CONTRACTS OUTLINE
Van Loo - Fall 2022
Contract Formation
Overview
Offer
Mutual Assent
Advertisement as Offer
Destroying the Offer
Mailbox rule
Reasonable time frame for acceptance
Acceptance
Effectiveness of Acceptance
Acceptance by Performance
Acceptance by Silence
Imperfect Acceptances
Common Law: Mirror-image rule
UCC § 2-207
“Knockout” rule: Different Terms
UCC § 2-207 Flow Chart
Deficient Agreements
Mutual Misunderstanding
Indefiniteness
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Consideration
Pre-existing duty rule
Illusory promise
Moral Obligation
Substitutes for Consideration
Material benefit rule
Promissory Estoppel - R2C § 90 and § 139
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Unenforceability
Statute of Frauds
Fraud, Misrepresentation, Capacity
Fraud - R2C § 162
Material Misrepresentation - R2C §§ 159-164
Nondisclosure - R2C § 161
Capacity - R2C § 12
Duress and Undue Influence
Duress - R2C §§ 174-176
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Undue Influence - R2C § 177
Threats - R2C § 176
Unconscionability - R2C § 208 and UCC § 2-302
Mistake - R2C § 152-154
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Interpreting Terms of a Contract
Interpretation Generally
Gap fillers (default rules - R2C § 204 and UCC generally):
Trade Custom and Usage
Parol Evidence Rule - R2C § 213 and UCC § 2-202
Implied and Imposed Terms
Exclusive Dealing
Warranties and the UCC
Express Warranties - UCC § 2-313
Implied Warranty of Merchantability - UCC § 2-314
Implied Warranty of Fitness for Particular Purpose: UCC § 2-315
Contracts of Adhesion
R2C § 178 - When a contract of adhesion is unenforceable based on public policy
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When a Party is Excused from Performance
Conditions - R2C § 224 & 225
Waiver, Estoppel, Modification
How to Waive
Modification
Impracticability/Impossibility - R2C § 261-264
Force Majeure
Frustration of Purpose - R2C § 265
Anticipatory Repudiation - R2C § 250 & 253
Adequate Assurance - R2C § 251
UCC § 2-209
Material Breach - R2C § 241
Contemporaneous Performance
Substantial Performance
UCC § 2-601 - Perfect Tender Rule
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Remedies
R2C § 344 - Purpose of Remedies
Specific Performance - UCC § 2-716
Liquidated Damages - UCC § 2-718 and R2C § 356
Expectation Damages - R2C § 347
Two Ways to Make Nonbreaching Party Whole
Direct vs. Consequential Damages
Buyer’s Damages under the UCC: §§ 2-711, 2-712, 2-713
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Seller’s Damages under the UCC: § 2-703
Reliance Damages - R2C § 349
Limitations on Monetary Damages
Mitigation - R2C § 350
Foreseeability - R2C § 351
Certainty - R2C § 352
Restitution
Quasi-Contract
Third Parties
Beneficiaries - R2C § 302
Assignment of Rights - R2C § 317
Delegation of Duties
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Contract Formation
Overview
● A contract is a promise or set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.
Includes:
○ Promise(s)
○ Ability for legal enforcement.
● Policy considerations can impose limitations on freedom of contract
○ Ex: R.R. v. M.H.
Three elements of a contract:
1. Offer
2. Acceptance
3. Consideration
R2C: summary of the state of contract law. Does not itself have force of law, but courts will
sometimes consult. Individual states’ contract law may vary but R2C rules generally apply for
contracts that are a provision of services.
UCC: most states have adopted the UCC at least in part, so it does have the force of law.
Governs contracts that involve the provision or sale of goods.
Unilateral contract: I will give you X if you perform Y. Offeree can accept by performance.
- Can be accepted only by full, complete performance BUT the offer will be irrevocable
once performance begins.
Bilateral contract: One party does X and the other party does Y, each in exchange for the other’s
promise of X/Y.
- Offer and acceptance happens together, and a failure to later perform on either side
constitutes a breach of contract.
Offer
An offer must:
● Be communicated (oral or written)
○ May be inferred wholly or in part from conduct
● Indicate a serious (not joking) desire to enter into a contract
● Be directed at some person or persons
● Invite acceptance
● Be sufficiently definite (see ad section)
● Create a reasonable understanding that upon acceptance a contract will arise (Leonard
v. PepsiCo)
○ Is it so outlandish/impossible that a reasonable person could not reasonably
believe it was an offer? → NOT AN OFFER
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R2C § 24 Offer Defined: manifestation of willingness to enter into a bargain
Mutual Assent
R2C §22. Mode of Assent: Offer and Acceptance
1. The manifestation of mutual assent to an exchange ordinarily takes the form of an offer
or proposal by one party followed by an acceptance by the other party or parties.
2. A manifestation of mutual assent may be made even though neither offer nor
acceptance can be identified and even though the moment of formation cannot be
determined.
R2C §21. Intention to Be Legally Bound.
Neither real nor apparent intention that a promise be legally binding is essential to the formation
of a contract, but a manifestation of intention that a promise shall not affect legal relations may
prevent the formation of a contract.
Mutual assent: both parties must agree to the terms of the deal (must agree to the same thing).
● Objective theory of mutual assent: courts look to outward manifestation of the parties,
regardless of what their subjective intentions may have been
OBJECTIVE MUTUAL ASSENT TEST
● (1) Would a reasonable person in the position of the enforcing party understand from the
other party’s words and conduct that they intended to be legally bound? [outward
manifestation]
○ **objective third party is not omniscient - only listens to/considers interactions
between the two parties
● (2) Did the enforcing party in fact believe that the other party intended to be bound?
Ex: Lucy v. Zehmer: Zehmer said he was joking, but his actions indicated otherwise. Subjective
intent did not matter
R2C § 26: Negotiations generally do not constitute an offer.
Advertisement as Offer
○ Is an offer in an advertisement enforceable?
