IS THERE A VALID K?
MUTUAL ASSENT
For a K to form, the parties must meet an agreement to which they mutually
assent. They must agree to the same major terms at the same time (can be
manifested by word, deed, or a combination of both)
OBJECTIVE THEORY – external manifestation of words and actions
1. There is no K if parties attach different meanings AND they do not know
or have reason to know of the other party’s meaning
2. Based on what at reasonable person in that position would think (realist
perspective)
3. Sufficient manifestation of assent whenever:
a. a party uses an expression that he knows, or has reason to know, the
other party would reasonable interpret as an offer or acceptance AND
b. the other party does so interpret it
c. Lucy v. Zehmer: A person cannot say that they were joking when his
conduct and words would lead a reasonable person to believe that it
was a real agreement.
i. R2D 20 – Misunderstanding: When A & B have diff meanings
1. There is no K if neither knew or had reason to know of
the other’s meaning or if both parties know or has reason
to know the other’s meaning
2. There is a K if A does not know or has reason to know B’s
meaning but does know or has reason to know A’s.
4. Evidence of reasonable belief w/o true knowledge – how do you get assent?
a. look to: price, bargaining, revisions of K, reliance, contradictory
statements, past agreements (oral & written)
b. Look to the K itself – if it seems patently unreasonable then there
was probably not a reasonable belief that the K was serious
EXPRESSED v. IMPLIED K’S
1. Express Contracts – when offer and acceptance are manifested by oral or
written words
2. Implied Contracts – mutual assent is manifested by conduct (implied-infact contract)
OFFER
Manifestation of a party’s willingness to enter into bargain, which confers on
the other party the power to create a contract ** R2D 24
TYPES OF OFFERS
1. Unilateral – invites acceptance by performance
2. Bilateral – invites acceptance by promise
REQUIREMENTS OF AN OFFER
1. Manifestation of Intent: objective display of willingness to enter into K
by promise action or commitment; how reasonable person would view
external manifestations (secret intentions are irrelevant)
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i. Embrey v. Hagardine:
2. Definiteness R2D 33:
c. Must be reasonable to define breach and remedy
i. Toys v. F.M. Burlington Co.:
d. Terms must be definite: subject matter, price, quantity
i. price quotes are not offers
e. Still an offer if terms are lacking BUT
i. expression otherwise evidences a bargain AND
ii. the omission does not indicate a lack of such intent AND
iii. ct can fill in the omitted term by implication
3. Communication to an Identified Offeree:
f. Must indicate a specific person AND offer must be known to offeree
VALIDITY OF CERTAIN OFFERS
1. Jest 2.
3.
4.
5.
6.
if an offeree knows or have reason to know an offer was made in
jest, then offer not valid
a. Lucy v. Zehmer
Opinions – offer must contain promise or commitment, not an opinion
Rewards – Unilateral offers
a. Acceptance occurs on full performance – formalistic interpretation
of the rule
b. Must act w/ knowledge of the reward
c. Legal duty rule: cannot be compensate for something that someone has
a legal duty to do
Negotiation and Solicitation of Bids –
a. Look at it from the standpoint of a reasonable person in offeror’s
shoes
b. Owen v. Tunison
i. Facts: Π sued Δ for breach of k for sale of property. Π offered
$6k, Δ said min. $16k. Π accepted.
ii. Rule: A statement specifying the min. price for sale does not
constitute offer.
c. Statement of future intention is not an offer
i. “I am going to sell my car for $500” – NOT AN OFFER
Price Quotations –
a. Quantity clearly stated?
b. Addressed to a particular person or is it part of a general list?
c. Quote or offer?
d. Does it reserve the right for the proposer to close the deal?
e. If it is close call whether offer is present, the court will usually
find that there was NO OFFER
f. Fairmont v. Crunden-Martin:
i. Facts: Π asked for min. price from Δ for jars. Δ relied on
terms for immediate acceptance & shipment.
ii. Rule: A price quote for immediate acceptance constitutes an
offer to sell.
Advertisements – Most are not offers to sell b/c they don’t contain
sufficient words of commitment to sell
a. Exception:
i. Specific terms or promise
ii. specific number of units or particular manner
iii. Lefkowitz v. Great Minneapolis Surplus Store
1. Facts: Δ advertised fur stole for $1, first come first
serve. Did not specify women only Δ (male) sued.
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2. Rule: If the ad is “clear, definite and explicit, and
leaves nothing for negotiation, it is binding.
7. Mistaken Construction Bids - relief is granted when one party knows or
has reason to know of the other’s error and the requirements of
rescission have been met
a. Mistake is material to contract
b. Not a result of neglect to legal duty
c. If other party can be placed in the status quo
i. notice is promptly given
d. Elsinore Elementary v. Kastoroff:
i. Facts: Π suing Δ for retracting bid after realizing he made a
mistake in calculating.
ii. Rule: if mistake is known prior to acceptance, the bid can be
retracted.
RECAP
What Constitutes an OFFER and what DOES NOT:
Yes:
No:
Manifesting willingness to bargain
Outward Acts or words in jest w/o
intent to create a legal relationship
Convey power to conclude the bargain
Opening a negotiation (Owen)
Limit in quantity
Announcing intent to sell
Limit or name buyer
Opening an auction, inviting bids
“First come, first served” (Lefkowitz)
Price Quote
Most Ads (general rule)
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TERMINATION OF OFFER
LAPSE OF TIME
1. If not accepted by a specified date
2. Expiration after a reasonable time
REVOCATION
1. Words or conduct of offer terminating the offer
2. Risk of reliance falls on offeree
3. Classical Rule: anytime prior to acceptance
a. EXCEPTION: can’t revoke under option K w/ consideration
b. Indirect Revocation is OK if other party has reason to know about it
i. Dickinson v. Dodds:
IRREVOCABLE OFFERS
1. Firm Offers (Option K for merchants or for sale of goods) UCC 2-205
a. Applies to merchants only
b. Must be in writing and giving explicit assurance that offer will be
held open
c. w/in reasonable time but , <3 mos. Unless specified
d. Irrevocable even though no consideration
2. Precontractual (detrimental) reliance
a. Unilateral K – R2D 45
i. Beginning of a performance creates an option K and offer
becomes irrevocable; conditional on offeree completing the
performance as specified in the offer.
ii. Preparation for performance doesn’t count.
iii. Ragosta v. Wilder:
b. Bilateral K – R2D 87(2)
i. offer which offeror reasonably expects to induce action or
forbearance of a substantial character on part of offeree
before acceptance and which does induces such
action/forbearance is binding as an option K to the extent
necessary to avoid injustice
3. Option K – R2D 87 (1)
a. Express promise to hold open an offer in writing – recital of
consideration
b. In writing and signed by offeror, recites purported consideration
for making the offer and proposes an exchange on fair terms w/
reasonable time or is made irrevocable by statute
REJECTION
1. Words or conduct of offeree rejecting the offer
2. Effective when received
COUNTEROFFER
1. Acts as rejection to offer
2. Also acts as new offer
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TERMINATION BY OPERATION OF LAW
1. Death or insanity of a party
2. Destruction of subject matter of contract
3. Supervening illegality
5
ACCEPTANCE
Manifestation of assent to the terms of the offer, made in the manner invited
or required by the offer ** R2D §50
MANNER OF ACCEPTANCE
1. When not specified, offer may be accepted in any manner and by any medium
reasonable in circumstances ** R2D §30 (2)
2. Notice
a. Usually required in bilateral K’s, unless “offer manifests contrary
intention.” ** R2D 56
i. Int’l Filter
b. Not required in unilateral K’s unless offeror request notification
or offeree has reason to know that offeror has no adequate means of
learning of performance with promptness and certainty
3. By return promise or performance
a. Common Law
i. Can only accept by performance if offer invites acceptance by
performance
ii. In case of doubt, offer interpreted by inviting acceptance by
promise or performance
iii. If offer prescribes manner, then offeree must comply with the
offer. If the offer merely suggests, then other methods ok.
b. Acceptance for an offer to buy goods ** UCC 2-206(1)(b)
i. Buyer’s orders are usually seen as offers
ii. You begin performance by beginning delivery
iii. Shipment of conforming goods = acceptance
iv. Shipment of nonconforming goods = no acceptance
1. nonconforming goods are seen as accommodation if buyer
has been seasonably notified
2. Corinthian v. Lederle:
c. Silence = acceptance only when ** R2D 69
i. Offeree keeps benefit and know/should have known that
compensation is expected
ii. Offer invites acceptance by silence and offeree intends to
accept by silence
iii. Because of previous dealings or otherwise, it’s reasonable that
offeree should notify offeror of intent not to accept
d. Acceptance by promise in Bilateral K
i. Offeree must fulfill every aspect of making the promise &
requires reasonable notification to offeror
ii. Exceptions:
1. if offer manifest contrary intention (i.e. counter offer)
2. Acceptance by silence
e. Acceptance by Performance in Unilateral K
i. Full Performance: not necessary to notify offeror of acceptance
unless:
1. Offeror requests notification
2. Offeree knows/should know that offeror won’t hear of
performance
ii. Option K arising of part performance: Offer to unilateral
contract must be accepted by full performance; but if offeree
begins performance, most courts treat offer as becoming
temporarily irrevocable.
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iii. Part Performance: when offeree should reasonably expect offeror
to know of performance
iv. Intent to accept implied: if no evidence about whether offeree
intended to accept, usually valid K.
MAILBOX RULE
1. Acceptance is effective as soon as it is put in the mailbox
2. Revocation is effective upon receipt
3. Not a big deal today because communication is instantaneous
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THE MIRROR IMAGE RULE v. “BATTLE OF THE FORMS”
Both rules provide ways to resolve the terms when the offer terms and
acceptance terms to do agree.
THE MIRROR IMAGE RULE (COMMON LAW VIEW)
1. Terms of the acceptance must be identical to the terms of the offer
2. If terms were not identical, the acceptance became a counteroffer(R2D
§39) or a rejection
3. “Last Shot Rule” the last party to send a form governs the terms
4. Mirror Image Concerns
a. Allowed one party to easily get out of the agreement even if
intentions were clearly to contract
b. Unfair and arbitrary to let the last party to send a form to have an
advantage over the other
“BATTLE OF THE FORMS (UCC §2-207)
Abolished the Mirror Image Rule and that between merchants, additional terms
proposed in the acceptance can become part of the contract IF the offeror
remains silent
1. (1) Expressions of acceptance acts as an actual acceptance even though it
states additional or different terms from the offer
a. EXCEPTION: there is no K if acceptance expressly states that it is
conditional on assent to additional/different terms
i. Stepsaver v. ProCD:
b. For Different Terms use
i. “Knockout Rule” – conflicting terms knock each other out so
that neither become part of the contract; instead UCC gapfillers are used
1. Northrop:
2. (2) Additional Terms are viewed as proposals
3. (2) If both parties are merchants, additional terms become part of the K
unless,
a. offer expressly limits acceptance to terms of offer
b. they materially alter it
c. notification of objection to them has already been given or is given
within a reasonable amount of time after notice of them is received
4. (3) Conduct of parties sufficient to establish K even though writings
necessarily establish a K. Terms consist of those writings on which the
parties agree.
a. Pro-Cd  Guy buys software and then copies and sells it, even though
there were terms “splashed” onto the screen. Court said “A vendor,
as master of the offer, may invite acceptance by conduct, and may
propose limitations on the kind of conduct that constitutes
acceptance. A buyer may accept by performing the acts the vendor
proposes to treat as acceptance.”
i. Vendor may add additional terms to consumer purchases
ii. additional terms may appear on outside of box as long as there
is a warning
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iii. K formed upon use NOT purchase
iv. May return the product  by keeping and using you have
assented to the terms
v. Vendor may specify assent by conduct: i.e. license agreement
b. Hill v. Gateway  Arbitration clause held to be enforceable b/c
customers had a chance to read terms and reject them by returning
product. Hills accepted Gateway’s offer when they kept the computer
beyond 30 days and thus a binding K was formed.
