When a non-breaching party in a contract for services receives
notice of another party’s breach, the non-breaching party must treat the contract as broken when notice is
received, cease performance, and sue for any losses sustained from the breach as well as profits that would have
been realized upon performance.
- An aggrieved party cannot recover loss that it could reasonably have avoided. Rst 350. This is the
Doctrine of Avoidable Consequences
Parker v. Twentieth Century-Fox Film Corp.: When the contract is for personal services, courts are
especially lenient toward the plaintiff, and do not require him to accept any position that is substantially
different from, or inferior to, the one contracted for.
- Issue: Whether an actress must accept a role in a different film to mitigate damages from the film
producer’s failure to produce the original film.
Hold: No. The measure of recovery by a wrongfully discharged employee is the amount of salary
agreed upon, less the amount which the employee has earned or with reasonable effort might have
earned from other employment. In such cases, the employer must show that the other employment
offered as a substitute was substantially similar to the other employment, and the employee's need
not seek other available employment of a different or inferior kind to mitigate damages.
Rst 350:
- (1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured
party could have avoided without undue risk, burden or humiliation.
(2) The injured party is not precluded from recovery by the rule stated in Subsection (1) to the
extent that he has made reasonable but unsuccessful efforts to avoid loss.
The Foreseeability Doctrine confines liability for consequential damages to those losses that should have been
reasonably contemplated based on information to which she had access at the time of contracting, as a
probable result of her breach.
- Rationale: It is not fair to hold the breaching party responsible for impacts beyond the simple
deprivation of the immediate contract performance if she didn’t have reason to know of such
consequential losses.
Hadley v. Baxendale: damages must be foreseeable to be recoverable.
- Arising naturally (what you would expect) and everything clearly expressed
More succinct: Losses not foreseeable at the time the parties entered into the contract are not
enforceable (Hadley Rule)(Rst 351)
What were Hadley’s expected damages? Six days lost profit.
Hadley rule breaks damages into two categories: General (arise naturally–i.e., consequential
damages that should be obvious without any special knowledge on the part of the breacher), and
Special damages (“surprise” liability–i.e., breacher had no basis for expecting this loss).
- Rationale for Special Damages: Courts should protect breachers from surprise liability
Incentives a party to provide adequate information, which is likely to increase the efficiency of
transacting and may even lessen the chance of breach. Foreseeability is justified as economically
efficient and fair
Kenford Co. v. County of Erie: Kenford said that hoped-for appreciation value of their peripheral lands
should be included in damages. Can the lost appreciation of the lands be recovered?
- Under Hadley, could Kenford recover the appreciation value? It seems like those losses should be
recoverable. They are foreseeable at the time the contract was entered into.
But the court holds it is not recoverable. It has to be more than “it was foreseeable.” The breachingparty has to explicitly agree that it was on-the-hook for those losses if the beach occurred. The
remedy clause in the contract did not mention any such liability. The rule is more strict than
Hadley. The breaching-party has to explicitly agree to be on-the-hook for such losses if they breached.
Adds to Hadley by requiring that the promisor intended to be held liable for damages under special
Rst 351(3)--courts can limit recover “as justice requires”
Emotional Distress: Courts have been reluctant to allow damages for emotional distress resulting from breach
of contract. But, possibly if the contract is “so predominantly personal in nature” and if bodily harm
Common law = mishandling of dead bodies (funeral home)
Duty to Mitigate: if the plaintiff has, through bad faith or unreasonable action (or inaction) aggravated her
damages, the defendant is not held responsible for the increase in loss caused by the plaintiff.
- If the plaintiff does increase her damages deliberately or not, she is still entitled to the damages that
she could not have avoided by good faith or reasonable conduct.
Breakdown of Rst and Cases for Limitations on Damages:
Reliance–Rst 349 (expectancy has to be proven with “reasonable certainty,” so they will often choose reliance).
Avoidable consequences: Luten–Rst 350
Foreseeability: Hadley/Kenford–Rst 351
- Kenford said that foreseeability is a sufficient condition (Hadley said it is a necessary condition).
Ascertainability–Rst 352 (speculative damages are not recoverable).
Emotional Distress–Rst 353 (this is pretty rare, but if it happens, there usually has to be physical harm to the
non-breaching party or the handling of a dead body like in a funeral).