1. Fully serious → not a joke
2. Concrete and specific → terms offered positively
3. Ready-to-be-accepted → no need for further consideration or meeting of certain
conditions
*also consider policy implications for future advertisements/commerce
○ PepsiCo: advertisement of Harrier Jet for 7 mil Pepsi Points was obviously a joke to a
reasonable person and not intended as a serious offer → not enforceable
○ R2C § 33 Reasonable certainty of terms
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a) Basis for determining breach
b) Basis for providing appropriate remedy
c) One or more terms left open → may not be an offer
i)
Contrast with UCC §2-204: one or more terms may be left open
○
○
Must be clear, specific terms offered positively that do not need further negotiation or
require meeting of certain conditions -- if they are conditional, NOT an offer
■ Finite number of goods → not an offer
● Ex: Ford Motor v. Russell: Only a finite number of cars available,
unreasonable to assume the offer was open. ONLY an invitation to
negotiate, also conditioned on meeting interest rate.
■ Non-finite number of goods → offer
● Ex: Kearney: A CLEAR advertisement (if buy gas, get free lift ticket), not
restricted by a finite number, does NOT need further negotiation, and is
not conditional.
EXCEPTION: offer of reward → in clear and positive terms, promise to render
performance in exchange for something requested by advertiser
■ Ex: Carbolic Smoke Ball: promise to award a reward for using smoke ball and
still getting sick, clearly made an offer that was capable of being accepted by
anyone who bought the smoke ball and used it as directed, not limited by a finite
number, also deposit (1,000￡) was made to keep money aside in a reward pot,
shows sincerity
Destroying the Offer
Mailbox rule
Contract is entered into at the point when the acceptance is deposited
Reasonable time frame for acceptance
(1) Subject matter of the contract
- Ex: contract for sale of product whose price fluctuates drastically or rapidly
(2) Intent of the parties
- Ex: offeror sent terms by telegram instead of much slower postal service,
indicating they expected speedy acceptance (immediate/ASAP after
consideration)
Ex: Minnesota Linseed Oil - was delay in acceptance reasonable? When was acceptance
effective?
- Delay was unreasonable because it allowed def to take advantage of the market
fluctuations to their benefit
R2C § 36: Destroying an Offer
1. Rejection or counter-offer
a. Offer revoked before acceptance → destroys offer
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b. Explicit rejection: offeree explicitly refuses. Offer cannot be revived unless offeror
chooses to do so (offeror is king)
c. Implicit rejection: counteroffer is implicit refusal of original offer
2. Lapse of Time
a. Offer lasts as long as offeror says it will → retains complete control until
acceptance
b. Offer can expire before acceptance if delay to acceptance is unreasonable
i. If unstated period of time, remains open for reasonable time
ii. Time is reasonable in light of contemplation by the parties
3. Revocation by offeror
a. Can be revoked BEFORE ACCEPTANCE
4. Death / Incapacity of the Offeror
UCC § 2-205: an offer made by a merchant, in writing, that provides the offer will be held open
cannot be revoked (even without consideration) for that specified period of time or at most 3
months
Acceptance
RULE: Offeror has complete control over the terms
of the offer, including the terms of acceptance.
● Acceptance brings the agreement into
existence and terminates the offeror’s
ability to revoke.
● Acceptance must be in the form authorized
by the offeror!
○ R2C § 60
○ R2C and UCC: an offer is treated
as inviting acceptance in any
reasonable manner unless the offer
clearly and unambiguously indicates the designated manner is the only possible
way to accept the offer
La Salle Nat’l Bank v. Vega - trust buying land, seller specified signing order of trusts’ agent →
seller → trustees = execution
Trustees did not sign, so no execution according to terms → no enforceable contract
Effectiveness of Acceptance
Acceptance by Performance
● Offer can only be revoked BEFORE acceptance
● Ex: Evertite Roofing Co - agreement specified contract would become binding upon
either authorized signature or performance
○ Contract becomes binding at the moment performance begins
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○
●
Delay to acceptance was reasonable due to nature of activity (credit checks take
time)
If acceptance by performance is an option, notice of acceptance is not required (unless
specified). Performance is acceptance.
○ Acceptance pre-performance could lead to over-acceptance, which courts don’t
want
○ Carbolic Smoke Ball
Acceptance by Silence
● In general, silence does not constitute acceptance.
● Exception: Beneficial National Bank: acceptance by silence is possible.
○ Why? Parties contracted around the general (default) rule!
Imperfect Acceptances
Two approaches, depending on content of contract (whether common law or UCC governs).
↓
↓
non-goods
goods
Common Law: Mirror-image rule
Traditional rule: acceptance must be unconditional expression of assent to terms without
addition or variation → anything less is a counteroffer
R2C § 59 Purported Acceptance Which Adds Qualifications
● Conditional or qualified acceptance which adds or alters terms is not an acceptance, but
a counteroffer.
R2C § 39 Counter-Offers
(1) Counteroffer is made by offeree to offeror and proposes a substituted bargain differing
from the original proposed by the offeror.
(2) Offeree’s power of acceptance is terminated by making a counteroffer (it’s a rejection,
then a counteroffer).
UCC § 2-207
“Battle of the Forms” - BUT there doesn’t need to be two forms!
“Failed proviso” cases - upon addition of new or different terms, acceptance is made
(1) expressly conditional on offeror’s
(2) assent to new/additional terms.