GAP-FILLERS (UCC 2-207)
Apply Gap-fillers to the terms left out of K
1.
2.
3.
4.
5.
§2-305
§2-306
§2-308
§2-309
§2-314
–
–
–
–
&
price
quantity (output/requ Ks)
place of delivery
time – “reasonable” time
§2-315 – character & quality
CONFLICTING TERMS
3 Ways to Handle Conflicting Terms
1. Knock Out Rule – Knock out different terms and put in a gap filler – this
is the majority rule
2. First-Shot Rule – Go with what was in the first contract, the offerer’s
terms (leading minority rule)
3. Treat different terms as additional terms and apply 2-207 (only CA does
this)
a. Pro CD v. Zeidenberg – Zeidenberg ignored the user agreement that
software was not for commercial use and a right to a refund if the
terms were not acceptable.
1. Rolling contract – contract is accepted after return period ends
2. Conditional acceptance – acceptance that adds conditions but is
not a counteroffer
DEFINITENESS
Contracts can be thrown out if terms are not definite enough; requirement for
bargain to be concluded.
1. Classical Approach – terms must be explicit and defined; minds must
meet
2. Realist Approach – flexible terms are upheld and K does not fail b/c of
vague terms(Fill in with Gap-Fillers); however, terms mean nothing w/o
remedy
3. Certainty – R2D §33
3. Terms must be reasonably certain
4. Terms will be reasonably certain of they if they can be a basis
for determining a breach
5. If one or more terms are left open, this may NOT constitute an
offer
2. Toys Inc.
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3. Oglebay
** NOTE: K will be upheld if
1. Ct sees that parties intend to be bound
2. Remedies can be determined
MISUNDERSTANDING
1. Can prevent meeting of the minds and have no contract
2. No contract if
1. Each party has a different subjective belief
2. Term is material
3. Neither party knows or has reason to know of misunderstanding
3. Example: Peerless
4. If one party does know of misunderstanding, contract will be made
according to the innocent party’s belief
5. But offeree must read offer and try to understand
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CONSIDERATION
FUNDAMENTALS
R2D 77 - In order for a promise to be supported by consideration:
1. An external manifestation of performance or return promise have to be
bargained for/induce each other
2. Performance can be an act, a forbearance, or a creation or destruction
of a legal relationship
i. Hamer v. Sidway: uncle promises nephew that he will pay $5,000 if
he gives up swearing and drinking. There was consideration
because his forbearance of a legal right was induced by the
promise
ii. Fiege v. Boehm: Man agreed to pay child support if woman would
not sue him. Doesn’t pay b/c he found out kid wasn’t his. There
was consideration b/c the woman believed that she gave up the
legal right in good faith.
Consideration serves two functions
1. Evidentiary function: provides objective evidence that the parties
intended to be in a legally binding agreement
2. Cautionary function: if parties are aware that the providing of
consideration by one will make the promise enforceable, they will act more
carefully and not make thoughtless promises and vice versa
No nominal consideration
1. Policy reasons:
a. Concerns that people will make promises w/o thought
b. Courts don’t want to get involved in family issues
2. EXCEPTION:
a. Option Contract (Firm Offer): valid contract with only nominal
consideration
b. UCC 2-205: Firm offer is good up until 3 months if it is put in writing
REQUIREMENT OF A BARGAIN
R2D § 71: To constitute consideration a promise must be bargained for – done or
given as inducement of the promise
1. One purpose of bargain element is to prevent enforcement of promises that
are really gift
a. There is no consideration for gifts because the promise was not
bargained for and there was no detriment on the part of the promise.
b. Conditional gifts: sometimes the promise incurs a detriment but
there is no consideration because nothing was bargained for. These
are cases where the promise must meet certain condition in order to
obtain the gift; however, the fulfillment of these conditions did
not induce the promise of the promisor.
1. Test for recognizing pre-conditions: does the occurrence
benefit the promisor?
2. Doesn’t have to be economic benefit. (i.e. Hamer v. Sidway
uncle’s benefit was seeing his nephew lead a healthy
lifestyle)
3. Kirsey v. Kirsey: I will give you a place to stay “if you
come and see me.” Not consideration b/c brother-in-law did
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4.
5.
2. Bargained
1.
2.
not promise to give P a place to stay b/c he wanted to see
her. It was just a condition of receiving the gift.
Tiffany Case: father bargaining to see estranged daughter
again so it is a contract
Tramp Case: go to the store and I will by you a coat is not
consideration; it is a condition of receiving the gift
for means that performance has to be induced by another party
CAB v. Ingram: covenant not to compete signed by D’s who
were employed by P, an at-will employer. D’s argue that
there was no consideration. Held that consideration was
continued employment and raises and promotions. The invalid
bilateral contract was turned into a valid unilateral
contract.
Employee Handbook: is not a contract in some jurisdictions
(Bankey v. Storer) b/c there is no consideration. In other
jurisdictions it is because the exchange is that the
employer agrees to follow handbook rules for the employee’s
continued employment
DETRIMENT ELEMENT
Promisee does something that he doesn’t have to do or refrains from doing
something he has a legal right to do
NON-ECONOMIC DETRIMENT (FORBEARANCE)
As long as the party has circumscribed his freedom of action
1. May be promise (bilateral) or performance (unilateral)
2. Court will generally NOT inquire into the adequacy of the detriment (but
K has to pass through the bargained for requirement)
a. Hamer v. Sidway - nephew suffered detriment b/c he gave up
drinking, smoking, gambling
PAST CONSIDERATION
1. Not sufficient
2. Promise to pay for past service is usually not supported by consideration
a. Feinburg v. Pfeiffer: D promise to pay P pension when she retires at
any time. P works for a few years and retires. D doesn’t pay. Past
work wasn’t consideration. D already paid for that service. Further
work wasn’t consideration b/c it wasn’t bargained for
b. Mills v. Wyman: D’s son becomes ill and is nursed by P. D writes to
P and promises to pay for P’s costs. No consideration since D did
not request P’s service. Also the son was an adult so he was not
under D’s care
c. Can be binding in light of “moral obligation.” Webb v. McGowin
i. Contrast w/ Mills: material benefit went to promisor and
McGowins payments affirmed contract
ii. Contrast w/ Feinburg: Feinburg was paid so their was no gain of
material benefit to D
iii. Contrast w/ Harrington: wasn’t made with seriousness of
McGowin’s promise
3. EXCEPTION:R2D 86: promise in recognition of past benefit is binding to
a. the extent to prevent injustice
b. only if promisor is unjustly enriched/ benefit not conferred as gift
c. to the extent that the value is in proportion to the benefit
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4. Factors to Consider in Applying the Doctrine
a. Character of benefit received
b. “definite and substantial”
c. Formality of promise
i. Writing
ii. Amount
d. Performance of promise or reliance on promise
5. Other Things to Consider
a. promise to pay debt that is not barred by the statute of limitations
b. emergency where there cannot be negotiation (unless person is acting
within professional duties)
c. Mistake: i.e. if you tell a painter who mistakenly paints your house
that you will pay then the K is binding
PRE-EXISTING DUTY RULE
If party does something he was already legally obligated to do, no necessary
detriment so no reliance
1. POLICY: to deter “hold up” behavior which would allow one party to take
unfair advantage of another
a. Alaska Packers Ass’n v. Domenico  salmon canning season, workmen
tried to bargain for increased salary after they sailed from SF to
Alaska; agreement was w/o consideration since they were doing what
they were already bound to do under K.
2. Forbearance from bringing suit
a. Valid claim: promise is considered detriment
b. Invalid claim: must have been made in good faith and must have not
been unreasonable;
i. Fiege v. Boehm - ∆ promised to pay for expenses in exchange for
her forbearance from suing for bastardy, consideration
c. POLICY – this will encourage people to settle outside of ct
PROMISES AS CONSIDERATION
1. Bilateral Contract: promise for a promise
2. Unilateral Promise: promise for a performance
ILLUSORY PROMISE
Has language of a promise but does not bind promisor to the promise (i.e. “if
satisfied” clauses, exclusive agency, alternative promises, output/requ.
contracts)
1. Strong v. Sheffield: D promises to guarantee her husband’s debt in
consideration for forbearance. D promises to keep it until he wants it. No
consideration. If he never said those words, contract may have been
enforceable
2. Mattei v. Hopper: D purchased property from P subject to P’s approval of
subsequent leases (“if satisfaction clause). No evidence of bad faith so
the K was valid
a. For std. goods you use the RP std.
b. Can bring in outside person to show industry std.
c. If the goods are more unique/ there are many factors to weigh then
you use the subjective “good faith” std.
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REQUIREMENT AND OUTPUT CONTRACTS
1. Output K: buyer promise to buy everything seller produces
2. Requirement K: seller agrees to supply whatever buyer needs
a. Eastern v. Gulf: P agrees to buy all fuel requ’ts from D. D agrees
to supply it at industry posted price. Prices rise. D tries to get
of K. K was valid b/c D acted in good faith in determining requ’ts
3. Policy: sometimes can be seen as illusory b/c in theory, buyer is not
promising to buy anything at all; concern that buyer will buy a lot when
prices are low, stockpile it, and not buy any when prices are low. UCC
tries to solve this by requiring that buyer act in good faith and
restricting quantities that are unreasonably disproportionate to stated
estimates. Will allow for business interests (growing or closing) and
shutdowns to avoid losses is acceptable
IMPLIED PROMISES
Even though promise isn’t explicitly stated, it is assumed to give effect to
the terms
1. Exclusive agency
a. Wood v. Lucy: D gave P exclusive rights to market her name. D tried
to get out of K, claiming that there was no consideration. Court
says that the K implies that P will use reasonable/ best efforts to
market D’s name. This suffices as consideration so K is valid.
ALTERNATIVE PROMISES
1. Each promise has to be supported by consideration
2. conditional promise isn’t illusory if both alternatives are supported by
consideration or
a. insurance policy: (1) person pays and ins. doesn’t b/c no accident;
(2)person pays and ins. pays a lot b/c of accident-> small chance
this will happen
REGULATORY FUNCTION OF CONSIDERATION DOCTRINE
1. Formal Concern: is there really consideration b/c one parties promise is
illusory?
