Contracts I - Pryor
THE AUTONOMY & SECURITY PRINCIPLES
I.
Terms:
a. Assumpsit: lawsuit for breach of K
b. Nonsuit: judge drops the suit
c. Warranty: promise of future performance
d. Contract: enforceable promise
e. Promissory agreements: promise on at least one side
f. Writ of mandamus: writ issued by the court to compel a lower court or government to act in some way.
II.
Uniform Commercial Code - Nine Articles:
1. Article 1 − General Definitions
2. Articles 2 & 2A − Sales and Leases (of Goods) (Sales & Leasing) Serves as law everywhere; not statespecific.
3. Articles 3-4 − Payment Systems (Negotiable Instruments)
4. Article 5 − Letters of Credit
5. Article 6 − Bulk Sales (generally repealed)
6. Article 7 − Documents of Title
7. Article 8 − Investment Securities
8. Article 9 − Secured Transactions
III.
The Autonomy Principle: The law empowers people to make and receive enforceable promises when they
communicate decisions to act or refrain from acting in some definite way in the future, subject to other principles.
IV.
The Liberty Principle: God created human beings in his image and with liberty to exercise dominion by making
certain promises enforceable at law when they communicate decisions to act or refrain from acting in some
definite way in the future, subject to other stipulations of his covenant.
a. After the Fall, God delegated to humans the authority to vindicate breaches of certain promissory
agreements.
V.
The Security Principle: The law requires each K party to do its part to sustain the other party’s reasonable
expectations of performance when due in accordance with the K.
Promises
I.
Promises: Promisor manifests intention (oral/written/wholly or partly inferred by conduct) to act or not act in a
specified way in the future, so made as to justify a promisee in understanding a commitment has been made. (R2 §
2). Creates an obligation in the promisor.
a. 2 Elements necessary for a promise to have significance:
i.
Existence of another person to be bound.
ii.
Social practice in which the sounds fit & signal an obligation.
a. Expressions of opinion and words of reassurance are not promises.
iii.
Hawkins v. McGee - McGee performed unsuccessful skin grafting surgery on Hawkin’s
damaged hand. Medical opinions are not promises, but “I will guarantee to make the hand
100% perfect and or 100% good hand” + repeated solicitations  promise
II.
Extent of Liability – 3 measures for relief:
a. Expectation (What we were supposed to get) - (what we got) = expectation
i.
Two Categories of Expectation:
1. Specific Performance
2. Substitutionary ($ damages) = As Promised – As Is
a. Puts the promisee in the position in which the promisee would have been had the
promise been performed (Hawkins)
b. Works well when an established market already exists.
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b. Restitution
i.
Award to promisee to deprive a benefit conferred on the promisor in the course of the
transaction.
ii.
Puts promisor back in the position in which the promisor would have been had the promise not
been made.
iii.
Normally the smallest measure of recovery.
c. Reliance
i.
Award to promisee to compensate for expenses incurred in preparing to perform and
performing the transaction.
ii.
Puts the promisee back in the position in which the promisee would have been had the promise
not been made.
Promissory Agreements – promise by at least one party
I.
Intent
b. K exists when:
i.
There is a meeting of the minds, and
ii.
Both parties agree to the same thing in the same sense.
c. Intention of the parties: 2 sided coin:
i.
Subjective Theory of K: enforceable K requires a meeting of the minds. Determines which
meaning prevails when there is no meeting of the minds:
1. A did not know B’s meaning, but B knew A’s meaning  A prevails
2. A had no reason to know of B’s different meaning, but B had reason to know  A
prevails
ii.
Objective Theory of K: enforceable K requires outward expressions (not subjective intent) as
manifestations of mutual assent from the perspective of a reasonable person in the position of
the other party. (Lucy v. Zehmer)
1. No manifestation of assent if:
a. Parties attach materially different meanings to their manifestations, and
b. Neither party has reason to know of the other’s meaning.
d. Variations of Intent
i.
Subjective Agreement & Objective Agreement - No formation or interpretation problem.
ii.
Subjective Failure & Objective Agreement - Formation problem overcome; R2 § 20(2)(b).
1. Lucy v. Zehmer - Zehmer signed memo agreeing to sell farm, but tried to renege on basis
that he was only joking. Lucy thought & acted as if they had an agreement. Lucy must
establish first that Zehmer made a promise, b/c with no promise there is no K.
a. If Lucy knew Zehmer was joking, then no K.
b. Lucy had no reason to know Zehmer was joking (2 written drafts; wife signed),
and Zehmer had reason to know Lucy was serious  K.
2. Embry v. Hargadine, McKittrick Dry Goods Co. - Embry reasonably counted on
extension of his K for another yr & continued to perform. Context crucial to the words 
promise. Court put weight on what parties manifested as intent, not intent itself.
Reasonable Man standard
iii.
Subjective Failure & Objective Failure - Formation problem insoluble; R2 § 20(1)(a).
1. Oswald v. Allen - Sale of Swiss v Rarity Coin Collection. The words matched, but the
meanings did not. No K b/c no meeting of the minds.
iv.
Subjective Agreement & Objective Failure - No formation problem, but there can be an
interpretation problem; R2 § 201(1).
e. Lowest Cost Avoider: person who could have prevented the problem bears the risk; law sides with the
honest believer. Ex/ an expert, person who is playing a joke, etc.
II.
Offers: manifestation of willingness to enter into a bargain, so made as to justify another person in understanding
that his assent to that bargain is invited and will conclude it. (R2 § 24). Creates the power of acceptance in the
offeree. Conditional promises (conditional upon acceptance). Ex/ Not a promise to sell a car, but a promise to sell
a car in exchange for $x.
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a. 2 Elements:
i.
Promise/Commitment (Hawkins; Lefkowitz)
ii.
Certainty (R2 § 33): Terms must be reasonably certain. If terms are clear, definite, explicit, and
leaves nothing open for negotiation, then it’s an offer.
1. Reasonably certain terms provide basis for determining:
a. Existence of a breach, and
b. An appropriate remedy.
2. Terms must be reasonably certain regardless of manifestation of intention.
3. Uncertain/open terms may indicate lack of intent.
4. Uncertainty in terms may be eliminated by events. The law generally wants to enforce K,
so if it looks like a K, the court will try to enforce it.
5. Lefkowitz v. Great Minneapolis Surplus Store – Furs $1 each (certainty), “First come-first
served” (commitment). Even though an ad, terms left nothing open to negotiation. Offer
b/c no multiple acceptance problem.
b. An offer depends on the objective reasonableness of the offeree’s belief.
i.
Advertisements are invitations, not offers.
1. Multiple Acceptance Problem – unreasonable to treat ads as offers b/c sellers could not
fill all potential “acceptances” with limited supply of goods.
a. Mesaros v. United States – No commitment or certainty present. Credit card form
“Yes, please accept my order,” but also language of an offer. Ambiguous, but ct
 unreasonable to say ads = offers.