● Not enough that acceptance is conditional upon those terms themselves
● Has to be clear that offeree would not move forward without offeror’s assent to those
terms
[See flow chart on next page for full application of 2-207]
“Knockout” rule: Different Terms
● Where there are different terms (not additional terms), those terms in each form cancel
each other out and are replaced with UCC gap fillers
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○
UCC gap fillers: default rules
■ Applies when the parties have not otherwise agreed
■ In theory, designed to reflect what the parties would have agreed to if they
had addressed the issue
■ In reality, tells us what RPs in the position of the parties would have
agreed to, and assumes the parties were bargaining from relatively equal
positions of strength
■ Allows some contract terms to remain indefinite or open in the interest of
conducting business freely → only thing that can’t remain indefinite is
quantity
Relevant cases:
● Klocek v. Gateway (terms and conditions added to box; additional term (arbitration
clause) found not to be included in contract for sale)
● Dorton v. Collins & Aikman Corp (sales made orally with forms to confirm that had
arbitration clause added. Court holds contract was formed under 2-207(1) but we don’t
yet know whether the terms of the oral agreement and the written confirmation were
different)
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UCC § 2-207 Flow Chart
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Deficient Agreements
1. Mutual misunderstanding: parties have attached materially different meaning to a
term(s) of the contract
2. Indefiniteness: parties have failed to define a key term of the agreement
Mutual Misunderstanding
● Parties agree to use the same term but attach different meanings to it
● Mutual misunderstanding = no mutual assent (cannot enforce agreement)
● Ex: Raffles v. Wichelhaus (the Peerless case)
● R2C § 20: mutual misunderstanding applies when different meaning is attached to
material term and (1) neither party knows/has reason to know the meaning attached by
the other, or (2) each party does know/have reason to know the meaning attached by
the other
ON EXAM: if you can argue both mutual misunderstanding and trade usage, do it! They have a
lot in common, but different results:
● Mutual misunderstanding = no contract because no mutual assent (Peerless case)
● Trade usage = contract, but disagreement over key term (Chicken case)
Indefiniteness
● R2C § 33 Reasonable certainty of terms
1. Basis for determining breach
2. Basis for providing appropriate remedy
3. One or more terms left open → may not be a contract
● UCC 2-204
1. Parties intend to make a contract
2. Reasonably certain basis for giving appropriate remedy
3. One or more terms may be left open → still can be a contract
● Under UCC, default rules (gap fillers) are used to overcome indefiniteness in contracts
for sale
● Ex: Varney → Cardozo’s dissent says Varney should get salary even though oral
contract left terms open (provided there is other evidence to support oral agreement)
● Ex: CDC v. Antonell → Bonus agreement is not too uncertain/indefinite where there is
vagueness about the amount (still enforceable)
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Consideration
Consideration = anything sought by one party and given by the other party; something given in
exchange for the promise that is bargained for
● Bargained for = sought by the promisor in exchange for the promise
○ Also given by the promisee in exchange for the promise
● Past action is not consideration
○ You can’t “bargain for” something that has already happened
○ Only performances that are bargained for are consideration
● Gratuitous promises generally not enforceable (promise is given without something in
return)
○ Ex: Kirskey v. Kirksey (brother giving sister place to live, then kicking her out)
→ promise was a gratuity (would probably be decided differently today)
● Consideration can be either a benefit conferred on the promisor or a detriment to the
promisee
○ Ex: Hamer v. Sidway → nephew’s forbearance of a legal right (to drink alcohol)
constitutes consideration because he acted to his detriment, and that behavior
was induced by his uncle’s promise
● R2C § 79: no equivalence is necessary for purposes of consideration
Pre-existing duty rule
A promise to do what a party is already contracted/obligated to do cannot constitute
consideration for a contract modification
● R2C § 89: contract modification requires new consideration unless (1) there are
unforeseen circumstances and (2) modification is fair & equitable (in good faith)
● UCC 2-209: an agreement modifying a contract for the sale of goods does not require
consideration to be enforceable
● Ex: Alaska Packers v. Domenico → workers argued there was a new contract for the
raise because their working conditions had changed, but they hadn’t. No consideration
for new contract because they were doing the same work they had already contracted to
do
Illusory promise
● When a real promise is exchanged for an illusory promise, neither is enforceable
● What makes a promise illusory?
○ R2C § 77: words of promise which by their terms make performance entirely
optional with the “promisor” do not constitute a promise. Illusory promises are not
consideration.
○ Ex: I’ll buy as much candy from you as I can.
○ Ex: I accept what you’re offering me, but reserve the right to terminate the
agreement at any time.
Moral Obligation
Moral obligation does not constitute consideration
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●
●
●
●
i.e., a moral obligation is not a legal obligation
Ex: Harrington v. Taylor (saving neighbor from axe, neighbor promised to repay and
didn’t, no consideration→no contract)
Ex: Mills v. Wyman (son taken care of, father promised to reimburse and did not, no
consideration→no contract)
In both cases above, def didnt’ get anything in return for their promise (of $), because
the thing they were given (care or aid) happened before their promise
○ Induced by feelings of gratitude for prior conduct → not consideration
Substitutes for Consideration
Material benefit rule
Past performance can constitute consideration where the subsequent promisor received a
material benefit
● A performs unsolicited act for B’s benefit → B subsequently promises to repay →
promise is enforceable
● The promise is affirmation/ratification of services rendered
● Essentially a presumption that the promising party would have asked for that act
● May be enforced to prevent injustice
● Ex: Webb v. McGowin (pff was permanently injured in workplace accident when saving
def’s life)
Promissory Estoppel - R2C § 90 and § 139
● Promise that foreseeably induces reliance on the part of the promisee may be enforced
despite the absence of consideration. Must include:
1. A promise
2. Justifiable and detrimental reliance on such promise by the promisee that
3. The promisor should have expected to cause the promisee to change her
position by taking action/forbearing from acting, AND
4. Enforcement is necessary to prevent injustice
● Ex: Ricketts v. Scothorn (promisee gave up job in reliance on money from grandfather)
● Ex: Dixon v. Wells Fargo (couple stopped making mortgage payments at Wells Fargo’s
direction, then had their home foreclosed on→ court upholds agreement to negotiate in
good faith)
● Re #4: not enforcing the promise is unjust. This doesn’t mean specific performance is
the only remedy
○ Remedy is usually limited to actual loss (what the other party relied on)
● WARNING: check if there is a typical contract (supported by consideration) BEFORE
jumping into a promissory estoppel analysis
○ Only applies where there is not already a contract
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Unenforceability
Statute of Frauds
Certain agreements must be in writing or have evidence of contract by some writing
● Purpose: to prevent false claims by unethical pffs/defs that there was or was not an oral
agreement
●
R2C § 110: types of agreements covered by SOF
○ Contract of an executor or administrator to answer for a duty of his decedent
○ Contract to answer for the duty of another
○ Contract made upon consideration of marriage
○ Contract for sale of an interest in land
○ Services contracts not capable of being performed within a year of the date of
contract formation
●
UCC § 2-201: requirements of SOF
○ Sale of goods exceeding $500
○ Quantity term must be stated in writing
○ Writing must be signed by the party against whom enforcement is sought
■ Except between merchants (2): if both buyer and seller are merchants
and recipient of a signed writing fails to object in writing within 10 days,
then writing signed by pff satisfies SOF
○ Must also look to state’s Statute of Frauds for more specific info if available
○ Ex: DF Activities v. Brown (UCC - purchase of FLW chair by Domino’s CEO)
EXCEPTION TO STATUTE OF FRAUDS: contract is enforceable if party against whom
enforcement is sought admits that a contract for sale is made
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●
IF WRITING DOESN’T COMPLY/THERE IS NO WRITING → may still be enforced if it
has been reasonably relied on [promissory estoppel]
Fraud, Misrepresentation, Capacity
All about consumer protection → rescinding contracts that are unfair
Misrepresentation = an assertion that is not in accord with the facts.