2. Informal Concern: is one party taking advantage of another b/c of
flexibility (policy concern)
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RELIANCE AS BASIS FOR ENFORCEMENT
Promissory Estoppel R2D 90: a promise which the
expect to induce action or forbearance on part
a third party and which does induce such action
injustice can be avoided only by enforcement of
limited as justice requires.
promisor should reasonably
on the part of the promisee or
or forbearance is binding if
the promise. The remedy may be
UN-BARGAINED FOR RELIANCE
A promisor is bound by promise if promise relies on the promise to his
detriment
1. Used in gratuitous promises as well as in commercial settings, where
parties engage in negotiations and a party rely on assurances to their
detriment (i.e. Red Owl Stores)
2. Actual Reliance: promisee actually relies on promise and would not have
taken the step, except for the promise
3. Foreseeability of Reliance: must be reasonably foreseeable to the
promisor
PROMISES TO MAKE GIFTS
1. Family Promises: PE may be used to enforce promise if the promisor
reasonably relies on promise to his detriment
a. Ricketts v. Scothorn: Grandpa promises to give P note so she won’t
have to work. She quit and then went back to work. G-pa dies. Estate
doesn’t want to pay note, citing no consideration. K enforceable b/c
it was meant to induce reliance
PROMISES TO CONVEY LAND
Enforceable especially when a promisee has relied by moving to land
CHARITABLE SUBSCRIPTION
PE being used more to enforce charitable subscriptions
1. Reliance NOT necessary in these cases if promise is written
a. Allegheny College v. National Bank: consideration for D’s promise
was P’s promise to name the scholarship after her
GRATUTIOUS BAILMENTS AND AGENCIES
One who takes care of another’s property for no consideration is traditionally
not liable until she begins performance
1. more courts are enforcing these Ks based on reliance
PROMISES TO PAY PENSIONS
1. Feingberg v. Pfeiffer: pension enforceable because P reasonably relied on
it to her detriment
AT-WILL RELATIONSHIPS
1. D&G Stout v. Bacardi: reliance was the lost opportunity. Since Bacardi
withdrew its account, D&G lost its leveraging power.
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2. Contrast w/ Sullivan: Sullivan’s lost opportunity was too vague; D&G had
a specific dollar amount
BID BY SUBCONTRACTORS
Subcontractors who submit a “sub-bid” to a general contractor for use in
computing the general contract bid must give contractor a reasonable amount of
time to accept, even if no consideration is given to keep the offer (bid) open.
RESTITUTION AS AN ALTERNATIVE BASIS FOR RECOVERY
Prevents unjust enrichment
IS K, BUT
1. Breacher seeks relief (i.e. tenant breaks lease and wants deposit –
nonrefundable amt.)
2. Losing K: nonbreaching party seeking relief but value of benefit
conferred > damages of K
NO K, BUT UNJUST ENRICHMENT
1. P conferred benefit on D that D retained
2. Not a gift
3. Not officious – no opportunity to seek assent
a. Emergency:
i. Cotnam v Wisdom: doctor helps unconscious person. Doctor
recovers restitution of service b/c the contract was impliedby-law
ii. Quantum meruit: reasonable price for services rendered
b. Mistake: housepainter hypo where owner nods head as painter
mistakenly paints house
c. Third Parties:
i. Callano v. Oakwood Park Homes: Shrubbery purchased by
homeowner. Homeowner dies. P sues D for amt due. P does not
recover b/c there was no direct-relationship
ii. EXCEPTION: if there is no direct relationship to recover from
then you can try to seek recovery from 3rd party
d. Marital Situation:
i. Pyeatte v. Pyeatte: P was allowed to recover because the action
was extraordinarily unilateral
ii. In CA, if they had been married for 10yrs> then they would have
shared the benefit
ENFORCEMENT CHART
Theory Of Enforcement
DAMAGES
Expectation
Reliance
Bargain with
Normal – default Only if
consideration
rule
expectation is
and mutual
uncertain or
assent
unfair
Promissory
Maybe
R2d Recommends
Estoppel
this
(Reliance)
Restitution
NO
NO
Restitution
Only if there
are damages for
the breacher/a
losing contract
Maybe
Yes – fair
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market value of
the benefit
** If damages are not adequate you can get specific performance
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DEFENSES
STATUTE OF FRAUDS
Contract requirement that renders certain categories of contract unenforceable
if they are not in writing and signed (can be initials)
1. Five Categories
a. Surety Agreements: a promise to pay someone else’s debt
b. Marriage Provision: promise for which the consideration is marriage
c. Land Contract: a promise to transfer an interest (sale, mortgage,
lease) in land
d. One-year provision: a K that cannot possibly be completed in one
year must be in writing; however if there is any possibility that
the contract can be completed in one year then it doesn’t have to be
in writing
e. Sale of Good: has to be for a price of $500 or more
2. Loopholes
a. Any piece of paper will do – a written confirmation following an
oral agreement will do
b. Some courts say that videotapes or audiotapes count
c. It can be a multiple, detached document
d. Requirement is satisfied even if the document is lost, destroyed, or
stolen
e. UCC 2-201(3)(b) says that if parties admit to an oral agreement, it
is enforceable
f. Restitution and promissory estoppel are both used to enforce
promises unenforceable under a traditional bargain theory because of
the statute of frauds
PRESSURE IN BARGAINING
DURESS
Party entered into or modified K because of unfair coercion arising from the
other party’s act or threat (subjective)
1. R2D §174: physical compulsion voids K
2. R2D §175: improper threats, leaving no real alternative void a K
a. Crime, tort, criminal prosecution, sue in bad faith, breach of duty
b. OR unfair result, prior unfair dealing, use of power for
illegitimate ends
c. AND harm and no significant benefit to P
3. Austin v. Loral: D agreed to the modification of the 2nd K only under
“economic duress” and is therefore entitled to damages. To prove duress,
D needed to show that it could not have gotten the goods elsewhere, but
this showing was made here.
4. Policy: Realists have expanded duress doctrine b/c mkt system no really
free
a. Rich have more mkt choices than the poor
b. Mkt system is coercion of the poor by the rich
PRE-EXISTING DUTY RULE
There is no consideration for a promise to do something that a party is already
bound by contract to do
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1. R2D §73: performance of a legal duty owed to a promisor which is neither
doubtful nor the subject of honest dispute is not consideration
a. Alaska Packers v. Domenico
2. R2D §89: promise modifying duty under a K not fully performed is binding
if:
a. Modification is fair and equitable in light of unanticipated events
b. Justice requires enforcement because of reliance on modifications
3. UCC 2-209: agreement to modify K doesn’t need consideration as long as it
is renegotiated in good faith
4. Rescission and Modification: rescission immediately followed by a new
agreement is really just a modification and must be in writing
UNDUE INFLUENCE
Imbalance in bargaining due to different status
1. usually in wills, deed and trusts cases
2. close relationships where one party takes advantage of the other’s
weakness
3. R2D §177: unfair persuasion of party under the domination of the party
who is doing the persuasion or b/c of relationship of trust(confidential
relation)
a. Characterized by heavy persuasion, overpersuasion
b. Usually in cases involving the elderly or mentally disabled
4. overbearing someone’s will
a. 7 situational factors:
i. discussion of transaction at an unusual or inappropriate time
ii. unusual place
iii. business must be finished at once
iv. extreme emphasis on bad consequence of delay
v. multiple people on strong side v. one weak person
vi. no 3rd party advisors for the weaker party
vii. statements that there is not time to consult lawyer or advisor
b. BE CAREFUL NOT TO CONFUSE WITH DURESS
c. Odorrizi v. Bloomfield School District
CONCEALMENT AND MISREPRESENTATION
1. According to common law, there is no duty to disclose, so must figure out
what in what situations non-disclosure is a misrepresentation
a. Must be a situation where P would not be able to otherwise find out
the information
2. Can be used as a defense against enforcement or as grounds for rescission
or damages
a. both tort and K claim
b. but easier to prove in K
3. Statutes: may also have statutory claims for unjust business practices
(misleading advertising)
MISREPRESENTATION (ASSERTION NOT IN ACCORDANCE W/ FACTS)
1. Classical view: intentional, material misrepresentation, i.e. lies, but
you have free reign not to say anything
2. Modern view: voidable in more situations (R2D § 159-169)
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a. §159: assertion not in accord with the facts
i. Assertion of fact or opinion
ii. Classical view: must be an assertion of fact
iii. Modern view: opinion permissible as misrepresentation if given
by:
1. an expert (superior knowledge) or
2. fiduciary relationship(you lawyer, your family member,
special relationships) or
3. deceit
b. §164: voidable if:
i. Fraudulent or material §162
1. fraudulent: intends to induce assent
a. knows assertion isn’t true
b. isn’t confident in the facts
c. know that the assertions have no basis
2. material: kind of thing that would induce someone to make
a contract
ii. On which there’s justifiable reliance
1. Kanavos v. Annino
iii. Induces assent
CONCEALMENT/ NON-DISCLOSURE
Simple failure to disclose information; harder to prove than misrepresentation
(R2D §161) ** Swinton v. Whittinsville
1. R2D §161: Misrepresentation = non-disclosure when:
a. Half truths
b. Positive concealment
1. UCC §2-314, §2-315: Sue for breach of express warranty (e.g.
Car is sold as in “great condition” but it ends up being a
lemon OR “Build the industrial park of your dreams!” for a sale
of crappy land)
1. express/implied warranty that the goods are fit for
implied/express use
2. If known that the buyer has a particular purpose, there
is a duty to disclose
c. Failure to correct a mistake about contents or effect of writing
d. Failure to correct past statement
e. Fiduciary Relationship
2. POLICY: protect incentives to investigate to allow the persons who have
invested in that info while trying to balance that with keeping pertinent
info accessible
a. When expensive to investigate, there is a greater duty to disclose
(this is to reward the party who investigates but also efficient b/c
it balances the cost of investigation)
b. Shallow v. Deep defects:
1. Apparent defects don’t require disclosure, deeper secrets do
(if no disclosure this violates the duty of good faith & fair
dealing)
c. More interested in protecting the buyer. Better to have gotten
windfall than to have been swindled.
INCAPACITY
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1. Mental impairment
a. If they knew what they were doing, then liable for breach
b. Other party does not have to know they are impaired
c. If the other party has reason to know
2. Children
UNCONSCIONABILITY & ADHESION CONTRACTS
1. Classical: a K is a K, freedom to enter into a K
2. Realist: these are not bargained for, 2 Ks are formed
3. If provisions of K are so grossly unfair to shock the conscience of the
court, judge may void K
“STANDARDIZED”(ADHESION)CONTRACTS
Have large number of non-negotiated, pre-drafted terms put together by one
party w/ room to negotiate only a few aspects of the deal (e.g.
price/quantity). Usually drafted by party with greater bargaining power,
complicated, unclear, favorable to drafter and in small type.
1. Take it or leave it Ks: has the non-drafter really assented to the
bargain? If not, not enforceable.
a. O’Callaghan v. Waller  Tenant’s negligence action against Landlord
was barred by an exculpatory (waiver of liability) clause upheld b/c
landlord didn’t have a monopoly and the tenant could’ve bargained.