2. Exception: ad terms satisfy elements of an offer (Lefkowitz and Chang v. First Colonial
Savings Bank - great deal of certainty, commitment, and performance occurred, and
banks don’t usually have multiple acceptance problems.)
III.
Powers of Acceptance - An offer empowers the offeree to create a K by making an acceptance. (R2 § 35). An
offer looking to a bilateral K looks to a promise on the part of the offeree. An offer looking to a unilateral K
looks to an acceptance by performance.
a. Central concern: POA comes to an end b/c the court does not want to trample the autonomy of the
offeror.
b. Mirror Image Rule – (Common Law) acceptance must correspond exactly with the offer. A response is
not an acceptance if the offeree imposes conditions of the acceptance or seeks to change or qualify the
terms of the offer (Ardente v. Horan), otherwise  counter-offer.
i.
last shot rule: under mirror image rule, the most recent offer/counter-offer is the offer that the
court considers/enforces.
c. An Offeree’s POA may be terminated by…
i.
Lapse of Time (R2 § 36 (1)(b)).
1. POA is terminated at the time specified by the offer, or end of a reasonable time if no
time is specified. (R2 § 41(1)).
2. Akers v. J.B. Sedberry, Inc. – bilateral K. no time specified in offer, so reasonable time =
end of the conversation. Sedberry had to accept offer to terminate Akers by the end of
the conversation, but she did not.
a. Corbin Rule: POA ends when offeree turns away in silence.
ii.
Rejection or counter-offer by offeree (R2 § 36(1)(a)).
1. Counter-offer:
a. Offeree proposes to Offeror a substitute bargain related to the same matter, but
differing from the original offer. (R2 § 39(1)).
b. A reply that tries to accept an offer, but is conditional on offeror’s assent to
different or additional terms (R2 § 59).
c. NOTE: you can have conditional offers, but never conditional acceptances.
Conditional acceptances = counter-offers.
i. If ambiguity on real acceptance, then burden  offeree to show he
accepted b/c offeree is the lowest cost avoider.
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iii.
iv.
v.
IV.
2. Ardente v. Horan – Bilateral K. Ardente’s letter included additional conditions not
mentioned in offeror’s original offer, and was therefore deemed a counter-offer  Mirror
Image Rule.
Revocation by offeror (R2 § 36(1)(c)).
1. An offer can be revoked anytime before the offeree tenders full performance
2. Revocation may be made indirectly, but the offeree must receive the notice for POA to
die. Ex/ if notice gets lost in the mail, POA has not terminated.
3. Petterson v. Pattberg – Unilateral K. Before offeree could tender final $ payment at the
door, offeror revoked.
4. An option K limits the offeror’s power to revoke (R2 § 25)
a. Option K is created when the offer invites offeree to accept by rendering a
performance and not promissory acceptance (unilateral K) AND offeree tenders
or begins the invited performance (R2 § 45(1)).
b. Marchiondo v. Scheck – Unilateral K. Revocation was limited b/c the realtor had
begun making arrangements with 3rd party to buy real estate. Courts inserted
legal fiction by calling the parties’ K an option K, and since partial performance
had begun, offeror owes $ to offeree. Multiple acceptance problem if offer is
made irrevocable.
c. Difference between preparing to begin or beginning an option K depends on
circumstances and whether there is a multiple acceptance problem.
Death or Incapacity of either party (R2 § 36(1)(d)).
1. Davis v. Jacoby – bilateral K. Whitehead asked Caro and Caro promised to take care of
widow. Whitehead committed suicide before Caro fully performed. If the parties did not
accept before death, there would be no K… language ambiguous  when in doubt, the
court presumes a bilateral K to protect both parties.
Definite action by offeror that is inconsistent with intention to enter into a K and offeree
receives information to that effect (R2 § 42 & 43).
1. Petterson v. Pattberg – unilateral K. Offeror acted opposite of intention to enter into K by
selling the mortgage rights to a third party, before Patterson died he received a letter that
mortgage rights had been sold to third party.
Acceptance – offeree exercises the POA  K. The exercise of a power of acceptance creates the set of legal
relations called a K. Acceptance terminates the power of revocation in the offeror.
a. 2 types of K:
i.
Unilateral: promise that is only accepted by performance; promisor does not receive a promise
as consideration for his promise. Ex/ offers of reward.
1. Must have full performance in order a K to exist.
2. Can be revoked anytime before full performance.
3. When offer invites offeree to accept by performance, offeree does not need to notify
offeror of his acceptance unless offer requests notification (R2 § 54).
ii.
Bilateral: promise in exchange for a promise to perform. Mutual promises between two parties
to the contract, each party is both a promisee and a promisor.
1. Acceptance must usually be communicated to offeror.
2. Courts prefer bilateral K when ambiguity exists.
b. Manner of Acceptance:
i.
General: Acceptance by return promise or by performance. (Davis) Unless the offer clearly
indicates otherwise, acceptance may be signified in any manner reasonable under the
circumstances.
ii.
Specific: Acceptance must be made in a manner invited or required by the offer.
1. Mirror Image Rule – Common Law - the acceptance by the offeree must be in
accordance with the terms set forth in the offer (R2 § 50(1)).
2. If no particular manner is required by the offer, any reasonable method of acceptance
invited by the offer is sufficient (R2 § 50(2)).
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3. Mailbox Rule: Acceptance occurs as soon as it leaves offeree’s possession unless offer
provides otherwise (R2 § 63(a)).
a. Exception: Option K acceptance does not take place until offeror receives notice.
4. Silence and Inaction can operate as acceptance under limited circumstances (R2 §§ 56
and 69):
a. Course of Dealings
i. No course of dealings  Silence ≠ Acceptance
1. Houston Dairy, Inc. v. John Hancock Mutual Life Insurance Co.
– JH made offer; HD didn’t accept until after the 7 day POA
limit, so HD = counter-offer. JH intended to accept and cashed
check, but did not actually communicate acceptance to HD.
Meeting b/t lawyers is not acceptance  acceptance of check
required notification.
ii. Course of Dealings  Silence = Acceptance
1. Cole-McIntyre-Norfleet v. Holloway – salesman solicited buyer,
buyer always sent offer and seller shipped without
communicating acceptance. Continual communication. Parties
had a ‘course of dealings’  reasonable that offeree should
notify the offeror if he does not intend to accept. (R § 69(1)(c)).
a. Today, we have usage of trade allowing silence =
acceptance.
b. Implied-in-Fact K: Offeree takes benefit of offered service with reasonable time
to reject and reason to know they were offered with expectation of compensation
i. Manifestation of mutual assent can take place entirely by knowing
conduct or fairness; sometimes trumps autonomy.
ii. Seaview Ass’n of Fire Island v. Williams – Ass’n made implied offer of
unilateral K based on services they provide, so purchase of home =
acceptance. Fair b/c of the history of realty in the area.
c. Communication that silence/inaction = acceptance: When offeror tells offeree
or gives reason to think that assent may be manifested by silence or inaction, and
offeree remains silent and inactive with intent to accept  acceptance (R2 §
69(1)(b)).
5. Detrimental reliance can take the place of acceptance (R2 § 87(2))
V.