When looking at whether to enforce agreement based on misrepresentation, courts look at:
1. How important representation was
2. Whether the other party relied on the representation
3. If reliance was reasonable
Fraud - R2C § 162
● Intentional or negligent deception
● Done with the intent to deceive
● Maker intends his assertion to induce a party to manifest his assent and the maker:
○ Knows or believes the assertion is not in accord with the facts, or
○ Does not have the confidence he states/implies in the truth of the assertion, or
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○
Knows he does not have the basis that he states/implies for the assertion
Material Misrepresentation - R2C §§ 159-164
● Act likely to affect conduct, but no clear intent to deceive
● Concealment: a contract maker is not required to tell the other party everything he
knows, but if a party purposefully conceals or hides an issue from a buyer, that’s
misrepresentation
● Sellers will often argue caveat emptor (buyer beware) → no duty to disclose all
information to buyer
○ Nondisclosure is legal BUT
○ The line is crossed when you actively conceal
● Minor conditions will not allow for rescissions, even if they seem to be misrepresented
Nondisclosure - R2C § 161
● A nonaction or noncommunication of a fact
● When a nondisclosure is equivalent to misrepresentation:
○ Person knows disclosure of the fact is necessary to prevent some previous
assertion from being misrepresentation or fraud
○ Person knows disclosure of the fact would correct a mistake of the other party as
to a basic assumption on which that party is making the contract
○ Person knows disclosure of the fact would correct a mistake of the other party as
to the contents or effect of a writing or agreement
○ Other person is entitled to know the fact because of relationship of trust and
confidence between them
■ Ex: fiduciary relationship (investing money on your behalf): duties are
greater than in an everyday relationship; must act in your best interest
A contract can be rescinded for fraud only for misrepresentations of fact.
Exceptions - where misrepresentations of opinion can factor in:
● Fiduciary relationship
● Artifice or trick
● Parties do not deal at arm’s length
● Superior knowledge or unequal opportunity to learn information
Capacity - R2C § 12
● Common law and statutes regulate who may legally enter into a contract
● Who does not have the capacity to enter into a contract?
○ Under guardianship
○ Infant (minor under 18)
○ Mentally ill
○ Intoxicated
● Contract is voidable by the incapable party → not void
○ Valid until the incapable party voids it (the party protected by the law)
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Duress and Undue Influence
Duress and undue influence share elements of coercion, but duress is stronger.
● Undue influence is more about relationship of trust and the use of that relationship to
persuade
● It generally will be easier to prove undue influence because it requires a lower threshold
of pressure
○ But duress cases with clear threats will be stronger and easier to win
● Don’t always pull the undue influence alarm! Lots of cases will have elements of
pressure that can be argued, but don’t go too far.
Duress - R2C §§ 174-176
● When one party forces another party to enter a contract → UNENFORCEABLE
○ Physical compulsion → void (either party)
○ Threat → voidable (by victim)
● If there is excessive force or pressure, there’s no true assent to enter into the contract
Undue Influence - R2C § 177
● Defense to contract enforcement → voidable by the victim
● Two elements (Odorizzi v. Bloomfield School District):
(1) undue susceptibility
■ Lessened capacity of subservient party to freely enter contract
(2) excessive pressure
■ Unfair advantage where the will of the subservient party is overcome by
the will of the dominant party
● Can be temporary or permanent
● Can be due to nature of parties’ relationship
● To determine under influence, court uses 7 factors (Odorizzi)
(1) Discussion of transaction at unusual or inappropriate time
(2) Consummation of transaction in unusual place
(3) Insistent demand that business be finished at once
(4) Extreme emphasis on untoward consequences of delay
(5) Use of multiple persuaders on dominant side against single subservient party
(6) Absence of 3rd party advisers to subservient party
(7) Statements that there is no time to consult financial advisors or attorneys
Threats - R2C § 176
● A threat is improper where:
○ A crime or tort is threatened
○ Criminal prosecution is threatened
○ Use of civil process is threatened and threat is made in bad faith
○ Threat is a breach of contractual duty of good faith and fair dealing
○ Resulting exchange is not on fair terms AND
■ Threatened act would harm recipient w/o benefitting party making threat
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■
■
Effectiveness of the threat in inducing manifestation of assent is
significantly increased by prior unfair dealing by the party making threat
What is threatened is otherwise a use of power for illegitimate ends
Unconscionability - R2C § 208 and UCC § 2-302
● Courts will not enforce a contract (or term) that is fundamentally unfair, whether
procedurally or substantively
● Involves (1) absence of meaningful choice on part of one party and (2) terms that are
unreasonably favorable to one party
● NEED BOTH ELEMENTS TO BE UNCONSCIONABLE
○ Procedural element: how the contract was made
■ Where, when, under what circumstances, differences in power/education
of the parties, reasonable opportunity to understand terms of the contract,
deceptive sales practices
○ Substantive element: terms of the contract itself
■ Conditions, terms, implications
● Focused on particular transaction and pff → not effect on society or contracts as a whole
Mistake - R2C § 152-154
Memorable Case: Estate of Nelson v. Rice (sold paintings that ended up being worth millions)
Mistake = factual mistake; applies only to existing facts, not mistaken belief about future
events/states of affairs
When a mutual mistake makes a contract voidable:
(1) Mistake by both parties as to a basic assumption on which the contract was made
(2) Mistake has a material effect on agreed exchange of performances
● Then look at who bore the risk (R2C § 154)
When a unilateral mistake makes a contract voidable:
(1) One party makes a mistake (as above) and
(2) He does not bear the risk of the mistake (as below), AND
(3) Either:
(a) Enforcement of the contract would be unconscionable OR
(b) Other party had reason to know of mistake/other party’s fault caused mistake
A party bears the risk of a mistake when:
(1) Risk is allocated to him by agreement of the parties (in the contract)
(2) He knows (at the time contract is made) that he has only limited knowledge about the
facts, and he proceeds anyway, treating his knowledge as sufficient (conscious
ignorance)
(3) Risk is allocated to him by the court (if it is reasonable to do so)
Court needs clear and convincing evidence to rescind contract for mistake; will be reluctant
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Interpreting Terms of a Contract
Interpretation Generally
Sources for interpreting terms (in the order court considers them):
1. Express terms
