Chapter 2 - The Classical System of Contract Law:
Mutual Assent and Bargained-for Exchange
1) Bargained for Exchange
Generally
-Formation of a contract involves 2 steps which symbolize collectively mutual assent:
1) offer
2) acceptance
-An offeror may revoke an offer at any time prior to its acceptance which is a long standing common-law
rule
-Termination may also result if the offeree takes action that can be interpreted as a rejection (such as by
making a counter-offer).
-In order for there to be a contract, there must have been a “manifestation of mutual assent” (R.S. §17)
-See Lucy v. Zehmer, where D claimed he was drunk and was joking when sold own farm.
Contract was enforceable despite D’s “undisclosed intention” to regard proceedings as buffoonery.
-See Peerless case where since there had bee no ‘consensus ad ideam’ (meeting of the minds), there could
be no contract.
Offer And Acceptance Generally:
1) Offer
-In Fairmount Glass Works v. Grunder-Martin Woodenware, seller’s quote “we quote you. . .for
immediate acceptance, and shipment not later than. . .” Court held that this was a firm offer. (in this
case, seller realized after communication that inventory was depleted).
-However, as a general rule, the purchaser usually plays role of offeror.
-In normal use, “quotation” implies reservation of right on the supplier’s part to accept or
reject customers’ orders more or less at will.
-In Lefkowitz v. Great Minneapolis Surplus Store, D forced to specifically perform when it put an ad in a
circular inviting customers to come in for a lapin stole @ $1.
-Usually, an advertisement is nothing more than an offer to deal.
2) Acceptance
-Once accepted, an offer becomes a contract, although offeror is free to revoke at any time up till
acceptance.
-What constitutes an effective acceptance?
-Answer depends on offer itself (offeror is the master of the offer)
-Sometimes, prompt commencement of performance can be considered an acceptance.
-If I ship to you as soon as you make an offer, you can’t say that there is no contract because I
didn’t accept in writing.
-This is reflected in UCC §2-206, “an offer can be accepted by any reasonable medium,
including commencement of performance.
-This is unless otherwise indicated.
-R.S. §§32 & 62 indicate this, but also say that it’s a “two way street” (if you promptly
execute, you are a promisor in your own right.)
-In Ever-Tite Roofing Corp. v. Green, a contract stated “agreement shall be binding only upon written
acceptance or upon commencing performance of the work”
-P had begun a credit check, and this was deemed “performance”, and contract was upheld. (lost
wages and lost profits were awarded)
-Unilateral offers are revocable by the offeror at any time by offeror prior to beginning of
performance. (Check out Restatement 45 on option K. Performance usually means acceptance)
-A court looking to avoid this could break performance into a “series” of performances.
-R.S. §45 sees some unilateral contracts (I’ll pay you $5 to you if you find the cat), as twofold
option contract.
1) an offer to pay
2) offer is irrevocable if performance commenced.
Revocation and counter-offer Generally:
-Dickinson v. Dodds- an offer to sell real estate was made and “left over until Friday at 9 o’clock A.M.”
The offeree later learned through his agent that the property had been sold, but then went and accepted the
offer anyway. Held that offer had been revoked and offeree had no right to contract any longer.
-Offeror does not have to notify offeree that the offer has been revoked. Performance with another party
indicates this.
-UCC §2-205 allows for a firm offer to be made in the absence of consideration for three months on
an options K.
-Drennen v. Star Paving Co, Star made a bid and then stated that it was made by mistake. Drennen was
able to enforce bid (notice that Drennen was in no obligation to actually use Star’s services under any
circumstance).
-James Baird Co. v. Gimbel Bros, held the opposite in Second Circuit
-Judge Hand felt that promissory estoppel was aimed at reliance on donative promises.
-Hoffman v. Red Owl Stores, P went about 3 years after promise that he would receive a franchise. After
several years, P sued D for raising capital requirement mid-stream.
-As R.S. §90 stated, the action was brought as a separate cause of action, not related to a contract.
Mirror-Image Rule Generally:
-As stated in R.S. §59, statement of acceptance is only effective if it is a mirror-image of the offer and
expresses unconditional assent to all of the terms and conditions imposed by the offeror.
-UCC rejects this because some minor terms can be left out in agreements to agree such as price.
-If a person responds to an offer with a counteroffer, this is the equivalent of an outright rejection (see R.S.
§39).
-Mirror image rule has been supplanted by UCC §2-207, which allows “form” items to be included
without being treated as a counter-offer and rejection.
-Minneapolis & St. Louis Railway Co. v. Columbus Rolling-Mill Co. Here P inquired for “2000 to 5000
tons of rails”. Mill replied that it would sell 2000 to 5000 tons for. . . When P finally put the order in, it
was for 1200 tons. Court interpreted this as a counter-offer and a rejection of the original offer.
a) Mutual Assent
Generally
-Mutual assent is the combination of offer and acceptance
-Exchange of promises for performance.
-Confirmed by: - written/oral expression of agreement
-Commencement of performance which is talked about in UCC §2-206
-Can’t enforce a contract that neither party intended or expected to be fulfilled
-Peerless case: no “meeting of the minds” / wholly different ideas of objects/acts of K means no K
i) Objective theory of K
Generally
-Is there a meeting of the minds?
-Plain language which requires the reasonable person standard.
-To understand objective theory, ask yourself would a reasonable person enter into this agreement?
- If signed, enforce it – regardless of intent
-Consumers: don’t like objective view (“I didn’t understand it”)
-Producers: like objective view (“You signed it. So assume you read it & understood”)
-UCC § 2-206: “Consumer is not bound to part of contract which an objective person would not have
reasonably suspected”
Case - Ray v. William G. Eurice & Bros., Inc. – contract for construction parties had different understanding of
what provisions were part of K. Contractor rejected K.
-Issue: Whether a contractor can claim to not have read a contract that they signed, and thus not be bound
by it (thinking that they were signing something else that they had read)
-Court RULE: Absent fraud, duress or mutual mistake, that one having the capacity to understand a written
document who reads and signs it, or without reading it or having it read to him, signs it, is bound by his
signature in law.
Case - St. Landry Loan Co. v. Avie – Illiterate Black Creole induced to sign himself off as endorser of son-in-law’s
debt. D had different understanding of K. Though D did not understand what he was signing, there was no fraud or
misrepresentation on part of P when D signed, so D liable to K/P.
Rule: A party who signs a written instrument, or who places his mark or allows his mark to be placed
thereon, is presumed to know its contents, and he cannot avoid the obligations which may be imposed on
him by that instrument merely upon showing that he had not read it, or that he had not had it read and
explained to him, or that he did not understand its provisions.
-R.S. §19, points out that an expression of apparent commitment may not be binding because of
“fraud, duress, mistake, or other invalidating cause”
-Currently, a revised §2-206 is being debated, that would exclude “any term that the objective
consumer would not have expected”
ii)Offer and Acceptance – Bilateral
Generally
-There must be an exchange of promises on both sides
-The rules of offer and acceptance still apply
-It is generally held that the deposited acceptance rule will not apply to a mailed acceptance if the offeror
has in the offer specified that an acceptance must be recieved in order to be effective.
-The traditional Anglo-American "deposited acceptance" rule makes an accptance effective when properly
posted.
-The "deposited acceptance" rule is sometimes known as the mailbox rule because the offer is deemed
accepted when offeree deposits acceptance in the mailbox. (59)
-Process generally:
-Negotiation of general terms
-An offer is made – a direct, complete proposal that contract be entered into, providing for exchange of
defined performances (also, ‘conditional offers’ e.g form letters – first come first serve)
-There is a willingness to enter into bargain, and other party understands that their assent makes a K
-Acceptance, in a legally effective way – K comes into being
OR
-Counter-offer, which may have different terms, and may give rise to a new K if accepted
same subject matter, different bargain (‘conditional acceptance’)
-Invitation to offer: A price quote, ad inviting reader to make offer. May be misconstrued as offer.
-Offeror is free to terminate offeree’s power to accept by power of revocation. Revoke before
acceptance recorded.
-Offers must be presumed to be revokable unless fee or premium is paid to offeror which would be
consideration
-Silence generally does not equal acceptance of offer.
-If performance commences before party aware that offer is revoked, this is legitimate
-‘Qualified acceptance’ will be considered a counteroffer
-UCC 2-206 makes it clear, where sales of goods are concerned, that an offer- usually a purchase ordercan be accepted by any reasonable "medium", inclucding the commencement of perfomance. (40)
-UCC 2-205 provides that an offer can be made by means of a signed writing, no consideration required if
offer is limited to a reasonable time not exceeding 3 monthes.
Case - Lonergan v. Scolnick – K for sale of Joshua Tree land. P inquired to D’s ad. P acts on purchase, but D sells
to another (timing/communcation problem). Argument over what was offer
Issue: is the advertisement of a property and a later letter that states “. . .if you are really interested, you
will have to decide fast, as I expect to have a buyer in the next week or so. . .” constitute an offer?
Rule: There can be no contract unless the minds of the parties have met and mutually agree upon
some specific thing. . .Restatement §25 states: “if from a promise or manifestation of intention, or
from the circumstances existing at the time, the person to whom the promise or manifestation is
addressed knows or has reason to know that the person making it does not intend it as an
expression of his fixed purpose until he has given a further expression of assent, he has not made
an offer.
Holding: no offer, just an invitation to begin negotiations.
Case - Normile v. Miller - In this case, a buyer of real estate made an offer that stated it would be good for a period
of time. Seller made a counter offer, and then sold property to someone else. Buyer thought that he would still have
until the time specified in his original proposal to accept counter-offer.
-Court held that counter-offer was a rejection and seller was under no obligation to wait out the period
specified in the original offer.
Notes:
-R.S.- §38: offeree’s power of acceptance will be terminated by a rejection
-R.S.- §§57, 58: an acceptance must be unconditional and unqualified in order for a contract to be
formed thereby
-R.S.- §59: a qualified acceptance will amount to a counter-offer
-R.S.- §39: . . .and such will have the same effect as a rejection, but effect should be given to the
expressed intention to the contrary.
-Once Miller rejects (by making counter-offer) she cannot accept (see §36 and following in the restatement)
-Offers last a “reasonable time”
Case - Henthorn v. Fraser: In this case, D mailed P a revocation of the offer, but P mailed the acceptance before
he received the revocation.
Held: that an acceptance is effective as soon as it is posted.
-One can state in the contract that acceptance is conditional upon receipt of the letter
-See UCC §2-206(1)(a) which allows in the comment section: “any reasonable manner of
acceptance intended to be regarded as available unless the offeror has made it quiet clear that it
will not be acceptable.
iii) Offer and Acceptance – Unilateral
Generally
-Promise made in return only for performance – no promise for performance necc. ($100 to walk Brooklyn Bdge)
-Promisor/Offeror is bound to their promise; Promisee/Acceptee is not bound to perform.
-Unilateral Contract- One party makes a promise in exchange for the rendering of some specified
performance by the other.
Example - A promises B to sell him a specified chattel for $5, stating that B is not to be bound until he pays the
money. B tenders $5 within a reasonable time, but
A refuses to accept the tender. There is a breach of contract.
Restatatement §45
-Commencement of performance by offeree in unilateral contract binds offeror (promisor)
-This Section is limited to cases where the offer does not invite a promissory acceptance.
Restatement §62
-Where acceptance by performance is invited and no promise is invited, the beginning of performance or
the tender of part performance creates an option contract and renders the offer irrevocable.
-As under Restatement 45, what is begun or tendered must be part of the actual performance invited, rather
than preparation for performance, in order to make the rule of this Section applicable.
Case- Petterson v. Pattberg - D promised to reduce mortgage if P paid x amount by certain date. P went to pay,
and D refused to accept. Court concluded offer withdrawn because he had sold the mortgage. Dissent said D
promised and had obligation to accept the payment.
-Classical theory witheld the offeree any remedy on the contract if the offeror revoked unilateral contract
before performance was completed.
-P advances theory that there was partial performance
-see R.S. §45 – partial performance
Case - Bishop v. Eaton
Facts/Issue: Offeror made it available to offeree to guarantee a loan for a third party. Offeree arranged loan and
then sent Offeror the note. Offeror says he never received note, and claims not to be bound to guarantee loan
because he had never received notice of performance.
Rule: Because Offeree mailed back the note, this constituted reasonable notice of performance and Offeror
was bound to contract.
Notes:
-The possibility that notice may be necessary in order to hold offeror to promise is expressed in
R.S. §54 and UCC §2-206(2)
-R.S. §69, generally mere silence would not constitute acceptance in a bilateral contract, but see
R.S. §69(1)(b) where offeree is permitted to take advantage of offeror’s statement if indeed he
does intend to accept but does not expressly so indicate.