Formation under the UCC
…first thing in any essay: which body of law controls
a. Differences b/t Common Law & UCC:
UCC (drafted in 1940s)
Common Law
Mirror Image Rule
Mirror Image Rule
Last Shot Rule
Last Shot Rule
Harder to form K
Easier to form K
Definite terms
Relaxed terms
K may be known for certain
K may exist, but be imprecise
Acceptance with different terms ≠
Acceptance with different terms, if meant to
acceptance
be acceptance = acceptance
K requires meeting of minds & agreement Promotes K formation even when parties do
to everything in the same sense
not agree
b. Goods: moveable at time of identification to K for sale.
c. 2 tests to decide if a case should be decided under common law or UCC:
i.
Predominant Purpose test: if predominant purpose of K is the sale of goods, then  UCC
1. Used by majority of the courts.
d. B/t 2 merchants for sale of goods, additional terms are proposals that become part of the K unless:
i.
The offer expressly limits acceptance to the terms;
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ii.
iii.
The additional terms materially alter it; or
Notification of objection has already been given or is given within reasonable time after notice
of additional terms is received. (UCC 2-207(2).
1. Gibney v. Arlington Brewery Co – (goods) originally decided under the common law.
a. Arlington dissatisfied with carloads of malt from Gibney; Arlington made an
order and Gibney responded with different terms. Gibney delivered bad batch,
Arlington did not pick up the additional carloads. Gibney sued, saying Arlington
breached their K.
i. Common law: No K b/c Gibney’s reply is a counter-offer b/c it does not
fit the mirror image rule. No obligation b/c Arlington never accepted to
buy the additional loads of malt.
ii. If under UCC: Arlington made an offer; different terms are out, but
additional terms are proposals. So, if Arlington did not make an
objection immediately or within reasonable time, then K b/c the only
different term is quantity.
e. Even though one or more terms are left open, a K for sale does not fail for indefiniteness if the parties
have intended to make a K and there is a reasonably certain basis for appropriating a remedy (UCC § 2204(3))
i.
ProCD, Inc. v. Zeidenberg – (Pryor: how is this a good transaction?) Court said Zeidenberg
manifested acceptance by purchasing the CD. He knew about the license, which bound him
when he accepted by clicking. Time of purchasing to clicking “I accept” was zone of
acceptance.
f. Unless otherwise ambiguously indicated by the language or circumstances an offer to make a contract
shall be construed as inviting acceptance in any manner and by any medium reasonable in the
circumstances. (UCC § 2-206(1)(a)).
i.
Abolishes the common law mirror image rule
ii.
Limited form of acceptance can be waived based on conduct of the parties
1. Empire Machinery Co. v. Litton Business Telephone Systems – (services + goods
mixture) Litton clearly to steps to accept K by calling phone companies, arranging for
new number, etc. Litton backed out. Court said while offeror can still limit acceptance,
UCC language will not stop K when conduct  acceptance. Conduct indicates assent.
g. Battle of the Forms: If the writings of the parties do not agree, but their conduct does, then the courts
take all writings and combine them to form a K (UCC § 2-207(3)):
i.
All similar terms go into agreement and all opposite terms are thrown out, and
ii.
UCC fills in gaps with supplementary terms from its other provisions.
iii.
Effect of UCC: enforces uncertainty where common law did not
1. Abolishes common law last shot rule - under common law, normally the counterofferor
ends up getting his terms in the K. (sequence: offer, counter-offer, which stands b/c
usually not objected to, etc.)
2. This gives the court an opportunity to find a K where none existed.
a. Ionics, Inc. v. Elmwood Sensors, Inc. – (goods) Thermostats in water coolers
caught on fire. Both parties had terms that basically said ‘my way or the
highway.’ Ionics won b/c court took out conflicting terms and filled in gaps.
Note: parties had transacted 3x before, but courts did not call that course of
dealings.
VI.
Incomplete Agreements
a. For a K to fail due to indefiniteness, there must be an incurable uncertainty about what parties agreed to,
so the court cannot establish a basis for what was agreed.
i.
The element of uncertainty must relate to a material aspect of the relationship (fundamental
basis of the bargain).
ii.
When the parties to a bargain (sufficiently defined to be a K) have not agreed on an essential
term, the court supplies a term that is reasonable in the circumstances (UCC 2-204).
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b. Agreements to Agree
i.
Under the common law, no K until all its material terms have been settled (R2 § 26).
1. Adams v. Hazen – common law hesitant to fill in missing K terms, but did here by
imposing timber removal deadline b/c everyone in the business knew it was a reasonable
time. Under UCC today, court would have filled in missing K terms (deadline for
payment, deadline for removing timber, & interest)
2. Sun Printing & Publishing Ass’n v. Remington Paper & Power Co., Inc. – fatally
incomplete b/c no agreement as to time. Time agreement essential b/c if no time
agreement  dozen options, resulting in opportunistic K at the expense of another.
ii.
The parties may nonetheless agree to agree, which amounts to an agreement to continue
negotiations in good faith (A/S Apothekernes, Itek Corp.).
iii.
The parties may also sufficiently commit to definite terms to constitute a K even though they
still intend to reduce the agreement to writing (R2 § 27).
c. 2 types of preliminary agreements:
i.
Type I: states all essential terms and is subject only to production of a final draft (R2 § 27)
1. If agreement on essential terms, no dispute issues are perceived, and the only thing
lacking is a final draft, and party walks away  breach of K. (boilerplate left)
2. Beware that preliminary negotiations may bring preexisting legal consequences.
a. Arnold Palmer Golf Co. v. Fuqua Industries, Inc. – parties signed Memo of
Intent: “to confirm the general understanding,” but containing detailed
statements, press release. Fuqua wanted out of the deal on basis of no agreementcourt said there was enough to remand to see whether facts show commitment.
ii.
Type II: states some, but not all, essential terms; implicit (or explicit) agreement to negotiate
remaining terms in good faith (or provided in agreement).
1. Parties bind themselves to work out remaining terms in good faith, but do not bind
themselves to reach a conclusion
2. Courts look to real reason of K, not just writing itself, to determine essential terms
3. Note potential minefield on international level: only American common law jurisdictions
do not believe there is a duty to act in good faith in negotiations.
a. A/S Apothekernes Laboratorium for Specialpraeparater v. I.M.C. Chemical
Group, Inc. – letter of intent with strong anti-commitment language. Letter 
legal obligation for parties to negotiate in good faith, but no breach b/c good faith
duty cannot contradict the black letter terms requiring BOD approval.
b. Itek Corp. v. Chicago Aerial Indus., Inc. – letter of intent to “make every
reasonable effort…” created high standard of good faith. Itek sold shares to third
party in middle of negotiations with Chicago. Court said Itek breached duty of
good faith, but not stockholders who did not sign the letter.
The Statute of Frauds – The Requirement of a Writing
I.
II.
A K within the scope of the S/F may not be enforced unless a memorandum of it is written and signed by the
party to be charged.
a. The entire K does not need not to be in writing.
b. Only the party against whom enforcement is sought needs to have signed.