2. Course of performance – the way parties have conducted themselves in the past
3. Prior agreements
4. Course of dealing – the way parties have acted with past contracts
5. Usage of trade – practice or method used with regularity in industry such that it’s
reasonable to expect it will be observed for this contract
Issues the courts considers in interpreting terms of the deal:
(1) What terms the court would imply
(2) When will court substitute out written terms with those from prior oral agreement
(3) How do courts interpret written terms
(4) What terms will courts add when they are missing (gap fillers)
Gap fillers (default rules - R2C § 204 and UCC generally):
● Implemented where parties have not otherwise agreed on a term (contract is silent)
● Designed to reflect what reasonable persons in the position of these parties would have
agreed to, assuming they were bargaining from relatively equal positions of strength
● Only term in a sale of goods contract that cannot be supplied by default rule is quantity
Trade Custom and Usage
ON EXAM: if you can argue both mutual misunderstanding and trade usage, do it! They have a
lot in common, but different results:
● Mutual misunderstanding = no contract because no mutual assent (Peerless case)
● Trade usage = contract, but disagreement over key term (Chicken case)
Trade usage = how people within a given trade use that word
● In order to impute trade usage into the contract, you need to show there was actual or
constructive knowledge of the trade meaning of the term by the party (essentially, party
has to be a member of that trade)
● If trade usage is only constructively known, it must be sufficiently obvious that both
parties contracted with reference to it
Steps the court used to figure out the meaning of “chicken” (mimic these steps for unclear
terms):
1. Definition of the word itself
2. Four corners of the contract
3. Negotiations*
4. Definitions found elsewhere*
5. Trade usage*
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*extrinsic evidence → court will only go beyond four corners of contract itself if contract does not
make the term clear
● Examples of range of extrinsic evidence court will rely on to make a term clear: USDA
definitions and regulations, common sense market-related argument, conduct of the
parties
Parol Evidence Rule - R2C § 213 and UCC § 2-202
Parol evidence = evidence about parties’ discussions regarding what the contract should
contain
Parol evidence rule
● If there is an integrated agreement, neither party may argue that preformation acts or
agreements should influence the terms of the contract (may not introduce parol
evidence)
● Integrated agreement = final expression of one or more terms of an agreement (R2C §
209)
○ Completely integrated agreement: parties have not agreed to any terms other
than those within the contract
○ Partially integrated agreement: some terms are final, some are not
● When can you introduce parol evidence?
○ If fully integrated: no parol evidence admissible that would contradict or add to
the writing
○ If partially integrated: parol evidence on non-integrated (silent or additional) terms
is admissible, but not for clear, explicit terms (where evidence contradicts terms)
■ Ex: Parties enter into an agreement that is silent on an issue – S and B
contract for 100 chickens, and contract is silent on how chickens are to be
wrapped. B may enter evidence that S told her he would deliver chickens
wrapped for freezing.
○ If there is an integration clause: no parol evidence admissible – indicates
agreement is complete and supersedes prior discussions, letters of intent, and
representations
● Any ambiguity within the four corners of the contract is interpreted against the drafter
R2C § 214. General things parol evidence can establish
(that a writing is fully or partially integrated, the meaning of the writing, ground for remedy, etc.)
Where Parol Evidence Rule Doesn’t Apply
Parties can always introduce evidence to show
● Illegality
● Fraud
● Duress
● Mistake
● Lack of consideration
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Implied and Imposed Terms
Memorable cases: Lucy, Lady Duff Gordon and Clint Eastwood
●
●
●
●
Courts will read an implied promise into a contract, provided that the term effectuates the
clear intent of the parties as expressed in the words of the contract
Mutuality or a return promise may be implied from the circumstances surrounding the
contract and the nature of the whole writing
Every contract under common law (R2C) and UCC contains an implied obligation
of good faith and fair dealing.
UCC §1-302: PARTIES CANNOT CONTRACT AROUND THE DUTY OF GOOD FAITH
○ Courts sometimes want evidence of parties’ intent to deal in good faith, but will
still be reluctant to waive this duty
Exclusive Dealing
§ 2-306(2): exclusive dealing implies:
(1) seller obligation to use best efforts to supply goods AND
(2) buyer obligation to use best efforts to promote sale
Warranties and the UCC
Two main questions:
(1) Was there actually a warranty made, or was it just typical sales talk/an opinion?
(2) Is the warranty part of the bargain?
●
●
●
●
Warranty = allocation of risk; a party who makes a warranty accepts the risk of the
untruth of the subject matter of that warranty
○ Warranty is an affirmation of fact
Express warranty = statements or assurances given by seller concerning quality or
characteristics of goods subject to contract
○ Overt manifestation from seller to buyer about the good’s characteristics
Implied warranty = assurance concerning seller’s title to goods and their basic quality
○ Deemed to automatically become part of the contract unless they are excluded
from the contract by affirmative agreement of the parties
Warranties are in unless they are consciously taken out
Express Warranties - UCC § 2-313
Explicit promise that goods will have certain qualities → warranty can be made through
description or by showing a sample (implies all others are like the sample)
● Expressing an opinion or “mere sales puffery” ≠ warranty
● Can be the basis of the bargain even if it was made after the close of the sale
(comment 7)
● Assumed that buyer relied on express warranty → don’t need to prove it
○ As long as they heard or saw the statement, it’s an express warranty
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Implied Warranty of Merchantability - UCC § 2-314
Always implied in contract with merchant unless expressly disclaimed.
To be merchantable, goods must be at least such that they:
(a) Pass without objection in the trade
(b) Are of fair average quality within the description (fungible goods - items that are easily
replaced with another item, so not something like a diamond where quality affects the
relative value)
(c) Are fit for ordinary purpose for which such goods are used
(d) Run of even kind, quality and quantity among all units involved
(e) Are adequately contained, packaged, and labeled
(f) Conform to promise or affirmations of fact made on the label (if any)
Implied Warranty of Fitness for Particular Purpose: UCC § 2-315
Elements:
(1) Buyer tells seller about purpose
(2) Buyer relies on seller’s knowledge to determine fitness for that purpose
If goods turn out not to be fit for that purpose, then buyer has breach of warranty claim against
seller.