-R.S. §69, where receipt and retention of unsolicited goods may give rise to contractual liability
(see Austin v. Burge, where defendant cancelled newspaper but kept receiving it. He kept reading
it and was liable.).
b) Consideration
Generally
-A value or waiving of legal right that must be present on one side of a promise in order for K to be enforceable.
-As a general rule, courts will not enforce a promise unless it is tied to some form of consideration
-Two unique functions of consideration that should be looked for1) Evidentiary function: the existence of consideration provides objective evidence that the parties
intended to make a binding agreement.
2) Cautionary function: providing consideration for one party will make the other party’s promise
enforcable which will make them more likely to adhere to the terms of K.
-It is important to note that courts usually will not look at the adquacy of consideration, only if it exists.
-UCC 2-209(1) instructs that modification of terms of a K can be made without separate consideration
when it involves the sale of goods. The Restatement says that you need consideration when modifying a K.
-Definition involves:
-The promisee giving up something of value or sometype of liberty in some way (such that he has
a legal detriment. [important to look for in business agreements, since it might be unclear that one
party is giving something up]
-And the promisor making his promise as part of a bargain; that is he makes his promise in
exchange for the promisee’s giving of value or loss of liberty. [important to look for in gift giving
situations, since it is normally lacking]
-Firm offer or option K – needs consideration most of time (at time of K); some statutes allow no
consideration; UCC§2-205 – w/in reasonable time (3 mos.), no consideration needed and it can’t be
revoked.
-Detriment is part of consideration and it means that the promisee must do something he does not have to
do or refrain from doing something that he had a right to do. It is important to look for forbearance which
is showing that refraining from act was not just a personal preference
-Restatement 79 abolishes the need for a large detriment to be induced inorder for there to be
consideration. The values do not have to be equal, only that there was a bargain and there was some type
of detriment. (Chastain v. Texas Christian Missionary Society)
-The detriment can be either fulfilled by a promise or performance. Promise will usually be a bi-lateral
contract and performance will be a unilateral (option) contract.
-There can be no such thing as past consideration. Consideration will only be valid if it is bargained for
by the promisor/promisee at the time that the agreement is being made.
-Examples of past consideration (thus not consideration at all): Pre-existing debt, past services received,
etc.
-Many courts do not require consideration in option Ks because they are an irrevocable offer with built in
consideration based on the price paid to have the option. Restatement 87. (contigent on a reasonable time
period for taking up the option).
Example - A borrows $300 from B to enable A to begin litigation to recover a gold mine through litigation, and
promises to repay $10,000 when he recovers the mine. The loan is consideration for the promise.
Restatement 71
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some
other person. It may be given by the promisee or by some other person.
Promises Binding Without Consideration (look for these types of agreements that do not need
consideration)
-Promises to pay past debt
-Promises to pay for benefits received
-Promisary Estoppel issues (where someone has relied to their detriment on a possible promise)
See Obligation In The Absence Of Exchange section for more
Case - Hamer v. Sidway (1891) OLD CASE / RULE – Uncle promises nephew $ if he drops bad habits.
Court said was consideration b/c he waived a legal right.
-The judge assents to the fact that unless there was no consideration, there was no binding contract.
However, citing Parsons, “in general a waiver of any legal right at the request of another party is a
sufficient consideration of a promise”. Hence, it was ruled that P did give up his rights (to drink, etc.), and
hence made sufficient consideration.”
Case - Dougherty v. Salt (1919) – An aunt made out a note to her nephew for $3,000 to be paid before or at her
death. Given that no consideration was made, the note was not deemed to be a contract.
Court: notice was a gift, and there was no consideration. There were no conditions for nephew.
Unenforceable. Nothing is consideration that is not regarded as such by both parties.
‘value received’ – past consideration –> not really a bargain.
-Policy against enforcing donative promises:
-usually informal; hard to distinguish ‘promise’ from ‘present intent’
-obligation excused by acts of the promisee amounting to ingratitude.
-See R.S. §71 where nominal considerations are expressly forbidden.
Case - Baehr v. Penn-O-Tex Oil Corp. (1960) – Basically, D was assigned accounts receivables on gas stations that
were being leased from P. P talked to D, who was running the affairs of the company (but had not been assigned the
leases), and D “promised” to have the rents paid. Issue: was there a contract for D to pay P?
-Promise does not necc. equal K. Not every promise legally enforceable.
-No consideration. P says forbearance from suit is consideration. Court says no active forbearance.
-Forbearance – must show that refraining from act was not just a personal preference.
-A promise can be an assurance that a thing will or will not be done.
Case - E.I. DuPont De Nemours v. Clairborne-Reno Co.IB (1933) Du Pont cancelled a contract that contained
terms saying that they would continue contract “as long as they were happy with [performance]”. Reno argued that
since it had invested heavily in the product it was distributing, it could not be terminated as long as services were
satisfactory.
-Mutuality of Obligation – if one party is not bound, no side is bound. Because court found no M.O., Reno,
who could have left K at anytime, cannot bind DuPont to contract indefinitely (K did not specify
timeframe).
- ss 79 declares that if the requirement of consideration is met, there is no addtional requirement of
"mutuality of obligation."
-M.O. generally required for contractual enforcement, except unilateral & option K
-Beware of “illusory promises” (a promise that does not commit the party to anything. It appears to be a
promise, but really is not.) which do not actually constrain party (see R.S. §77).
Case - Plowman v. Indian Refining Co. (1937) – workers laid off and given payments; told payments would be for
life, but written K did not say that. Workers wanted benefits.
-Court says no consideration so not enforceable. Past services are not sufficient for consideration. The
condition that checks be picked up is not consideration
-Conditions in a Promise – sometimes are/aren’t consideration. See if they fit the definition (e.g. forbearance).
-‘Moral Consideration’ : morality of a promise (e.g. recog. of past faithful service) does not
suffice for consideration (in most cases).
-It is often said that the fact that the promisor may have had some other motive or inducement for making a
promise will not itself defeat the agreement. See R.S. §81
Case - Batsakis v. Demotsis - A loan to a person in Greece, $25 of Drachma for $2,000
Issue: Can the amount of consideration in a contract bear on the damages collected?
Rule: Mere inadequacy of a contract will not void a contract
Notes:
-in R.S. §79, where consideration is present, there is no additional requirement of equivalence in the values
exchanged. However, gross inadequacies may be an indication that a bargain is tainted by fraud, mistake,
misrepresentation, duress, or undue influence.
Chapter 3 – Obligation in the Absence of Exchange:
Restitution and Promissory Estoppel
1) Obligation in Absence of Exchange
a) Restitution : Liability for Benefits received
Terms Used Generally :
-Express Contract: Contracts made of words either written or oral.
-Implied contract:
-Implied-in-fact contract – it looks like you have a K. Example- Go to doctor and get assistance.
The implied part is that you are going to pay.
-requires mutual assent and consideration (but inferred, not expressed eventhough it is
treated like an express contract)
-Implied-in-law contract – court will treat it as if there is a K (even if doesn’t resemble in fact)
-obligation imposed by law to prevent unjust enrichment usually referred to as a reliance
issue. This would be like a doctor finding someone passed out and performing emergency
work on that person. There is no exchange of promises, but the doctor could probably be
awarded reliance/restitution damages. Usually courts will reward restitution damages.
-Quasi contract – an old term with the same meaning as implied in law
i) Restitution in the absence of Promise
Generally
-These are situations where the one party is looking for restitutionary recovery for benefits conferred on
another where the other party never expressly promised to pay for those benefits received.
-A gratuitous act for the benefit of another does not give rise to an duty to pay therefor. [Glenn v. Savage]
-One, who in contemplation of receiving compensation, renders essential services to one who cannot
intelligently consent to the rendering of those services (e.g. someone knocked unconcious), may recover the
reasonable value of the benefit conferred. [In Re Estate of Crisan]
-A party may be liable to make restitution for benefits received, even though he has committed no tort and
is not contractually obligated to the other party. [Flooring v. Radison]
Case - Glenn v. Savage -Lumber fell into the river, Glenn saved it, and tried to collect damages.
Issue: Can person who performs unrequested service be awarded damages?
Rule: He must either have requested the performance of the service, or, after he knew of the service, must
have promised to pay for it.
Case - In re Estate of Crisan -A lady fell unconscious, was hospitalized for several months, and died without ever
regaining consciousness
Issue: can the (public) hospital recover damages for services provided to decedant (despite the fact
that there was “no meeting of the minds)?
Rule: Restatement (of restitution) §116
-a person who has supplied things or services to another, although acting without the others
knowledge or consent, is entitled to restitution therefor from the other if:
1)He acted unoffficiously and with intent to charge therefor, and
2)The things or services were necessary to prevent the other from suffering serious bodily harm or
pain, and
3)The person supplying them had no reason to know that the other would not consent to receiving
them, if mentally competent, and
4)It was impossible for the other to give consent or, because of extreme youth or mental
impairment, the other’s consent would have been immaterial.
Notes:
-In Restitution Restatement, §117 sets out similar provision for danger to one’s property (see p.
144)
-Posner suggests from the economic perspective that it is the high transaction costs (can’t wait,
since patient will die) that make this situation allowable. If transaction costs are low (i.e., a
conversation) then you can’t justify provision of services without consent.
-Note Wade’s general principal of restitutionary recovery: If one without intent to act gratuitously
confers measurable benefit upon other. . . is entitled to restitution . . . if he affords the other an
opportunity to decline or has reasonable excuse not to. . . if the other person refuses, he is not
required to make restitution unless. . . imposed on him by law.
Case - Flooring Systems, Inc. v. Radisson Group, Inc. - In this case, P provided subcontracting work but was not
paid by general contractor. Since GC didn’t pay P, D didn’t pay GC. P sued D since D was owner of the hotel
where work was being done.
Issue: Can P sue D for restitution even if P and D had no contract?
Rule: If D hasn’t paid anyone for services, can be held liable. If D pays GC, then not liable.
Notes:
-Courts have generally denied restitutionary claims brought by subcontractors because
owner had not been unjustly enriched (see Morrisville Lumber Co. v. Okcuoglu & Seegers v.
Sprague). When owner has not made full payment, courts are split (see Indianapolis Raceway
Park, Inc. v. Curtiss (owner must act wrongfully or engage in misleading conduct))(Skjod v.
Hofstede (no liability absent unusual circumstances))
Case - Watts v. Watts - Appeal over failure to state claim. Common-law marriage broken up, “wife” suing
“husband” over property accumulated during marriage.
Issue: can person collect damages under contract, unjust enrichment, or partition as a result of common-law
divorce?
Rule: yes for all three
Notes:
-Usually family “services” are presumed gratuitous, but see in re Estate of Grossman, where
daughter who lived more than 100 miles from home was able to recover for services to dying
mother.
-See Harrison v. Harrison, where court allowed recovery based on an express or implied contract
(for services to family members) but will demand “clear and convincing evidence”, a standard
more demanding than the normal civil standard.
-“implied-in-fact” contracts are the same as express contracts except that there is no oral or written
agreement. An “implied-in-law” contract is a “quasi-contract.”
-5 legal theories presented
1. “Family”
2. Marriage by “estoppel”
3. Implied Contract
4. Unjust enrichment
5. Partition (land division)
ii)Promissary Restitution
Generally
-These are agreements where the reciepent of services agrees to pay for them, but only after they are
received.
-The material benefit rule, which holds that if a person receives a material benefit from another, other than
gratuitously, a subsequent promise to compensate the person for rendering such benefit is enforceable.
Restatement 86 adopts the material benefit rule. Referred to as "promissory restitution" (175).
-Restatement 86 comment i- If enforcement of the promise would be disproportionate to the reasonable
value of the benefit received, enforcement may be limited in value.
-These types of agreements are often supported by moral obligation as opposed to legal obligation.
-Moral obligation sometimes holds as consideration, and must be supp. by a pre-existing
obligation (i.e. a revival of an obligation that used to exist in law but was dispensed with, such as
bankruptcy debts). Restatement 82
-Legal obligation is always sufficient consideration to support either an express or an implied
promise.
-Although in general a person who has been unjustly enriched at the expense of another is required to make
restitution, restitution is denied in many cases in order to protect persons who have had benefits thrust upon
them. Restatement 86
-In other cases restitution is denied by virtue of rules designed to guard against false claims, stale claims,
claims already litigated, and the like. In many such cases a subsequent promise to make restitution removes
the reason for the denial of relief, and the policy against unjust enrichment then prevails. Restatement 86
Example - A finds B's escaped bull and feeds and cares for it. B's subsequent promise to pay reasonable
compensation to A is binding.