But dissent (& Gross) thinks that it wasn’t valid b/c the clause was
in all of the rental Ks and so no bargaining power.
b. Henningsen v. Bloomfield Motors  ∏ buys car from ∆, steering wheel
falls off 10 days later. ∆ claims warranty has been disclaimed by
provision limiting liability for 90 days/4000 miles, which was
buried on the back in small print. Court said disclaimer was
ineffective b/c it was part of a stdized industry-wide K and no
matter what would’ve had to take the K as it was. Gross inequality
in bargaining position. Against public policy so shouldn’t be
enforced.
2. Boilerplate (ticket stubs): when the non-draftsman does not even realize
that he is entering a K at all, so court would probably void
a. When is it binding? R2d § 211
i. If he signs or manifests assent
ii. RP in D’s shoes would expect to find terms similar to those
which the ticket actually contained
iii. Terms apply: treat alike all those similarly situated, w/o
regard to their knowledge or understanding of the terms
iv. Terms eliminated: if drafting party has reason to believe party
manifesting assent would not agree if he knew the writing had a
term, it is not a part of agt.
v. E.g. Klar v. H&M Parcel Room  $1000 parcel delivered to
someone else; claim check limited liability to $25 but Court
said it wasn’t a K
b. Carnival Cruise Lines v. Shute: Forum selection clause was valid b/c
RP in D’s shoes would’ve probably expected the terms and conditions
to come with ticket – D admitted to having read the terms. Forum
selection clause is fair/cost efficient
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3. Policy for enforcing standardized Ks
a. Duty to read
b. Courts shouldn’t make legislation
4. Ks of adhesion are limited by:
a. Don’t enforce any term outside of reasonable expectations for weaker
party
b. Terms w/in RE won’t be enforced if unconscionable
c. E.g. Armendariz v. Foundation Health
5. Enforcement (or hesitation to enforce)
a. Classical: invalidate on procedural terms; eliminates the ability to
bargain which is central to K formation. Initially more comfortable
invalidating under this idea
i. Cant negotiate b/c all companies use the same K (O’Callaghan
Dissent)
b. Realist – be honest, people don’t really read these things
i. Doctrine of Reasonable Expectations (R2D § 211) – Terms are
interpreted according to the reasonable expectations of the
parties. If the K includes terms that were not expected (had
they known the terms they would not have assented), then they
do not apply
ii. Substantive terms – de facto heighten scrutiny & usually
against public policy (b/c cannot be bargained over & against
reasonable expectations
1. Waivers of liability (except for activities that are
dangerous)
2. Limitations of remedies
3. Warranty disclaimers
iii. cannot write K to be ambiguous or confusing
POLICY
Pro-Adhesion
Economic Efficiency
Anti-Adhesion
More law than meeting of minds.
Disseminate knowledge/make
widely available a standard
form of code that everyone can
use.
Lower prices for consumers
One party (usually seller) drafts
the agreement, and often has
superior bargaining power.
Reduces uncertainty
Duty to Read
Courts shouldn’t’ legislate—
freedom of K
Take it or leave it approach; No
bargaining. Raises question of how
much competition is out there –
i.e. is there actually a “leave it”
option?
Terms are not understood by weaker
party
Be realistic, no one reads fine
print
Not a K, no ability to bargain
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UNCONSCIONABILITY
The absence of a meaningful choice in accepting the terms of a K
1. Purpose of doctrine: prevent oppression and unfair surprise but not to
disturb the allocation of risks b/c of superior bargaining power (cmt 1)
2. Enforcement: UCC 2-302
a. Apply doctrine of reasonable expectations, supra
b. Can be raised as a matter of law by court; can refuse to enforce or
may enforce the K w/o the unconscionable clause or limit
c. Parties can present evidence re: commercial setting, purpose and
effect to aid the court in making the determination
3. 2 types of Unconscionability: Procedural & Substantive
a. Procedural/substantive law tests.
i. Procedural: Absence of meaningful choice (inequality of
bargaining power, understanding terms, manner entered into,
hidden or confusing terms)
ii. Substantive – K terms that are unreasonably favorable to other
party (in light of general commercial background/circumstance
of the case)
4. POLICY:
a. Paternalism – Should we protect people or allow them to suffer the
consequences from their own decisions
b. Redistribution – empirical and normative explanations; should we be
looking at who is better able to bear the burden of the costs?
c. Efficiency – not looking at substance, but at what parties would
have had in a truly free market
d. Freedom of contract – basic disagreement about the word “freedom” 
one might see court as rewriting the contract and that’s not true
freedom, the other might see that she didn’t have true freedom in
the contract
e. Fairness – terms of contract were substantively unfair? No real
choice given about certain term
5. Remedy: not enforce K; no restitution, no damages
a. Excise unconscionable clause
b. Modify the offending term
c. Refuse to allow P to recover at all
6. Williams v. Walker-Thomas Furniture : term in K: if P defaults on
payment, D could repossess the item + earlier purchased items that are
still being paid off. Court held unconscionable b/c unfair surprise and
oppression; i.e. absence of meaningful choice and gross inequality of
bargaining power. U 2-302
7. Excessive price  Jones v. Star Credit  Ps bought fridge for $900;
fridge had max retail price of $300; Ps had already paid $600. K was
found unconsc. b/c of the disparity b/n the retail value and price.
Allowed to keep fridge w/o further charge
8. Arbitration Clauses: tricky b/c of public policy. On one hand, it saves
costs for co and society and there is legislation that encourages this
method, but it might be advantageous to employer b/c they are “repeat
23
players”, might become close to the arbitrator, and may reduce the
rewards employee might get
a. Hill v. Gateway2000  Hills argued that arbitration clause was not
part of K b/c of UCC 2-207, but Easterbrook said it was a part b/c
of UCC 2-204. By keeping the computer beyond 30 days, the Hills
accepted Gateway’s offer, including the arbitration clause. Vendor
is master of the offer, invites acceptance by conduct and may
propose limitations on the kind of conduct that constitutes
acceptance. A buyer may accept by performing the acts the vendor
proposes to treat as acceptance.
b. Brower v. Gateway2000  unconscionable arbitration clause due to
unduly burdensome procedure and cost for the individual consumer.
i. Procedure: setting of transaction; experience and education of
parties; “fine-print”; “high-pressured tactics”; disparity in
bargaining power
ii. Substance: excessive cost factor of arbitrating before ICC;
alternate arbitrator AAA also excessive
c. Armendariz v. Foundation Health  Employees signed wrongful
termination suit arbitration clause. The had no choice because the
arbitration agreement stood b/n the employee and necessary
employment and it limited their reward, so K & clause was void.
ILLEGALITY
Won’t enforce Ks to do something illegal
1. Two types:
a. Clear legislative statement
b. Judicially created p.p.  leg hasn’t yet spoken on the issue, but
judges render illegal b/c it is “against public policy”
COVENANTS-NOT-TO-COMPETE
If unreasonably broad, they will be held illegal and will not be enforced.
1. Traditional approach: “blue pencil” rule – “blue pencil” could be drawn
through certain portions of agreement leaving other portions intact to be
enforced. Discourages draftsman from writing most overreaching contract
he can think of
2. Modern realist approach:
a. Most modern courts will enforce it up to reasonable limits even if
those limits cannot be spelled out by use of the “blue pencil”  R2d
§ 184(2)
b. Best interests of both parties determined by:
i. Employer – no greater than necessary to protect the employer
ii. Employee – no undue hardship on the employee
iii. Public – not injurious to the public (lack of competition)
c. CAB v. Ingram -- ∆s signed a two-year, nationwide covenant not to
compete Ks when hired to CAB; unreasonably broad, so Court enforced
only in limited area and for one year using “rule of reasonableness”
rather than “blue pencil”
i. Dissent: maj. approach will allow employer to insert oppressive
and unnecessary restrictions
PRE-NUPTIAL AGREEMENTS
Enforceable UNLESS both parties are not represented by their own independent
counsel and has a 7-day cool off period (CA state law)
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1. Simeone v. Simeone – pre-nup agmt presented on eve of wedding.
Wife
didn’t consult counsel and did not get explanation from mr.’s lawyer, but
signed anyway. After separation, mr. refused to pay more than what was
in pre-nup. Enforced. Dissent: Traditional view - sanctity of marriage
presumption  offensive to the idea of preservation of marriage that
there should be a contract before the marriage in case there was a
divorce. Concurring: Need to look closely as if this were any other
contract of adhesion, look at the financial situation, the way the
contract was entered into, etc. etc. Majority: Men and women are equal
and they should be treated like equals
2. In re Barry Bonds – ct looks to voluntariness, strict scrutiny b/c she
didn’t have counsel
a. Differentiates btwn K pre-marriage (non-confidential) & w/in
marriage (confidential)
b.
3. Public Policy – look to what is in the interest of the public v.
individual freedom to K
a. Entire types of Ks may be void (i.e. Baby selling is illegal 
moving toward surrogacy agreements)
PRE-NUPTIAL AGREEMENTS
1. Most states have banned Ks OR take non-enforcement approach  Consent to
K is revocable
2. Uniform Parantage Act allows surrogacy (subject to ct approval)
3. POLICY: concerns for welfare of child, exploitation of the
surrogate/class, coercion, freedom to K, freedom to work
POLICY
Intentions
Pro
Allow people who want
to have kids to have
kids
Promote families of
intent
Freedom of K Freedom of Kvoluntary by both
parties
Protect
Child
When to do Specific
Performance—could be
better living
situation for child.
Is being sold
different than
adoption?
Feminist
Anti-paternalism –
give women benefit of
doubt in deciding to
enter into K
Exploitation Right to do what she
of Mother
wants
Paying for service,
not the child
Anti
Promote traditional
families
Not really free-Money,
don’t know enough before
child is born
Per se uninformed
No protections built in
Female Control over Body
Commodification of
mother (like
prostitution).
Commodification of child
Exploitation of “breeder
class”
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Degradation of women
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WHAT ARE THE TERMS OF THE K?
INTERPRETATION OF TERMS
The modern approach  allow the parties to introduce extrinsic evidence of
what they subjectively thought the terms in a writing meant, even if writing is
an integration. This rejected the plain meaning rule, which says that any
writing appearing to be clear, complete and unambiguous on its face will be
determined w/o resort to any extrinsic evidence at all.