What must be in writing?
a. Common law: executor-administrator provision, suretyship provision, marriage provision, land K
provision, one-yr provision (R2 § 110)
b. UCC 2-201: requires K for sale of goods ≥ $500 to be in writing and signed by party against whom
enforcement is sought.
i.
Writing is not insufficient because it omits or incorrectly states a term agreed upon, but K is not
enforceable beyond the quantity of goods shown in such writing.
ii.
Cloud Corp. v. Hasbro, Inc. – goods exceeding $500. Cloud made excess packets w/ expensive
Laponite in anticipation of Hasbro’s normal orders. Hasbro’s market died, did not want the
packets, but courts said the emails with sender’s name on the email, sent by Hasbro’s employee
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to supplier satisfied the S/F and signature requirement. Quantity discrepancy – Cloud made the
change and relied on it, so court said Hasbro waived it
1. Waiver: intentional relinquishment of a known right. Waiver must be clear, unequivocal,
or relied upon.
c. E-Sign: 15 U.S.C. § 7001(a-b):
i.
In General … a signature, K, or other record … may not be denied legal effect, validity, or
enforceability solely because it is in electronic form …
ii.
Preservation of rights and obligations. − This title does not … limit, alter, or otherwise affect
any requirement imposed by a statute, regulation, or rule of law relating to the rights and
obligations of persons under such statute, regulation, or rule of law other than a requirement
that contracts or other records be written, signed, or in or electronic form…
III.
Every state has adopted its own version of the S/F.
IV.
Exceptions:
a. Common Law:
i.
Judicial Admission – when a party against whom enforcement is sought admits in court there
was a promise
1. Chomicky v. Buttolph – K to sell cottage subject to subdivision permit with oral
agreement for alternative if permit denied. It was, and seller Buttolph called off the deal,
and even admitted in court that they had an oral K for sale of real property. Court said
only doctrine of part performance could save the K.
2. Radke v. Brenon – written offer to sell real property accepted orally. No objection when
seller raised price. Buyer tendered payment according to original letter, court held there
was a K b/c of admission to K and the circumstances supporting the admission.
ii.
Estoppel – intentional misrepresentation  then party may be estopped from denying a K that
should have been written (p126 c).
iii.
Promissory Estoppel – clear agreement giving proof that party urging doctrine acted to their
detriment in relying on the agreement. (p127 d; R2 § 139).
b. UCC (2-201(3)):
i.
Specially manufactured goods that seller would not be able to sell in ordinary course of
business and seller has begun production
ii.
Judicial admission: party against whom enforcement is sought admits a K in court
iii.
Payment or goods have already been made and accepted
THE JUSTIFICATION PRINCIPLE
I.
The Justification Principle: the law enforces promises when prima facie there are sufficient legal reasons for a
court to enforce the promise.
II.
The Jurisdiction Principle: God has delegated to the State the authority to provide remedies for agreements that
concern a person’s interests in life, liberty or property, subject to other stipulations of his covenant(s).
The Bargained-For Exchange
I. Informal, Unrelied-upon, Donative Promise – why are these not enforced? B/c these are gifts.
a. No cognizable expectation interest
i. No gains of trade, therefore no social utility of bargain
ii. No formality to assure commitment
b. No reliance (by definition) to protect
c. No restitution to return
i. Congregation Kadimah Toras-Moshe v. DeLeo – $ gift to synagogue. promises for gifts are usually
not enforced (R2 § 72).
d. Gift: No benefit to promisor + no detriment to promisee.
e. Exception: charitable subscription & marriage settlements
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II. Doctrine of Consideration: required for a promise to be enforceable, with some exceptions.
a. Historical Basis
i. Pre-1100 AD: No general enforceability of mutual promises, oaths, half-completed agreements
ii. Gregory VII and the Papal Revolution: (1075 to 1122) Separation of church and state, rise of canon
law
iii. English Common Law: Covenant, Debt & Detinue (problem of wager of law), Rise of Indebitatus
Assumpsit (culminating in Slade’s Case, 1602) 
1. No writing required
2. No wager of law permitted
3. Promises enforceable without completion
4. Misfeasance and nonfeasance
iv. Why the need for “considerations”?
1. Courts could not enforce every broken promise
2. Moral foundation in catholic thought
3. Shift to economic emphasis (“bargained-for exchange”) under the Puritans
v. Pryor’s Theory:
1. Consideration as a “jurisdiction substitute”:
2. Limited civil governmental jurisdiction – liberty and life
3. Public law vs. private law
4. Private law limits – formal requisites (evidentiary, cautionary, and channeling)
b. Consideration: performance or a return promise that is bargained for in exchange for the promise sought to
be enforced. (R2 § 71).
i. The process: Bargained-for exchange?  Consideration?  bargain  enforceable promise.
ii. Bargain: agreement to exchange promises or to exchange a promise for a performance or to
exchange performances. (R2 § 3).
iii. 3 Elements of Consideration: Reciprocal, conventional inducement.
1. The promisee must suffer legal detriment.
a. Legal detriment is any relinquishment of a legal right.
b. Legal detriment need not be detrimental.
c. Legal detriment can take the form of an act or a forbearance to act or a promise to
act or forbear. (Hamer, nephew forbore to get $).
2. The detriment must induce the promise.
a. The promise must have been made in exchange at least in part for the conduct or
promise of the promisee (i.e., the detriment).
3. The promise must induce the detriment
a. The promisee must act or promise at least in part because of the promise.
iv. Note: in bilateral K, promises must both be supported by consideration or serve as consideration for
the other.
v. Example: Danielle says "B if you will make muffins for our study group, I will buy you a gift card"
vi. The Bargained-For Exchange:
1. No consideration  unenforceable
Lack of consideration is only a defense for executory, not executed, promises.
a. No Value
i. Newman & Snell’s State Bank v. Hunter – Widow’s husband died broke &
owing bank $. In return for her promise to pay, bank gave her decedent’s
worthless promissory note and stock, also worthless b/c company
insolvent. No consideration b/c worth absolutely nothing.
b. Sentiment or motive
i. Schnell v. Nell – Schnell promised to pay out of the love and respect he felt
for his dead wife. No bargain  no K.
c. Past Consideration
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Contracts I - Pryor
i. Schnell v. Nell – consideration of his dead wife’s lifetime acts/virtues
cannot be consideration. No bargain  no K.
d. Promising someone in exchange for their state of being
e. Conditional gift
i. Ex/ if you meet me at the back door, I will give you soup.”
f. Nominal Consideration
i. Schnell v. Nell - The $1 promised in exchange for Schnell’s payment was a
sham. No bargain  no K.