Restatement 86
(1) A promise made in recognition of a benefit previously received by the promisor from the promisee is
binding to the extent necessary to prevent injustice.
(2) A promise is not binding under Subsection (1)
(a) if the promisee conferred the benefit as a gift or for other reasons the promisor has not been
unjustly enriched; or
(b) to the extent that its value is disproportionate to the benefit.
Case - Mills v. Wyman - In this case, P cared for son of D, and son died. After the fact, D promised to pay for
expenses incurred by P but did not live up to those promises.
Rule: If there was nothing paid for the promise, the law leaves the execution of it to the conscience of he
who makes it.
Notes:
-Pre-existing debt barred by statute of limitations may become enforceable if there is a promise
made later. Restatement §82 states that a promise to pay a debt barred by statute of limitations
can be express or it may be implied by the conduct of the obligor. See Berghuis v. Burges (letter
acknowledging debt but stating inability to pay not enforceable) and Harbaugh v. Herr (letter
acknowledging debt but stating inability to pay held sufficient because it showed intent to pay
when able).
-Restatement §83 permits enforceability of debt discharged in bankruptcy, but must be express.
-Promise to pay debt barred by statute of limitations or bankruptcy must be written
-Under current laws, debtor has right to a) rescind the agreement to renew debt obligation within
60 days and b) there must be a court hearing if the person is an individual
-A mere verbal promise, without any consideration, cannot be enforced by action.
Case - Webb v. McGowin -Case concerns Webb who saved McGowin’s life, but sustained crippling injuries as a
result. McGowin made promise to pay an annuity for the rest of Webb’s life. After McGowin died, Webb had to
sue the estate to receive payments.
Ruling: Promise to pay was enforceable based on material consideration (saving a life) that defendant had
received.
Notes:
-This case is often cited as an example of the “material benefit rule.” Which holds that unless
benefit is rendered gratuitously, a subsequent promise to pay is enforceable (see R.S. §86).
-Text and comments of §86 limit promissory restitution in certain circumstances:
a) if enforcement of a promise would yield damages disproportionate to the value of the service
provided.
b) if the promise is made to pay an additional sum for benefits received under a preexisting
bargain.
-Where the promisee cares for, improves, and preserves the property of the promisor, though done
without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay
for the service, because of the material benefit received.
-Moral obligation is a sufficient consideration to support a subsequent promise to pay where the
promisor has received a material benefit, although there was no original duty or liability resting on
the promisor.
b) Promissary Estoppel
Generally
-Consideration is uneeded and so the agreement did not need to be bargained for.
-Promissary Estoppel usually comes into play when a promisee relies to his detriment on a promise.
-The promisee must actually rely on the promise either by taking actions because of the promise or
forbearance (not acting when you would normally act) from doing something he would have normally
done.
-The promisee’s reliance must be reasonably forseeable by the promisor to claim damages based on
promissary estoppel.
Example - A, knowing that B is going to college, promises B that A will give him $5,000 on completion of his
course. B goes to college, and borrows and spends more than $5,000 for college expenses. When he has nearly
completed his course, A notifies him of an intention to revoke the promise. A's promise is binding and B is entitled
to payment on completion of the course without regard to whether his performance was "bargained for" under s 71
(Consideration section).
Restatement §90
(1) A promise which the promisor should reasonably expect to induce action or forbearance on the part of
the promisee or a third person and which does induce such action or forbearance is binding if injustice can
be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice
requires.
(2) A charitable subscription or a marriage settlement is binding under Subsection (1) without proof that the
promise induced action or forbearance.
-Reliance need not be substantial – only that reliance be reasonable & forseeable.
i) Promises within the family
Generally
-Promissary estoppel works well for family situations where usually no consideration is present, but gifts
are often given.
-Likely to be actuated by feelings of affection and altruism rather than by expectation of a quid pro quo
(something for something) in return.
Case - Kirksey v. Kirksey - Woman was invited to live on her brother-in-law’s property, and abandoned her home to
do it. Court did not compensate her for when she was kicked off the property. There was no consideration,
according to court.
-To be legally enforceable an executory promise (a promise not performed or complete yet) must be
supported by sufficient, bargained for consideration
BUT
-A promise may be legally binding without consideration if it reasonably induced action or forebearance
and if injustice will be avoided by its enforcement. [Ricketts v. Scothorn , Greiner v. Greiner]
-Strange case because dissenting judge wrote opinion
Case - Ricketts v. Scothorn - Woman quit her job because of grandfather’s issuance of a note to her. Executor
challenged debt after grandfather’s expiration.
Court held: that Ricketts had a “right arising from acts, admissions, or conduct which have induced a
change in position in accordance with the real or apparent intention of the party against whom they are
alleged”
-Granddaughter justifiable and foreseeably relied on Grandfather’s promise of payment by giving up her
job.
Case - Greiner v. Greiner - Case where son is in battle with mother over whether she had given him property or
not.
Court ruled: that there was a promise and son did rely on that promise in coming to live on the property.
-Strange case, maybe court decided this way because afraid of family injustice.
ii)Charitable Subscriptions
Generally
-Before promissary estoppel, courts often enforced the giving of gifts for charitable use without any
consideration at all.
-When the promisor requires that the promisee do anything in exchange for the promise there is adequate
consideration present when dealing with charitable contribution. i.e. donee fulfills conditions/oblig’s set by
donor. Allegheny College v. National C.C. Bank
-probability of reliance is enough
-consideration can be found where element of exchange (baragain) doubtful or nonexistent
-‘Charitable subscription or a marriage settlement is binding under [P.E.] without proof that the promise
induced action or forbearance.’ Restatement §90
Case - Allegheny College v. National Chautauqua County Bank, - Woman made a charitable subscription to a
college, and her representative would not continue it after her death. It was held that the creation of a fund in her
name was consideration, and the first intallment of the gift was enough to estopp either party from revoking the
arraingement. Cardozo held that there was a bilateral contract here, but also seems to have been ready to invoke
promissory estoppel.
-In this case, the agreement could have been a options K where once the charity made a fund in her name,
that was suffiecient performance to start paying on. See R.S. §45 (unilateral contracts and when they can
be revoked)
Case - Maryland National Bank v. United Jewish Appeal Foundation, - Complicated case. Man made large
donation to UJA, then died before gift was fully made. UJA described in detail how they used him to encourage
others to make similar donations. UJA also stated that they never spent pledged monies until they were collected. It
was held that since they did not spend money beforehand, there was no reliance and contract was not enforceable.
iii)Commercial Use of Promissary Estoppel
Generally
-Four part test used especially in commercial promissary estoppel situations
1) a promise
2) a detrimental reliance on such promise
3) injustice that can be avoided only by enforcement of the promise.
4) the promisor reasonably expected the promisee to rely on the promise.
- Doctrine of promissory estoppel was applied in Feinberg v. Pfeiffer Company (1959). The court held the
reliance by Feinber was giving up her job in reliance of the promise of a pension
Case- Katz v. Danny Dare, Inc. – In this case, Katz was injured and asked to retire by the CEO (his brother-in-law).
Arguments put forth by the Defendant that they would have fired him anyway were not convincing since the fact is
that they did not fire him. Court said that makes no diff, and P did rely:
-Court Holding: The application of P.E. does not require the relinquishment of a legal right.
-See Hayes v. Plantations Steel Co., where P announced intention to retire, and company offered a
pension benefit. Court held that there was no reliance on the promise since the retirement was
announced before any promise was made.
Case - Universal Computer Systems, Inc. v. Medical Services Assn.– P. relied on D’s agent, who had apparent
authority, who said that D would pick up P’s delivered bid. D changed position. P sued b/c they relied on D’s
assurance.
Court: A promisee who reasonably relies upon the apparent authority of the employee of another, to his
detriment, may recover for breach of contract on the basis of P.E.
-Don’t need all formal elements of K – offer, acceptance, & consideration – to have detrimental reliance under P.E.
Chapter 4 – Obligation in the Absence of Complete
Agreement
1) Obligation in the absence of Complete agreement
a) Promissary Estoppel: The effect of pre-acceptance
Reliance
Generally-Restatement 87(2) deals with offers by offerors which will induce action and thus reliance.
-Example: A offers to B a "blanket arrangement" to buy "poultry grown by you" at stated prices. As
contemplated, B buys 7,000 baby chicks and begins raising them for sale to A as "broilers." Thereafter A
purports to revoke the offer. B has the rights of an aggrieved seller under a contract for the sale of 7,000
"broilers."
-Check out Restatement 90 which is the basic doctrine of promissary estoppel.
-Remember that Promissary Estoppel is usually used by courts when consideration doesn’t exist (so no
contract strictly speaking) but the courts believe detrimental reliance exists. See the Consideration section
for more information
-Also remember that no consideration is needed in option contracts per Restatement 87(1)(a). Actual
consideration does not have to be exchanged as long as the terms are fair within a reasonable time period.
-See also firm offer stuff below, UCC 2-205, where consideration is not needed to keep a options K open
for three months.
-Example: A writes a note that says he paid B one dollar to keep a contract open for his signing for one
week. There does not actually have to be the payment of the one dollar.
Case - James Baird Co. v. Gimbel Bros., Inc. - In this case, a subcontractor made a mistake in its bid, and Judge
Hand said that there was no contract since there was no acceptance. He also dismissed PE as a cause of action
because it was not a gift.
Court Holding: The doctrine of promissary estoppel shall not be applied in cases where there is an offer for
exchange as the offer is not intended to become a promise until a consideration is received.
-Most courts agree that mere use of a bid by a G.C. does not constitute acceptance. See Williams v. Favret,
Case: Drennan v. Star Paving Co. - P sued D under Promissory Estoppel since D withdrew bid made as a
subsidiary promise. Judge admitted that there was no contract here, but there was sufficient reliance to grant
damages. Note that Judge states a general contractor after receiving a contract is not free to delay acceptance after
he has been awarded the general contract in hope of getting a better price, this would constitute a rejection of the
subcontractor’s offer.
-Court Holding: A promise which the promisor should reasonably expect to induce action or forbearance
(inaction) of a definite and substantial character on the part of a promisee and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of the promise.
-R.S. §87(2) endorses Drennan (see comment e and illustration 6)
-Drennan line of cases has evolved more or less to the point where judgement is given almost
automatically.. See Crook v. Mortenson-Neal (defense so weak that attorney’s fees given) and Arango
Construction Co. v. Success Roofing, Inc. (P G.C. entitled to summary judgment when no evidence offered
to support contention that bid was so low that it was obviously a mistake).
-Note that bid could have expressly stated that it was revocable at any time before acceptance.
-Occasionally G.C.’s are liable to S.C.’s. See R.S. Bennett & Co. v. Economy Mechanical, Inc. (P lowered
bid to defendant and other contractors in reliance on promise that it would get contract if it did so)
-Use of bid was not consideration, it was reliance – so no K between them
-Subsidary promise – [Star’s] promise not to revoke sub-bid if part perf. given –makes deal like option K
Case: Berryman v. Koch - In this case, $10 consideration was offered but never paid to D by P for a real-estate
options contract. Court ruled that this was not sufficient consideration for a bilateral options contract. Neither was
there sufficient reliance by P to justify promissory estoppel.
-Court Holding: An agreement that lacks consideration may be enforcable based on promissory estoppel
when: (1) the promisor reasonably expected the promisee to rely on the promise; (2) the promisee
reasonably relied on the promise and (3) a failure to enforce promise would lead to injustice.
-Test in this case was:
1) was the promise made under such circumstances that the promisor reasonably expected the promisee to
act in reliance on the promise
2) did the promisee act as could be reasonably expected?
3) would a refusal by the court to enforce the promise virtually a sanction of the perpetration of fraud or
result in injustice.
-If $10 had been paid, would that have been sufficient consideration? Most courts seem to say yes.
See Eastern Michigan University v. Burgess (one dollar paid could be considered consideration for 60-day
option to buy house) & Keaster v. Bozik (five dollars could be sufficient consideration to bind one-year
option to purchase land for $200,000.
-See R.S. §87(2) where written recital is OK without consideration. See Smith v. Wheeler (recital of
consideration gives rise to an implied promise to pay which can be enforced by the other party). The
Revised Restatement rules out “implied considerations” and states that it is only an issue of form
(Comment c) (this refers to written forms).
-Some courts have held that the attempt to obtain financing is enough consideration to enforce
promise (see Mack v. Coker & Keaster v. Bozik. In Ragosta v. Wilder, Vermont SC found $7,500 in loan
closing costs could be found to be sufficient consideration for Promissory Estoppel.
-In options contracts, R.S. §63(b) states that the offeror must receive acceptance by deadline, and
mailbox rule does not apply.