Liquidated Damages and Penalty Clauses
Liquidated Damages Clause: provision in a contract in which the parties agree on the amount of damages to
be paid in the event of breach instead of having a court decide that issue. “Agreed damages”
- Courts carefully scrutinize liquidated damages clauses to ascertain whether their purpose or effect may
be punishment rather than compensation (purpose should be to compensate the non-breaching party).
Lake River Corp: A court will enforce a liquidated damages clause only if the specified amount isn't seriously
disproportionate to the probable loss.
- Lake River’s so-called liquidated damages clause was really a penalty clause, thus unenforceable. The
liquidated damages clause systematically overcompensates Lake River.
The Court: (1) the amount agreed-upon has to be a reasonable estimation at the time the contract
was executed of likely damages and (2) damages are hard to measure after a breach occurs. You have
to make some showing on both of these elements to not enforce the penalty clause.
- Note: This is a federal case. Contract law is a state law. So the court looks at what the state
supreme court would probably do. Illinois law is very close to Rst 356(1).
Hypo on Liquidated Damages: ABC Co. hires Bob at a salary of $50,000 for one year. After
working for six months, during which Bob was paid $25,000, Bob quits to take another job.
ABC Co. hires Carla for the remainder of the contract term at a reasonable cost of $35,000.
Assume that the contract provides that Bob shall pay ABC liquidated damages of $30,000 if
Bob breaches the contract. When Bob breaches, ABC seeks to recover liquidated damages of
$30,000 from Bob. Will ABC recover that amount under the rule of Restatement § 356?
No. That does not seem like a reasonable anticipated loss and we know it is not
reasonable in light of the actual loss, since the actual loss was $10,000.
Why are penalty clauses bad? Because they discourage efficient breaches. We want to encourage
efficient breaches, and discourage inefficient breaches.
- Posner thinks penalty clauses encourage people to enter into agreements that they may not
otherwise enter
Jacob and Youngs v. Kent: If a party substantially performs, that party will not be forced to bear the
replacement cost needed to fully comply. Will owe the non-breaching party the difference in value between
full performance and the performance received. (Diminution)
- Hold: Jacob substantially performed its contract with Kent with only trivial defects and is thus entitled
to receive the remainder of the amount owed under the contract.
- Damages: Measure of damages is not the cost to rip out the old pipe and install the new, but the
difference in value which in this case is zero dollars (hence, the ruling–no difference in pipes).
This is the rule of unfair forfeiture.
To complete performance, you’d have to destroy the walls
Groves v. John Wunder Co.: Damages for willful breach of a construction contract, even where there has
been substantial performance, are awarded as the cost of completing the failed performance.
- How does the court distinguish Groves from Jacob? The breach of the contract here was wilful and in
bad faith.
The cost of completing full performance (digging up the excess soil which Wunder contracted to do
but didn’t) was estimated to be about $60,000–what Groves wanted. If Wunder had completed the
performance, then the value of the property would only be about $12,000. Trial court said that the
damages should be the difference between the value of the property at the time of the contract and the
value after Wunder performed (12,000).
Appeals court said the trial court got it wrong.. Because Wunder deliberately breached,
Groves gets the cost of completing performance ($60,000??). Why? To prevent parties
from abusing the equitable doctrine of substantial performance. Also, we want to award the
non-breaching party what was promised.
No destruction required
Peevyhouse v. Garland Coal & Mining Co.: Only the diminution value, $300, should be awarded. Why?
The provision of the contract requiring remedial work (“beautifying” the property after the strip-mine
operation) is only incidental to the main purpose of the contract. Second, the economic benefit which the
plaintiffs would receive from full performance of the work is grossly disproportionate to the cost of performing
the work.
- Facts: The value of the farm is only about $300 less than it would have been had the defendants
performed this work. The total value of the farm is less than $5,000. In the plaintiff’s suit for damages
for breach, should they be awarded $300 or $29,000? Peevy sued for $25,000 in damages, and alleges
that the reasonable cost to complete performance is $29,000. Peevy relies on Groves.
Page 10-11 on depo outline is great on these
No destruction required
Argument for Diminution: encourages efficient breaches | more wealth id you don’t perform | but does give
Wunder a windfall
Argument for Cost of Performance: what the parties bargained for | diminution doesn’t consider
idiosyncratic values (family farm in Peevyhouse).
