Contracts I
Section A- Overview
Chapter 1 – Legal Issues and Business Policy
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Contract- 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
Types of K’s:
o Unilateral K- promise for an act
o Bilateral K- promise for a promise
o An act for an act is a barter
For a K there must be contractual intent. (Cohen v Cowles Media Co.)
Consent to adopt cannot be bartered or sold (Stutz v. Stutz). The free market is not
a suitable process when it comes to the selling of a human being.
Purposes of K law:
o Consent Theory- by manifesting their intention to be legally bound,
promisors and promisees have consented to a legally enforceable
agreement, a contract. Contract law should be designed to impose
individual responsibility on those who make such promises (promisors).
o Will Theory- Contract law should be designed to foster individual liberty,
private autonomy, and freedom of transaction in the private sector, subject
to minimum controls in the name of collective or public interests. Courts
should vindicate the intentions of promisors and promisees who willingly
exercise this “freedom of contract.”
o Promise Theory- Contract law is necessary to uphold moral values by
recognizing the sanctity of promise. When a promisor invokes the norm of
promising, he or she should be held to his commitment.
o Reliance Theory- Contract law should be designed to protect promisees and
their reasonable expectations. When promisees act in reliance upon others’
promises, courts should protect them from injury due to broken promises to
avoid injustice.
o Utilitarian Economic Theory- The principles of contract law should be
designed to maximize the potential gains from transactions by facilitating
the process of voluntary trade. Contract law should be utilitarian and based
on free market principles.
o Critical Legal Studies Theory- Contract law based on any or all of the
foregoing principles is not “value neutral,” as some of the proponents of the
foregoing principles would have us believe. From its inception, contract
law has been designed to protect and promote particular vested interests and
privileged classes, the “haves” at the expense of the “have nots.” Private
law, including contract law, should be deconstructed and then reconstructed
to serve altruistic, societal interests in the pursuit of social justice rather
than the venal interests of individuals.
o Relational Theory- Rather than concentrate on discrete transactions or
isolated agreements as events between equally situated parties, adherents of
this approach “emphasize the social and interpersonal relationships between
the parties to the contract.” Unlike the other schools of thought that
embrace a neoclassical model and focus on offer and acceptance and the
exchange of promises, this theory focuses on social practices, normative
behavior, long-term relationships and how these factors operate together to
influence transactions. There are many variations on relational theory.
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If a K involves predominantly the sale of goods- UCC applies
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Causes of action:
o Traditional contract
 Express or implied in fact
 Civil law- between private parties
 Private law- the parties themselves define their obligations to one
another
 Assent is necessary to make out a claim
 Elements- contractual intent, offer, acceptance, consideration,
certain terms
 Remedies- typically, expectation damages and/or equitable relief; no
punitive damages available in K law
o Promissory estoppel
 Promisor made a promise
 Promisor should reasonably have expected reliance or forbearance
 Promisee reasonably relied or forbore
 The promise must be enforced to avoid injustice
 Recovery- usually limited to out-of-pocket expenses
o Unjust enrichment, quasi-K, K implied at law
o Tort
Section B- Traditional Contract Formation
Chapter 2 - Offers of Contractual Terms
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Offers of K terms: contractual intent, promise or commitment, assent
Promises and acts; unilateral and bilateral K’s
o Unilateral contract- formed when an offeror makes a promise which the
offeree accepts by actual performance of the act required under the terms of
the offer
 Sarah offers Jack $50 to wash her car, and Jack washes it
o Bilateral contract offer is made when the offeror offers a promise in
exchange for the offeree’s return promise instead of an actual act by the
offeree
 Sarah offers Jack $50 to promise to wash her car
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Offer – Acceptance: the parties are then bound
Objective Theory of Contracts – the “reasonable person”
- Courts apply an objective theory of contracts, determining whether an offer has
been extended based on the offeror’s outward manifestations of intent viewed from
the perspective of a reasonable person in the offeree’s place.
- When deciding whether an offer has been accepted, the courts apply an objective
theory, asking whether the reasonable person in the position of the offeror is
warranted in believing the offeree has accepted based on the offeree’s outward
manifestations of assent.
- Under the objective theory of contracts, hidden intentions are generally immaterial
to a determination of contractual intent. (Lucy v. Zehmer- the court held a K where
2 drunk guys agreed on a sale of property on a barroom napkin; objective
theory/outward manifestations are what matter)
- Objectivism vs. subjectivism:
o Play rehearsal hypo- You walk in on 2 people rehearsing for a plan. One
offers and the other accepts a K. You, the observer, do not know the
context. The reasonable person incorporates facts and circumstances.
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If a reasonable person would believe an offer is being made, then the speaker risks
the formation f a K which was not intended. It is the objective manifestations of
the offeror that count and not secret, unexpressed intentions (Barnes v. Treece)
Constructive notice of revocation- use ideally the same medium of communication,
or a similar medium of communication (constructive notice differs from actual
notice)
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The presumption is that family and social arrangements are ordinarily intended to
be gratuitous (gifts) and are not intended to be K’s w/ legal effect (Morrow v.
Morrow)
o The definition of family is not solely related to legal concepts of blood
relationships. It is the reality of the circumstances that matter (Morrow)
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There is a presumption governing advertisements, price lists, catalogues, price
quotes, etc. Ordinarily they are not offers but invitations to inspect the goods and
make an offer. (usually too uncertain, e.g., no quantity term)
o But the presumption may be overcome, i.e. by language of commitment
(“for immediate acceptance”)
o Advertisements are not presumed to be offers, unless they invite acceptance
w/o further negotiations in clear, definite, express and unconditional
language, and a reasonable person in the position of the offeree would
construe the ad as an offer.
o Ex. - “Fresh Broccoli- 68 Cent a Pound” – likely not an offer (no quantity
term; unspecific)
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There is a difference between an offer and an invitation for an offer. Apply the
objective theory- what meaning would a reasonable person in the person’s position
assign to the “offer”? (Volker Court v. Santa Fe Apts.)
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In determining the correct interpretation of the expression in question, the
expression is to be judged on the basis of what a reasonable person in the position
of the offeree has been led to believe (objective theory). (Southworth v. Oliver)
o Beyond this, there are other guides: language used, whether an expression
definitely names a party (the offeree), and definiteness of the proposal
o (these factors are all considered as a whole)
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Offers under the UCC. – You do not need to identify when the offer was made, or
when a K was formed, as long as there’s evidence that the parties understand that
they’ve reached agreement and have a legally binding K (a relaxed view)
Auctions (courts generally recognize 2 types):
- Auction with reserve- the owner (offeree) invites offers in the form of bids, and can
withdraw the goods (rejecting the high bid offer) at any time before the hammer
falls. When the hammer falls, it signals the owner’s acceptance of the last, high
bid.
- Auction without reserve- The owner (offeror) declares that goods will be sold to the
high bidder (offeree?). The owner has no right to withdraw the goods. What does
the hammer signify then? (no identification as to who the offer is being extended
to)
- (Auctions do not fit nicely into the K model. An auction without reserve is the only
situation where there may be a withdrawal of an acceptance.)
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Ways in which an offer can terminate:
o Lapse by offeror’s express terms in the offer
o Lapse after reasonable time
o Revocation by the offeror, directly or indirectly
 Exception- option K’s (irrevocable offers)
o Counteroffer/rejection by the offeree
 Exception- option K’s
o Death (revokes w/o notice)
o Incapacity (revokes w/ notice)
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A late acceptance is a valid counteroffer; it cannot be an acceptance
o An offeror cannot waive a late acceptance (Ellefson v. Megadeth)
 Objective theory- neither the offeror nor the offeree would
reasonably believe that they have a K upon a late acceptance
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If the master of the offer (the offeror) sets a specific time for acceptance, the offer
lapses upon expiration of that time.