Case: Hoffman v. Red Owl Stores, Inc. - While there was no contract, the court ruled that promises that Red Owl
made to Hoffman re: a franchise agreement were enough to cause damages in the amount of the money Hoffman
lost is selling his stores.
Court Holding: The court found this was a straight example of Restatement 90 and that Hoffman
reasonably counted on promises made by Red Owl when he sold his store, bought merchindise, etc.
-This case differentiates from Drennan because here there was actually no bargain reached.
Knapp suggests the ruling is that parties must negotiate in good faith.
-See Security Bank & Trust v. Bogard, where the statement “in two or three days, we ought to
have something here ready for you to go with” was interpreted as a prediction or expression of
intent, and not a promise.
-See Twin City Fire Insurance v. Philadelphia Life Insurance Company (representation that an
annuity would cost a certain amount was held as sufficient for promissory estoppel).
-This is more of a quasi-contract suit, since a contract did not exist existed.
-Keep the legal realist element in mind…small town franchisee dealing with big corp. Maybe this
outcome would not be the same if it was Red Owl dealing with 7-eleven.
b) Irrevobability by Statute: “The UCC Firm Offer”
Generally:
-UCC 2-205 deals with what is called a firm offer which is really an option contract that needs no
consideration.
-The provision provides that a written and signed offer by a merchant to buy or sell goods which states that
the offer is irrevocable is indeed irrevocable even without consideration for three months. The provision
time limit becomes unlimited if consideration is given by the offeree.
-If the form is provided by the offeree it must be signed seperately by the offeror to ensure that they saw the
clause.
-Of course also refer to Restatement 87 which makes an option K irrevocable for several reasons,
including by consideration and statute.
Case: Mid-South Packers, Inc. v. Shoney’s Inc. - In this case, a seller of pork products submitted a letter proposal
setting out the prices of certain products. It stated 45 days were required to change prices. Shortly after deliveries
began, P had to raise their prices. D kept ordering at the new prices but then stiffed P on its last order. Court ruled
that letter was not a contract since it did not specify any particular amounts of product to be shipped. Each order
was considered to be a contract in itself.
-Court Holding: In the absence of a requirements K, each sale of a product to a purchaser carries its own
contractual terms.
-Court rejects that there was a requirements contract under UCC §2-306
-Note that under UCC§2-205, it is possible to create an irrevocable offer without consideration.
However, it has been held that if under accepted principles, if an offer is not an “offer”, it cannot
be a “firm offer”. See Cannavino v. Shea (communications merely “quotation of prices”). Note
also that buyers can be held as well as sellers (see CUNY v. Finalco, buyer’s offer to buy used
computer system not revocable during period stated).
-When offer expires is a matter of the terms (see Loranger Plastics Corp v. Incoe Corp., where
offer “subject to acceptance without modification for 30 days” was interpreted to mean offer was
still available, just that it was not irrevocable.
-Lewellyn had little regard for PE, but used UCC §2-205 to enhance concept of “agreement”
b) Qualified Acceptance: The Battle of the Forms
Generally
-The problem generally is when the offer differs from the acceptance.
-Common law view of this problem has been that the offeree’s response must be a Mirror Image of the
offeror’s offer. If there is any difference, then the acceptance will in fact be a rejection and then constitute
a counter-offer.
-The problem with this doctrine is that it let a party slip out of a K because of an unimportant
difference between the offer and acceptance.
-Also there was the existence of the Last Shot Doctrine in common law which meant the person to send
the last form had the upper-hand if goods were shipped and accepted, since performance would mean the
last form was the governing document.
-The UCC attempts to fix both of these problems with 2-207 which has two main jobs1) to determine whether a contract has been formed at all by the exchange of documents
2) if a contract has been formed, to determine what the terms of that contract are.
-Under UCC §2-207 it is important to determine when offer is made. In Brown, price quotation was not
held to be offer, but see Mace Industries v. Paddock Pool Equip. where a quotation in the form of a sales
agreement was an offer.
-Note that the acceptance must almost explicitly spell out that it is a counter-offer for it to be held as one.
- JJ’s baby…THE Knock-Out rule: when there are different, conflicting (not ‘additional’) non-negotiated
terms, they drop out and UCC fills gaps. This can be seen in Revised UCC 2-207. See below.
-The policy behind this is why give offeror all the power just b/c his documents came first? It is random
which is the offer.
-UCC 2-207 directs the court to discover the terms of the agreement by applying the rules of offer-andacceptance, as modified by that section to accomodate the practice of doing business on standardised forms.
(291)
UCC 2-207
-2-207(1) Abolishes the mirror image doctrine of common law by saying that an acceptance can be one and
not have identical terms.
-2-207(2) Provides that between merchants the additional terms proposed in the acceptance can become
part of the contract if the offeror merely remains silent on the issue (thus abolishing the common law rule
saying that silence CANNOT be acceptance)
-Material alteration: must result in surprise or [economic] hardship. 2-207 comment 4
-Remember 3 approaches to dealing with conflicting terms with 2-207
1) treat new terms as a proposal for a new term (thus dropping it)
2) offeree’s terms simply drop out (Summers’ approach)
3) knock-out approach (White’s approach)
-If, in an acceptance, a term of a contract added by an offeror is a material alteration, then it will require
express consent by the offeree in order to become part of the contract.
-The burden of showing surprise with material alteration is on the offeror, or non assenting party. (Horning
v. Falconer. See UCC 2-207(2) and 297
- Surprise and hardship are increasingly being used as the markers for determining if an alteration is
material under UCC 2-207. Possible material alterations: indeminification, consequential damages,
warranty disclaimers, and limitations of liability, choice of law and forum selection, arbitration clauses,
provisions calling for interest payments on amount owing and overdue, and provisions stating that the
losing pary is liable for attorney's fees. (302)
Case - Poel v. Brunswick-Balke-Collender Co. (1915) OLD CASE – Brunswick (D) repudiated a contract with Poel
(P) alleging that its agent lacked authority to enter into the contract.
Court Holding- If an acceptance varies any term of the offer, it is deemed a rejection and counteroffer.
-IMPORTANT: This case falls under the old common law rule of Mirror Image. UCC 2-207 abolishes
this thing like a bad habit.
Case - Brown Machine, Inc. v. Hercules, Inc – Brown Machine sold a press to Hercules. Battle of forms case in
which Brown’s form indemnified against any liability from the operation of the machine. History of documents
transferred goes something like this: S sends quote, indemnifying S. B sends P.O. back w/ modification and mine
& mine only provisions (no indem.). S replies with own form w/ old provisions. B replies w/ modification in specs.
In suit S sues B for not indemnifying.
Court: Quote not offer. P.O. was offer – and S’s ack. was acceptance. Not counter offer b/c no
unwillingness to proceed, no express conditions. But acceptance with additional terms. Add’l terms would
not be accepted.
-Under UCC §2-207 it is important to determine when offer is made. In Brown, price quotation was not
held to be offer, but see Mace Industries v. Paddock Pool Equip. where a quotation in the form of a sales
agreement was an offer.
-Under UCC§2-207(2), additions in the acceptance are to be considered ‘proposals’ for additional terms.
See Maxon Pipe v. Tyler Pipe Industries where D argued (to no avail) that earlier course of performance
had in effect acted as an acceptance of the suggested terms.
-Additional terms hardly ever make their way into the contract, unless they are clearly immaterial. See
Maxon Corp. v. Tyler Pipe (indemnity clause a material addition) and Trans-Aire International v. Nothern
Adhesive (clause requiring indemnity held material where seller had already effectively disclaimed
warranties).
Acceptance v. Counter-offer:
UCC §2-207
(1) offeree’s response is a valid acceptance, even if it contains additional or different terms from
offer, unless the acceptance is expressly made conditional. (the it is counter-offer)
-so expressed that offeree is unwilling to proceed if new terms not included in K
(2) additional terms are included in K unless:
(a) offer limits acceptance of terms to the terms of offer
(b) they materially alter K
(c) notification of objection given or will be given in reasonable time.
Express assent to terms cannot be presumed by silence or failure to object.
Case - Dale R. Horning Co. v. Falconer Glass Industries, Inc. - P hired D to install glass. Agree over phone. D
puts ‘no conseq damages’ in biolerplate. P made many verbal notes to D that D is liable for consequential and
incidental damages. D makes no objection. P not aware of limitations in boilerplate. P wants C & I damages.
Court Holding – limitations are added terms, and do materially alter K. Two part test set up to test
materiality: must not cause 1) surprise or 2) hardship. No surprise here since in most Ks, but hardship.
-Can’t hide behind boilerplate on issue so big that needs to be negotiated.
-Can’t shift burden in fine print by using boilerplate to force conditions.
-Remember warranties provided in UCC§2-312, 313, 314 & 315. These warranties can be disclaimed via
UCC 2-316.
-Choice of law and venue clauses have been held to be material, see General Instrument Corp. v. Tie
Manufacturing; Products Components, Inc. v. Regency Door and Hardware, Inc. Arbitration clauses are
similarly material, see Marlene Industries Corp v. Carnac Textiles, Inc. (arbitration clause requires express
consent New York law, material as a matter of law), contra Schulze & Burch Bicuit Co. v. Tree Top, Inc.
(arbitration clause neither surprise nor hardship).
-Overdue interest sometimes held to be material (but not in Advance Concrete Forms, Inc. v. McCann
Construction Specialties (18% not material). See Comark Merchandising, Inc. v. Highland Group, Inc.
(party resisting inclusion has burden of showing its materiality).
c) Postponed Bargaining : The “Agreement to Agree”
Generally-The parties in this section appear to have completed their bargaining or at least enough to have an
agreement.
-Common law has generally been resistant in allow an enforcable contract to exist when terms have been
left open to be decided later
-UCC 2-305 totally goes against this by allowing for open price terms if the parties intend to be bound by
the K.
-Restatement 33 comment e seems to be open to open price terms in an enforcable agreement concerning
goods.
-UCC 2-204 says that an enforceable K can be formed with a few open terms, including price.
-Legal effect of agreement to agree should reflect intentions of parties
Types of Agreements
1. Agreement in Principle: contemplation of a more formal agreement.
2. Price to be Agreed: work will be done, but price to be established
3. Price set by one party or standard: like above, w/ standard
4. Incomplete Negotiations: like Red Owl…
2,3 generally in long term K, where prices change.
Case Walker v. Keith - In this case, a lease was executed with an option to extend at “[rates] fixed in such and
amount as shall actually be agreed upon by the lessors and the lessee with the monthly rental fixed on the
comparative basis of rental values as of the date of the renewal with rental values at this time reflected by the
comparative business conditions of the two periods”
-Court rules: that this in an insufficient term to be enforced. Court is unwilling to invent an agreement for
the two parties who are unable to agree themselves.
-See Casinari v. Mapes, where court upheld renewal option and set new rent (in this case there were
damages for wrongful eviction).
-UCC §2-305 goes against common law and says a contract can result when price is failed to be agreed
upon by permitting “open price” term. Court may impose a “reasonable price” if it seems parties intended
to be bound. See Automatic Vending Co. v. Wisdom (agreement for placement of plaintiff’s cigarette
machine not void by clause letting P set commission rates. Power could only be exercised in “good faith”).
Allied Disposal v. Bob’s Home Service, Inc. (each use of disposal site to be mutually agreed upon).
-In Oglebay Norton v. Armco, Inc. court set price for current year and ordered parties to agree on a future
rate for very long-term ore hauling contract
-Note that if parties do not intend to be bound, then court may not allow 2-305. See Bethlehem Steel v.
Litton Industries (not allowed to enforce “option” since certain clause that was important was not settled
on)
-In Quaker State Mushroom v. Dominick’s Finer Foods, 2-305 was used to impose a price after the fact
when a price had never been agreed on. This was despite the fact that no contract ever existed.
Case - Pennsylvania Co. v. Wilmington Trust Co. - In this case, a letter of intent was sent to by P to D, setting a
price to buy shares of a railroad, and leaving other terms open. Court cites UCC 2-204 (that allows a contract even
though certain terms may be absent). This was a denial for summary judgement and not a full disposition.
Holding: If an intent to enter into a binding agreement can be established, the existence of open terms will
not defeat the validity of the K.
-Restatement §26 – where parties have exchanged ‘mutual manifestations of assent’, may be able to show
contractual obligation
-INTENT – state of mind important – how do the parties regard themselves? (p.327)
-LETTER OF INTENT – agreement in principle
If no mention of legal obligation, such document may imply:
-more bargaining
-no bargaining w/ anyone else
-does not say you have to accept reasonable offer
-stuck on agreed terms but can negot. Open terms
-stuck with deal
-no binding deal at all
-Restatemnet §27 although mutual manifestation of assent may be enough to form a contract, the mere fact
that they have decided to prepare a document does not necessarily mean that there is a contract.
other elements may include:
-is this usually in writing
-needs formal writing for its full expression?