Rst 348: defective or unfinished construction = diminution or reasonable cost of completing performance.
Tells us that parties should write their preferences into the contract. If a contractor breaches, sue for specific
performance, will result in bargaining.
Contracts for Sale of Goods:
UCC 2-703: remedies if buyer breaches: not delivering the goods, reselling the goods to another buyer, and
canceling the contract.
UCC § 2-706: authorizes a seller to resell goods identified for a breached contract, and then recover damages
for the difference between the contract price and the resale price.
UCC § 2-708: authorizes a seller to recover damages from a breaching buyer in the amount of the difference
between the contract price and the market price of the goods or, if such measure will not adequately restore
the seller, in the amount of lost profits.
UCC § 2-709: authorizes a seller to recover damages from a breaching buyer in the amount of the price due on
the contract for any accepted goods or rejected goods the seller was unable to resell.
*UCC 2-711: Buyer’s remedies: when seller fails to make delivery or repudiates
UCC 2-712: ”cover” on the part of the buyer
UCC § 2-713: damages for the non-delivery of goods or repudiation of a contract are calculated as the
market price minus the contract price.
UCC 2-216: specific performance is available in an action for breach of a contract for the sale of goods only if
the goods are unique or if money damages are otherwise inadequate as a remedy.
Incidental damages resulting from the seller's breach include expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges,
expenses or commissions in connection with effecting cover and any other reasonable expense incident to the
delay or other breach.
UCC 2-715(2): consequential damages include "any loss resulting from general or particular requirements
and needs of which the seller at the time of contracting had reason to know and which could not
reasonably be prevented by cover or otherwise.
Buyer's remedies include consequential damages, while Seller's remedies do not.**
R.E. Davis Chemical Corp. v. Diasonics Inc.: a lost volume seller may recover as damages the profit it lost
from the buyer’s breach upon establishing that it would have been profitable to both produce and sell the
additional product that the buyer failed to purchase.
- Court applies UCC 2708
- First, see if 2-708(1) is adequate or inadequate (K price - Mkt price), if not then (2)
- 2-708(2): lost-volume seller
- How do we know if a lost-volume seller?
- Have the capacity to make an additional sale
- That additional sale would have been profitable to you
And would have in fact made that additional sale
Rst 224: “a condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused,
before performance under the contract becomes due.”
Condition precedent: Rst 224–something that has to happen before a performance obligation kicks
Condition subsequent: something that, if it occurs, will discharge the obligation of performance by
the other party (ground for termination)
Luttinger v. Rosen: A condition precedent must be met before performance by the parties is required under
a contract, and the contract will not be enforced if the condition is not met. Luttinger wins b/c condition
precedent not met.
Facts: Under a condition precedent in the contract, the parties were obligated to perform the contract only if
the Luttingers could obtain a mortgage for at least a twenty-year term at an interest rate of no more than 8.5
percent per annum. They couldn’t get that interest rate. Rosen refused to give back their deposit, and offered to
finance for them. Luttinger sued.
- Since there was an express condition in the K = strict compliance is required to enforce the contract.
Had there not been an express condition, the court would read into the K an implied obligation to use
reasonable care to perform (prevention). Thus, perhaps Luttinger would have had to accept Rosen’s
offer to finance the home for them.
Mitigating Doctrines for Conditions
- Allows conditions to be enforceable even if not entirely satisfied
Prevention: you can’t prevent the occurrence of a condition that compels you to perform (A can’t do
something that would prevent a condition that would require A to perform his duty to B).
- actively prevent a condition from occurring or
- Fail to use good faith and fair dealing.
- BUT, the other party sometimes should assume the risk that a condition precedent might not be met
- Ex: Crouch contracts to buy Bowman’s farm in 60 days. Contract says Crouch will purchase
if, prior to closing, he hasn’t entered a k to buy a similar sized plot closer to town. Crouch then
goes about trying to find closer land. He finds such land and enters a k on day 50. Refuses to
close. Bowman sues. Result?
- Although Crouch is actively preventing the condition, Bowman essentially
assumes the risk that Crouch would not cause the condition to be satisfied
Waiver: an obligor whose duty is conditional may promise to perform despite the non-occurrence of a
condition or despite a delay in its occurrence.
- A waiver by itself can be retracted by the person making the waiver, unless there is consideration.