But if the offeror does not express a duration, an offer expires at the end of a
reasonable time
o “Reasonable time” - a question of fact; objective theory
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Revocation of the offer
- The offeror may revoke the offer even after the offeror has indicated that he
wouldn’t revoke
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It is not necessarily required that the offeror revoke the offer expressly (“Well, I
don’t know if we are ready. We have not decided…” – a court held this to be a
revocation)
The offeror is free (absent an option) to revoke at any time before acceptance takes
place (Green v. Keener)
o Berendt’s “Gorka” hypo: “I’ll give you this money if you walk to the front
of the room for it.” Gorka gets up, and Berendt says he revokes. Gorka
could not assent to a unilateral K because he was not allowed to complete
the act.
To revoke a public offer, the offeror must give a public revocation (must publish a
revocation in a manner equal to the manner of notice given the offer)
An offer may be revoked indirectly, w/o any actual direct communication from the
offeror to the offeree.
o Hypo: Jordan offers to sell his sneakers to Pippen and Rodman. Jordan
sells them to Pippen and does not express his revocation of the offer to
Rodman. Then Rodman sees Pippen w/ the sneakers. A reasonable person
in Rodman’s position would understand the offer to be revoked.
o A later offer may revoke an earlier offer; objective theory(Forney v. TTX)
Irrevocable offers: option contracts
- An option is an offer which the offeror (optionor) agrees to leave open, on stated
terms, usually for a specific duration. In effect, the optionor sells to the optionee
(option holder) the optionor’s power to revoke the offer for that stated period of
time.
- An option is both an offer and a K.
- An option must be supported by consideration independent of the other K’s
involved. A very small consideration is sufficient, either a bargained-for benefit to
the optionor or a bargained-for detriment to the optionee (must be a bargained for
exchange)
o The benefit or detriment does not have to be actual; it can be theoretical
(Hamilton Bancshares v. Leroy- optionee could not use $10,000 for the
specified option period; valid consideration)
Firm offers under the UCC
- Firm offer- a merchant’s assurance that an offer to buy or sell goods will be held
open for a stated time or for a reasonable time.
- Firm offers are not revocable for the stated time or a reasonable time, but not longer
than 3 months
- No consideration is required under a firm offer.
Termination of offer by rejection or counteroffer
- A rejection ordinarily terminates an offer
- A counteroffer ordinarily terminates an offer
o Counteroffer states different terms than those from the original offer;
original offeror would reasonably believe that their offer is terminated
- Exception- Ordinarily a rejection of an offer held open under an option does not
terminate the offer (Ryder v. Wescoat)
o Exception to the exception- If the optionor has materially changed his
position, in reliance upon the optionee’s rejection, the option and the offer
terminate prior to the option’s expiration date (where the optionor is
unaware of the rule that a rejection of an offer held open under an option
does not terminate the offer; if optionor is aware of the rule it may be a
different story)
o (If the optionor dies, the option remains open to the optionee)
Termination of offer by death or incapacity
- Death of the offeror or offeree, even w/o notice to the other party, terminates the
offer.
o Jordan v. Dobbins- The court said the offeree should be diligent enough to
make sure that the person upon whose credit they are selling is living (Is
this reasonable in modern times?)
o (This is an exception to the objective theory; outward manifestations of
assent; What would a reasonable person in the offeree’s shoes believe?)
- Mental incapacity terminates an offer, but only with notice
o Mental incapacity revokes the offer if the offeree knew or should have
known of the offeror’s loss of mental capacity (Swift v. Smigel)
Chapter 3 – Acceptance of Offers
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The offeror is the master of the offer, but it is the offeree who has the power to
complete formation of the K by accepting the offer.
The ‘mirror image’ rule- at traditional common law, the offeree must agree to the exact
terms stated by the offeror to accept. The terms of the acceptance must “mirror” those in
the offer.
- If the offeree varies a material term in response to the offer, the offeree’s response
is a counteroffer that also implicitly operates as a rejection of the original offer.
- In Illinois, even a minor, immaterial change violates Illinois’ strict application of
the mirror image rule (Finnin v. Bob Lindsay). This is the minority view.
- Material modification rule- the majority view is that immaterial or minor
differences between the offer and acceptance do not prevent the formation of a K.
If there is a material modification, there is no acceptance.
o Material- of such a nature that knowledge of an item would affect a
decision-maker’s decision-making
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Where an offeree changes a material term (i.e., quantity) in response to an offer, the
original offer is terminated and can no longer be accepted.
Where an offeree accepts and adds a term consistent w/ the original offer (i.e.,
“prompt delivery”), since the additional term is not a material change in the offer’s
terms, the acceptance is effective.
Hypo: “I accept your offer to sell me 100 cases of Mason fruit jars, first quality
goods only”
o The addition of “first quality goods only” is reasonably to be understood as
part of the original offer. It is reasonably implied that the goods would have
been first quality goods anyways. This is an acceptance, not a counteroffer.
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UCC Section 2-207: (w/ respect to sales of goods) A definite and seasonable
expression of acceptance or a written confirmation sent w/in a reasonable time
operates as an acceptance even though it states terms additional to or different from
those offered or agreed upon, unless acceptance is made conditional on assent to
the additional or different terms.
o Very different from the common law K approach
o Utilitarian economic theory
Mode of acceptance
- The offeror is free to prescribe an exclusive mode of acceptance. In the absence of
an exclusive mode of acceptance, the offeree may accept by using any reasonable
mode of acceptance (objective theory)
o For an offer to set an exclusive mode of acceptance, the offeree must use
pretty explicit language (The law has moved toward utilitarian economic
theory).
o Panhandle v. Smith- Offeree accepted even though he added notes near his
signature, because the court said the notes were immaterial. This was a
“grumbling acceptance.”
- The Statute of Frauds requires a writing in certain situations for there to be a K. If
the Statute of Frauds does not apply, then whether a writing is necessary, and what
kind of writing, depends on the parties’ intentions.
o Mutual manifestations of assent that are in themselves sufficient to make a
K will not be prevented from so operating by later making a formal writing
of the already assented to agreement (McCarthy v. Tobin- The later
additions to the agreement were held to be ministerial and nonessential
terms of the bargain)
o UCC Section 2-201- Statute of Frauds for sales of goods for $500+
Acceptance by silence
- R2d Section 69- an offeree’s silence ordinarily will not serve as acceptance
(objective theory; silence is the absence of outward manifestations)
o However, there are several limited exceptions (driven by utilitarian
economic theory, etc.): (1) where an offeree takes the benefit of offered
services w/ reasonable opportunity to reject them and reason to know that
they were offered w/ the expectation of compensation (Hoffman v. Purina),
(2) where the offeror has stated or given the offeree reason to understand
that assent may be manifested by silence or inaction, and the offeree in
remaining silent intends to accept the offer, (3) where because of previous
dealings or otherwise, it is reasonable that the offeree should notify the
offeror if he does not intend to accept.
Dealing at a distance and the “mailbox rule”
- Communications that are generally effective upon receipt: offer, revocation,
rejection/counteroffer
- Communications that are generally effective upon dispatch (mailbox rule):
acceptance only
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o Where the mail is an acceptable medium of communication, acceptance
takes place (and a K is formed), when the offeree posts a letter of
acceptance.
 The letter must be properly posted and addressed for the
mailbox/dispatch rule to apply.