Contracts of Adhesion
Contract of Adhesion = take it or leave it contract: no bargaining over terms
● Necessary to keep society and the modern economy running, so the question becomes
whether a contract of adhesion is reasonable
R2C § 178 - When a contract of adhesion is unenforceable based on public policy
● If interest in enforcement is outweighed by public policy
● Considerations for enforcement:
○ Parties’ justified expectations (e.g., predictability of litigation fora)
○ Any forfeiture if not enforced
○ Any special public interest in enforcement of a particular term
● Considerations for public policy:
○ Strength of policy legislatively/judicially
○ Likelihood that refusal to enforce term will further the policy
○ Seriousness of any misconduct involved and whether it was deliberate
○ Directness of connection between the misconduct and the term
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When a Party is Excused from Performance
When a court will excuse performance:
1. Enforcement would cause undesirable forfeiture or disproportionate loss
2. Party trying to escape caused the non-occurrence of the condition
3. Party trying to escape previously waived the condition
Conditions - R2C § 224 & 225
●
●
●
●
●
Where a contract contains a condition precedent and that condition does not occur,
performance is excused → there is no breach
○ Doesn’t make the contract void!
Usually involves words like if, subject to, provided that, etc.
○ But this language on its own does not automatically create a condition
Conditions are strictly construed and enforced largely as written
○ Any ambiguity interpreted against the drafter
○ Doubtful language read as an implied rather than express condition
An act or event designated in a contract will not be construed as creating a condition
precedent unless it is clear that that was the parties’ intent
○ If unclear, parol evidence may be introduced
Even a clearly worded condition may be excused when the requirement:
○ (1) is immaterial AND
○ (2) would cause disproportionate loss if enforced
■ Disproportionate loss = depriving the party of the benefit of the bargain
Express conditions → must be strictly performed
Implied conditions → only require substantial performance
Waiver, Estoppel, Modification
●
●
●
Imperfect performance = not doing exactly everything in the contract
○ Other party may accept imperfect performance, and thereby excuse what
otherwise would be a breach
Waiver = intentional relinquishment of some established right under a contract
○ Unilateral dispense of a contract condition
○ May be retracted unilaterally as long as other party has not relied on the waiver
Estoppel = relinquishment of a right because a party relies on acquiescence
○ Unilateral
How to Waive
Party can expressly waive conditions, or their continued performance as if fulfillment of
conditions doesn’t matter is usually understood as waiver (implied)
● Waiving one condition doesn’t waive all subsequent conditions, BUT continually waiving
or not enforcing condition may be construed as waiving all contract conditions
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●
If no consideration for waiver, party can retract and reinstate condition as long as other
party hasn’t detrimentally relied
Modification
Bilateral decision to change the terms of a contract (need agreement from both parties)
Common law
● Must provide consideration on both sides in order to modify a contract
● Exceptions
○ Where there is reliance by one party on that modification (a party makes a
material change in condition)
○ Unanticipated circumstances
UCC § 2-209
● Does not require consideration to modify
● Makes it easier to protect businesses against subsequent causal or accidental
modifications
● Attempt at modification can operate as a waiver (aka buyer can’t sue over that term)
● Waiver is retractable unless there has been some reliance on the waiver
Impracticability/Impossibility - R2C § 261-264
●
●
●
Makes performance no longer necessary when it no longer makes sense to perform
Circumstances have changed, so the crux of the contract has changed → performance
is excused
Impracticability (modern standard) = extremely difficult or perhaps extremely expensive
○ Parties must make reasonable efforts to surmount the obstacles → only if those
efforts fail will performance be excused
○ Parties must not have contemplated the event
○ Occurrence must be through no fault of the parties
Force Majeure
● Parties have the ability to determine what events make performance impracticable
○ “Private ordering”
○ Excused for non-performance where certain circumstances beyond parties’
control arise, making performance inadvisable, commercially impracticable,
illegal, or impossible
● When parties include a force majeure clause, the contents of the clause determine the
boundaries of its application
● Economic factors are not unforeseeable in business transactions
○ BUT parties may set out different boundaries than the standard, e.g., can include
downturn in economic conditions as excuse for performance
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Frustration of Purpose - R2C § 265
Where, after a contract is made, a party’s principal purpose is substantially frustrates without his
fault by the occurrence of an event the non-occurrence of which was a basic assumption on
which the contract was made, his remaining duties to render performance are discharged,
unless the language or the circumstances indicate the contrary.
● Can excuse party from performance even if performance is practicable (still physically
possible) because key purpose for which party entered into contract is no longer
valuable (virtually worthless)
● Frustration must be substantial → so severe that it is not fairly regarded to be within risks
he assumed under the contract
Anticipatory Repudiation - R2C § 250 & 253
When one party indicates that it cannot or will not perform under the contract
● Where there is anticipatory repudiation, the other party
○ (1) may sue for breach immediately
○ (2) may suspend its own performance under the contract
● Repudiation may be by words or conduct
○ Ex: contractor repeatedly not showing up to complete work despite saying he will
● Repudiation must be definite and unambiguous
○ Ex: renting out a property to a different person, selling a unique piece of art to a
different person
● Cannot retract repudiation once the other party has relied on the repudiation
○ Ex: you back out of an employment contract, then they find other work
● NOTE: where there is a contract with acceptance by completing performance
○ Refusal to perform does not automatically trigger anticipatory repudiation!
○ You can’t breach a contract that doesn’t yet exist
○ Have to find other avenues to get out of the contract
■ Reliance → creates an option contract → offeror is estopped from
revoking the offer, even though it hasn’t been fully accepted
■ Fraud or misrepresentation
■ Duty of good faith → to allow other party to accept the offer by completing
performance, then able to be sued for breach if no performance
Adequate Assurance - R2C § 251
Where it is not “clear and unequivocal” that the party will repudiate, but there is cause for
concern → other party may demand adequate assurance of performance
Test:
(1) Are there grounds for reasonable insecurity that are enough to demand assurance?