- Ex: Crouch contracts to purchase Bowman’s farm. Closing in 90 days. Closing contingent on
rezoning in 60 days. On day 55, the commission says it will vote in ten days and will likely rezone.
Crouch says he’ll go forward even if the rezoning doesn’t occur within 60 days. On day 59, Crouch
says, “changed my mind – if no rezoning by tomorrow, deal’s off.” No rezoning by day 60. Bowman
sues to enforce. Result?
The condition is that Bowman’s farm must be rezoned by day 60. Crouch changed his mind
on day 59, but the day 55 waiver of the condition was “naked,” meaning that there was no
consideration behind it (there was no bargained-for exchange with Bowman). Thus, Bowman
can’t enforce the contract. Crouch wins.
Estoppel: A party that, without consideration, has waived a condition that is within the other party’s control
before the time for occurrence of the condition can retract the waiver and reinstate the requirement that the
condition occur unless the other party had relied to such an extent that retraction would be unjust. (A party
cannot waive the requirement to perform if they waive after the condition is met)
- Ex: Crouch contracts to purchase Bowman’s farm. Closing in 90 days. Closing contingent on
rezoning in 60 days. On day 55, the commission says it will vote in ten days and will likely rezone.
Crouch says he’ll go forward even if not rezoned within 60 days. On day 57, Bowman receives another
offer on the farm – same purchase price. Turns it down b/c of contract with Crouch. On day 59,
Crouch says, “changed my mind – if no rezoning by tomorrow, deal’s off.” No rezoning by day 60.
Bowman sues to enforce.
- Bowman wins, as Crouch will be estopped from revoking the promise. Enforced under
Election: a party has a choice to perform after the time for the condition has expired. A party can take
advantage of the nonoccurrence and treat the duty as discharged, or it can disregard the nonoccurrence of the
condition and treat the duty as conditional.
- An election is not retractable
Constructive Conditions
When performance could be a duty, condition, or promissory condition, courts will interpret unclear language
as being just a duty, since others raise risk of forfeiture of performance.
- Rst 227
- Rst 229: material breaches can’t be excused.
- Lambert K’s with State Farm. Lambert has to pay $1200 a month and notify of the
claim within 5 days. Lambert does pay for 5 months, then his house burns down.
Notifies in 7 days.
- Result: house burning down would be a condition, but the court is likely to interpret
the 5-day reporting requirement as a duty. Lambert would get paid. Rst 229 says that
a non-occurrence can be excused if breach is not material
Lambert buys State Farm insurance on Jan 1. Doesn’t pay at all. May 1 house burns
down, but reports within 5 days. State Farm refuses to pay. Lambert sues
- Result: this is a material breach. State Farm won’t have to pay.
Kingston v. Preston: When one party’s performance under a contract is dependent on the prior performance
of the other party, the other party’s performance is a condition precedent and performance will be excused
unless the condition is satisfied.
This contract had a condition and dependent covenant–that Kingston provide adequate security to
Preston before Preston would hand over the business. Kingston failed to satisfy the condition–so
Preston doesn’t have to perform.
Three types of covenants in contracts:
1. Mutual and independent: either can recover from the other (traditional)
2. Conditions and dependant: performances are conditions of one another, one has to precede
performance of the other.
3. Mutual conditions to perform at the same time: if one offers and other refuses, can maintain action.
Determine which of the three based on the evidence sense of the K and meaning of the parties
- Typically the performances are intended to be dependent, not independent. RS 232–assume unless
otherwise clear that the performances are dependent.
- Default Rules:
RS 234(1): where they can be rendered simultaneously, they are assumed to be
contracted to be done at the same time.
- Default rule for sales contracts. You hand over money at the same time they
hand you goods
RS 234(2): where performance of one requires a period of time, theirs is due first.
Doing is a condition to the giving.
- Contractor duty precedes payment, sometimes along with periodic payment
Mitigating doctrines for Constructive Conditions
Luttniger = express conditions require strict enforcement. But not all K’s have express conditions.
Jacob & Youngs: Although J&Y breached, Kent still had to pay b/c J&Y substantially performed. In the
universe of constructive conditions, the duty to perform has been discharged by substantial performance.
- Perfect Tender Rule Exception: substantial performance does not apply to the sale of goods. BUT
UCC 2-508 allows a seller to “cure” defective performance if time has not yet expired.