Exceptions to the mailbox rule: acceptance of option/offers; second-thought
acceptances that follow rejections
o Both are effective upon receipt
o R2d Section 40- an acceptance dispatched after a rejection is effective on
receipt and only if it arrives before the rejection
 Hypo: Offeror makes an offer by mail. Offeree rejects by mail
(effective upon receipt). Before offeror receives the rejection,
offeree changes his mind and mails an acceptance (effective upon
receipt). The rejection arrives before the acceptance, and offeror
sells to another before receiving the acceptance.
 The rejection was effective. The acceptance was not.
(objective theory)
The mailbox rule does not apply to telephone conversations. Telephone
conversations are considered to be communications in the present, not dealing at a
distance over time. Receipt and dispatch occur instantaneously.
Experts disagree over whether the mailbox rule applies to faxes, e-mails, etc.
o Almost all states have digital signature laws, authorizing electronic
signatures as the equivalent of natural signatures. (important where the S/F
applies to an agreement, requiring that the agreement be written and signed
to be enforceable)
Notice of acceptance
- At old common law, in order to form the K and complete acceptance, the offeree
had to notify the offeror.
o This slowed down business, so courts started entertaining other theories.
o It makes more sense for notice of acceptance to be required in cases of
bilateral offers than cases of unilateral offers.
- R2d Section 56- There is no acceptance…until the offeree notifies the offeror of the
acceptance or at least employs reasonable diligence in attempting to do so (Sementa
v. Tylman).
Acceptance of unilateral offers
- R2d Section 54- The K is formed when the act is performed. However, the
offeror’s duty to perform will be discharged:
o (1) if the offeree fails to make a reasonable effort to notify the offeror that
he has performed, or (2) if the offeror does not otherwise learn of the
offeree’s performance, or (3) if notice was not necessary because of an
express or implied dispensing of notice
- To satisfy the S/F there must be a writing, but that writing does not necessarily
have to be the acceptance/contract (Still, it usually is)
Rewards
- Rewards are usually unilateral offers, offering a promise for an act.
- Objective theory helps determine what the requested act is and the person(s) to
whom the offer has been made.
- Where a reward is offered by a private party, there can be no K unless the offeree is
aware of the existence of the offer (Glover v. Jewish War Veterans).
o Where the government offers a reward, the offeree is not required to have
been aware of the offer when the offeree accepted (Government wants to
encourage good citizenship. This goes beyond simple K law).
- Knowledge and voluntary acceptance are enough to accept a private reward offer.
o Intent to accept is required (acting w/ volition to do accept). Motive is
largely irrelevant (ultimate objective).
The effect of part performance:
Unilateral offers
- Some unilateral offers cannot be accepted instantaneously. The act of acceptance
may take time.
- R2d Section 45- where there is a unilateral offer and the offeree begins
performance, an option at law is created (Taylor v. Multnomah County). A legally
binding K is not yet created, but the offeree has a reasonable time to accept by
performance.
o If the offeree stops performance, the option at law disappears and the
offeror may then revoke the offer. But the K is not formed until the offeree
completes performance.
- Option in fact- actual consideration is exchanged
- Option at law- a legal fiction (“at law” = the courts consider it to be like…)
- There is a difference between a beginning performance and preparation for
performance.
o The offeree must act in response to the offeror’s offer. (Ragosta v. Wilderthe offeror did not begin performance because they sought financing before
receiving the offer)
Bilateral offers
- Under ordinary circumstances an offeree of a bilateral offer may accept by a return
promise or by performance of the act sought.
- Where a bilateral offeree begins performance of the act sought and then the offeror
tries to revoke:
o R2d Section 62- The tender or beginning of the invited performance is an
acceptance by performance. Such an acceptance operates as a promise to
render complete performance.
- Hypo: I promise to pay you $50 if you promise to walk the Brooklyn Bridge. You
start to walk the Brooklyn Bridge (responding to a bilateral offer by part
performance).
o Under R2d Section 62, there is a K.
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Bilateral offer- offeree can accept by either a promise or an act.
Unilateral offer- offeree can only accept by an act.
o Hypo: Offeror requests an act. A promise to act is not an acceptance.
Chapter 4 – Bargained-For Consideration
Consideration defined
- Consideration is a necessary, independent element for a K to be found and enforced
by a court.
- The presence of consideration distinguishes enforceable agreements from nonbinding transactions, such as gifts.
- Some experts regard consideration as evidence or assurance of contractual intent.
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Consideration is (1) something of legally recognized value (2) which the parties
have intentionally exchanged through their bargain.
Something of legal value
- Something of legal value- may be either: (a) a benefit to promisor or (b) a
detriment to promisee
o Berendt promises to sell you his book for $50.
 There is consideration that supports both promises: benefit to
promisor and detriment to promisee
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Identification of consideration- based on application of objective theory.
Intangibles may serve as consideration (i.e., refraining/forbearing from doing
something that one is otherwise legally free to do)
Subjective feelings, incapable of valuation (i.e., “love”) generally cannot serve as
consideration.
Bargained-for exchange
- Bargained-for exchange- the intentional exchange of this for that
- Intent to exchange (meaning to do so) is the key.
o Motive (purpose/ultimate objective) is largely irrelevant.
- R2d Section 71(2) – A performance or return promise is bargained for if it is sought
by the promisor in exchange for his promise and is given by the promisee in
exchange for that promise.
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Hypo: Nephew promises uncle to refrain from drinking, using tobacco, searing,
playing cards for money until he turns 21 in exchange for $5000.
o There is consideration here; Nephew abandoned what he had a legal right to
do (nephew suffered detriment); not required to show benefit to uncle
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Neither benefit to promisor nor detriment to promisee need be actual.
o Detriment (as used in testing the sufficiency of consideration) - means legal
detriment as opposed to detriment in fact.
 It means giving up something which immediately prior thereto the
promisee was privileged to retain, or doing or refraining from doing
something which he was then privileged not to do, or not to refrain
from doing.
o Benefit- means the receiving as the exchange for his promise of some
performance or forbearance which the promisor was not previously entitled
to receive.
 That the promisor desired it for his own advantage and had no
previous right to it is enough to show that it was beneficial.
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Browning v. Johnson- Browning sells his business to Johnson, but then changes his
mind and offers Johnson $40,000 to rescind the K, and Johnson accepts. Then
Browning changes his mind again and sues Johnson to get his $40,000 back,
claiming Johnson provided no consideration for the rescission.
o Johnson provided consideration to support Browning’s promise to pay
Johnson $40,000 to rescind the sale of the business.
o Benefit to promisor Browning- Johnson released Browning of his obligation
to sell the business (and Browning sought the exchange)
o Detriment to promisee Johnson- Johnson gave up the business he had
bought
“Sufficiency” vs. “adequacy” of consideration
- Sufficiency- Is there something that the law will recognize as having any legal
value at all?
- Adequacy- Is it worth it?
o Unlike sufficiency, adequacy suggests a comparative valuation of the
consideration exchanged.
o Adequacy of consideration must be determined at the time of the bargain;
not based on hindsight
o Courts do not usually inquire into adequacy (adequacy is not relevant)
because as a general proposition we have a free market where the parties
themselves determine value.
o Ordinarily, inadequacy of consideration is not a defense to K enforcement.
But there are important exceptions:
 Adequacy of consideration is relevant when P seeks extraordinary
relief in the form of equitable remedies, such as injunctive relief,
declaratory judgment, or specific performance. (Ohio Players case)
 Inadequate consideration or grossly disproportionate consideration
may be evidence relevant to establishing a defense to K enforcement
other than pure lack of consideration.