EXPRESS TERMS
Interpretation in BOTH integrated and non-integrated Ks
1. Someone wants to bring in extrinsic evidence to interpret the terms (ie
verbal discussions before the K was signed) is this allowed in? – 2 step
test
a. Stage 1: is the express language ambiguous (Classical - narrow
interpretation – look to 4 corners of the document) OR susceptible
to more than 1 meaning (Realist - broader interpretation – the judge
should look at all extrinsic evidence at stage 1 to decide if the
express language is susceptible to more than 1 meaning – RST & UCC)?
i. RST – says you can always look to the extrinsic evidence to det
if it is ambiguous at stage 1  if yes, then it is allowed in
stage 2 (but not always)
b. Stage 2 – if yes (it is susceptible to more than 1 meaning)  then
admit extrinsic evidence to the fact finder for purposes of
interpretation
2. UCC – for interpretation: trade usage, course of dealing & course of
performance can ALWAYS be used
a. Course of performance – how has the term been used by the parties in
this K
b. Trade usage - prevailing stds in the industry, this was implied in
the agreement
c. Course of dealing – sequence of previous conduct under previous
transactions (only applies to conduct under previous Ks), this was
implied in the agreement
VAGUENESS AND AMBIGUITY
1. Vague – unclear, open
2. Ambiguous – bad drafting, not clear which connotation meant
3. R2d §20  if one party has reason to know the meaning attached by the
other, but the other party doesn’t have reason to know the other’s
meaning, the unknowing party’s meaning governs – Lucy v. Zehmer
4. R2d §201 – if parties attach same meaning, that is the meaning of the K
(subjective); if different, then same as §20 (modified objective test)
1. Note: super objectivists don’t like this – they like RP standard.
But this is the modern trend.
5. RULES IN AID OF INTERPRETATION  R2d § 202
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1. In light of the circumstances, great weight to principle purposes of
the parties
2. Writing is interpreted as a whole, all parts together
3. Unless otherwise indicated
i. generally prevailing meaning of language
ii. technical terms and words of art given tech meaning when used
in field
4. Course of performance
5. Manifestations of intention of parties, course of performance,
dealing, trade
6. STANDARDS OF PREFERENCE IN INTERPRETATION
1. Reasonable, lawful, and effective meaning to all terms
2. Express terms  course of performance  course of dealing  usage
of trade
3. Specific/exact terms  general language
4. Separately negotiated/added terms  standardized terms
7. Frigaliment v. B.N.S. Int’l  “what is a chicken” dispute  buyer:
broiler, fryer, young; seller: any chicken. Judge said it was ambiguous
so looked at:
1. Terms of K  D showed that it coincided w/ at least one objective
meaning
2. Course of performance  P took 1st shipment and then resold it
3. Course of dealing (negotiations)  “huhn” agreed to, which means any
kind
4. Trade usage  buyer new to industry so had no actual knowledge, it
was not generally established in community, USDA standards
5. P did not meet burden of persuasion
8. Raffles v. Wichelhaus (Peerless case) buyer intended to accept shipment
from earlier ship, seller intended to ship on the later ship. No K b/c
they were in subjective disagreement as to the meaning of the term
“Peerless” and neither had reason to know about the disagreement. (R2d §
20)
9. Oswald v. Allen  Swiss Coin Collection case – dispute about what the
orally agreed upon sale of “Swiss coins.” Since there was no meeting of
the minds, no K.
TRADE USAGE, COURSE OF PERFORMANCE, AND COURSE OF DEALING
1. Common Law: party could introduce evidence to show “custom” if it was
lawful, reasonable, notorious, universal, ancient
2. UCC (Modern): Tends to allow more leeway in introduction of evidence.
Three sources:
a. Course of performance (UCC 2-208)
i. the way parties conducted themselves in performing the
particular contract at hand
b. Course of dealing (UCC 1-205(1))
i. pattern of performance b/n parties w/ respect to past Ks
c. Usage of trade (UCC 1-205(2))
i. any practice or method of dealing having such regularity of
observance in a place, vocation or trade as to justify an
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expectation that it will be observed w/r/t the transaction
in question
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PAROL EVIDENCE RULE
Bars from factfinder’s consideration all extrinsic evidence of certain
preliminary agreements not contained in the final writing.
1. Is the writing an integration (i.e. final expression of parties’
agreement?)
2. Is it partial or complete?
a. Complete: document is intended by parties to include all details of
agreement
i. No extrinsic evidence may be admitted which would contradict or
supplement
b. Partial: document is NOT intended by parties to include all details
of agreement
i. No extrinsic evidence may be admitted which would contradict
(supp. ok)
c. How do you decide?
i. look at the K itself (classical) – Gianni v. R. Russell  G
rented storeroom, signed K that he wouldn’t sell tobacco. G
claimed that there was oral agmt that he would be only seller
of soft drinks in consideration for increased rent and no
tobacco. Court said it was a complete integration since it had
terms of no tobacco – refused his extrinsic evidence b/c the K
appeared to be a K in itself and it would’ve been natural to
put that agmt in the K.
ii. look at context, alleged extrinsic evidence, R2d § 214 –
Masterson v. Sine  Ms gave deed to ranch to Ss. K included
option clause that allowed Ms the right to buy it back after 10
years. Court allowed some extrinsic evidence to interpret
ambiguous terms.
iii. show the K was never valid b/c of mutual mistake (R2d 214(d)) –
Bollinger v. Central  B said agmt was that waste was going
to be sandwiched b/n topsoil. No K b/c mutual mistake of not
inserting terms. C began performing waste sandwich to begin
with, which was enough to show mistake.
3. Is extrinsic evidence admitted to:
a. Contradict? NEVER
b. Supplement? Only in partial
c. Interpret? OK to define vague ambiguous terms
4. If for interpretation
a. Is writing ambiguous?
i. How decide?
1. Four Corners Rule (Classical)  WWW Assoc. v.
Giancontieri – sale of land reciprocal cancellation
provision allowing either party to cancel K if pending
litigation was not resolved by end of 6 month period. W
sued for specific performance b/c they said that it was
only for W’s benefit. But court didn’t allow extrinsic
evidence b/c it was a complete integration w/ unambiguous
terms. Should not bring in evidence that would make a K
that was otherwise clear ambiguous.
2. Look at everything (Realist)  PG&E, R2d – dispute about
term indemnify. Traynor rejected four corners argument
30
b/c he believes that language isn’t that clear. You
can’t assume that there is a single stable meaning for
every word and replacing extrinsic evidence with judge’s
presumptions is wrong.
a. Delta Dynamics v. Arioto  Exclusive
distributorship K under which ∆ was to sell minimnum
of 50,000 units in first year. ∆ only bought
10,000. J. Traynor held that extrinsic evidence re:
meaning of “subject to termination” clause was
improperly excluded at the trial court.
b. If yes, admit extrinsic evidence
5. POLICY
a. Why do we have p.e. rule?
i. Juries are more sympathetic to economic underdogs
ii. Writings are more reliable
b. Why shouldn’t we have a p.e. rule?
i. What’s so bad about being sympathetic underdog?
ii. Why don’t we trust the jury?
iii. Freedom to K  point of K is to give effect to the intent of
the parties
6. How to get around p.e. rule:
a.
b.
c.
d.
e.
“Merger clause” indicating that K is completely stated
R2d §214(d), (e)
Doesn’t include collateral agreements
Doesn’t exclude evidence of negotiations after K was made
Under UCC, can always supplement with course of dealing, trade
usage, etc.
FILLING GAPS (IMPLIED TERMS)
In cases of indefiniteness, modern courts show an increased willingness to
supply missing terms re: questions the parties never even thought and did not
address in the K.
1. Duty of “good faith” – Wood v. Lucy  court required that ∏ make good
faith, reasonable efforts to promote ∆’s fashion creations.
a. Dalton v. ETS  SAT case; court found that ETS violated duty of good
faith – they were not req’d to show that ∏ cheated but should’ve
taken extrinsic evidence he offered (sickness, prep course, etc.
since the K said they would do so.
2. Requirement Ks – courts will often say that parties have duty of good
faith in order to prevent a party from sabotaging the other by changing
the product required or produced just enough to escape from K
a. Eastern v. Gulf  court found that Eastern acted in good faith to
buy req’ts from Gulf
i. UCC §2-306 – parties are bound if actions are consistent with
good faith
ii. UCC §1-201(19) – Good faith means honesty in fact in conduct or
transaction concerned. Note: this is a subjective standard 
i.e. are you telling the truth?
31
iii. UCC §2(103)(1)(b) – Good faith for merchants – honesty in fact
and observance of reasonable commercial standards of faith
dealing in trade
1. 30 year relationship, Gulf never complained and
consistent with industry standard
2. Courses of performance, courses of dealing and usages of
trade
3. Opportunism  typical type of bad faith case where one party is trying to
take advantage of the other party. If co does something for good business
reasons, usually not bad faith. On the other hand, if they are
interfering w/ other party’s performance or don’t notify about changed
circumstances, usually bad faith.
a. Market Street Associates v. Frey (Posner) -- ∏ tried to exercise a
option in clause that ∆ didn’t know existed. Posner said that “good
faith” doesn’t make you your “brother’s keeper” and that in
negotiations, superior knowledge may be exercised; BUT if MSA had
reason to know that ∆ didn’t know about paragraph, then not
enforceable.
4. Percentage Leases: fixes rent as a stated percentage of lessee’s receipts
or profits
a. Dickey v. Philadelphia Minut Man Corp  carwash lease set at 12.5%
of annual gross sales, minimum $1800. Lessee switched from high
gross, low profit to low gross, high profit business and ∏ gets mad
b/c resulted in less rent, but court found for ∆ b/c the minimum
amount is an express term that was intended to protect ∏.
5. Best Efforts Requirement
a. Bloor v. Falstaff Brewing Co.  beer co purchased for $4 million +
royalty (50 cents/barrel); court found that ∆ failed to use best
efforts b/c they decreased ads, closed distribution centers; there
was an express term in the K that stated that they had to have high
volume of sales
b. Wood v. Lady Duff Gordon
6. Termination of At-Will Ks
a. Tension b/n 2 views:
i. Independent Duty of Good Faith  have the right to terminate
at any time, sometimes expressed in K
ii. If duty of good faith can’t override express term, there is a
default rule
b. Bak-a-lim Corp. v. Alcoa Products  distributorship K of aluminum
siding/products distributorship. ∆ kept secret the fact that they
were going to terminate K. ∏ expanded in reliance; Court held that
when the K is silent, principles of good faith to fill the gap as
default
c. Employment Ks
i. Wood’s Rule: absent contrary agreement, employment can be
terminated at will by either employee or employer
1. note: Courts have never held that employers have to have
a reason; there just can’t be an illegitimate reason for
firing someone
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ii. Public Policy exceptions  goal is to protect employees fired
for reasons that violate public policy (i.e. whistle-blower or
refusal to participate in illegal actions)
1. Sheets v. Teddy’s Frosted Foods  quality control manager
noticed substandard products and was eventually fired
when he complained. The problem lie where to draw the
line, but the court said that it was unfair to have to
choose b/n being criminally sanctioned or keeping his job
so found for ∏.
a. Dissent: this is giving sword to employees to coerce
employers into retaining them
2. Balla v. Gambro  in-house counsel advised against
substandard kidney machines, was fired and reported to
FDA. Court found that he was obligated by professional
oath and law and would therefore have to suck up the
losses he got; reasoning lay in the fact that attorneyclient relationship would be ruined and would prevent
people from being completely honest in the future.