(2) Demand for reassurance must be clear and must be conveyed properly
(a) In writing
(b) Clear that assurance is demanded
(c) Made directly to party
(d) precise
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Performance assurance should not be used to modify a contract!
UCC § 2-209
If reasonable grounds for insecurity re: performance exist, may demand adequate assurance of
due performance in writing; may suspend performance until adequate assurance is given.
● Examples of adequate assurance: deed, earmarked money, evidence of profitability
Material Breach - R2C § 241
If one party materially breaches a contract, the other party does not have to perform.
● This is an implied condition in all contracts (constructive condition)
● Considerations for whether a breach is material:
○ Whether injured party is deprived of benefit of the bargain
○ Whether injured party can be adequately compensated for part of the benefit of
which he will be deprived
○ Extent of forfeiture
○ Likelihood breaching party will cure failure
○ Extent to which breaching party’s behavior comports with standards of good faith
and fair dealing
Contemporaneous Performance
● Unless circumstances show otherwise, performance is exchanged simultaneously
○ This is a constructive condition read into all contracts unless the parties’ intent
shows otherwise
○ When party does not perform under contemporaneous performance →
MATERIAL BREACH
Substantial Performance
If a breach is not material, and exact and full performance is not an express condition to full
payment, then the breaching party is still entitled to the other party’s performance.
● Regardless of whether breach is material, nonbreaching party may still sue for breach
and recover damages. But they can’t suspend performance!
Judges may decide not to enforce performance when doing so would cause disproportionate
forfeiture (loss of benefit of bargain)
● Think about both sides of the argument for whether loss is “disproportionate”
● Think about whether enforcement might be barred by other doctrines, such as
unconscionability
UCC § 2-601 - Perfect Tender Rule
● Any breach by the seller will excuse buyer’s performance
● Rejection (before buyer acceptance of goods): seller can “cure” reason for rejection
● Revocation (after buyer acceptance of goods): seller does not necessarily have the
same right to cure
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○
○
§ 2-608(1): to justify revoking an acceptance, buyer must prove that the
nonconformity substantially impaired the value of the goods AND
■ (1) the buyer accepted on the assumption that its nonconformity would be
cured by the seller (and it hasn’t been), or
■ (2) the buyer accepted without discovery of the nonconformity, if
acceptance was reasonably induced by (1) difficulty of discovery before
acceptance or (b) seller’s assurances
Buyer retains the duty of reasonable care towards the goods, and must notify
seller within a reasonable time if they intend to revoke
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Remedies
R2C § 344 - Purpose of Remedies
1. Expectation damages - putting the nonbreaching party in the position they would have
been in had the other party not breached
2. Reliance damages - putting the nonbreaching party in the position they would have been
in had the contract never been entered into
3. Restitution damages - restoring to the nonbreaching party any benefit they have
conferred on the other party
Specific Performance - UCC § 2-716
● Ordering a breaching party to fulfill its obligations under the contract
○ RARE
○ Monetary damages are preferred
● Courts will order specific performance:
○ When damages are inadequate to compensate and
○ When it is fair and reasonable to compel performance and
○ When goods are unique
● No specific performance for services contracts! We don’t want to force people to do
things. Monetary damages are highly preferred.
● Ex: iLan Systems v. NetScout (software not unique enough to compel specific
performance/pff did not sufficiently rely on promise)
Liquidated Damages - UCC § 2-718 and R2C § 356
Liquidated damages = monetary damages set forth in a contract
Limitations:
● Amount of liquidated damages cannot do more than compensate for actual loss
● R2C § 356: damages must be reasonable in light of actual or anticipated loss
○ Test for reasonableness:
■ (1) anticipated or actual harm caused by breach
■ (2) Difficulty proving loss
■ (3) Difficulty obtaining an adequate remedy (determining amount of actual
loss)
● Memorable case: Kvassay v. Murray (baklava)
Expectation Damages - R2C § 347
Loss in value + any other incidental or consequential loss - any loss or cost avoided by not
having to perform = expectation damages
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●
●
Difference in value between what was promised and what was delivered
Expectation damages may be written into a contract, but they don’t have to be
Incidental loss = costs incurred in a reasonable effort, whether successful or not, to
avoid loss
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○
○
Ex: fees to pay a headhunter after breach of employment contract
Legal fees are not considered incidental
■ May be included in damages calculation depending on contract terms and
state law
Two Ways to Make Nonbreaching Party Whole
1. Difference in value (diminution of value)
2. Amount it would cost the nonbreaching party to purchase full performance (replacement
value)
The hairy hand case → expectation damages are difference between what was promised
(perfect hand) and what was given (hairy hand); pain and suffering only relevant as incidental
loss beyond what was to be expected from contract for experimental surgery (pain and suffering
part of consideration)
Direct vs. Consequential Damages
1. Direct = benefit of the bargain
2. Consequential = damages beyond the scope of the contract
*lost profits may be either direct or consequential → depends on the contract terms and the
circumstances
Buyer’s Damages under the UCC: §§ 2-711, 2-712, 2-713
Cover → if seller breaches, buyer is allowed to replace the item to “cover” loss instead of
choosing to calculate market price. Will be compensated for difference between cost of those
goods and the contract price
● If cover price is same or slightly less than contract price, no damages
● If party is able to use connections to cover at much lower price, breaching seller may
still be liable for some damages (see ex below)
● Cover purchase must be made in good faith, without unreasonable delay, and at a
reasonable time
EXAMPLES
1. Contract for sale of a machine for $1,000. Seller breaches. Buyer pays $800 for
replacement machine.
a. No damages → cover was $200 less than contract price
2. Same facts as (1), except Buyer pays $1,400 for replacement machine.
a. $400, if you can show purchase was reasonable and in good faith (don’t have to
find or take the best price available)
3. Same as (1), except Buyer does not replace machine. Buyer establishes that the market
price for replacement machine is $1,400.
a. $400 → difference between contract value and market price
4. Same as (1), except Buyer replaces at $800 through her “connections.” Buyer
establishes that market price is $1,400.