 Defenses where inadequacy may be relevant to establishing
the defense- duress, fraud, mental incapacity
 The consideration is so grossly inadequate as to shock the
conscience of the court (relatively rare; unconscionability)
Past consideration and moral obligation
- Courts hold that “past consideration is no consideration”
- A moral obligation ordinarily fails to provide consideration; subjective and cannot
be valuated objectively
- Past consideration is not bargained-for; can also be argued that past consideration is
not of any legal value
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Examples:
o A couple nurses a sick sailor back to health, and sailor’s parents then
promise to pay couple for services rendered.
 No consideration. Services rendered were not the product of a
bargained-for exchange; they were conferred gratuitously.
o Woman chases D w/ hatchet, and D flees to P’s house, where P takes a blow
to hand and saves D’s life. D then promises to pay P for saving his life, but
does not end up paying.
 No consideration; no bargained-for exchange; gratuitous
o Employee puts in 30 years at employer’s workplace, and employer promises
to pay employee a nice pension when she decides to retire. Employee
retires and a year later, employer stops paying, and asserts no K because no
consideration.
 Past consideration is no consideration; no enforceable K here; P fails
under a K theory
 Courts holds P can recover under promissory estoppel; P retired
from a lucrative position in reliance upon employer’s promise to pay
her the pension
o A promise to pay for past services rendered is not consideration to support a
K (Dementas v. Estate of Tallas- Tallas had a moral obligation to
Dementas, but no consideration)
Pre-existing duties
- Pre-existing duty rule- A promise to do what one is already legally obligated to do
cannot serve as consideration for the other party’s promise or act.
o Similarly, promising to refrain from doing what one is legally forbidden to
do cannot serve as consideration.
 Refraining from taking illegal drugs—something one is legally
prohibited from doing—cannot serve as consideration under preexisting duty rule.
- R2d Section 73- The performance of a legal duty owed to a promisor which is
neither doubtful nor the subject of honest dispute is not consideration; but a similar
performance is consideration if it differs from what was required by the duty in a
way which reflects more than a pretense of bargain.
- Pre-existing legal duty rule- designed to prevent the “hold-up game” (where a party
withholds a performance already owed in order to coerce additional payment,
commitments or agreements from the other party)
- Hypo: Berendt refuses to teach you the intricacies of consideration unless you each
pay him an additional %500. You pay him, but later sue him for restitution.
o You win. Berendt has merely given you what you were already legally
entitled to receive. You pay tuition, and Berendt is legally obligated to
teach the intricacies of consideration.
- Hypo: After you graduation, but before bar exam, Berendt offers to teach you
consideration again in return for $500. You accept, he gives a review, but later you
sue Berendt for restitution.
o You will not win this time. He was not legally obligated to give you a
review after you graduated.
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Several people seek to collect a reward for providing information or acting to assist
in the apprehension of bank robbers: bank employees who provided info to police,
state police who arrested the criminals in their jurisdiction, a deputy sheriff who
arrested a suspect while out of his jurisdiction.
o Bank employees and state police could not collect. They were already
legally obligated as employees to perform the acts (did nothing beyond
scope of employment)
o Deputy sheriff recovered the award because he was acting outside the scope
of his employment. He had no pre-existing duty as an employee to make
the arrest (outside of his territorial jurisdiction).
Kuder v. Shroeder- Court holds that under NC law wife had a pre-existing legal
duty to do what she did (support husband), and therefore wife did not provide valid
consideration for a K.
o Dissent- The type of support wife provided was outside the scope of the
marital duty of support under NC law, so there was valid consideration (but
uncertain terms for a K; would allow unjust enrichment claim)
Disputed claims, settlements and modifications
- Courts may deny enforcement to settlements that have been coerced in bad faith
disputes (i.e., threats to sue public figures or celebrities based on baseless
accusations)
- Courts have employed the pre-existing duty rule to deny enforcement to
modifications of existing K’s where one party has extracted the modification in bad
faith by refusing to perform under the original K.
o I.e., athletes who refuse to perform unless they get a new K; pre-existing
duty rule thwarts “hold-up game”
- The modern trend is no longer to focus on the validity of the claim. Instead, courts
now enforce settlement of a doubtful claim, or even an invalid claim, if the claim
was made in good faith.
- R2d Section 74- Forbearance to assert or surrender a claim or defense which proves
to be invalid is not consideration unless…the forbearing or surrendering party
believes that the claim or defense may fairly determined to be valid (good faith).
o The relevant point in time is “at the time the K was executed”
o The surrender of, or forbearance to assert, an invalid claim by one who has
not an honest and reasonable belief in its possible validity, is not sufficient
consideration for a K.
- A good faith forbearance to litigate a claim, which proves to be invalid, is sufficient
consideration to uphold a settlement K
o Dyer v. National By-Products- employer argued that employee had a preexisting duty not to sue employer for personal injury; because his sole
remedy was WC; employee forbore in good faith
- Withholding an amount admittedly owed, on condition that payment of that amount
settles a separate disputed claim, violates the pre-existing legal duty rule.
o The resulting settlement is unenforceable and cannot serve as a defense to a
suit to collect the disputed amount.
- Where a sum due is unliquidated (not cleared or paid off) or disputed and a
remittance of an amount less than that claimed is sent to the creditor w/ a statement
explaining that it is in full satisfaction of the claim, the acceptance of such a
remittance by the creditor constitutes an accord and satisfaction.
o This rule is not applicable where a portion of the alleged debt in excess of
the amount paid is acknowledged and not in dispute (no consideration
would have been given).
Modifications
- Like a rescission, a modification of an existing K is itself a K, ordinarily subject to
the requirement of consideration.
- Modifications must be entered into willingly by the parties; must be uncoerced
o Pre-existing duty rule is invoked to prevent the hold-up game (i.e., Berendt
refuses to teach you consideration unless you pay him more)
- Employment at will- employer is free to terminate employee for any reason at any
time, and employee is free to quit for any reason at any time.
o Common law rule- employment is at will absent express provisions to the
contrary
o What makes a K employment at will is the lack of duration terms in the K
o If employer provides employee w/ a manual, handbook or set of policies w/
procedural or substantive commitments, the relationship may not be at will,
but instead may be an employment K incorporating the manual’s terms.
- Modification must be the product of bilateral negotiation which leads to a
bargained-for exchange, and must be voluntarily entered into.
o Therefore an employer may not unilaterally modify an existing employment
K, withdrawing commitments made in an employment manual and
converting the employment relationship to employment at will. (Doyle v.
Holy Cross Hospital)
- R2d Section 89- To be enforceable w/o additional consideration, a modification
must be: (1) voluntarily entered into; (2) made before the K was fully performed by
either party; (3) prompted by unanticipated circumstances; and (4) the modified
terms must be fair and equitable.
Illusory promises
- At traditional common law, illusory promises are said to provide no consideration
and are unenforceable.
o But modern courts strive to vindicate parties’ intentions, and have
developed devices for circumventing the illusory promise doctrine.
- Illusory promise- although it may resemble a true promise, an illusory promise is
empty of commitment, usually because a party reserves the discretion not to
perform at all.
o Ex.- Berendt says, “I promise to teach you the law of consideration
tomorrow, if I feel like it.”
- Conditioning a promise on willingness to perform renders the promise illusory. But
conditioning a promise on ability to perform does not render the promise illusory.
o Ex.- “I promise to teach you the law of consideration tomorrow unless a
blizzard prevents me from coming in.”
 Relates to ability; circumstance that is outside of his control; nonillusory promise
-
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Office Pavilion South Florida v. ASAL Products- Pavilion agreed to fill orders as
made to them by ASAL, but ASAL did not promise to buy a single chair. ASAL
did not commit to buy any chairs; illusory promise.