2. Consideration  enforceable
a. If performing the action would have been consideration, then the promise to
perform it is consideration. (R2 § 75).
i. Ex/ promise to rake leaves in exchange for soup.
b. A party refrains from a legal right in the present or limits his legal freedom of
action in the future, as an inducement for the promise
i. Hamer v. Sidway - unilateral K. Nephew promised to refrain from tobacco,
alcohol, etc. in exchange for $ at 21yrs. Regardless of uncle’s subjective
thoughts, he promised in exchange for nephew’s legal detriment.
c. Inadequacy of consideration is no defense unless it reflects a pretense. (R2 § 79(b)).
i. Batsakis v. Demotsis: 500,00 drachma worth $25.00, but she agreed to pay
back $2,000. Consideration b/c 500,000 induced her promise to pay, which
induced him to loan.
d. If a party gives up a legal remedy/claim/defense, which is actually invalid, in good
faith truly believing it is valid, then there is consideration. (R2 § 74).
i. Dyer v. National By-Products, Inc. - Dyer promised not to sue
(forbearance) employer for his personal injury that occurred at work in
exchange for lifetime employment. Dyer’s promise was worth nothing
under worker’s comp laws, but b/c he sincerely believed he had a claim,
court said that good faith  consideration.
e. A promise may be lacking, but the whole writing may be full of obligation
imperfectly expressed, so there is consideration.
i. Courts look to purpose and writing of an agreement and the surrounding
circumstances to see if a promise can be implied – without implication, no
consideration
ii. Wood v. Lucy, Lady Duff-Gordon – Lucy promised exclusivity of her brand
on goods. Even though K did not specify Wood’s role, court implied the
use his efforts to market her name in good faith as consideration.
vii. Borderline Situations:
1. Compromises
2. Covenants not to compete?
a. Lake Land Employment Group of Akron v. Columber – Columber promised not to
compete if terminated. Worked for 10 yrs with no special raises, promos, or
benefits. Majority said, yes, consideration: not to compete in exchange for not to
discharge at will employee.
3. K Modification:
a. Common law: K Change requires consideration to modify K
i. Levine v. Blumenthal – tenants said we had an agreement. No detriment to
tenant and negative benefit to landlord. No consideration, so K
modification unenforceable.
b. UCC 2-209: modification does NOT need consideration to be binding if the
modification was made in GOOD FAITH.
i. Gross Valentino Printing Co. v. Clarke – magazine producer. Court
enforced the price increase b/c Clarke’s silence failed to undercut Gross
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Contracts I - Pryor
Val’s good faith. Clarke argued economic duress, but Clarke had
alternatives.
1. Economic duress: improper threat + no reasonable alternative
ii. Angel v. Murray – K to collect trash. Increase in homes  modified K to
increase $ charge. Court said promise modifying a K not fully performed is
binding if fair & equitable, & parties did not anticipate the increase.
1. When consideration is relaxed to simplify modification,
consideration often substituted with fair & equitable +
circumstances unanticipated.
c. A promise modifying a duty under a contract not fully performed on either side is
binding if (R2 § 89):
i. Modification while still an executory promise.
ii. Circumstances = unanticipated
iii. Modification = fair and equitable
iv. Used to get away from pre-existing duty rule as long as the parties
voluntarily agree to modify the existing K.
viii. Tools of Inquiry
1. Benefit-Detriment Analysis: Identify the promisor and promisee and ask:
a. What was the benefit to the promisor and detriment to the promisee?
b. Did the promise induce the detriment and did the (prospect of) detriment induce the
promise?
ix. Pre-existing Duty Rule: a promise to do what the promisor is already legally bound to do is an
unreal consideration, so invalid (R2 § 73).
1. Similar performance is consideration if it differs from what was required by the duty in a
way that reflects more than a pretense of a bargain – there must be a new and independent
consideration.
a. Opportunistic Case — Nothing has happened to raise the cost of the promisor’s
performance; all that has changed is that the promisee has put himself in the
promisor’s power.
i. Pre-existing Duty Rule tries to prevent these cases; Hold Up Game.
b. Non-opportunistic Case — The promisor’s cost of performance has risen
unexpectedly since the contract was signed; if the contract is not modified, the
promisor will not perform
x. The “Formal” Functions (meaning like the written form required by S/F)
1. Cautionary - Parties more likely to have understood that there were legal consequences to
their promises in the context of an exchange
2. Evidentiary − Promises easier to prove where there is a paired set as in a bargained-for
exchange
3. Channeling − Courts find it easier to deal with relatively standardized forms of promissory
obligations like bargained-for exchanges; fits into a legal category
Reliance on a Promise
I. A promise that the promisor should reasonably expect to induce action or forbearance on the part of the promisee or
a third person, and does induce such action or forbearance, is binding if injustice can be avoided only by
enforcement of the promise. (R2 § 90)
a. Promise must induce an action by the promisee relying on the promise
b. Reciprocity missing from the traditional bargained-for exchange
c. Injustice = particular economic harm to promisee, not justice in the broad sense.
d. Yes, reliance 
i. Devecmon v. Shaw – Uncle’s promise induced nephew to go to Europe, but seems like conditional
gift since uncle gets no benefit. Consideration based on nephew’s reliance on uncle’s promise.
Nephew would not have gone and spent $$ without his uncle’s promise. Nephew relied to his
detriment on uncle’s promise.
11
Contracts I - Pryor
ii. Feinberg v. Pfeiffer Co. – at will employee retired b/c they told her they were going to give her a
yearly pension, she continued to work after the referendum and retired a year or so later. She relied
to her detriment by retiring and not seeking new employment. Courts enforced promise even though
she could have quit/been fired at any time. Employee relied on employer’s promise (whereas
Columber relied on his own promise, which is not allowed under reliance).
e. No reliance 
i. Hayes v. Plantation Steel Co - employee announced retirement long before the company said they
would “take care of him” with every check asked if more could be expected  no reliance.
f. Comparison:
Feinberg
Hayes
A promise to pay pension for life
A promise to pay pension for life
Expectation to induce action
No expectation to induce action
Which did so
No evidence of induced silence
Financial hardship after pension cut off is an
No injustice b/c no causation
injustice (b/c action induced by employer)
II. An offer that the offeror should reasonably expect to induce action or forbearance of A SUBSTANTIAL
CHARACTER on the part of the offeree before acceptance, and which does induce such action or forbearance, is
binding as an OPTION K to the extent necessary to avoid injustice (R2 § 87(2)).
a. Used for contractor/subcontractor relationships
b. Detrimental reliance = substitute for acceptance;
i. Drennan v. Star Paving Co. – Star made an offer to get school paving job, not a promise, which it
revoked, but courts said acceptance is implied b/c of reliance. Based on industry, Star wanted
Drennan to present its offer in its offer. Courts implied the offer of an option and implied
acceptance to make Star’s offer irrevocable.
c. Can’t detrimentally rely on your own offer; you can only rely on another’s offer.
i. Southern California Acoustics Co., Inc. v. C.V. Holder, Inc – subcontractor saw its name in the
winning bid list in the newspaper. Manifestation of assent? No, only compliance with state law.