(Note: this isn’t majority rule, not CA rule)
USAGE: TO SUPPLEMENT OR QUALIFY
1. UCC §1-205(3) – Express terms, course of dealing, trade usage construed
as consistent; if inconsistent, express terms control
a. Exceptions will be allowed if they don’t entirely negate express
terms:
i. Nanakuli Paving v. Shell Oil  long term supply K stating that
seller’s posted price governs price. ∆ had previously given P
price protections but refused. Even though this seemed legit
under express terms of K, court held for P b/c price protection
trade usage was custom in the industry and formed a broad
exception to express term while not “swallowing it up entirely”
(i.e., the two terms can co-exist)
2. UCC §2-202 – Express terms may be explained or supplemented by course of
dealing, trade usage, course of performance
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HAVE THE TERMS OF THE K BEEN PERFORMED?
PERFORMANCE AND BREACH
Condition
Promise/Duty
Promissory
Condition
Doesn’t
occur
Doesn’t
occur
Avoid K, Discharge duty to perform
Doesn’t
occur
Damages for breach & discharge duty to perform
Damages for breach, must return performance if
substantial performance
Condition: in bilateral K, performance is sometimes conditional on the
happening of an event; that event which must occur before party’s performance
is due is the condition
EXPRESS CONDITIONS
Any condition on which the parties agree
1. Peacock v. Modern A.C.  Gen. Ker alleged that “condition” clause in K
made payment to subKers conditional on the receipt of full payment from
ownder. Court found that it wasn’t a condition, but just set a
“reasonable time for payment”
2. Gibson v. Cranage  P solicited job of painting D’s deceased daughter’s
portrait; D resisted but P assured him that “if he wasn’t satisfied” he
didn’t have to buy it. Court said there was no K b/c he wasn’t satisfied
and had exercised his judgment in “good faith”
1. UCC §2-314  Warranty of Merchantability uses reasonableness
standard; fair average quality for fungible goods
CONSTRUCTIVE CONDITIONS
Not agreed on by parties (even by implication) but which court imposes as a
matter of law, in order to ensure fairness
1. R2d § 232  One party’s promise is a constructive condition of the K
unless a contrary intention is clearly manifested in all bilateral
promises
2. Kingston v. Preston  ∏ was ∆’s apprentice. ∆ agreed to sell business to
∏, payment to be made in installments. ∏ promised to post a security
bond, but didn’t so ∆ refused to sell. Court found that there was a
constructive condition b/c the promises were not independent.
3. Independent v. Dependent Conditions
a. Independent: one party doesn’t perform, other party must perform;
but then sue 4 breach
b. Dependent: each party’s duty of performance constructively
conditional upon the other’s substantial performance of all previous
duties (R2d §232)
4. Substantial Performance:
a. mitigating doctrine to protect breaching party that has only
breached in a minor way
b. defined: “I know it when I see it”
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i. Not fraudulent or intentional
ii. Realists look to intent of parties & essence of the bargain
iii. Affects substantial value
c. the rights of the injured party depend on the severity of the breach
i. Material breach by B  A can w/hold performance or K price
ii. Minor breach or Substantial performance by B  Damages: K
price – damages
d. party who is to perform work will be held obligated to substantially
complete that work before he may received payment (if no
express/implied agreement)
e. Stewart v. Newbury  P did excavation and concrete work and wanted
to be paid before work was finished (according to trade practice,
i.e. “usual manner”) and when ∆ refused, stopped work. Court found
that if there was no agreement re: payment, P had to substantially
perform before being paid.
f. Note: this is the antithesis to material breach; if there’s material
breach, withhold performance (K price), while if there’s a minor
breach/substantial performance, dissatisfied party can’t withhold
performance but can sue for damages
i. Willfulness of breach: more likely to be regarded as material
than breach caused by negligence or other factors
1. Trivial defects still allowed: Jacobs & Young v. Kent  K
for different brand of piping than what was installed.
Court weighed the purpose to be served, desire to be
satisfied, excuse for deviation (willfulness), cruelty of
forced adherence (economic waste)
ii. Essential purpose has been met: Plante v. Jacobs  P built
house for D, dispute arose so left work unfinished and
misplaced wall by one foot. Court held for D since essential
purpose was performed, therefore substantial performance b/c it
was a stock floor plan w/ standard printed forms – s.p. doesn’t
require perfection
iii. Materiality difficult to determine: Walker v. Harrison  lease
has maintenance agreement; tomato, rust & cobwebs build up. D
requested clean up but P didn’t respond, so D withheld
performance. Court held that there was no material breach (on
W’s part) so D ends up being the breaching party…should’ve
covered and then sent the bill to W. R2d §251
g. Example: Wage earners
h. Exceptions: tuition
i. Cynical View: ruling came down this way b/c most judges are
employers
The Rule of Perfect Tender: The UCC Approach
1. Buyer can reject goods for any reason, even minor defect
2. UCC – 2-601 Perfect Tender Rule – Buyer’s Rights
a. Goods or tender that fail in any respect to conform:
i. can reject the whole; or
ii. accept the whole; or
iii. accept any commercial units or units and reject the rest
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3. UCC – 2-508 Right to cure – Seller’s Rights
a. If time hasn’t run out, seller can try to make a conforming delivery
b. Under certain circumstances, seller can have further reasonable time
after time of performance, if the reasonably believed that original
shipment was conforming
4. UCC 2-608
a. Buyer can revoke acceptance if substantial impairment when (1) good
accepted on reasonable assumption that nonconformity would be cured
and it has not been cured, or (2) goods were accepted without
discovering their nonconformity and if acceptance was reasonably
induced either by difficulty of discovery before acceptance or by
seller’s assurances
5. UCC 2-612
a. In installment Ks, can reject an installment which is non-conforming
if it substantially impairs value of that installment and cannot be
cured
6. Analysis of rule:
a. much stricter rule for the buyer
b. but mitigating rules for the seller
c. mitigating doctrines protect the breaching parties
Divisibility
1. K where both parties have divided up their performances into units or
installments so that each part of performance is the rough compensation
for a corresponding part performance by the other
2. E.g. K to build house and swimming pool; house built, pool not; court can
require payment for house but not for swimming pool
Restitution
Breaching party can ask for fair market value of work they put in so far
Periodic Payments
Legislation in most states
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Suspending performance & terminating the K
1. Progress cautiously: Q for injured party whether to suspend performance;
if breach is immaterial & you suspend, you may be liable for the breach
BREACH
Material
Suspend
performance
Cure?
Treat as
partial
Not material (substantial
performance)
Treat as total
and terminate
ANTICIPATORY REPUDIATION
If B indicates it will breach, A can act immediately, even if it is before time
for performance has come. This can either be expressed or implied (by conduct)
Common law – express of implied announcement of intention not to perform all or
part of a K
a. A repudiation of a BILATERAL K, w/ duties owing from both parties
b. The repudiated duty results in a material breach AND
c. The repudiation was definite & unequivocal
2. UCC – statement of intention no to perform except on condition which goes
beyond the K (§2-610) OR failure to provide reasonable assurance (§2-609)
a. If 1 party uncertain of performance, may suspend performance until
receive assurance of K or 30 days
b. Does not suggest that any breach is ok to suspend performance on
c. May resort to any remdy for breach, while urging retraction
3. Certainty  if time for performance hasn’t come, then hard to ascertain
damages
4. Recipient of repudiation free to make other arrangements (Hochster v. De
La Tour)
5. Recipient is free to sue even before time of performance has arrived
(Hochster)
6. Recipeint generally has a duty to mitigate damages
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7. What if recipient urges a retraction?
At your peril.
8. Repudiation may not be withdrawn if the other party changed their position
on reliance on your repudiation EVEN IF other party urged retraction.
9. Hochster v. De La Tour  H was supposed work for D. K on 4/12, D
repudiates on 5/11, H sues on 5/22, H gets another job b4 5/22-6/1, K was
supposed to begin on 6/1. D was arguing that H couldn’t sue until 6/1 and
that it would benefit everyone if H exercised duty to mitigate. Court
rules that future promises have present value.
10.
Kanavos v. Hancock Bank & Trust Co.  K had option to buy stock. H
repudiated by selling it to someone else. K sued, but didn’t have ability
to exercise his option and had to show that he would’ve been able to buy
it from the bank. The court found for H. If you can’t fulfill your part
of the bargain can’t sue other party for repudiation.
11.
Maddox v. Coalfield Services  M was subcontracted to C (gen
contractor). M tried to ask C several times to sign written K. C didn’t
sign written K. C stopped work and gave ultimatum: sign and pay 45%. M
says it will sign and add liquidated damages provision. Where was the
breach? Anticipatory breach by silence of M at the repeated requests for
signing of the K and furthermore, the insistence of liquidated damages
clause after M stopped work was proof that C didn’t want to enforce the K.
12.
UCC 2-609: Right to Adequate Assurance of Performance
a. When one party is reasonably insecure about the other party’s
performance, it may demand adequate assurance of performance in
writing. If it does not receive the assurance, it has the right to
reasonably suspend its performance for yet received agreed return
b. Between merchants, reasonableness of grounds of insecurity and
adequacy of assurance is determine by the commercial standards
c. Acceptance of improper delivery or payment does not negate the right
to demand assurance
d. Failure to provide an adequate assurance is a repudiation of
contract
13.
UCC 2-610: Anticipatory Repudiation
a. If one party repudiates and substantially impairs the value of
contract, the other party may:
i. Wait for a commercially reasonable time
ii. Resort to any remedy for breach
iii. Suspend performance, but has a right to identified goods
14.
UCC 2-611: Retraction of Anticipatory Repudiation
a. Repudiating party can retract repudiation until the next performance
is due unless the other party had already changed position in
reliance of repudiation
b. Retraction must clearly indicate intend to perform. An assurance of
performance must also be included
c. Retraction reinstates rights of repudiating party with due allowance
and excuse for to the aggrieved party
15.
Exceptions:
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a. Unilateral contracts where the contract only depends on the
repudiating party’s performance (Diamond)
b. Bilateral contracts where one party had already substantially
performed
c. Payment in installments. The repudiation of the paying party after
the aggrieved party had substantially performed will not accelerate
the time for payment.
MISTAKE
(Excuse, not defense) Belief that is not in accord with the facts (§151)
Requirements for a mistake (R2d § 152)
1. Basic assumption: mistake must concern a basic assumption on which the K
was made
2. Material effect: mistake must have a material effect on the agreed
exchange of performances (i.e. one party must have actually suffered b/c
of the mistake)
3. Risk of mistake: adversely affected party must not bear the risk of the
mistake (§154)
a. If all three conditions are satisfied then MUTUAL MISTAKE and remedy
is that K is voidable by the adversely affected party (§§157,158)
b. If UNILATERAL MISTAKE (only one party made mistake) § 153 – must be:
i. unconscionable to enforce, or
ii. other party had reason to know of the mistake and was trying to
take advantage of it
MUTUAL MISTAKE
1. Sherwood v. Walker  D agreed to sell P a cow.
barren but it turned out it was pregnant. Barren
different in kind, and so the court found that K
modern courts would rule the other way b/c buyer
They both believed cow as
cow and pregnant cow are
was rescindable  most
should be able to profit.