Wood v. Lucy, Lady Duff-Gordon
o Wood promises to share profits w/ Lucy from sales of any items he sold w/
her name on them. But wood did not expressly promise to sell x amount of
anything.
o Strict application of illusory promise doctrine- this would be an illusory
promise
o Cardozo finds an implied commitment to use reasonable or best efforts
 Cited in Ohio Players case- implied that the parties made mutual
promises to engage in best efforts
o “The whole writing may be instinct w/ an obligation, imperfectly
expressed”
Requirements K- x promises to buy all the widgets x needs from y manufacturing
company (x relinquishes the right to buy widgets form any manufacturers other
than y manufacturing company)
Output K- buyer agrees to buy all of the outputs of a seller
At traditional common law- requirements K’s and output K’s were considered
illusory. Buyer may need nothing, or seller may manufacture nothing.
o Modern courts have devised ways to circumvent the illusory promise
doctrine, enforcing requirements K’s if a party agrees to buy all its needs
from the seller. (facilitating transactions & vindicating parties’ intentions)
 By promising to buy all its needs from seller, buyer has implicitly
made a commitment to refrain from buying from others.
Laclede Gas Co. v. Amoco Oil Co.
o Did Laclede’s right of cancellation render all its other promises in the
agreement illusory so that there was no consideration?
 No. A cancellation clause will invalidate a K only if its exercise is
unrestricted.
 Laclede’s right of cancellation was limited: it could not cancel until
1 year after the first deliver of propane by Amoco; any cancellation
could be effective only on the anniversary date of the agreement,
and Laclede had to give Amoco 30 days written notice of
termination.
-
Multiple and alternative promises: (A & B are non-illusory promises; o is an
illusory promise)
o A + B = consideration; A + o = consideration; o + B = consideration; o + o
= no consideration; A or B = consideration; A or o = no consideration; o or
B = no consideration; o or o = no consideration
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Principles of construction from R2d Sections 202 & 203:
o Where an agreement is subject to 2 constructions, one rendering it invalid,
the other sustaining validity, choose the valid interpretation.
o Provisions in an agreement should be interpreted together, not in isolation,
when determining the parties’ intentions.
o You construe an ambiguous provision against the party who created the
ambiguity.
Chapter 5 – Reasonable Certainty of Contract Terms
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Courts require reasonably certain terms:
o To determine the parties’ intentions as to whether they wish to contract at
all
o To discern whether the parties’ negotiations have culminated in mutual
assent or agreement as to the material terms of the bargain
o To identify the parties’ terms in order to:
 Determine whether there has been a breach, and if so
 Fashion a remedy that is appropriate
Uncertain terms may indicate lack of contractual intent, lack of agreement, absence
of consideration, may prevent a determination that a breach has occurred, and may
prevent formulation of a remedy even in the event of a breach
Missing terms
- Omitted terms that would ordinarily be significant to a reasonable person may
suggest:
o Parties are still engaged in preliminary negotiations and do not intent to be
bound yet; or
o Parties assume that customary terms are part of the deal; or
o Parties regard the omitted terms as unimportant to them
- Omitted/missing terms may not be fatal to the K (particularly under UCC’s gap
filler provisions)
o Courts are divided over whether, under what circumstances, and how they
should provide missing terms for parties (competing K law policies)
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There is a trend of courts to seek to vindicate the parties’ intentions instead of
letting strict application of legal rules render agreements unenforceable.
Courts are hesitant to enforce agreements w/ uncertain terms. But some courts will
seek to vindicate parties’ intentions where there is particularly strong evidence of
intent of the parties to contract.
Pyeate v. Pyeate- married couple orally agrees to support one another during each
one of their education; wife supports for years and then husband divorces; wife
sues for breach of K.
o Court holds parties had no K; terms were indefinite (no terms provided
regarding tuition, period of time, where wife could go to school, no way to
determine breach or remedy); parties had no contractual intent when they
agreed
o Court refuses to infer reasonable terms to try to vindicate parties’ intentions
(wife recovers under unjust enrichment)
Option for tenant to renew w/ rent to be negotiated:
o Deadwood- Unenforceable because option is indefinite, vague, uncertain
o Mamaroneck- Where the parties have manifested an intent to be bound, and
left a price term to be determined, the agreement may still be sufficiently
-
definite if the missing term (here, amount) may be determined objectively
w/o need for new expression from the parties:
 Agreement itself may provide a method for determining the amount;
or
 Agreement may make reference to an extrinsic event, condition, or
standard, or a commercial practice or trade usage to set the amount
o Moolenaar- renewal rent “shall be renegotiated” (no method or objective
standard is to be used to determine rent); but the court goes extremely far to
vindicate parties’ intentions (pretty rare case), and allows tenant to renew
 R2d Section 32- A K is valid if it is “so definite in its terms” that the
“performances to be rendered by each party are reasonably certain”
UCC Section 2-204- 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 giving an appropriate remedy
o Offer, acceptance, etc. can still be examined under UCC, but they are not
absolutely necessary.
o A K may be found in the bargain of the parties by their language or
implication from other circumstances (i.e., course dealings, usage of trade)
o Quantity term- Only a quantity term must be provided by the parties to
satisfy the requirement of definiteness under the UCC
Misunderstanding vs. mistake
- Characterization of the issue (as a misunderstanding or mistake) can be
determinative of whether there is a K at all, or if there is a K, on whose terms.
o Misunderstanding- usually will lead to a K on one of the parties’ terms (but
may still be no K)
o Mutual mistake- no K
o Unilateral mistake- can also be a misunderstanding
- Misunderstanding- i.e., 2 parties use the same term, but each attributes a different
meaning to that term (may be unilateral mistake- one party makes a mistake and
other does not)
o One party believes A. Other party believes B.
o Usually courts will employ the objective theory to resolve the
misunderstanding in favor of one of the parties’ understandings and against
the other party (R2d Section 20)
- Mistake (mutual) – both parties erroneously believe the same thing
o Both parties believe A, and both are in error.
o To characterize a fact pattern as a mutual mistake- both parties must share
same erroneous belief as to a basic assumption in their agreement:
 Can you sensibly fill in the blank?
 Both parties erroneously believe _____.
 If you can- mutual mistake; If you can’t- no mutual mistake
(probably a misunderstanding)
o Mutual mistake- no K. Even though it may be said there was a meeting of
the minds, the agreement was based on an erroneous assumption that was
material to the bargain.
-
o R2d Section 20 (I) – There is no manifestation of mutual assent to an
exchange if the parties attach materially different meanings to their
manifestations.
R2d Section 202- Unless a different intention is manifested, technical terms and
words of art are given their technical meaning when used in a transaction w/in their
technical field.
Section C - Alternative Theories for Recovery
Causes of action
- P’s generally prefer to sue in tort (if the facts support a tort cause of action):
punitive damages are generally available in tort but not in K.
- But many situations are not suitable for treatment in tort; and remedies available
through a K action (i.e., specific performance) may be preferable over tort
remedies.
- Hierarchy of causes of action w/in K law:
o Breach of traditional K, either express or implied in fact;
o Promissory estoppel; and
o Unjust enrichment (or quasi-contract; or K implied at law)
o (The courts’ preference for recovery in this order of causes of action may be
explained by purposes & policies of K law, especially “will theory”)
o (implied in fact- an actuality; implied at law- tends to be a fiction)
Chapter 6 - Avoidance of Unjust Enrichment
Quasi-Contract (unjust enrichment)
- Courts may find a quasi-contract (a) where there has been an attempt to contract, or
(b) where there has not been an attempt to contract
- Basis of a quasi-contract cause of action- society’s expectations (not the parties’
intentions)
- No assent is necessary for recovery. The K exists “at law,” not in fact (strictly
speaking- not an actual K)
- Remedies:
o Quasi-K is an equitable action- the remedies are fashioned according to
notions of fairness and justice
o Remedies are flexible
o Recovery is usually limited to- (a) the value to the D of the benefit
conferred, or (b) “quantum meruit” – the reasonable and customary cost for
the goods and services
 But remedy may even be restitution for the cost of out of pocket
expenses
Unjust enrichment vs. quantum meruit
- Some jurisdictions distinguish between the 2. Both causes of action are based on
equitable principles, but recovery differs.