Promisee (general contractor) never made a promise, so Southern Cal could only rely on its own
promise.
d. Nonreciprocal relationship justified? Ultimately produces an uneven result. General contractor seems free
to delay acceptance to go price shopping, which is what courts did not want to happen. Not all jurisdictions
(probably not VA) recognize this.
e. UCC 2-205 Firm Offers: no consideration necessary b/t merchants.
i. An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance
that it will be held open is not revocable, for lack of consideration, during the time stated or if no
time is stated for a reasonable time, but in no event may such period of irrevocability exceed three
months; but any such term of assurance on a form supplied by the offeree must be separately signed
by the offeror.
Unjust Enrichment
I. Unjust enrichment exists when:
a. Defendant received benefits from plaintiff, and
b. If a benefit was received, then its retention would be unjust.
i. As opposed to gratuitous gift  nature of the gift means it is not unjust for the recipient to retain
the gift without paying for it.
II. Factors that indicate when something is unjust:
a. Relationship of parties
b. Length of time
c. Nature of services (necessities v. non-necessities)
d. Extent of services – would they normally be considered gratuitous?
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Contracts I - Pryor
i. Sparks v. Gustafson – Gustafson, close friend of Sparks Sr., provided serious
mgmt/financial/marketing/etc. oversight ($62K) for the building. Gustafson continued providing
services after friend’s death, but NO gratuitous gift b/c these are services that expect payment. Plus
Gustafson hoped to buy the building. Unjust not to pay Gustafson. But why didn’t Gustafson call up
Sparks’ son???
1. Courted cited the Kershaw case, in which the friend providing services to the widow was
not unjust b/c they are activities expected from lifelong friends.
III. Enforcement of promises to pay:
a. Services must be rendered to promisor, not a third party (unless a dependent).
i. Mills v. Wyman - P nursed D’s sick son returning home from a voyage. No consideration for
father’s promise to reimburse P’s expenses. Here, the detriment precedes the promise. D had a
moral obligation to keep his promise, but not a legal obligation. Son was of age, no unjust
enrichment to D, so no payment.
b. A promise made in recognition of a benefit previously received by the promisor from the promisee is
binding to the extent necessary to prevent injustice. (R2 § 86(1)).
i. These promises will not be binding, however, if:
1. No unjust enrichment, or
2. To the extent that its value is disproportionate to the benefit.
ii. Webb v. McGowin - P saved D’s life and improved and preserved the property of defendant – there
was a material benefit received, so there was unjust enrichment if promise to pay $15/2 wks was
not enforced.
c. Note: Subsequent promise reinstitutes the consideration… (R2 § 82).
IV. Principles of Restitution:
a. “A person who is unjustly enriched at the expense of another is liable in restitution to the other (R3 § 1):
i. What sorts of “enriching actions” are unjust? Those that result from:
1. Mistake
2. Misrepresentation, duress, coercion, etc.
3. Emergency actions to protect life or property
b. A person who takes effective action to protect another’s property or economic interests has a claim in
restitution against the other if (R3 § 21):
i. The circumstances justify the claimant’s decision to intervene w/out a prior agreement for payment
or reimbursement, and
ii. It is reasonable for the claimant to assume that the D would wish the action performed.
c. Measured by the lesser of these options:
i. Loss avoided by the defendant, or
ii. Reasonable charge for the services provided.
V. The Continuum:
“Real” Consideration
Compromises/Modifications/etc.
Reliance
Unjust Enrichment
THE JUSTICE PRINCIPLE (how to undo a K)
I.
II.
Justice Principle: the law refrains from enforcing promises when the prima facie justification for enforcing the
Normative - the terms make K
promise is overridden by considerations of justice
Perspectives on Justifications for K Avoidance
Existential – something wrong w/ 1 of
Recent mvmt to expand
the 2 contracting parties Ex/ certain
classes of ppl who can
class cannot legally contract…
contract.
Married Women’s Act
Cognitive/volitional incapacity, infancy
wrong Ex/ hitman
Illegality, public policy
3 Categories
for K
Avoidance
Situational – something
wrong w/ contracting process
Ex/ duress
mistake, misrepresentation
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Contracts I - Pryor
The Domain of Freedom of Contract
Courts will not enforce K if:
I. Existential (party incapable of assenting)
a. Capacity to Contract: A natural person who manifests assent to a transaction has full legal capacity to
incur contractual duties thereby UNLESS he is any of these (R2 § 12):
i. Under guardianship
ii. An infant – person incurs only voidable K duties until age 18 (R2 § 14).
iii. Mentally ill or defective (R2 § 15) person…
1. Incurs only voidable K duties if
a. COGNITION TEST: unable to understand in a reasonable manner the nature &
consequences of the transaction? Or
b. VOLITION TEST: unable to act in a reasonable manner in relation to the
transaction AND the other party has reason to know of his condition?
i. Ortelere v. Teachers’ Retirement Board – outward manifestation to change
retirement plan insufficient b/c of Ortelere’s mental incapacity
c. Note: all states recognize the cognitive test, but not all recognize the volitional test.
iv. Intoxicated
II. Normative (subject matter outside scope of K law)
a. Public Policy: makes a promise/agreement unenforceable if legislation provides that it is unenforceable or
the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the
enforcement of such terms (R2 § 178(1))
i. Courts lean in favor K enforcement, so
1. Balancing test  public policy violation must clearly outweigh K enforcement
ii. The public policy may come from (R2 § 179):
1. Relevant legislation, or
2. Public welfare, like
a. Restraint of trade
b. Impairment of family relations (See R2 § 189, 191)
i. In the Matter of Baby M – the court chose to give surrogate mother custody
rights (not adoption) b/c it’s better for child to be raised by both parents.
c. Interference with other protected interests
i. Indian cases – one court held that influencing the court through
supernatural means is against public policy; 2nd court said person could
pray for own spiritual help, so he can contract for a 3rd party to do so.
III. Situational
a. Undue Influence makes a K voidable when it induces party’s assent
i. Undue influence: unfair persuasion +
1. Dominant-subservient - under the domination of persuader, or
2. Close confidential relationship – justifies victim’s assumption that party will act
consistent with victim’s welfare (See R2 § 177).
a. Jackson v. Seymour – unfair persuasion for sale of valuable land b/c of bro-sis
relationship (he also managed her property), which should give rise to trust.
ii. If undue influence by 3rd party, voidable unless inducer, acting in good faith & without reason to
know of the undue influence, either gives value or relies materially on transaction (See R2 § 177).
b. Mistake & Misrepresentation (see below)
IV. Avoiding K:
a. Rescission permitted when
i. Concealment of material fact (or mistake)
ii. Unlikely to be discovered by a prudent purchaser (or peculiar in nature)
iii. That materially impairs value to buyer.
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Contracts I - Pryor
b. Party loses power to avoid K when:
i. Affirmance (See R2 § 380).
ii. Delay: Defense of Laches (See R2 § 381).
Mistake
I. Definition: belief that is not in accord with the facts (R2 § 151).
a. Duty to Disclose? Generally no b/c we want ppl to maximize personal knowledge, BUT…
i. Misrepresentation: assertion (words/conduct) that is not in accord with the facts (R2 § 159).
Misrepresentation by silence entails duty to disclose.