2. Wood v. Boynton  parties thought that the diamond was the topaz.
Discovered later that it was actually a topaz. The court found that the
girl was allowed to rescind. Girl probably thought that she was taking it
to a jeweler and would get a fair estimate of the price. Since he was an
expert, he shouldn’t have been allowed to profit from his mistake. This
would probably be better than jeweler’s “conscious ignorance” argument.
Posner talks about allocating risk to the party who is the cheapest cost
avoider, the one who is best able to bear the risk b/c they have insurance
or b/c they had resources to investigate
3. Stees v. Leonard  P Ked w/ D to “erect and complete a building.” The ∆s
tried to build it twice, each time it fell down. They stopped performance
b/c the soil was quicksand. The court held for the ∏s b/c they bound
themselves to the K and hardship wouldn’t be enough to excuse him. P got
restitution damages  out-of-pocket costs, progress payments
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a. Pre-existing duty rule and p.e. rule  scissors effect: if there are
oral agreements b/f it might be barred by p.e. but if it is after,
it might be barred by the pre-existing duty rule.
4. Renner v. Kehl  K to sell leases of land – mistake was about the water
available *water was basic assumption*. AZ case, where D wanted to grow
jojoba which needs lots of water, which D had told the P about. This was
a mutual mistake.
Impracticability v. Mistake
Impracticability – UCC 2-615,
R2d 261
1. occurrence of contingency
2. non-occurrence was basic
assumption not fairly to be
regarded as a risk of K
3. made performance
impracticable (excessive or
unreasonable costs) any
alternative means.
Note: courts are very reluctant
to give relief when it deals
merely with costs
Mistake
1. mistake re: facts
2. Fact = basic assumptions
3. material effect
4. adversely affected party
didn’t bear risk
IMPRACTICABILITY (SELLER’S WAY OUT)
If, due to changed circumstances, performance would be infeasible from a
commercial viewpoint (b/c of extreme increase in costs, a tremendous increase
in the time needed for performance, etc.) the promisor is excused just as she
would be if performance were literally impossible. R2d §261
Classical Formalists
1. Only evoke the impracticability doctrine only in act of God or death.
(Theory of Implied Condition: Legal fiction that says that when K was
made, there would’ve been a meeting of the minds to allow that condition.
This is a legal fiction criticized by legal realists who’d say that there
was no real contemplation of such circumstances, so look at
reasonableness.)
2. Taylor v. Caldwell  K to use concert hall. Concert hall burned down, so
the court allowed the K to be excused. Rationale: performance is excused
when it is considered an implied condition that it depends on the
continued existence of a given person or thing. The court relied on civil
law re: bailment of slaves. I.e. if death of slaves is enough, then
destruction of a thing (hall) is enough
UCC 2-615: Excuse by Failure of Presupposed Cond.’s (For sellers only)
1. Non-occurrence of a contingency that was a basic assumption upon which the
contract is based in good faith could be an excuse for non-performance
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2. If the non-occurrence only affects a part of the output, the seller must
allocate the remaining output in any fair and reasonable manner
3. Seller must notify buyer seasonably if it allocates the remaining output
UCC 2-613: Casualty to Identified Goods
1. If goods suffered casualty without fault from either party and before the
risk was passed to the buyer
2. If the loss is total, the contract is avoided
3. If the loss is partial or that the goods no longer conform, the buyer may
still demand an inspection and either void the contract to accept goods
with allowance for the deterioration. Buyer has no other right against the
seller
Foreseeability of Risk
1. Is usually not enough alone to excuse K
2. Factors to look at include: Express terms (i.e. price), Other terms
agreement/negotiations, trade, custom, economic analysis (who’s superior
risk bearer?)
3. Transatlantic Financing Corp. v. U.S.: P Ked with D to carry wheat from TX
to Iran. They usually went through the Suez Canal, but it was closed, so
they wanted to be excused from K. The K language said that the K said
“usual and customary route” and they said it was impracticable. Court
said that foreseeability argument was not enough b/c sometimes it’s too
burdensome to contemplate every situation. It also wasn’t enough that the
costs were higher, i.e. in order for the costs to be considered, the cost
has to be excessive.
4. In fixed price contracts, courts usually hold that the partied implicitly
allocated the risk of the price rise on the party agreeing to supply the
good or service for the fixed price.
a. Eastern Airlines  Gulf makes two arguments: 1) gov’t imposed two
tier pricing wasn’t allowing the pricing mechanism work the way they
wanted it to and 2) price increases in oil makes performance
impracticable (intra-company profits part of the costs they were
complaining about); Here, a basic assumption of K re:volatility of
the Middle East, political situation, energy crisis is widely known
 Gulf assumed the risk under the K re: embargoes, etc. – they were
not naïve party at all and a rise in prices is not enough (2-615)
Force Majeure Clauses
During negotiation, parties may insert clause that excuses performance if
impediment arises.
41
1. Both UCC 2-207 and 2-615 recognize such clauses
POLICY CONCERNS
1. Classical – imply fiction of assumption that thing would still exist
2. Realist – not an ex-ante condition, ex post ct should look to allocate
risks
a. Determine superior risk bearer
i. Party w/ control over price – ability to spread/pass on costs
ii. Insurance
iii. Diversification – Big companies have diversified mkts & are
thereby better able to bear the risk. Therefore, look to
overall profitability of the company, not just the financial
situation of a particular division
FRUSTRATION OF PURPOSE(BUYER’S WAY OUT)
1.
R2d §265
A. Occurrence of an event
B. Non-occurrence of basic assumption of the K
C. Substantially frustrates principal purpose of the K
2.
Krell v. Henry  King’s
apartment for the parade,
basic assumption of the K
been frustrated. Landlord
anymore
3.
Foreseeability and Allocation of Risk is the dominant principle (basic
assumption)
coronation was cancelled, landlord leased his
D breached b/c no parade. Court says that the
was to see the parade so the primary purpose had
got the deposit but renter didn’t have to pay
A. Chase v. Paonessa  D entered into K with gov’t for highway
construction. Ordered concrete median barriers from P. Citizen
protest and lawsuit, so the gov’t ended up canceling the concrete
barriers as a compromise. D had paid P for what he had received
already. In anticipation, D sends P a letter of cancellation. D’s
performance was excused even though both parties knew that MA had the
right under its K w/ D to cancel part of project because there was
evidence that parties “did not contemplate the cancellation for a major
portion of the project of such a widely used item as concrete median
barriers and did not allocate the risks of such cancellation”
B. NIPSCO v. Carbon  NIPSCO entered into a long term coal purchase
contract, but later had to stop buying because of a government order to
find cheaper energy sources. NIPSCO took a gamble at energy prices and
lost and therefore should bear the risk.
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What are the Remedies if the K has been Breached?
COMPENSATORY
AVOIDABLE DAMAGES
Duty to
General
avoid a
expense
Mitigate
rule: P may NOT recover for breach if P fails to make an effort to
particular item of damage by reasonable effort, without undue risk,
or humiliation
1. Note: it’s not that they have a duty (i.e. obligation for noncompliance
which may be judicially sanctioned) but that ∏ will lose the right to
recover damages
2. Sellers – good faith & commercially reasonable manner
3. Buyers – cover by §2-712 & then repurchase goods in a reasonable time
4. Rockingham County v. Luten Bridge Co.  P Ks to have ∆ build bridge.
Midway through construction, P orders ∆ to stop work. D completed bridge
anyway. Court did not allow ∆ to recover for any damages incurred after
the stop work order.
Reasonableness Standard
P is not expected to enter into dubious Ks, incur considerable expense or
inconvenience, disorganize his business, damage rep or honor, break other Ks,
in order to mitigate the damages from D’s breach
Employment/Personal Service K
Courts are usually very lenient toward ∏ and do not require employees to accept
any position that is substantially different from or inferior to the one Ked
for.
1. Parker v. Twentieth Century  Shirley MacLaine Ks to perform in movie
musical. ∆ cancels the K but offers to pay P for the same salary for a
western movie. The court held that the 2nd movie was “different and
inferior” employment and P was not required to accept in order to mitigate
damages. The sole question is whether she made reasonable efforts to
procure employment that was substantially the same as the cancelled work.
a. Dissent said that the two jobs did not have to be identical for P to
be required to accept the second one.
Diminished Value Rule
Cost of completion v. decrease in value  if the value of the ∆’s defective
performance is less than the cost of remedying it then only diminution in
market value should be awarded.
1. R2d §338: as a default, award cost of remedy defect unless the ∆s can
prove disproportionate cost
2. Rationale:
a. Economic waste: wasteful expenditure to compel performance that no
one values
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i. Jacobs v. Young  Reading pipe case, allowed D to collect the
difference in value since it would be nominal/nothing and there
would be no great benefit to the D along with great loss to the
P.
ii. Critics of economic waste say: “Right to get what was bargained
for”  Groves v. Wunder  D got the right to remove sand and
gravel for 7 years and the use of P’s screening plant. P got
$105,000 and promise to regrade land, but D breached, arguing
that the diminution in market value was much less than the cost
to remedy. Court said the value of the land was not relevant
and that expectation damages were appropriate since the parties
bargained for the promise and the rent and the ∆ breached in
bad faith.
b. Clearly disproportionate: cost clearly disproportionate to probable
loss in value
i. Peevyhouse v. Garland  K gave D the right to strip mine for
five years and gave P lease and promise of restorative and
remedial work at the end. Since the cost to remedy was $29,000
and the increased value of the property would only be $300, it
was clearly disproportionate and only the diminution value was
given ($300).
c. Look for: willfulness/bad faith, small value of the land, paid for
value, unique personal value of land, did they go to the trouble to
specify?
d. Policy: If you do give damages to remedy a defect, is there really
economic waste? Well, it just ends up being a transfer of wealth.
Foreseeability
1. Consequential damages usually available ONLY if foreseeable
a. Test for damages (either)
i. Arise naturally according to the usual course of things (i.e.
would a reasonable person in the shoes of the ∆ foreseen?)
ii. Arise from the special circumstances under which the K was
actually made and only if they were communicated to the D.
b. Hadley v. Baxendale  P operated mill; when shaft broke, they Ked w/
Ds for shipment to get the shaft repaired. They did not tell D that
the mill was closed b/c the shaft was broken. ∆ negligently delayed
delivery, resulting in losses b/c mill could not open. Court held
that P could NOT recover for lost profits b/c damages did not arise
naturally, according to the usual course of things and did not
inform the D about the special circumstances
2. “Tacit agreement”: extent of liability is limited to what fairly may be
presumed that P would have assented to if they had been bargained for.
(generally not favored approach  UCC 2-715 rejects it)
a. Kenford v. County of Erie D planned on building a stadium. P
donated land in exchange for DSI’s leasing/management rights. P also
owned surrounding land, hoping for appreciation in value and profit
from stadium. D canceled the project, P sued for breach. Court said
that there was a “tacit agreement” problem  damages legit only if
there was an actual bargain or if the parties contemplated liability
for anticipated appreciation value, (stricter reading of the Hadley
rule) thus narrows the D’s liability
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3. UCC §2-715  Uses reasonable test instead of tacit agreement, i.e. allows
buyer to recover consequential damages if reasonably foreseeable
a. Delchi v. Rotorex  D sent non-conforming compressors to P in 3
shipments. P asked for conforming goods but D refused. Court held
that if a seller knows it is selling to a buyer for resale, loss of
such profits is generally regarded as foreseeable.