- Unjust enrichment- P’s recovery is based on the value of the benefit unjustly
received by the D (awards P the value of the benefit that D received)
-
Quantum meruit- P may recover even where no actual benefit is conferred for the
reasonable value of the goods or services P rendered (awards P the value of the
services provided, even if D received no benefit)
o Cotham v. Wisdom- Quantum meruit recovery (in this case, the reasonable
and customary value of the medical services rendered); D actually received
no benefit. He died despite the surgery performed w/ due care.
5 elements necessary for a quasi-K cause of action (all 5 must be present)
- (1) D received a benefit for which society expects him to pay
- (2) D’s retention of the benefit w/o paying would be unjust
- (3) P provided a benefit for which P reasonably expected remuneration (payment)
- (4) The parties either had a direct relationship or the benefit was conferred by
mistake
- (5) No other cause of action is available to P
-
Apply the elements; There must be no other cause of action available to the P to
recover under a quasi-K theory.
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Mere volunteers- Courts decline to award recovery in unjust enrichment or
quantum meruit to mere volunteers or good Samaritans. (Which elements are
missing?)
o You are not obligated to pay Bob the bongo guy just because you enjoy his
music while waiting in line at the train station.
Chapter 7 – Promissory Estoppel
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Promissory estoppel arose as an alternative cause of action to traditional K, usually
where consideration was missing from a transaction
Doctrine of equitable estoppel preceded PE and was the model for PE
o Equitable estoppel- a party who misrepresents a fact is estopped or
prevented from asserting contrary facts in a judicial proceeding
o Courts began fully embracing PE around 1900
Promissory estoppel (PE) - where P reasonably relies on D’s promise, and it would
be unjust to deny some form of recovery for that detrimental reliance, P may
recover damages, usually corresponding to the extent of the reasonable detrimental
reliance (reasonable is key)
Because promisor should have expected promisee to rely on the promise, promisor
is said to be estopped (prevented) from asserting there was no consideration.
R2d Section 90:
- To make out a case for relief in promissory estoppel, P must establish 3 elements:
o (1) The promisor made a promise which he or she should have reasonably
expected would induce reliance (either an act or a forbearance) by the
promisee or another;
o (2) The promisee did in fact rely on the promise; and
o (3) Enforcement of the promise is needed to avoid an injustice.
Promissory estoppel remedies
- Traditionally, the remedy in PE has been limited to “out-of-pocket” expenses
directly incurred due to reasonable detrimental reliance.
- R2d Section 90 – The remedy granted for breach may be limited as justice requires.
- In recent years, some courts have opened the door to larger recoveries in PE,
approaching or matching recoveries under traditional K theories, such as damages
based on the expected benefit of the bargain.
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Ricketts v. Scothorn- Grandfather promises granddaughter money, telling her she
no longer has to work. She quits, grandfather dies, and estate refuses to pay.
o Proper case for PE; court awards her breach of K damages, but it should
have awarded her out-of-pocket expenses reasonably traceable to the
detrimental reliance
Hoffman v. Red Owl Stores- Hoffman recovers under PE theory for relying on a
promise to open up a new store
o The court allows Hoffman’s wife as a 3rd party to recover.
Ravelo v. County of Hawaii- County tells Ravelo he is hired as a police officer;
Ravelo and wife quit their jobs, and County decides not to hire Ravelo
o No traditional K (employee at will)
o Ravelo and wife (3rd party) recover under PE theory
Promissory estoppel in Illinois
- In IL, to establish a claim for PE recovery, P must prove:
o (1) D made an unambiguous promise to P;
o (2) P relied on such promise;
o (3) P’s reliance was expected and foreseeable by D, and;
o (4) P relied on the promise to P’s detriment
- In 2009, IL Supreme Ct confirmed that PE is available as an affirmative cause of
action for recovery and not limited to a defense.
o Concerning appropriate damages, it stated: “Damages may be appropriately
limited to restoring P to the position he was in prior to relying, to his
detriment, on the promise.”
Section D – Defenses to Contract Formation
Chapter 8 – Consent to Contract Impaired
Impairment of free will – incapacity (minor and mental infirmity), duress, undue influence,
fraud, mistake, unconscionability
Incapacity
- Effective expression of contractual intent and assent presumes that the parties
possess capacity to exercise free will or autonomy. An agreement reached by
someone who lacks capacity to exercise free will may be deemed voidable by the
courts.
- Incapacity includes: minority, mental infirmity, impairment or insanity, and in
limited situations- intoxication or effects of medication or drugs
Minority or Infancy
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Minors have the power to avoid K’s w/ adults. K’s between a minor and an adult
are voidable by the minor or the minor’s parent or guardian.
o Adults do not have the power to avoid K’s w/ minors.
Voidable- K is valid until someone w/ the authority exercises that power of
avoidance (void- void ab initio)
o As long as minor does not avoid the K, the K between adult and minor is
enforceable
Minor may exercise power of avoidance while still a minor or w/in a reasonable
time after reaching majority (18 yrs old in most jurisdictions).
o “Reasonable time” – question of fact
Minor may disaffirm or the minor’s parent or guardian may disaffirm on minor’s
behalf
Affirmance/ratification
- If minor does not disaffirm w/in a reasonable time after reaching majority, minor is
said to affirm or ratify the K
- Minor may also expressly affirm or ratify a K entered into during minority, but may
only do so after reaching majority.
o Express ratification while still a minor is ineffective to affirm the K entered
into during minority.
Exceptions to general rule affording minor power to avoid
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(1) Where the K is for “necessaries” or “necessities”
o Courts require minors to compensate adults who have contracted to provide
necessaries to the minor
o This exception is often characterized as avoidance of unjust enrichment or
as in the nature of a quasi-K to yield a quantum meruit set off
o Recovery for the conferral of necessaries is generally limited to the
reasonable charge for the goods or services conferred on the minor
(quantum meruit)
o For goods or services provided to minor to be subject to the exception for
necessaries, 3 elements must be present:
 (1) The goods or services must be of such a nature that they are
important or required for the maintenance of the minor;
 (2) Minor must have an actual need for the goods or services that is
urgent or at least immediate; and
 (3) Minor must rely upon his/her own credit
 E.g., minor is emancipated (free from parents) or parents are
destitute (very poor)
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(2) Where a statute provides otherwise
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(3) Some jurisdictions- Where minor has misrepresented their age in order to enter
into the transaction, minor is prevented from asserting minority (equitable estoppel)
o Other jurisdictions- Lying minor may still avoid, but adult may recover in
tort for damages due to minor’s false assertion of a majority
Restitution
- Under ordinary circumstances, when minor avoids a K w/ adult, minor must
perform restitution to the extent such restitution is possible, returning whatever is
left of the consideration that had been provided by the other party
- Dissipation- Minor has no obligation to restore consideration to adult if the
consideration has been dissipated (naturally used up or otherwise gone through no
fault of minor)
o Keser v. Chagnon- minor had no obligation to give back certificate of title
on the car; third party had the certificate
o Exception- If minor has dissipated the consideration by a malicious act,
such as intentionally destroying a motorcycle purchased from an adult.
Mental Infirmity
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K’s entered into by those who are mentally incompetent are voidable by the
incompetent’s guardian or by the individual himself, if and when the individual
reacquires competence.