-few or many details?
-amount large or small?
-common or unusual contract
-standard form usually used?
Case: Teachers Insurance & Annuity Association of America v. Butler - In this case, there was a commitment
letter signed for the financing of a project in CA. In the terms was a 17 year lock-in period, along with other terms.
When closing came, D objected to default prepayment fee language, and refused to negotiate. Apparently, D had
the documents for several months before closing and did not object during the entire time. D had also been
attempting to obtain replacement financing (the reason the deal fell apart was a drop in interest rates).
Court Holding: Where the parties are under a duty to perfomr that is definite and certain, the courts will
enforce a duty of good faith, including good-faith negotiation, in order that a party not escape from his
contracted-for obligation.
-D argued that the prepayment language was a new term
-Court finds an implied duty to negotiate in good faith, and also language in the letter that allows for
“reasonably necessary language for the transaction.”
-Damages were contract-market on money (discounted)
Chapter 5 – The Statute of Frauds
1) Statute of Frauds
Basic Idea- Most contracts can be valid despite the fact that they are made orally. A few types, however, are
unenforcable unless they are in writing.
Basic Problem- This approach effectively eliminates/minimizes fraud, but it also denies enforcement to some
nonperjured and nonfraudlent claims. IT is a double edged sword of possible injustice to one side.
a) General Principles: Scope and application
General use-Was originally used as a defense to prevent acts of fraud and perjury
-Now used as a requirement for written agreement to avoid potential enforcement of spurious claims
-Failure to comply with S.F will render a contract unenforcable. (351)
-If contract meets SF, it just means that it is not dismissed from court for that reason.
- Classes of contracts covered under the statute of frauds are listed in Restatement 110, UCC 2-201, 1206, 8-319. (352)
-Some states do not have S.F. rules
-Traditional acedemic view of S.F. is to abolish it. (this has been pushed in revision of UCC§ Art.2)
because it is used by powerful people to impose on little people – so it imposes fraud
-Big business view is to keep it because they want a written requirement.
-SF more likely to be applied to prevent P from winning in trial court then in appellate court
-The memo need not be one document, just linked in some way. (Crabtree)
-Restatement 132-memorandum may consist of several writings if one is signed and the others clearly
relate to the same transaction.
-Restatement 133- statute may be satisfied by signed writing "not made as memorandum of contract.
-Restatement 134- signature merely needs to be made with intention to authenticate writing.
-Restatement 136- memo may be made "at any time before or after" contract formed. (361)
Example: A and B orally agree to marry three years later. The contract is unenforceable because not to be
performed within a year, even though it is excepted from the provision for contracts in consideration of marriage.
Five Categories that fall within the Statute of Frauds- (meaning these things have to be in writing or
they are unenforcable) Covered under Restatement 110
1) Executor-Administrator: A contract of an executor or administrator to answer for a duty of the decedent
such as in a will or a trust [rare]
2) Suretyship: A contract to answer for the debt or duty of another. (very similar to #1)
3) Marriage: A contract made upon consideration of marriage. [rare]
4) Land Contract: A contract for the sale of an interest in land.
5) One year: A contract that is not to be performed within one year of its making (this doesn’t apply if it is
possible that the contract could have been performed within the year. Also because a K can be cancelled in
one year does not mean that it does not fall under the S.F.).
plus
UCC adds four of its own categories to this list of things that need to be proven through writing1) A contract for the sale of goods more than $500. UCC 2-201
2) Any contract for the sale of securities. UCC 8-319
3) Any contract that creates a security interest in personal property not held by that person secured.
UCC 9-203(1)(a)
4) Any contract for personal property that is not goods or securities over $5,000 must be in writing.
UCC 1-206
Court’s S.F. Evaluation:
When SF is asserted as a defense: Is contract one where SF applies (w/in the statute), so that a signed memo is
required for enforcement?
NO – then no application and P can prove K by any evidence. No prob.
STEP 1 YES – If applies, is SF satisfied? [there is a written memo signed by D that meets SF req.s?]
YES – then SF does not bar enforcement. Case proceeds as normal. [P still has the burden of showing a K
exists. Not automatic assumption that K exists simply because SF does not bar it.]
STEP 2 NO – if SF satisfied, are there any factors in the case [such as performance or
reliance by the plaintiff] which might invoke an exception to the statutory bar?
NO – then S.F. applies and case ended.
STEP 3 YES – then S.F. does not apply and case proceeds.
Important Definitions (Resatement §131)
-Writing & signature: Both the UCC & Restatement §134 take a lenient view of what may constitute
these under SF. UCC is a little different because some sales contracts do not need signatures to be
enforcable. This is dependent on prior dealins between the merchants.
-Memorandum: Any writing that is signed by party to be charged which identifies subject matter and is
sufficient to indicate a K with respect thereto has been made between parties of offered by the
signer to the other party and states with reasonable certainty the essential terms of the
unperformed promises in the K.
-Memo must fulfil four requirement1) it must reasonably identify the subject of the K
2) indicate that a K has been made between parties
3) states with reasonable certainty the essential terms of the contract
4) must be signed by or on behalf of the party to be charged
-Memo need not be a contract, but instead it can be a variety of communications, letters, diary entries, etc.
Comments to Restatement 133
Sneaky Remedies in S.F. How to get out of the S.F. (Restitution, reliance, estoppel and quasi-contracts)
-If you fully perform in a land contract, you can recover for restitution/reliance based on the policy that
even though you did not have a written contract, the court must uphold some sort of reward to avoid
injustice (unfair enrichment)
-P who has rendered part performance under an oral agreement within the S.F. can recover in quasicontract for the value of the benefits given to the other party.
-Under this, P can recover more than the quasi-contract price, because it is based on restitution
-However, the P cannot be the breaching party
-P can recover for promissary estoppel in certain circumstances which would pull the K out of the S.F., this
means of course that they could also recover expectation damages.
-This would be true if the D told P that the agreement reached was not within the S.F.
-Also applies to situations where D’s promise causes P to detrimentally rely on D. This may not
hold true for oral contracts for employment over one year, where it would be too easy for the P to
argue that they detrimentally relied on the job so they did not seek other employment.
-Promissary Estoppel beats out S.F. in these circumstances based on Restatement 139(1)
Restatement §132 (Connecting documents)
-Even if there is no internal reference or physical connection, the documents may be read together
if in the circumstances they clearly relate to same transaction and the party to be charged has
acquiesced in the contents of the unsigned writing.
-Easiest to connect if all written by party to be charged.
Restatement §129 (Part performance / reliance)
-A K for the transfer of an interest in land may be specifically enforced notwithstanding failure
to comply with the Statute of Frauds if it is established that the party seeking enforcement, in
reasonable reliance on the contract and on the continuing assent of the party against whom
enforcement is sought, has so changed his position that injustice can be avoided only by specific
enforcement.
- concerns nature and quality of the performance. e.g. transfer & possession of property, and making
valuable improvements on it
- equitable doctrine – applied only where relief sought is specific performance – NOT $damages
Oral Evidence
-P may introduce oral evidence to aid in interpretation of the memo if it is ambiguous, but this oral
evidence cannot supplement the memo, or replace a missing essential term.
-D can use oral evidence to attack a memo. This is contigent on wether the memo is a total integration or
not per the parol evidence rule. If it is a total integration then no oral evidence can be presented that would
contradict or supplement it to show that the memo is complete/incomplete.
-Oral rescission can occur of a K that falls within the S.F. (Restatement 148), but if it is for the sale of
goods it must have an accompanying memo of cancellation or for any modification. UCC 2-209
Relevent Cases to the S.F.
Case - Crabtree v. Elizabeth Arden Sales Corp: P & D negotiate employment agreement. Memo written by D on
proposed salary and 2 year term for P by Pres.. P accepts job. Payroll sheet created by D w/ salary and job info;
singed by VicePres. No increase in salary after time; D protests; new temporary payroll sheet created with salary
and terms signed by comptroller, dependant on Pres. approval. Pres. refuses to sign. P brings suit. D claims no
agreement to employ P for two years; if there was, it was barred by S.F.
Court held:
-K not to be performed in one year, so S.F. applies.
-Payroll cards constitute ‘memo’ under S.F. (does not matter that memos are not Ks)
-The memo need not be in one document. Can link documents if subject matter & occasion same.
- At least one document must have charged party’s signature
-signed writing establishes a contractual relationship between parties
- If documents unsigned: th.1) signed doc must refer to unsigned to latter to hold
[Court] th.2) sufficient connection if reference to same subj. matter
- Parol evidence may be used to show how documents connect, if there is doubt and
ignoring such proof would be violation of reason and common sense. Otherwise,
generally do not use parol evid. in S.F. examination
-There was little evidence that first memo was fraud.
-See Feedman v. Chemical Construction Corp, where construction of a plant took 5 years, but could have
taken one. A contract that can be terminated in one year is not the same as performed, and does not take it
out of the statute.
Case - Winternitz v. Summit Hills Joint Venture: Lessee attempted to assign lease to buyer of business and lessor
evicted lessor. In this case, a lease was not signed by a lessor, and thus was unenforceable under the statute of
frauds. Part performance was not held to be applicable since this is only an equitable doctrine. Because previous
lease existed that was renewable on a monthly basis, there was a basis to award tortious interference.
Court Holds: Breach – more than one year; must be signed. S.F. applies.
-Part performance: doesn’t apply b/c it is equitable relief. Not used for $ damages.
-Malicious intent? - Yes. “A third party who, w/o legal justification, intentionally interferes with
the right of a party to a K, or induces a breach thereof, is liable in tort t o the injured contracting
party.” [Restatement §766-67]. Evidence fits.
-A K unenforceable by SF can still be subject of malicious interference. P can collect for this.
-A leasehold interest in land for a term of one year or more that is not in writing has the force and
effect of an estate in interest at will only.
Case - McIntosh v. Murphy: In this case, P moves to Hawaii to take a job as the manager of an auto dealership. D
argued that contract was not enforceable since it was for longer than one year. Court disagreed. Trial court held that
there was a contract, and appeals court held that there was reliance that satisfied statute of frauds as per R.S. §139.
Court Holds: one year issue not relevant, b/c even if S.F. not satisfied ....
-Equitable Estoppel / Part Performance: P definitely relied. Injustice can only be avoided by
Enforcing K and granting $ damages.
-Dissent: should not circumvent SF for equity. That is job of legislature.
Rule: Where an oral employment contract for more than a year violates the Statute of Frauds, either
part performance or equitable estoppel may render the contract enforceable.
-See Alaska Airlines Inc. v. Stephenson (p quit job on promise of a written contract but never received one)
-Restitution may be granted to aggrieved party if statute is not fulfilled (see Montanaro Brothers Builders,
Inc. v. Snow, which recognizes right of restitution for partial performance when contract is unenforceable).
-One may need to show suffering to recover under §139, see Munoz v. Kaiser Steel (P was not injured in
any real way by breach, since he sold his house to move, etc.)
b) UCC statute of Frauds discussion §2-201
UCC §2-201
- not enforceable unless sufficient indication in writing & signed by party against whom
enforcement is sought.
- writing is not insufficient if it omits/messes up an agreed term, but can’t hold party to
a quantity of goods more than specified in the writing.
- between merchants – a letter confirming a K and understood by receiver is sufficient for (1)
must provide a reasonable basis for concluding that an agreement has been reache
- exceptions: if does not satisfy (1), is still enforceable if:
(a) - goods are specially made for buyer, goods have been/are being made, and no other market
(b) - if party against which enforcement is sought admits K was made
(c) - goods for which payment was made or which have been received and accepted
Relevent Cases to UCC 2-201Case - Cohn v. Fisher (1972): D accepts P’s price offer for boat. D pays partial and agrees to pay balance on
inspection. D can’t inspect then; P wants $. Falling out; D cancels first check. P resells boat and seeks resale
damages. D says no breach b/c K had condition of inspection.
Court: (1) [UCC §2-201(3)(b)] D admitted K existed and K not conditional
(2) [UCC §2-201(1)] b/c $500+, must be in writing. Check meets standard as “writing”.
(formality of memorialization)
(3) [UCC §2-201(3)(c)] – quantity specified (boat) & partial performance made (part-payment)
cancellation of check doesn’t matter.
S.F. Applies. K enforceable. Resale damages awarded.
Case - Bazak International Corp. v. Mast Industries, Inc. (1989): P & D orally agree on price. P uses D’s
form to send purchase order. D confirms doc. received but does not deliver goods. P says D breached. D says doc.
insufficient for UCC merchant exception.