Emotional Distress
1. Generally damages are not given b/c they are aren’t really foreseeable,
speculative & hard to calculate
2. Two traditional exceptions:
a. Breach causes bodily harm
b. Exceptional circumstances: Weddings, funerals, homes
3. But what about employment K breaches? No…but Gross thinks that’s not
necessarily a good thing b/c they can be emotionally devastating and
foreseeable.
Causation
Damages not awarded for losses not stemming directly from the breach
SPECIFIC PERFORMANCE
Generally, money damages preferred over specific performance, but when damages
are too speculative or uncertain to be calculated, damages are not a substitute
for ∆’s performance on the K , or where it is likely that a damage award could
not be collected, court may award s.p.
Prerequisites
1. Inadequacy of damages: damages are not adequate to protect the injured
party
a. Speculative/hard to calculate: matters that involve taste or
sentiment
b. Purchase of substitute: cannot purchase a substitute for the Ked
performance
i. Laclede v. Amoco P and D had K where D was to supply gas to P
over long term. P had liberal cancellation rights, but D was
not allowed to cancel the K unless certain conditions occurred.
Court said s.p. necessary b/c $ damages inadequate  the terms
of K were unique
ii. Klein v. PepsiCo -- three similar jets were available on the
market, so no s.p. – rise in mkt price alone was not sufficient
for s.p.
c. Definiteness – terms of K must be definite enough for the court to
be able to frame order
d. Difficulty of enforcement or supervision
i. Construction Ks: usually no s.p. b/c of difficulties in
supervising performance and judging results
1. Northern Delaware v. E.W. Bliss  D Ks to expand and
modernize a plant. Work was slow in progress so P wanted
order to require D to employ more people (not in K) but
court wouldn’t order s.p. b/c it was impractical. P’s
appropriate remedy was to sue for damages after.
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ii. Personal service Ks: s.p. almost never ordered
1. Concerns about forced labor and examining the quality of
the service
2. De Rivafinoli v. Corsetti – opera singer case. No s.p.
even though damages are uncertain.
Land-Sale Ks
Most common situation in which s.p. is decreed since $ damages inadequate (no
other identical piece of land) and it is not difficult to supervise.
1. Buyer Ks to resell  usually award b/c buyer might be liable for damages
2. Buyer breaches before land has been conveyed  usually award b/c value of
land is speculative – i.e. hard to know diff b/n market price and K price
a. But if seller has already conveyed the land, no s.p. b/c damages
will be adequate
Buyer’s Right to Specific Performance or Replevin – UCC §2-716
1. goods are unique, or in other proper circumstances
2. decree may include terms/condition, i.e. payment of the price, damages,
other relief
3. buyer must make reasonable efforts to find cover
Economic Considerations
1. If benefits of ordering s.p. outweigh costs, award decree of s.p.
2. Walgreen v. Sara Creek  Posner considered the costs of specific
performance and said it was appropriate:
a. Benefits: shifts burden of cost determination to parties (cheaper
for society), fairer, faster, more reliable
b. Costs: bilateral monopoly problem, costs of supervision, breakdown
of negotiations
EXPECTATION DAMAGES
Default rule  had the K been preformed
“Give the P the Benefit of the Bargain”
Put the P in the position she would have been in had the K been performed by
the D. Normally, this means the P would get the profit she would have made.
1. Hawkins v. McGee  P recovered difference b/n value of perfect hand and
hairy hand, i.e. the difference b/n what he would have received, had the K
been performed and the position he was left in after D’s breach.
Formula
1. Loss in value + other loss – cost avoided – loss avoided/avoidable
a. Loss in value  promised – what you got (perfect hand – hairy hand)
b. Other loss
i. incidental (amount spent trying to salvage the transaction)
ii. consequential (anything lost as a result of the nonperformance)
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c. Cost avoided (expected cost – actual cost)  what you don’t have to
pay for, once the K is stopped
d. Loss avoided  what you were able to cover
2. Lost profits + cost of reliance + other loss – loss avoided/avoidable
a. Lost profits  what was promised – what would have been spent
b. Cost of reliance  $ spent on work already done in reliance
3. Loss in value – cost avoided = lost profits + reliance costs
Overhead is not usually included in P’s cost of completion (amount P saved by
not having to finish)
1. Rationale: overhead is fixed, so there is no saving of any of it as a
result (good for P)
2. Vitex v. Caribtex  D backed out of K after P had reopened the plant,
ordered chemicals, recalled its work force and made necessary preparations
to process wool. P sued D for breach.
i. Overhead remains constant no matter what, so it can be recovered
 overhead is part of gross profits, not seller’s costs
Reasonable certainty
P may only recover for losses established w/ reasonable certainty – R2d §352
1. Must show the amount of the losses w/ reasonable certainty
2. Profits from a new business
a. Courts are usually reluctant to award damages b/c too speculative
b. But if P can show he ran a previous operation of similar nature, may
award
i. Fera v. Village Plaza  D breaches K to rent certain retail
space to Ps for a book and bottle shop. Ps recovered profits
that would have been made, but since they had prior experience
and presented testimony re: profits, it was enough evidence
from which jury could award lost profits.
UCC Remedies
Seller UCC 2-703
1. Resell and recover – (d) and
2-706
Contract price – resale price
and other loss
2. No resale, resale possible,
(e) 2-708(1)
Contract price – mkt. price and
other loss
3. Resale not possible 2-709
Contract price
Buyer UCC 2-711
1. Buy substitute goods 2-712
Replacement price – Contract
price + other
2. Don’t cover where possible
2-713
Market price – contract price +
other loss
3. Cover not possible 2-716
Get SP or recover goods id’d to
contract
1. Cover; Buyer’s Procurement of Substitute Goods
a. After breach, buyer may cover in good faith to purchase reasonable
substitute goods and then may recover the difference b/n the cost of
cover and the K price + incidental/consequential damages – costs
avoided b/c of seller’s breach. Note: failure to cover does not bar
∏ from remedy.  UCC §2-712
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i. consequential: profits buyer could have made by reselling goods
§2-715(2)
ii. incidental: expenses reasonably incurred in inspection,
receipt, transportation and care and custody of goods of goods
rightfully rejected, any commercially reasonable charges,
expenses or commissions in connection w/ effecting cover, and
any other reasonable expense incident to delay or breach -- §2715(1)
b. Laredo v. H&H  ∏ contracts to buy hides from ∆. ∆ breaches. ∏
covers by purchasing other hides and sues for the difference. Buyer
recovered for the extra cost of purchasing the other hides b/c he
acted reasonably. Furthermore, the seller had the burden of proving
that the costs of cover were too high.
c. If buyer does not cover, then give difference b/n market price and K
price - §2-713
Resale by Seller
Usually when buyer rejects goods or repudiates b4 they are even shipped
1. Formula
a. resale price – K price + incidental damages – costs avoided -- §2706(1)
b. sale must be made in good faith
2. If seller does not resale, he may recover difference b/n market price and
unpaid K price + incidental damages – expenses saved in consequence of
breach - §2-708(1)
Lost profits
Seller may not be adequately compensated by the K/resale differential; measure
of damage: profit, including reasonable overhead, that would have been made
from full performance by buyer + incidental damages  §2-708(2)
1. Lost Volume Sellers – lost profit + incidentals – loss avoided
a. This is a situation where the buyer’s breach entails the loss of
a profitable sale because seller could have sold the good to the
2nd customer anyway, since seller was willing/able to supply the
demand of both customers, so damages are the profits (including
reasonable overhead) that would’ve been made from full
performance by the buyer
b. R.E. Davis v. Diasonics P paid D $300,000 deposit for contracted
equipment to be resold to doctors. P breached. ∆ sold some of
the equipment to others. P sued for the deposit and ∆
counterclaimed invoking UCC 2-718(3) claiming that they were a
lost volume seller. D did not recover b/c they did not show that
they would have the capacity to make two sales AND that those two
sales would have been profitable.
RELIANCE DAMAGES
Put the Π back where they were before the K was formed – remedy limited as
justice requires.
1. Gains prevented + losses caused
a. Most common situations:
i. P cannot show lost profits w/ sufficient certainty
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ii. there is no legally enforceable contract but P is entitled to
promissory estoppel
2. Promissory estoppel cases  reliance b/c although P should not be barred
from recovery, P should not get full benefits of the usual Ktractual measure
since there was no traditionally enforceable K
3. Doctor-Patient Ks  few courts have awarded reliance where ∏ shows doc
affirmatively promised to achieve a particular result
a. Sullivan v. O’Connor  Doc promised to fix ∏’s nose and that it would
improve her appearance, but didn’t perform well. ∏ got reliance
damages b/c restitution wouldn’t be enough and expectation would be
excessive, forcing docs to practicing “defensive medicine”
RESTITUTION
1. Value to the D of the P’s performance (focuses on breacher)
a. Goal: prevent unjust enrichment and prevent D’s gain at P’s expense
b. Calculation: value rendered to the D, with market value as the standard
2. Losing Contracts
a. Restitution may be awarded where P has partly performed and would have
lost $ had the K been completed
i. United States v. Algernon Blair  P Ks to perform sub-K work for
D. D breaches after part of the work had been done. Even though
D showed that P would’ve lost more than costs already incurred,
court found that P was entitled to the reasonable value of their
performance, i.e. the amount for which such services could have
been purchased from one in P’s position at the time and place the
services were rendered.
PUNITIVE DAMAGES
1. Purpose: to punish the wrongdoer
2. Rarely awarded in K cases b/c considered inappropriate b/c breach is not
viewed as a moral wrong.
LIQUIDATED DAMAGES
An explicit agreement as to what each party’s remedy for breach of K shall be.
1. Contracting around the Hadley Rule
a. Waive liability for consequential damages
b. Set damages before (LD)
2. Rules of Enforceability  UCC § 2-718(1), R2d § 356(1)
a. Amount fixed must be reasonable relative to anticipated or actual loss
from breach
b. In some courts, harm caused by breach must be uncertain or very
difficult to calculate accurately, even after the fact
c. Inconvenience of otherwise obtaining an adequate remedy
d. Note: if the amount is unreasonable, then it is considered a penalty,
which is not allowed!
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e. Note: this is more relaxed than the C/L rule b/c it allows
reasonableness to be measured as of the time the K is made or after the
breach. C/L requires reasonableness as of the time of King
3. Wasserman’s v. Township of Middletown  P rented store space from D under a
30-year lease. Lease provided that if D cancels leas, D will pay P 25% of
P’s average annual gross receipts for the 3 year preceding the breach. D
cancels lease after 17 years, P sues for enforcement of LD clause. Court
held that damages only awardable if LD clause was reasonable.
4. Dave Gustafson v. State  67 days delayed construction of highway. State
w/held amount stipulated in LD clause and court upheld it b/c they said it
passed the test of LD.
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