Avoidance must be exercised w/in a reasonable time.
Same rules regarding restitution, dissipation, and necessaries apply as for minors.
Definition of incompetence has been controversial and inconsistent; R2d Section 15
offers 2 alternative tests for incompetence:
o Cognitive test- A person or guardian may avoid on behalf of a party who by
reason of mental defect or illness does not understand the nature of the
transaction, even if the other party did not know or have reason to know of
the incompetent’s condition
 Inconsistent w/ objective theory, but a long-standing test that
nobody has a problem w/
o Reasonable manner test- A person or guardian may avoid where due to
mental illness or defect the contracting party was unable to act in a
reasonable manner in relation to the transaction, and the other party knew
or had reason to know of the condition
 Consistent w/ objective theory (to avoid, the other party must know
or have reason to know the condition of the person), but people have
a problem w/ it
 Ortelere v. Teacher’s Retirement Board- court applies reasonable
manner test: (1) she may have understood what she was doing, but
she couldn’t control herself; couldn’t act in a reasonable manner
(expert testimony) (2) the other party had reason to know of her
mental incompetence (questionable)
o The courts have made clear that eccentricity is not insanity (Old Mason
Lee’s will)
Intoxication
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A party seeking to avoid for intoxication must satisfy 1 of the 2 mental
incompetency tests (does not understand the nature of the transaction, or is unable
to act in a reasonable manner), and the other party must know or have reason to
know of his condition
Person under the influence of prescription drugs- treated as a person w/ a mental
incapacity
Duress
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A party may avoid for duress where the other party has deprived the victim of the
exercise of free will: (R2d Section 176)
o (1) Through a wrongful, coercive act (a bad faith act that need not be
illegal);
o (2) The act leaves the victim no alternative but to agree to the other party’s
terms; and
o (3) The coercive circumstances were caused by the other party.
What is “a wrongful act”?
- Mere vexation (i.e., annoyance) and threats of embarrassment- generally not duress
o But a threat to embarrass made in bad faith, unrelated to the matter or
transaction settled, may be duress
- Threatening to file an unfounded suit- duress
- Withholding consideration admittedly owed- duress (hold-up game)
o Athlete already under K threatens not to play to get a raise (pg 206) – duress
o (Often duress goes hand-in-hand w/ consideration & pre-existing duty rule
Undue Influence
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Undue influence is a relatively modern defense that courts would prefer not to use
unless more traditional defenses are unavailable and justice can only be served by
employing this doctrine
If you’re the D, you don’t start your list of defenses w/ undue influence (or
unconscionability, which bears a strong resemblance to undue influence). They are
disfavored (and somewhat subjective)
Typically, undue influence resembles but falls short of duress, because the
circumstances were not caused by the other party. Instead, the other party takes
unfair advantage of victim’s circumstances.
Undue influence- An agreement is voidable by one who entered into the agreement
due to persuasion which tends to be coercive in nature, overcoming the will w/o
convincing the judgment.
o Typical elements- high pressure, mental, moral, or emotional weakness in
victim, misrepresentations of law or fact, confidential or dependent
relationship in which victim is at an inherent disadvantage, grossly unfair
terms or inadequate consideration (not adequate to invalidate a K, but may
be evidence of undue influence)
Misrepresentation and Fraud
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In addition to being a cause of action in tort, fraud is available as a defense to K
enforcement or as grounds to avoid K’s and obtain restitution.
o Tortious fraud includes element of “scienter” (knowledge of the falsity and
intention to deceive) and if made out, victim may recover in tort or may
elect to avoid and claim restitution.
Where misrepresentation is alleged, victim may avoid the K but has not made out a
claim in tort.
o Misrepresentation (“constructive fraud” or “innocent fraud) - same elements
as fraud but w/o scienter
Elements of misrepresentation
- (1) An assertion not in accordance w/ present or past facts at the time the assertion
was made (but usually not future events)
- (2) Misstatement must be material: It induced or contributed to victim’s decision to
agree (sort of a “but for” test)
o If misstatement is intentional, then misstatement need not be material.
- (3) Victim actually relied on the misstatement.
- (4) Victim’s reliance was justified or reasonable.
- (5) Victim’s reliance on the misstatement was to his detriment.
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To avoid enforcement of a K due to misrepresentation, victim generally need not
prove intent to defraud (innocent misrepresentation or constructive fraud is enough
to avoid)
Statements of opinion- generally not misrepresentations
Failure to disclose important facts by one party may be a misrepresentation, where
that party knows the other party is in no position to know or discover the facts
which would be material to him
Fraud generally involves an intentionally false statement
Mistake
Mutual mistake
- Mutual mistake- where both parties share the same erroneous belief as to a basic
assumption of the bargain, they may have a meeting of the minds, but it is not
meaningful. (R2d Section 152)
o Either party may avoid the transaction
- Misunderstanding- each party has a different understanding of the same thing (i.e.,
1 party believes “cows” includes heifers and the other party does not)
o Though there may be no meeting of the minds and no K due to a
misunderstanding, it is more likely that 1 of the 2 conflicting views will
prevail.
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When determining whether a situation presents mutual mistake, unilateral mistake
or a misunderstanding, characterization of the facts is the key.
Start w/ Berendt’s test for identifying a mutual mistake: Can you fill in the blank
w/a reasonable description of the facts?
o Both parties shared the same erroneous belief that_____.
o If you can’t fill the blank in reasonably, then it’s likely you have a
misunderstanding. And misunderstandings are frequently unilateral
mistakes.
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Mutual mistake (R2d Section 152)
o (1) Both parties had the same erroneous belief at the time the bargain was
made.
o (2) The mistake was as to a basic assumption of the bargain.
o (3) The mistake had a material effect on the exchange.
o (4) The party seeking to avoid did not assume the risk inherent in the
bargain.
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Mistake as to essence rather than value
o At traditional common law, an erroneous belief as to the value of
consideration was not a legal mistake at all. Courts required an error as to
the essence of consideration (substance of the consideration itself) for
avoidance due to mistake.
 Sherwood v. Walker- court permitted avoidance by seller based on
mutual mistake as to essence of the consideration. Mutual mistake
was that both parties erroneously believed they were transacting a
barren cow: the essence of the cow, not the value, was the mistake
o Michigan Supreme Ct purportedly abandoned the distinction between
essence and value (concepts so similar as to be inseparable)
 But later the court goes back to keeping the distinction
Unilateral mistake
- At traditional common law, party could avoid a K due to mutual mistake, but not
due to unilateral mistake.
o Courts remain reluctant to allow avoidance for unilateral mistake.
o The modern trend, though, is to permit avoidance for unilateral mistake as
well, but only under limited circumstances.