Court: ‘Merchant’s Exception’ - UCC §2-201(2) – applies. K enforceable.
- doc. are sufficient indication of K. (even if not signed by both parties); thought not
explicit words of confirmation, evidence that it is based on prior agreement
Rule: Annotated purchased order forms signed by the buyer, sent to the seller, and retained without
Objection fall within the ‘merchant’s exception’, satisfying stat. req. even w/o seller’s signature.
Dissent: Purchase orders not sufficient to indicate K made. This holding weakens S.F. protection.
Reliance – if a K is subject to SF under UCC, e.g. is not memorialized, and there has been reliance by P,
can P recover? Unclear, but majority favors promissory estoppel as an available remedy.
SECTION NOT DONE
Chapter 6 – The Meaning of the Agreement: Principles
of Interpretation and the Parol Evidence Rule
1) Contract Interpretation / The meaning of agreement
-Principles of interpretation question how the parties may show the meaning of terms contained in writing and
attempt to find an acceptable interpretation of a disputed term
-Parol Evidence Rule bars from the fact finder’s consideration certain preliminary agreements that are not
contained in the final writing depending on the state of the final writing.
a) Principles of Interpretation
Generally:
-Interpretation: process by which court gives meaning to contractual language when parties attach diff.
meanings.
-Construction: judicial role in determining the legal effect of that language
-History of Approach:
Old approach: subjective: if parties attributed materially different meanings, no K formed
Peerless Case: two ships named ‘Peerless’, led to confusion over arrival dates. Court: no binding K
-Reaction: objective approach: words and conduct should be interpreted in accordance with standards
under that scenario. However, this led to conclusions that gave meanings to K’s that neither party meant.
-Modern approach: modified objective approach: (1) Whose meaning controls interpretation?
(2) What was that party’s meaning?
-Modern Theory: look at all relevant circumstances in interpreting K (prelim. negotiations, communcations)
-Existence of trade usage can overcome even the clearest ‘plain meaning’ of K language.
-where parties have failed to specify/omitted term, courts may supply element by looking at trade
usage or prior relationship of parties.
-Restatement 201 governs over rules of interpretation:
-If two parties both agree on the meaning of a term then that is the meaning, even if an outside
reasonable party would disagree
-In cases of non-mutual assent, its important to know who knew or had reason to know the
meaning attached by the other. The party with knowledge of meaning of other is bound to that
interpretation §201(2)(b)
-In deciding the above courts will look to relevant circumstances including course of dealings and trade
usage found in (202)
-Restatement 228 argues that in determining an interpretation it is better to use the reasonable (objective)
person standard rather than the personal (subjective) standard. Comment (a) says that the personal standard
should only be resorted to when the agreement leaves no doubt that any dissatisfaction will only be in good
faith.
-Restatement 212 argues that extrinsic evidence can be used to interpret a contract which reenforces the
spirit of Restatement 201.
-Contract terms may be superseded by separately negotiated or added terms (s 203), they are construed
against the draftsman (s 206 because drafter is least-cost risk avoider- should avoid ambiguity), and they
are subject to the overriding obligation of good faith (s 205) and to the power of the court to refuse to
enforce an unconscionable contract or term (s 208). Moreover, various contracts and terms are against
public policy and unenforceable.
-All of this is seen as a rejection of the ‘four-corners’ theory (which argued to not allow outside evidence
about a contract) advanced by the first restatement.
-UCC rejects the layperson definition theory (which was the traditional manner of interpretating parts of a
contract) and instead deals with interpretation by one of three ways:
1)course of dealing - parties have worked together in the past which gives indication as to how
they work in future. 1-205(1)(3)
2)course of performance - how parties have acted dealing with the contract at hand. 2-208(1)
3)usage of trade - meaning attached by an industry or region. 1-205(2)
-See UCC§ 1-205(3) – must show not aware of what one should be aware of. Trade usage will bind those
that aren’t technically in the trade.
How the Restatment and UCC work togetherContractual History between Parties (Term of K always prevail over trade practice §1-205(4))
Course of Performance – UCC §2-208, Restat. §202(4)
Course of Dealing – UCC §1-205(3), Restat. §223
Usage of Trade – UCC §1-205(3), Restat. §222 (Least favored because not truly indicative of
these parties. Trade practice binds people who are not in trade if they had reason to know
or should have known.)
Principles of Interpretation
- Noscitur a sociis: a word may be affected by its immediate context
- Ejusdem generis: a general term joined with a specific will include only things under/related to specific
- Expressio unius exclusio alterius: if specifics listed w/o any general or inclusive terms, then other items
of the kind are excluded.
- Ut magnis valeat quam pereat: interpretation that makes K valid preferred over one making K invalid.
- Omnia praesumuntur contra proferentem: if a written K contains a word or phrase which is capable of
two reasonable meanings, the interpretation that is less favorable to drafter of K is preferred. [favors party
with lesser bargaining power].
- Interpret K as a whole: writings forming part of same transaction should be interp. together as a whole.
- “Purpose of the Parties”: is given great weight in determining intentions.
- Specific provision is exception to a general one: if two provisions in a K are inconsistent and one is
general enough to include the specific within it, then the specific one will be seen as an exception to the
general and will be followed.
- Handwritten or types provisions control printed provisions
- Public Interest preferred
Cases
Case: Joyner v. Adams, - P hires D to develop property on amendment of previous K. D completes job except for
one building by said time. P says job not complete, so D must pay high rent. D says that construction of building
not inlcuded in ‘develop’. Appeals court remanded to find who knew what about each other’s view of the terms.
-Can’t conclude on matter of law. No meeting of minds so court can’t enforce either interpretation.
Parties bargained from equal positions of power.
-Courts have generally approved of R.S. §201(2)(b)
-Only in “adhesion contracts” should verdict be against drafter if there is no meeting of the minds
Case: Frigaliment Importing Co. v. B.N.S. International Sales Corp. -In this case, P is suing D for delivery of
stewing chickens instead of frying chickens. P argued that this was a trade usage, but D argued that it was not, and
referred to a USDA definition that stated that chicken did not itself refer to any particular kind of chicken. P did not
prove that “chicken” was used in any narrow sense.
-Court: Burden of proof is on P to show narrower definition of chicken. Could not prove this so P’s claim
dismissed.
-UCC §213(1)(b) “Any description of goods which is made part of the basis of the bargain creates
an express warranty that the goods shall conform to the description.
-Rule: The party who seeks to interpret the terms of contract in a sense narrower than their everyday use
bears the burden of persuasion to so show, and if that party fails to supports its burden, claim dismissed.
-What if buyer took chickens and stopped payment? What can seller do?
1) implied in fact cause of action
2) perhaps a §90 cause of action
3) unjust enrichment the value of the chickens
-If there is a contract, then action for the price under UCC §2-709.
This line is fucking stupid and I cannot get rid of it!
Case: Morin Building Products Co. v. Baystone Construction, Inc., -In this case, there was an installation of
aluminum siding that was rejected from a GM plant since it was not of uniform finish. The court held that it was not
reasonable for the contract to be interpreted that GM wanted perfect finish since they requested a “mill finish”, even
though GM was allowed to reject for “artistic” reasons in the contract.
two standards given here to choose from:
-Declaration of dissatisfaction will be judged by a standard of reasonableness
-Will be held to standard of “honest” dissatisfaction
Notes:
-Court: Minority View: Subjective – if up to B’s satisfaction, can reject as long as in good faith.
-Majority View: Objective – would a reasonable person in that scenario be satisfied? Siding for
functional purpose, not for artistics. So Objective Standard OK.
-Rule: Acceptance of performance in a K whose purpose is primarily functional will be based on
objective standard.
-Reasonable Person Standard: what would reasonable person do? Employed when the K
involves commercial quality, operative fitness or mechanical utility v. Subjective /good faith
standard, used when K involves personal aesthetics or fancy
-As Posner states, it is unlikely that “satisfaction” of the party will be the basis of granting
unlimited power to reject without an external check.
-Historically, only personal satisfaction was considered important. See Singerly v. Lewis (elevator
contract)
-R.S. §228 states that objective standard should be used when it is practicable, and subjective
standard should be used when “agreement leaves no doubt that it is only honest satisfaction that is
meant and no more”. See Able Distributing Co. v. Lampe (objective standard used to evaluate
work of plumber in an apartment complex), Hall v. WL Brady Investments, Inc. (objective test
applicable on issue of whether there had been “satisfactory completion” of improvements,
triggering lending obligations)
-Where personal services are involved, court may be more inclined to use a subjective test
(Beasley v. St. Mary’s Hospital of Centralia, contract obliging doctor to remain “satisfactory” to
stay in the hospital).
-R.S. §227 allows for subjective test more frequently if 3 rd party’s opinion is used.
-See Kree Institute of Electrolysis, Inc. v. Fageros, where P was discharged not because her work
was unsatisfactory, but her employer wanted to save money.
-See Foreman v. Benson, where seller reviewing credit report should have the benefit of a
“personal and subjective standard”, but in this case, credit rejection was used as a ploy to
renegotiate the price.
-UCC 2-326 permits “sale on approval”, but it is unclear whether parties under the UCC can
expressly dictate a subjective standard for acceptance.
-Restatement § 228 – objective test should be preferred when it is practical to determine whether
a reasonable person in that position would be satisfied.
-UCC – no code provisions deal directly with contract terms requiring satisfactory performance.
(p.439)
Case: C & J Fertilizer, Inc. v. Allied Mutual Insurance Company, -This case regarded an insured chemical
company that was robbed and denied coverage because the robber left no visible marks on the outside of the
building. The court applies the concept of reasonable expectations, and argues that the insurer “buried” a term
limiting the definition of burglary. True exception should have been “This policy does not apply to any fraudulent,
dishonest or criminal act by an Insured, a partner herein, or an officer, employee, director, trustee or authorized
representative thereof. . .” Dissent stated that this decision had little to do with the record (JJ says an activist
decision).
Notes:
-Adhesion Contract: where one party is uncapable of changing K with party who made it.
Drafting party is clearly in more powerful bargaining position. “Take it or leave it” Common in
Insurance Contracts.
-Court applies doctrine of “reasonable expectations” Does this mean the reasonable expectations
of the insured? No, it means of a reasonable person.
-Some courts have held that terms need to be ambiguous for reasonable expectation to apply (see
Hallowell v. State Farm).
-R.S. §211 contains reasonable expectation doctrine.
- re: boiler plate, must ascertain what in K has been assented to
- Reasonable Expectation Doctrine – honor the r.e. of parties.
- nothing in negotiations to have P think of burglary so specific
-Reasonable Expectation Doctrine: generally for adhesion contracts. Used in 27+ States.
The reasonable expectations and intentions regarding terms of insurance will be honored. Should
not be bound to terms beyond range of expectation and forseeability. Where there is ambiguity,
measure on r.e. of average insured.
-Restatement § 211(3) – where drafter has reason to believe other party would not sign if other
party knew that clause was in, the clause is regarded out.
-If Consumer has knowledge – NO RECOURSE
-if by industry standard, consumer can’t claim ‘oppressive’ or ‘bizarre’
-consumer can’t claim term eliminates purpose of K
-Consumer may be able to show term unconscionable
b) The Parol Evidence Rule
Outdated View – [Williston]: conservative. Limit to what is written in K. Should not be allowed to explain.
Modern View – [Corbin]: liberal application. Should be used to seek true intention of parties.
Should always be allowed to explain.
Restatement 210:
-A completely integrated agreement is an integrated agreement adopted by the parties as a complete and
exclusive statement of the terms of the agreement.
-A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
-Whether an agreement is completely or partially integrated is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application of the parol evidence rule.
UCC §2-202:
-Prior info can explain but cannot contradict contract.
-Can explain K also by: course of dealing, trade usage.
-More explicit than common law
-Don’t need to find ambiguity before introducing evidence
Terms Generally:
Integration: when writing/K is integrated [a writing which is meant to be final and complete]
Restatement §210, UCC §2-202-Partial Integration: If the document is not intended by the parties to include all details of the
agreement. This means that no evidence of prior agreements or negotiations may be admitted that
would contradict any part of the agreement being disputed. [Restatement §213]
-Total Integration: If the document embodies all details of the agreement. This means that no
evidence can be admitted that contradicts or even adds to the writing being disputed.
Classical view: determined from ‘four corners’ of writing – w/o resort to other evidence [Williston]
Merger clause establishes that a writing is a total integration, thus not allowing parol evidence to be used
to explain or contradict any part of the agreement. (Something like MCI/WorldCom agreement that is
thousands of pages long is probably evidence of merger.