What constitutes substantial performance: (Rst 241):
- the extent to which the injured party will be deprived of the benefit which he reasonably
the extent to which the injured party can be adequately compensated for the part of that
benefit of which he will be deprived;
the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
the likelihood that the party failing to perform or to offer to perform will cure his failure,
taking account of all the circumstances including any reasonable assurances;
the extent to which the behavior of the party failing to perform or to offer to perform
comports with standards of good faith and fair dealing.
Gill v. Johnstown Lumber Co.: When parties agree that payment for delivered goods will be made on a perunit basis, performance of that obligation is severable and compensation can be had for units which are
delivered, even if full performance is not accomplished.
- Although Johnston failed to get all the logs to Gill, he got some there.
- Test for divisibility:
- Must be possible to apportion parties performances into paired partial performances, and
match them up as appropriate
Must be properly regarded as agreed equivalents. 10% of the way is not worth 10%, it is worth
nothing. Rst 240.
Restitution: Rst 374: if a party justifiably refuses to perform on the ground that his remaining duties of
performance have been discharged by the other party's breach, the party in breach is entitled to restitution for
any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused
by his own breach.
- Ex: contractor agrees to build you a garage over 8 weeks. You promise to pay $8,000. Contractor gets
sick after 4 weeks, and can't perform. You refuse to pay. What if the contractor sues you?
- Possible to apportion into $1,000 per week and allocate $4,000. However, not agreed
equivalents, weeks vary in value.
- Substantial performance also doesn't work. Probably not enough to constitute.
- Unjustly enriched at the contractor’s expense (Rest). This works because no other remedy is
available. You must pay the contractor back the value of the work minus losses you may incur.
Suspending Performance:
If a party does not perform, the options are usually (1) get damages, (2) suspend performance, or (3) walk away
To suspend:
1. Ask if the breach is material or immaterial related to substantial performance (Rst 241)
2. If immaterial, victim cannot suspend; if it does so, they have breached
3. If material, victim may suspend, but has to give breaching party the opportunity to cure defective
a. What is required for a cure opportunity? Reasonable in light of circumstances. Look to
same factors as substantial performance:
Adequacy of monetary damages, risk forfeiture by breaking party (custom goods),
likelihood of a cure, further loss to the injured party, etc.
Important for sale of goods K’s, where substantial performance will not suffice. UCC
2-508 provides two situations for cure opportunity:
1. Time for K has not yet expired
2. Other one (fill in later)
Walker & Co. v. Harrison: A minor failure of performance is not a serious enough breach to justify
repudiation of the entire contract.
- Walker's delay in cleaning the sign may have been irritating to Harrison, but, without more, it does not
constitute such a material breach as to provide justifiable grounds for Harrison’s repudiation of the
entire contract.
- Lesson: you have to be really careful when you decide to withhold performance or terminate due to
their deficiency. If you are wrong about the materiality and you stop, you will be the breaching party.
K&G Construction v. Harris: Promises are independent of each other if the parties intend that
performance by each of them is in no way conditioned upon performance by the other. Promises are mutually
dependent if the parties intend performance by one to be conditioned upon performance by the other.
The promises to perform were dependent here.
Facts: K&G was a contractor that hired Harris as a subcontractor. Harris damaged a wall. K&G
refused to pay until Harris fixed the wall. Harris discontinued work (repudiated), and K&G hired
another subcontractor. Harris sued for payments.
Hold: For K&G. The parties intended performance to be dependent on one another. Harris was the
first breacher, because he didn’t perform in a “workmanlike manner” when he damaged the wall. He
further breached when he discontinued work after K&G asked him to fix the wall.
Repudiation is a tool, but determination of materiality is fraught with peril
Hochester: A party can sue for a breach even if that breach hasn’t happened yet, but is inevitable.
- P was hired in April to serve as courier for a traveling businessman in Europe, to begin work on June 1.
On May 11, D told P he no longer needed him. P sued. P won suit. Why? b/c if Hochster is not
permitted to sue for damages until the day when his agreement with De la Tour is supposed to be
performed, he will miss out on an opportunity to mitigate the damages by seeking other employment.
Rst 253(1): Where an obligor repudiates a duty before he has committed a breach by nonperformance and before he has received all of the agreed exchange for it, his repudiation alone gives rise
to a claim for damages for total breach.