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a. Some courts would give nothing, some would give $400 (even though UCC
prohibits → buyer may only recover damages to the extent she has not covered)
Seller’s Damages under the UCC: § 2-703
Seller’s damages in general: UCC § 2-703
UCC § 2-708 – Seller’s damages for non-acceptance or repudiation:
(Market Price – Unpaid Contract Price) + incidentals – expenses saved from breach
● If measure above inadequate to put seller in same position as performance would have,
damages = profit from full performance + any incidentals
Lost volume seller = putting seller in position they would have been in isn’t about the loss of
one particular good, but the impact of that loss on profits (in relation to volume of sales)
● Ex: breach of contract to buy a white Honda Accord from region’s largest dealer
○ Even if dealer resells car for same amount, damages would be profit from lost
sale of the car
○ About the whole volume
● To be in ideal place before the contract, the seller would have the profit from the original
contract sale plus the profit from the resale
○ So for expectation damages, we give them the lost profit from the original
(repudiated) sale
Reliance Damages - R2C § 349
● Makes the breaching party pay an amount in monetary damages to put the
nonbreaching party in the position they were in before the contract was entered into
○ Recovery of expenditure to the extent nonbreaching party relied on the contract
○ Reliance damages are capped at the contract price
○ Reliance damages are less any loss the injured party would have suffered under
the contract had it been performed (e.g., they were going to be paid $20,000 for a
job that would cost $25,000 in materials and labor → damages amount reduced
by the $5,000 loss)
○ When are reliance damages applied?
■ When expectation damages are difficult to determine OR
■ When nonbreaching party chooses reliance damages
● Case: Merry Gentleman (Michael Keaton)
Limitations on Monetary Damages
1. Mitigation - R2C § 350
● Avoidable loss: Losses the nonbreaching party can mitigate with reasonable
effort
○ Alternative must be (1) substantially similar and (2) not inferior
○ Memorable case: Shirley MacLaine
○ Reasonableness of effort to mitigate is a question of fact
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●
Avoidable costs: costs you no longer pay because of breach (materials, wages,
etc.) → subtracted from damages and have duty to mitigate
2. Foreseeability - R2C § 351
● Breaching party is liable for consequential damages that are foreseeable at the
time of contract formation
● Occurrence must (1) flow naturally from the course of events or (2) be known or
should have been known (aka, special circumstances that were contemplated
and communicated, whether by direct or indirect notice)
○ Must be evidence that breaching party had reason to believe they might
be liable for this loss
■ Don’t need parties’ agreement → only need notice
○ Damages must be a probable result of the breach (more likely than not)
● Default rule under both common law and UCC
● Case: Hadley v. Baxondale
3. Certainty - R2C § 352
● Damages are not recoverable for loss beyond an amount that the evidence
permits to be established with reasonable certainty
○ Must show “a stable foundation for a reasonable estimate of damages”
■ (1) Must be directly traceable to the breach
■ (2) Must not be remote or the result of other intervening causes
■ (3) Nonbreaching party has burden of proof
● Case: ESPN v. Baseball → had no evidence of specific monetary damages and
had been paid full contract price, so awarded only nominal damages
Restitution
Goal: to restore any benefit conferred by the nonbreaching party on the breaching party
● IF PERFORMANCE IS COMPLETE: DO NOT CHOOSE RESTITUTION
● Unlike expectation and reliance damages, restitution is an equitable remedy → judges
have more latitude over conference and amount of damages
● Unjust enrichment = code for restitution
● A party may choose restitution → if so, EXCLUDE ALL OTHER COMPENSATORY
REMEDIES
● Would there have been a loss by the nonbreaching party had the contract been fully
performed?
○ If so, we don’t care for restitution purposes!
○ We don’t want to leave either party in a better position than they would have
been in, but if one party is going to have a windfall, then it should be the
nonbreaching party
● How to calculate restitution?
○ Objective value → look at contract, market value of services provided
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○
●
●
●
●
I.e., won’t give more in restitution just because this was an expensive contractor,
but will factor in things like higher quality service or extra treatment
If nonbreaching party goaded other party into breaching contract?
○ Judge could decide to lower the award, or not award restitution at all
Restitution is extracontractual
○ Might not be bound by a contract term that attempts to exclude restitution as a
remedy
○ Again, this is because it’s an equitable remedy → we’re more concerned with
what’s fair for both parties
Breaching party may get restitution for the benefit he has conferred, in excess of the
loss he has caused by his own breach (i.e., in excess of nonbreaching party’s
expectation damages)
○ Amount limited to a pro-rateable value of the performance rendered according to
portion of the contract completed
Is there a valid liquidated damages clause?
○ If so, NO RESTITUTION FOR BREACHING PARTY
Quasi-Contract
Contracts implied by law, for which parties may be entitled to restitution
Who can claim restitution under a quasi contract?
1. Person who conveys a benefit with a reasonable expectation of compensation
2. Person who conveys a benefit in accordance with some legal duty
Who cannot claim restitution under a quasi contract?
1. Person who conveys a benefit as a gift/gratuitously
2. Person who conveys a benefit on accident
3. Person who conveys a benefit officiously (meddles in someone else’s business) →
volunteers
*accident note: weighed against reasonable expectation of compensation. If the latter is present,
then restitution is available.
**another accident note: can’t typically receive restitution for an accidentally conveyed benefit –
e.g., Banksy accidentally increased the value of his painting when he shredded it, so he can’t
recover restitution
A party seeking restitution under quasi contract must establish:
1. A benefit was conferred that is
a. Appreciated or known by the other party
b. Accepted under conditions where there isn’t a good excuse for the receiving
party not to pay / where it would be inequitable not to pay
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Third Parties
Beneficiaries - R2C § 302
Intended beneficiaries – parties whom at least one party to the contract intended to benefit from
their actions; promisor must understand that promisee intended to benefit this party, even if
promisor himself didn’t intend to; intended beneficiaries have rights and can sue
Incidental beneficiaries – parties that coincidentally benefit from the contract even though
neither party intended for it to be that way; do not have any rights to bring suit
Assignment of Rights - R2C § 317
X makes contract with Y, then Y assigns their rights to Z
X (Obligor) → Y (Assignor) → Z (Assignee)
●
●
Assignment extinguishes right of original Assignor
Before Obligor receives notice of assignment, he should continue his obligations to
Assignor until directed otherwise
Delegation of Duties
X and Y have a contract, then Y delegates duties to Z
X (obligee) → Y(delegator/obligor) → Z (delegatee)
Delegator still owes duty to obligee unless agreement expressly discharges that duty
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