-After discerning if an agreement is a total or partial integration, then a judge must decide if the extrinsic
evidence contradicts or adds to the agreement. Restatement instructs how to do this better than the UCC.
- ALWAYS: written agreement may be explained by extrinsic evidence.
-MATTER OF LAW – not in front of jury, in-camera.
Extrinsic evidence MAY be used:
-to determine whether an ambiguity exists in a K (as long as only explains & does not alter, vary, or contradict the
clear meaning of the writing); sometimes judges will refuse (if obvious K is complete)
under what conditions can you bring this in?
-to resolve ambiguity by ascertaining intentions of parties
-If there is the existence of a condition set orally before the contract is signed. Courts will usually allow this
because it is proof that the document is not an integration.
-After the signing of an agreement, evidence of subsequent transactions can always be admitted
-in order to decide whether a written agreement ought to be regarded as “integrated” and, if so, whether “totally” or
“partially”.
DISPUTED:
Classical Approach (4 corners) – this defeated purpose of rule
Modern Approach – cannot know intentions of parties from document alone
should also look at facts and circumstances surrounding
execution of writing. Doc. itself cannot estab. its own completeness.
Restatement § 209(3)
-if oral agreement is in collateral form (capable of being expressed in separate agreement by its own
consideration, separate from the other agreement.)
-if the written K fails to totally integrate and embody parties understanding.
Exceptions: P.E. does not apply to:
------
agreements, oral or written, made after the execution of the writing
evidence offered to show that effectiveness of agreement was subject to an oral condition precedent. R.S. 217
evidence offered to show that the agreement is invalid for any reason (fraud, duress, undue infl., etc.) R.S. §214(d)
evidence that is offered to establish a right to an ‘equitable’ remedy, such as ‘reformation’ of K because a part of
the agreement was left out due to clerical error. R.S. 214(e)
evidence introduced to establish a ‘collateral’ agreement between the parties (only if there is separate consideration)
R.S. 216(2)
parol evidence admissible to explain the agreement
sometimes – evidence showing P detrimentally relied on promises/assurances not contained in integrated K
(promissory estoppel)
Cases:
Thompson v. Libby (1885) – Old interpretation
Buyer of logs did not believe that they were what was promised, but there was no warranty in the agreement.
Court holds that contract is complete on its fact, and that there are no issues that could constitute a
“collateral” agreement
-Court: when parties put full agreement in writing, unjust to allow new terms.
-Cannot add parol evidence where the writing is silent, as well as when it speaks
-Supports Willston’s four corners theory
Hershorn v. Gibraltar Building and Loan Association, p. 461
In this case, a creditor and a group of debtors signed a release that was to release certain debts.
The creditors did not believe that the release applied to a certain promissory note. The MD court,
which is generally unwilling to use external evidence to interpret facially explicit contractual
terms, held that the terms were quite clear. Holding is that “under settled principles of contract
interpretation, this court must hold the parties to the plain meaning of the terms of the agreement
and must ignore as irrelevant any extrinsic evidence that might show that the language did not
properly reflect their intent.”
-Dissent writes that the terms were clearly ambiguous to the parties, and ejusdem generis suggests the contract
be interpreted another way.
Notes:
-Jerome Frank in his opinion in Zell v. American Seating Co. suggests that the real reason for the parol
evidence rule is to protect the jury from oral testimony
-Prof. Sweet argues that rule should be replaced with instructions to fact-finder that “if writing was intended by
the parties to be final and complete, the writing supercedes any prior or contemporaneous arguments.”
-See p.467 where in some cases parol evidence rules was overcome by estoppel. Farnsworth, however, feels
that the trend toward informality has reversed, and we won’t be seeing too many more of these decisions.
Nanakuli Paving & Rock Co. v. Shell Oil Co. p.476
Shell raised prices on P without allowing for price-protection as was the standard in the Hawaiian industry at
the time.
-Nanakuli’s arguments:
1) trade usage assumed price protection
2) fair dealing
-Shell’s arguments:
1) court should not have denied motion to expand usage of trade to whole
industry
2) prior events were waivers, not courses of dealing
3) express terms control
-Court relies on UCC definition of usage of trade. States usage of trade includes price protection in this
situation. Shell’s argument that it was just a waiver was dismissed since waivers are interpreted when
terms are ambiguous. Nanakuli also would have won on good faith argument.
Notes:
-prior performance very prevalent and D must have known it is usage, by their own practice.
- express terms do not constitute entire agreement; agreement broader than written terms.
- thus, incorporate course of perf. & trade usage as long as they don’t conflict express terms.
-Compare UCC §§1-205(2), 1-205(1), 2-208, R.S. §222, R.S. §223 & R.S. §202(4)
-See Flower Painting Contractors v. Gumina Construction Co., court ruled that painters were not bound to trade
terms that included hallways in ‘apartments.’
-See Southern Concrete Services, Inc. v. Mableton Contractors
-Real tension between explaining and supplementing you might explain in order to supplement
-objective – subjective debate.
Aside: remember doctrine that all clauses in the same contract should be read as being consistent with one
another.
Preference for agreement expressed in a formal writing over oral and informal writing
- makes unenforceable oral agreements entered into prior to the adoption of written K
- renders inadmissible evidence of oral agreements and some written evidence made prior to K.
- does not say what evidence is definitely admissible, but excludes supplemental evidence of matters not
contained in the written agreement between the parties. If evidence clears P.E. rule, must still meet
requirements of rules of evidence.
POLICY – since document usually concludes bargain, ordinary expectation that document will contain
all the conscious and important elements of the deal
Chapter 7 – Supplementing the Agreement: The
Obligation of Good Faith and Other Implied Terms
1) Supplementing the Agreement: Obligations of Good
Faith and Implied Terms
a) The Rationale for implied terms
Generally
- These are terms implicit in the parties words or conduct, even though not literally expressed
- These are terms that are not found in agreement, but that court holds should be “implied by law” (and will be
imposed-by-law)
- Reasons for using: fairness, economic efficiency (using common terms, e.g. UCC)
Case - Wood v. Lucy, Lady Duff-Gordon (1917): D hires P to sell her label; gives P exclusive rights to sell. D uses
label – P says breach. D says no K b/c no promise on part of P.
Court: Promise is clearly implied from circumstances. Acceptance of agency assumes duties. Would
not have promised to account for profits and acquire patents/copyrights if did not plan to sell.
Rule: A promise may be implied from the writing even if not written, and thus create a K
UCC §2-306 – exclusive dealings imposes on seller obligation to use best efforts to supply goods
UCC Terms that will be implied as a matter of law:
§2-309 – [see below]
§2-308 – place of delivery
§2-310 – time of payment
§2-509 – risk of loss
§2-513 – buyer’s right of inspection
§2-305 - a reasonable price
Reasoning: default rules should reflect the agreement that most parties would have made if bargained
UCC §2-309 – Absence of Specific Time Provisions; Notice of Termination
- if time for action not specified, use “reasonable time”
- if K not specific on time frame, may be terminated any time by either party
- if terminated, reasonable notice must be given to other party.
- notice requirement can be dispensed with as long as it does not create unconscionable situation.
Case - Liebel v. Raynor Manufacturing Co. (1978): Oral agreement for appellant to have exclusive dealership of
Appellee’s goods. Appellant relies. After two years supplier terminates K. Appellant: says entitled to reasonable
notice [UCC 2-309]. Appellee: says K terminable at will.
Court: reasonable notification is required in order to terminate an on-going oral agreement for sale of
goods between supplier & distributor.
- UCC does apply to dealer-distributor relationship
- “termination at will” OK, but termination in bad faith is damaging to dealer
So, reasonable notification should be given as minimum protection; time to find substitute
- w/o notice, cause of action for damages exists.
-requirement of notice not as important as circumstances under which notice is given.
-Test for Reasonable Notification:
- time to find substitute arrangement?
- time to recoup investment made?
b) The Implied obligation of good faith
Generally
-Arises when one party claims to be acting within or not forbidden by K, while other deems it improper.
-UCC §1-203: “every contract of duty” within its scope “imposes an obligation of good faith in its
performance or enforcement”
-Restatement §205: extends “duty of good faith and fair dealing” to “every contract”
-Definitions:
-UCC §1-201(19): simply “honesty in fact”
-UCC §2-103(1)(b): honesty as well as “the observance of reasonable commercial standards
of fair dealing in the trade.”
-One standard of good faith is whether person at the bargaining table would have expected or agreed to this.
-Bad faith: attempts by one party to recapture ‘forgone opportunities’
-Use – where one party’s actions, although not expressly forbidden (and perhaps expressly permitted),
undermine the ‘spirit’ of the K. To protect bargain made by parties from attempt to undermine it.
-UCC 2-306 is the section of the UCC that controls requirement and output Ks.
Case - Eastern Air Lines, Inc. v. Gulf Oil Corp. (1975): Fuel purchase agreement. G raises price and demands E
meets it. E says G breached K. G says K not a binding req. K b/c lacks mutuality of oblig. and was commercially
impracticable. G says E breached by fuel freighting.
Court: - Requirements K has M.of O. b/c of obvious requirements B has for that good. (E needs gas).
and E &G have long followed this relationship.
- E not in breach b/c ff is a regular industry practice and G never complained before
- UCC§ 2-306 seems to treat output and requirements the same.
Requirements Contract: That a party promises to purchase all the goods it requires from supplier. [Output K –
agree to buy total output of supplier].
Criticism: No mutuality of obligation. No consideration. Vague & indefinite quantity.
Response: Consideration is that buyer will eventually have needs for those goods and will buy
only from supplier. (but no guarantee will have needs).
UCC §2-306(1): Req/Output K legitimate unless the quantity is unreasonably disproportionate to any
stated estimate or any normal or otherwise comparable prior output.
- A contract that is like req. K but does not bind buyer to buy only from that seller will be
considered invalid and unenforceable under UCC for lack of mutuality.
- Any cancellation of req. K by buyer for lack of orders is legit; cancellation merely
to curtail losses is not permissible. [Comment 2]
Case - Thompson v. St. Regis Paper Co. (1984): P sues D for firing him w/o reason and claims it was done in bad
faith. D says K terminable at will. P cites employee guide and says he can only be fired for cause. Trial court finds
for D. Both parties agree no formalized K.
Court: Employment at will: K terminable either by employer or employee. Terminable by
employer only for cause if (1) expressed or implied agreement stating this, or (2) the
employee gives added consideration.
Limitations on termination at will:
1) Bad Faith: must have good faith in termination [This court does not adopt this rule]
2) K may be modified by policy manuals/handbooks: Yes – absent a K obligation, can use
employee policy manuals to determine obligations.
3) Public Policy: cannot terminate at will when it contravenes public policy.
This case: Public policy issue applies.
c) Implied warranties
Generally
- American courts embraced the doctrine of caveat emptor (Let the buyer beware) in the 19th Century.
- In the last quarter of the 19th century American courts, responding to changing market conditions,
gradually reversed the rule of caveat emptor by imposing obligations on the sellor as to the quality of the
goods.
- These "implied warranties" were not based on actual agreement of the parties, but instead were imposed
by law on the seller. (561)
i) Common Law
Generally
- The Magnusson-Moss Warranty Act regulates written warranties. (561)
- Claims of implied warranty have been made and are continuing to be asserted in non-UCC transactions.
- The overwhelming majority of states recognize an implied warranty of habitablity in residential leases.
Defined on (564).
- Blood shield says that warranty claims must be based on the sale of goods, therefore implied warranty
cannot be claimed for a service. (See Doe v. Travenol Labortories. 578)
- In the absence of statutory protection like that provided by the blood shield statutes, courts have generally
been willing to hold commercial providers of services liable for a breach of implied warrany, or on a
similar tort theory. (582)
- By contrast, courts have been unwilling to impose warranty liability on providers of professional services
limiting the liability of professionals to negligence: failure to exercise the skill and care ordinarily
possessed by members of the profession. (582) 99
ii)UCC
Generally
- UCC 2-313 deals with the creation of "express warranties." Under 2-313, a seller can make an express
warranty by words, description, sample, or model. The most common application of this section is the
written express warranty given by a manufacturer of a consumer product, promising to "repair or replace"
any parts that malfunction due to defects or workmanship in a stated period of time. Such a warranty also
includes clauses that disclaim other warranties and limit remedies available to the buyer in the event of
breach. (561)
- UCC 2-314 sests forth the "implied warranty of merchantability"- goods are of good quality and fit for
ordinary purposes.
- Seller may be able to disclaim an implied warranty by appropriate language in the contract. UCC 2-316.