1. If a party’s manifestation of assent is induced either by fraudulent or material
misrepresentation by other party upon which recipient is justified in relying, then voidable
K (R2 § 164).
a. Stambovsky v. Ackley – no mistake, but rescission granted during executory period
b/c of misrepresentation (haunted house reputation created by sellers). Reputation
impaired home value & resale value; rescission b/c seller’s investment v. buyer’s
cost to discover info.
ii. Non-Disclosure of a fact known to the party = assertion that the fact did not exist ONLY when (R2
§ 161):
1. He knows the disclosure is necessary to prevent some previous assertion from being
misrepresentation/fraudulent/material.
2. He knows the disclosure would correct a mistake of the other party as to a basic assumption
on which the party is making the K AND the non-disclosure of the fact is a failure to act in
good faith & in accordance with reasonable standards of fair dealing
3. He knows that disclosure of the fact would correct a mistake of the other party as to the
contents or effects of a writing, evidencing or embodying an agreement in whole or in part
4. The other person is entitled to know the fact b/c of a relation of trust & confidence b/t them
iii. Duty to disclose latent defects varies from state to state.
b. A party bears the risk of mistake when (R2 § 154):
i. The parties agree to allocate the risk to him (Lenawee), or
ii. He is aware, at the time the K is made, that he has only limited knowledge of facts related to
mistake, but treats his limited knowledge as sufficient (Wood), or
iii. The risk is allocated to him by the court b/c it is reasonable under the circumstances.
c. Mutual Ignorance  no mistake; not voidable when parties are both consciously uncertain about a
material fact. Windfall gain – c’est la vie.
i. Wood v. Boynton – mutual conscious ignorance about diamond
d. Mutual Mistake (as to basic assumption at time K made that has a material effect on agreed exchanged
performances)  voidable by adversely affected party unless that party bears the risk (See R2 § 152).
i. Lenawee County v. Messerly – K avoidance allowed b/c nonconforming sewage system = a 100%
reduction in value; neither seller nor buyer knew of problem (so no misrepresentation here).
ii. When Mutual Mistake of both parties’ writings  reformation
1. Where a writing that evidences/embodies an agreement in whole/part fails to express the
agreement b/c of mutual mistakes as to contents or effects of writing, court may (at request
of a party) reform the writing to express the agreement, except to the extent that rights of
3rd parties will be fairly unaffected (R2 § 152).
a. No reformation if party knows about the mistake before signing (Lemoge).
e. Unilateral Mistake (as to basic assumption at time K made that has an adverse material effect)  voidable
by him if he does not bear the risk AND
i. Enforcement would be unconscionable, or
ii. The other party had reason to know of the mistake, or his fault caused the mistake (R2 § 153).
1. Elsinore v. Kastorff – contractor’s wksht error led to bidding mistake; no K b/c court said
vote did not amount to acceptance until letter receipt.
iii. Note: the law disfavors K avoidance based on unilateral mistake.
f. Variables to consider:
i. Executory v. Executed K – easier to get rescission before transaction is complete
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Contracts I - Pryor
1. Stambovsky (executory), Wood (executed), Lenawee (executed), Kastorff (executory)
ii. “Investment in” vs. “cost of” acquiring information (Stambovsky)
1. Does the non-disclosing party have a significant, socially-accepted investment in the
information the other party doesn’t know?
2. Can the other party acquire the information at a reasonable cost?
iii. Allocation of risk of “known unknowns” (Wood)
1. Parties can expressly or impliedly allocate risks of unknown facts
2. Conscious ignorance will not be rectified
3. But knowingly taking advantage of the other party’s mistake will be rectified
iv. Virtue vs. law (Cicero, who said expedience/profit and virtue never contradict, & AQ)
1. Loving your neighbor vs. not deceiving the other party
2. Golden Rule vs. incentives for a fallen world
Unconscionability (Matter of law, not the jury. Court can raise this issue at any time)
R2 § 208
If a K or K term is unconscionable at the time the
K is made a court may:



Refuse to enforce the K, or
Enforce the remainder of the K without the
unconscionable term, or
May so limit the application of any
unconscionable term as to avoid any
unconscionable result
Roman Law: no doctrine of unconscionability,
but laesio enormis. Buyer could avoid K if he paid
2x as much; Seller could avoid if he sold it for
half its worth.
UCC 2-302
1) If the court as a matter of law finds the K or any K
clause to have been unconscionable at the time it was
made, the court may:


“
“

“
2) When it is claimed or appears to the court that the
K or any K clause may be unconscionable the parties
shall have a reasonable opportunity to present
evidence as to its commercial setting, purpose and
effect to aid the court in making the determination.
I. Cross Collateralization: adding new purchases to debt already accumulated  larger amount to pay off before
‘owning’ anything.
a. Proponents: increases likelihood of payment, allowing creditors to reduce prices for everyone.
b. Economic Principles:
i. Late default - windfall gain to seller
ii. Early default - windfall loss to seller
c. Williams v. Walker-Thomas Furniture Co. – P bought stereo on store credit; court let P off the hook b/c
unconscionability; lack of meaningful choice.
d. Barred by 16 C.F.R. § 444.2 (except for pawn shops):
i. In connection with the extension of credit to consumers in or affecting commerce… it is an unfair
act or practice within the meaning of Section 5 of that Act for a lender or retail installment seller
directly or indirectly to take or receive from a consumer an obligation that:
1. Constitutes or contains a non-possessory security interest in household goods other than
a purchase money security interest.
II. Unconscionability defense in most jurisdictions requires BOTH:
a. Procedural Unconscionability: (existential & situational) lack of meaningful choice; courts examine
bargaining power & situation of the parties
i. Courts look for: (note: illiteracy does not count b/c of the objective theory of K)
1. Lack of knowledge
4. The use of complex legal language
2. Lack of voluntariness
5. Disparity in bargaining power b/t the parties
3. Inconspicuous print
6. Lack of opportunity to study or inquire about K terms
b. Substantive Unconscionability: (normative) unreasonably favorable terms; grossly unfair for one side
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Contracts I - Pryor
i. Toker v. Westerman – purchase price = unconscionable
ii. Frostifresh v. Reynoso – salesman misrepresented (fraud) to Spanish speaking couple about $1145
fridge actually costing $348; bargaining process is suspect
c. Economic Principles:
i. Effect of Legal Sanctions to Redistribute Income
1. Output/contraction & price/increase
2. Capricious redistribution
ii. Unconscionability
1. Narrow definition often viewed as fraud
2. Broad definition increases difficulty of poor to borrow; increase in everyone’s cost
III. Biblical Principles:
a. Ex. 23:3, 6 – no partiality to poor
b. Lev. 19:15 – no partiality to rich or poor
c. Prov. 22:22, 23 – legal justice for the poor
d. Lev. 19:13 – no fraud/cheating
e. Ex. 22:26-27 & Deut. 24:6, 10-15 − various creditor restrictions
Standard Form K
I. Definition: K of adhesion:
a. Standard form K (K forms drafted in advance of any particular transaction)
b. Take it or leave it
c. For consumers of goods or services.
d. Note: Anyone who signs written K has a DUTY TO READ.