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Unilateral mistake (R2d Section 153)
o (1) One party makes a mistake (could also be a misunderstanding)
o (2) As to a basic assumption of the bargain
o (3) Material to the exchange
o (4) The party seeking to avoid does not bear the risk
o (5) Enforcement of the K would be unconscionable, or the other party had
reason to know of the mistake or caused the mistake
 (Element 5 suggests that facts could be characterized to avoid under
unconscionability, misunderstanding, constructive fraud, etc.)
o Also- the effect of restoring the status quo ante (where the parties were prior
to agreement); i.e., whether it irreparably damage one of the parties
Unconscionability
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Unconscionability is the newest K defense (mid 20th c.), and the defense that courts
are least likely to use; a last resort defense to K enforcement
Unconscionability- Agreements that shock the conscience of the court are
avoidable.
o Courts usually state that a K cannot be avoided under unconscionability
unless no other traditional defense is available and these 2 major defects are
present: procedural unfairness and substantive unfairness
o Some jurisdictions limit unconscionability to a defense against enforcement,
not a ground for recovery
Some elements of unconscionability (Berendt’s list)
o (1) Extreme disparity in bargaining power or ratio
o (2) No real bargaining: take it or leave it bargaining
o (3) Standardized form and/or fine print (K of adhesion)
o (4) Unfair surprise
o (5) Victim was in a weakened, vulnerable condition
o (6) Other party took unfair advantage of weakened victim
o (7) Victim was w/o legal or other advice
o (8) Victim was uneducated, poor, or in disadvantaged state
o (9) Public policy is better served by denying enforcement
o (10) Terms are inherently unfair or oppressive
o (11) Grossly inadequate consideration that is “shocking to the conscience of
the court”
Chapter 9 – Impact of External Law: Illegality and Public Policy
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Mainly agreements that the parties intended to be K’s (external defenses)
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General rule- Illegal bargains are void. Courts leave the parties where they find
them.
o Policy- the benefit of the legal process should be withheld from those who
knowingly and willingly enter into an illegal bargain (The law will not aid
once w/ unclean hands)
Hypo: You pay Berendt money to commit a crime. Berendt takes the money but
doesn’t do it (breaches). You sue Berendt for specific performance or restitution.
o You will not be able to recover specific performance or restitution.
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Exceptions to illegality
- (1) Where a party is “not in pari delicto” (not equally at fault)
- (2) Where a party performs locus poenitentiae (withdraws from the illegal
transaction before serious wrongdoing or harm occurs and willingly cooperates w/
authorities)
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(3) Where enforcement would better serve public policy than denying enforcement
(usually identified in a statute)
Private cohabitation agreements
- Meretricious relationship- based on sexual favors
o Generally against public policy; consideration is “immoral” (prostitution)
- Whether agreements between consenting adults, to cohabit and provide mutual
support w/o the formality of marriage are meretricious, illegal, and unenforceable
o IL Hewitt case (1970’s) – illegal
o WI Watts case- legal
 Private cohabitation agreements (and quasi-K’s) are enforceable
because such agreements involve more than the sale of sexual favors
and no longer offend evolving social norms.
 Denying enforcement might actually encourage the party w/ greater
income to make promises knowing he could avoid the consequences
of revoking.
Restrictive employment covenants
- Restrictive employment covenants- generally disfavored as restraints against trade,
but courts will enforce them if they are drafted to protect legitimate “protectable”
interests.
o Courts generally enforce restrictions that are reasonable w/ respect to time,
area, and activity.
o Courts are more likely to enforce in-term employment restrictions than
post-term restrictions.
- In most states, courts will enforce post-term covenants not to compete if
o (1) Interest is a protectable one (thrown into doubt in IL)
o (2) Covenant is ancillary (supplementary) to a valid K or relationship
o (3) Covenant is supported by adequate consideration
o (4) Restraint is reasonable as to area, time, and scope of activity
o (5) Enforcing the restraint will not do damage to the public
o (6) Enforcing the restraint will not cause undue hardship to the former
employee
- Remedies for breach of covenants not to compete
o Former employer usually seeks to enforce the restrictive covenant by
obtaining equitable, injunctive relief as well as damages for breach.
o Reformation (the “blue pencil” rule):
 Some courts will strike the offensive portion of the covenant or
rewrite it, and enforce the reformed covenant.
 Courts differ; IL- will reform the covenant if employer did not
intentionally overreach
Chapter 10 – Statute of Frauds
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Writings not required at common law: At common law, oral agreements are
enforceable, unless the parties themselves require a writing in order to contract.
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Evidentiary value of a writing: At common law, presence or absence of a written
agreement may be relevant to the issue of whether the parties have contractual
intent.
o E.g., a writing may be evidence of contractual intent to overcome the family
presumption (Morrow v. Morrow)
1676- British Parliament passes the first S/F, requiring that certain agreements be
written to be enforceable
Purposes of the S/F:
o Preventing fraud
o Evidentiary purpose (faulty memory)
o Cautionary purpose (provides an opportunity for the contracting parties to
reflect and consider the importance of their commitment)
What the S/F requires
- According to the S/F, to be enforceable
o (1) Certain types of agreements must be in writing;
o (2) The writing must set forth the material terms of the agreement; and
o (3) The writing must be signed by the party to be charged w/ the K.
- Even if alleged agreement falls w/in the S/F and there is no satisfactory writing,
agreement may still be enforceable under one or more of several exceptions.
Approaching the issue of the S/F (i.e., on exams)
- When faced w/ a fact pattern, first note whether the agreement is oral or written. If
there is a writing, there is probably no S/F issue, unless the written agreement falls
short of the content or signature requirements. But S/F may be an issue if the
agreement is oral.
- Ask 3 questions:
o (1) Is the agreement one of those that falls w/in the S/F?
o (2) If so, is there a writing that satisfies the S/F’s content requirements
(Does it contain the material terms of the parties’ agreement and required
signature(s)?)
o (3) If not, do one or more of the exceptions apply?
- Do not overlook the possibility of the S/F on an exam (think about it for every
question; if there’s an “oral” agreement- you should address the S/F)
Agreements that fall w/in the S/F
- (1) Sale of goods for $500 or more
- (2) Sale of any interest in real estate (including restrictive covenants on the use of
land)
- (3) Agreements not capable of performance w/in 1 year of the time of agreement
(I.e., leases of more than 1 yr; leases of less than 1 yr need not be in writing)
o If agreement is capable of being performed w/in 1 yr, then it need not be in
writing (even if it turns out not to be performed w/in 1 yr)
- (4) Surety agreements (I.e., debtor promises creditor to make good on principal’s
obligation to creditor)
- (5) Agreements in contemplation of marriage and other less significant agreements
(I.e., pre-nuptial agreements)
Modern trend away from strict adherence to S/F
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Courts seek to vindicate parties’ intentions where identifiable and facilitate
transactions (strict adherence to S/F can impede these objectives)
Recent history of judicial treatment has been to minimize wherever possible the
impact of the S/F by
o Construing the S/F’s coverage narrowly;
o Moving away from the formerly strict requirements concerning a writing’s
contents; and
o Broadening the exceptions
Hypo: Berendt hires you as a research assistant for 1 year, to start January 1
o Writing is required- not capable of performance w/in 1 year
o Death does not mark completed performance (doesn’t matter that you may
die w/in 1 year); for a K for a duration of time (not a lifetime employment
K)
Lifetime employment:
o Majority position (and R2d)- falls outside scope of S/F; oral agreements for
lifetime employment enforceable
 Definition of lifetime employment is employment until death; death
marks the end of performance, and it is possible that employee could
die w/in 1 yr
o Minority position (only IL)- falls w/in S/F; oral agreements for lifetime
employment unenforceable
 Promise of lifetime employment is a promise of permanent
employment, a promise anticipating a relationship longer than 1 yr
Exceptions to S/F
- Full performance, by the party claiming the benefit of the oral agreement
- Partial performance, where it is not otherwise possible or practical to restore the
status quo or compensate claimant for the value of his performance
- Equitable estoppel
- Promissory estoppel (not available as an exception to S/F in IL)
Compliance w/ S/F
- If the agreement falls w/in the S/F, the writing must contain:
o All the material terms
o Reasonable certainty of terms
o The signature of the party to be charged w/ the K
o More than one writing may be used to satisfy the writing requirement, if
they are integrated in some fashion.
o Writings not intended to be the K itself may satisfy the S/F (i.e., employer’s
letter welcoming a newly hired employee)
o If writing is lost or destroyed:
 R2d- If you have a witness that saw the writing, then it exists, even
if it’s been destroyed.