II. Arbitration:
a. 9 U.S.C. § 2 - Federal Arbitration Act –
i. A written provision in any . . . K evidencing a transaction involving commerce to settle by
arbitration a controversy thereafter arising out of such K or transaction, or the refusal to perform the
whole or any part thereof, . . . shall be valid, irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any K.
ii. Requires arbitration clauses to be in writing
1. Washington Mutual Finance Group v. Bailey – P sued on procedural (illiteracy/no
explanation) & substantive (arbitration clause itself) unconscionability.
III. Dealing with unconscionability in Standard Form K:
a. Where the other party has reason to believe that the party manifesting such assent would not do so if he
knew that the writing contained a particular term, the term is not part of the agreement (R2 § 211(3)).
i. 2 Elements to determine whether the provision in the standard form K binds the parties:
1. Was the provision something a person should reasonably expect? Or
a. Broemmer v. Abortion Services of Phoenix, Ltd – P objected to arbitration
provision. Adhesion K b/c take it or leave it, & nothing explained to her. C:
unenforceable b/c of unreasonable expectation.
2. Is the provision a deal breaker? Would the party have signed anyway?
ii. We Care Hair Development, Inc. v. Engen – parties had to arbitrate, but landlord could evict tenants
through federal courts. Ct: unconscionable to combine arbitration agreement with cross default
agreement in lease. Can’t mix & match to advantage. Test to determine unconscionability:
1. Relatively unequal bargaining position + unfair surprise
2. Grossly one-sided
3. Outrageously unreasonable (no person in their right mind would have agreed)
Youthfulness/Fraud/Mistake
Vitiate Autonomy
Form K/Unconscionability
Illegality/Public Policy
Unjust
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Contracts I - Pryor
THE COMPENSATION PRINCIPLE
I.
II.
Compensation Principle: the law enforces promises mainly by compensating non-breaching parties for
unavoidable, foreseeable, and reasonably certain harms caused by a breach (See R2 § 351).
Compensation or Punishment?
a. Measure of Damages in General (R2 § 347): Subject to the limitations stated in §§ 350-53, the injured
party has a right to damages based on his expectation interest as measured by:
The loss in value to him of
Any other loss,
Any cost or other loss
the
other
party’s
including
incidental
or
DAMAGES =
+
- that he has avoided by
performance cause by its
consequential loss,
not having to perform
failure or deficiency
caused by the breach
b. Nominal damages ($1) awarded when there has been a K breach
c. NO punitive damages for breach of K unless conduct in breach was also a tort (R2 § 355).
d. Subjective Damages Standard – measured by loss in value to the individual
i. White v. Benkowski – well dispute. $10 compensatory damages, which trial ct lowered to nominal
b/c it limited compensatory damages to provable out of pocket expenditures ($0.25); S Ct said
trial ct ignored inconvenience of water stoppage
e. Efficient Breach Hypothesis - currently the leading reason why the common law rule is correct.
i. Economic Objections:
1. Assumes absence of transaction costs
2. Free rider use of public resources by D (social cost not borne by either party)
3. K damages often fail to compensate for all economic losses of injured party
4. Breakdown of community-wide trust among parties may lead to extra, inefficient security
devices (we might issue bonds… letters of credit… but that’s all an additional cost).
ii. Non-Economic Objections
1. Normative & pedagogical functions of the law are also important (i.e., promises should
be kept & virtuous character promoted)
2. A utilitarian approach (greater good theory) to K remedies conflicts with presuppositions
of tort law. You don’t get punitive damages in injury to your expectation, even though
you get punitive damages from injury to you or your reputation in tort law.
iii. Note: hard to collect a judgment; litigation is a terrible way to get justice.
f. Liquidated Damages & Penalties (R2 § 356):
i. Damages for breach may be liquidated in agreement, but only at amount reasonable in light of
anticipated/actual loss caused by breach & difficulties of loss.
1. Unreasonably large liquidated damages = unenforceable b/c of public policy.
ii. Bond term providing for money amount as penalty for non-occurrence of condition of bond is
unenforceable b/c of public policy to the extent that the amount exceeds the loss caused by such
non-occurrence.
*** too much may be a penalty & too little may be unconscionable (R2 § 356 comment a)
iii. 2 Steps (ALWAYS ask both when answering exam question):
1. At Time of Contracting:
a. Issue: Was this intended as a genuine liquidation of damages?
How difficult was it to estimate the loss?
Test of reasonable
Test of reasonable estimation
Balance
estimation leniently applied
strictly applied
Prospective loss uncertain &
Prospective loss relatively easy
speculative
to predict
2. At Time of Breach:
Yes; Comparison to
a. How does the estimate compare to the actual loss suffered? liquidated damages highly
relevant
Are actual damages capable of “easy determination?”
No; Comparison difficult or impossible – tends to
reinforce validity of liquidated damages clause 18
Contracts I - Pryor
iv. Burden is on party to establish what prospective losses are.
1. City of Rye v. Public Serv. Mut. Ins. Co. – city tried to get liquidated damages ($100,000
surety bond) from developers. City claimed loss of tax rev, employee time, height
restrictions… BUT lost b/c they didn’t give any evidence of loss! Ct: basically a hold-up;
city caused developer to expose itself greatly, then kept them from benefit of
development without this bond
v. Liquidated damages ok, but penalties are not.
1. Promisee wants promisor to pay fixed amount upfront b/c easier to prove liquidated sum
2. Promisor might want to lock in fixed amount upfront when promisor is newcomer in mkt.
Expectation Remedies
I.
II.
Specific Performance
a. Will not be ordered if damages are adequate (R2 § 359(1))
i. Damages never adequate in real estate sale contracts
b. Will be ordered when:
i. Damages are generally under-compensatory
ii. Goods = unique, peculiar, or sentimental personalty Ex/ artwork
1. McCallister v. Patton – buyer wanted Ford; paid $25 down, but not consideration b/c if
he changed his mind  refund (so option K). P argues performance on basis of WWII
scarcity. Ct: scarcity ≠ unique. lol.
c. UCC 2-716(1): Specific performance may be decreed where the goods are unique or in other proper
circumstances
i. “this Article seeks to further a more liberal attitude than some courts have shown in connection
with the specific performance of contracts of sale” (comment 1)… relax the common law 
General Damages
Sale of Goods
Services K
Buyers’ Remedies
Sellers’ Remedies
UCC
2-711 to 2-718
Recipients’ Remedies
Providers’ Remedies
COMMON LAW
2-703 to 2-710
a. UCC 2-713: When seller does not deliver or repudiates, Buyer gets
Market price at time
Incidental/consequential
Expenses saved b/c
buyer
learned
of
damages provided in
DAMAGES =
- K price +
- of seller’s breach
breach
UCC 2-715
i. Mkt price: determined as of the place for tender, or, in cases of rejection after arrival or
revocation of acceptance, as of the place of arrival.
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