(561)
- UCC 2-315 defines a third type of warranty, "the implied warranty of fitness for a particular purpose." It
arises from implication of law, but is different from the implied warranty of merchantibility because:
1) Created only when buyer relies on the seller's skill or judgement and seller has reason to know of
reliance.
2) Breach of warranty does not require a showing that the goods are defective- merely that the goods are
not fit for the buyer's particular purpose. (562)
Chapter 8 – Avoiding Enforcement: Incapacity,
Bargaining Misconduct, Unconscionability, and Public
Policy
1) Avoiding Enforcement
Generally- These are cases that cannot be legally enforced because of the way the contracts were formed or the
nature of the parties within the contract.
- These doctrines reflect policies based on a concern with the bargaining process by which an agreement is
reached and with the substance of any resulting agreement.
- Courts have broadened their role in interpreting agreements and in implying contractual provisions, to produce
what the courts consider to be just outcomes. (585)
a) Minority and Mental incapacity
Generally
-Minors can enter contracts that are then enforcable against the other contracting party
-However, a minor can escape from the enforcability of a contract if he so chooses. Thus the contract is
voidable at the discression of the minor and not the oppisite party. Restatement 14
-Age of majority is set by states and is now mostly 18.
-The only contracts binding to a minor are: (Restatement 12)
-agreements to support children had by the minor
-bail bonds to secure bail
-and certain contracts made with employees.
Case - Dodson v. Shrader - Case where minor bought pick-up truck, destroyed it, and attempted to avoid contract
Court Held:
Incapacity – person does not have the capacity to enter into K if that person’s property is under
guradianship.
Re: Criminality: - person not responsible if they lacked capacity to appreciate the criminality or
see their actions as contrary to the law.
Case - Estate of McGovern v. State Employee’s Retirement Board - In this case, a retiring man made a terrible
decision regarding his health benefits, and heirs tried to void contract retirement on the basis of mental incapacity.
Court relies on rule that mental capacity to execute an instrument is at issue “at the very time he executed the
instrument or made the gift in question. . . [and it is] best determined by his spoken words and his conduct, and that
testimony of persons who observed such conduct on the date in question outranks testimony as to observations made
prior to and subsequent to that date”
Court Holding - This goes against R.S. §15, which imposes a post hoc[after the fact] determination of
reasonableness.
-Someone under guardianship does not have the right to contract at all
-Note that R.S.§15 recognizes “volitional” disabilities as well as “cognitive” ones.
-Note cases like Farnum v. Silvano, in which fraud figures prominently. (woman sold home worth
$115,000 for $65,000.
b) Duress and Undue Influence
Duress Generally
-Restatement §175 – any wrongful threat that induces another to enter into a transaction under the
influence of such fear as precludes him from exercising free will and judgment, if the threat was
intended or should reasonably have been expected to operate as an inducement.
-Historical View: duress if party under duress could not exercise “free will”
-Modern View: less stress on ‘free will’; more on issue of abuse of power by one party in relationship
i.e. must relate to wrongful conduct of other party and not necessities of party ‘under duress’
-Also courts have been willing to adopt the defense of economic duress, which basically is any threat to a
person’s property, not just that person themselves.
-The most common form of duress is the threat to breach a contract. This has been found to be actual
duress if the result would be irreparable injury to the non-breaching party. Restatement 176.
-The remedy for duress is restitution because this avoids unjust enrichment by the party creating duress.
-It could also be rissicion of K or reformation. Further, the injured party could look for some type of tort
action
-Economic duress involves overcoming a person’s will by threatening them economically. Note: the eco
coercian must come from the oppisite party and not just circumstances surrounding the K
- Economic duress- The K is likely to be regarded as voidable at the victim's option rater than void at
inception. (Chirl 63)
Example Generally: A, with whom B has left a machine for repairs, makes an improper threat to refuse to
deliver the machine to B, although B has paid for the repairs, unless B agrees to make a contract to have additional
repair work done. B can replevy the machine, but because he is in urgent need of it and delay would cause him
heavy financial loss, he is induced by A's threat to make the contract. B has no reasonable alternative, A's threat
amounts to duress, and the contract is voidable by B.
Ways of Committing duress-Violence or threats of violence
-Imprisonment or threats of it
-Wrongful taking or keeping of a party’s property or threats to do so
-Threats to breach K
- When is a threat improper? Threat of physical harm renders any resulting agreement void. ss 174 Threats
to commit a crime or tort are improper because the threatened conduct is wrongful. ss 176(1)(a). A threat of
criminal prosecution is improper because the threat infolves a use of the criminal process for an
impermissable purpose 176(1)(b). Threats may be improper if the circumstances show that the threat was
made in "bad faith" ss 176(1)(c),(d). (609)
To avoid an agreement due to duress,
-You must show
1) a wrongful or improper threat by the other party, and
2) absence of any reasonable alternative to acceptance of the agreement. ss 175(1)
-Definitons:
Wrongful – threat to breach a K or withhold payment of an admitted debt is a wrongful act.
Improper Threat – physical harm, to commit crime or tort (conduct is wrongful), criminal
prosecution (impermissible use of criminal process).
Bad Faith - threat may not be ‘wrongful’, but may be in bad faith – which is improper.
If define to broadly or definitely, you say that weak people can never make enforceable contracts.
Reasonable Alternative- legal remedy (e.g. action for breach) is a reasonable alternative.
- not adequate if waiting for it causes increased harm to the party
- not reasonable if it will not afford any effective relief
- if threat is minor, toleration of inconvenience may be only reasonable alternative
Case - Totem Marine Tug & Barge v. Alyeska Pipeline– D hires P to transport goods. P meets
problems along way. At end, D terminates K. P wants payments; in debt, needs cash. Knowing
this, D gives P a tiny settlement and has P release D of all claims. P later sues D, rescinding release b/c of duress
and wants damages from breach of K.
Court holding: Economic Duress: [definition above]
(a) wrongful act – threat to withhold payment (threat does not have to be wrongful RS 176)
(b) reasonable alternative - none
-R.S. §376 – “restitution for voidable contract.” If the person who seeks to avoid contract has conferred
benefits on other party, these may be sued for in restitution. Note that in some jurisdictions, a tort action
can be used instead of a restitution action. Important to know since damages may be greater.
Undue Influence Generally
-Used to describe persuasion which tends to be coercive in nature, persuasion which overcomes the will
without convincing the judgement
-Influence or supremacy of one mind over another by which that other is prevented from acting in
accordance to his own judgment, and whereby the will of the person is overborne and he is induce
to do or forbear to do any act which he would not do, or would do, if left to act freely
-over-persuasion: persuasion coercive in nature, taking unfair advantage of other party’s necessities,
distress, weakness of mind through intense and oppressive pressure
-if interpreted too broadly, e.g. market power, then will be evoked every time there is imbalance of
bargaining power in deal.
-Policy implications: to make a good K a man must be a free agent. So can’t have K where pressure of
whatever sort by one party overpowers the will of the other party without convincing the judgment.
Example Generally - A, an elderly and illiterate man, lives with and depends for his support on B, his nephew.
B tells A that he will no longer support him unless A makes a contract to sell B a tract of land. A is thereby induced
to make the proposed contract. Even though B's conduct does not amount to duress, it amounts to
undue influence because A is under the domination of B, and the contract is voidable by A.
Restatement §177
-Unfair persuasion of a party who is under domination of the person exercising persuasion OR
has a relationship with the person where there is trust and it is expected that the other party will
take care in their dealings.
-If a party's assent has been induced by the undue influence of a third person rather than that of the other
party to the contract, the contract is nevertheless voidable by the victim, unless the other party has in good
faith either given value or changed his position materially in reliance on the transaction.
Overpersuasion is generally accompanied by certain characteristics
1) discussion of transaction at an unusual place
2) consummation of the transaction in an unusual place
3) insistent demand that the business be finished at once
4) extreme emphasis on untoward consequences of delay
5) the use of multiple persuaders by the dominant side against a single servient party
6) absence of third-party advisers to the servient party
7) statements that there is no time to consult financial advisers or attorneys.
Case - Odorizzi v. Bloomfield School Dist. (1966): P is charged with criminal activity. Charges later dismissed.
School reps (D) visit P, who is in bad mental shape, and said that P should resign now or they will have to
make charges public [threat]; P trusted D’s advice and resigns. P later says resignation invalid b/c under duress,
fraud, mistake, and undue influence.
Court holding: (a) Duress & Menace: NO. Action threatened not unlawful.
(b) Fraud: Actual fraud Involves conscious misrep. or concealment, or non-disclosure of a
material fact which induces the innocent party to enter K. Complaint of Fraud must plead
misrep., knowl.
of falsity, intent to induce reliance, justifiable reliance, and resulting damage. NO.
Constructive fraud arises on a breach of duty by one in a confidential or fiduciary relationship
to another which induces justifiable reliance by the latter to his prejudice.
NO – b/c no confid. Relat
(c) Mistake: NO. No errors in nature of transaction.
(d) Undue Influence: YES. Evid. shows both susceptibility of party and excessive pressure of
other.
-meets criteria for overpersuasion
(1) susceptibility of one party
(2) excessive pressure of other party
* can’t use it to get out of bad bargains
c) Misrepresentation and Nondisclosure
Misrepresentation Generally
-Can be used as a defense for resicission (right to avoid enforceability of contract [requires injured party to
return any enrichment])of K, for damages under K law or as a tort action for damages
-Elements of proof required:
-Other party’s state of mind: It is not usually needed to show that the misrepresentation was made in bad
faith. The other party might not be negligent and still misrepresent, if this misrepresentation goes to
a material part of K. A negligent party can misrepresent and not have it go to any material part of the K.
-Justifiiable reliance: The party asserting misrepresentation must show that he relied on the misstatement
and that it was a justifiable reliance. (not very strictly enforced)
-Must be a misrepresentation of facts: Opinions do not count as misrepresenations, like ‘puffing’ in a
commercial setting. Only facts can be mispresented. Restatement 168/169
-ss 161- treats non-disclosure as equivalent to misrepresentation where the undisclosed fact concerns a
"basic assumption" made by the other party to the contract and where the non-disclosure "amounts to a
failure to act in good faith".
Example Generally- A, seeking to induce B to make a contract to buy a tract of land at a price of $1,000 an
acre, tells B that the tract contains 100 acres. A knows that it contains only 90 acres. B is induced by the statement to
make the contract. Because the statement is a fraudulent misrepresentation (s 162(1)), the contract is voidable by B,
regardless of whether the misrepresentation is material.
Restatement §164(1)
-contract is voidable if party’s assent is induced by either a fraudulent or material misrepresentation by the
other party upon which the recipient is justified in relying.
Case- Syesta v. Banta - Action for fraud and misrepresentations in defendants' sale of dancing lessons to elderly
widowed plaintiff who lived alone. The Supreme Court held that evidence raised jury questions as to whether there
was fraudulent overreaching on part of defendants to obtain releases from plaintiff and as to whether defendants
made false representations which induced the sale. The court also held that jury's verdict for $14,300 actual
damages was within the evidence, and that evidence of greed and avariciousness on part of defendants warranted
jury's verdict for $40,000 punitive damages.
Two types of damage calculation1)Out-of-pocket rule: allows P to recover the difference between what she parted with and what
she received plus consequential damages that were suffered prior to discovery of fraud
2)Benefit of the Bargain Rule: puts P in the position she would have been if what the D had said
was true. (used by a majority of courts and mimics parts of tort claim recover actions)
-Modern contract law has qualified rule that opinions themselves are not actionable (e.g. if they had really
thought that she was a great dancer). Under R.S. §159, statement of opinion amounts to a material
misrepresentation of fact if the person misrepresented his state of mind.” Opinion may be actionable
(under R.S. §169) if: a) the opinion stands in a relationship of trust or confidence, b) the person is an expert
on the matter, or c) the advisee is particularly susceptible to misrepresentation.
Nondisclosure Generally
-Failure to disclose material fact may justify rescission of K if nondisclosure amounts to failure to act in
good faith & fair dealing
-Some courts require party seeking rescission to actually show that other party had knowledge of undisclosed fact.
-If nondisclosure is found you can
- create a tort action for damages Restatement of TORTS §551
- or rescind the right to enforce the contract [requires injured party to return any enrichment]
When deciding Nondisclosure some Factors to Consider:
1)
2)
3)
4)
5)
6)
7)
8)
difference in intelligence btwn. Parties
relation btwn parties
manner in which info is aquired. (by chance, by effort, illegal act, …)
nature of fact not disclosed (close to deal, more need to disclose)
who parties are (seller more req. to disclose info than buyer)
nature of contract (lease, release, …)
importance of fact not disclosed
conduct – active concealment?
Case - Hill v. Jones - The termite case. Buyers bought house, and inspector didn’t notice evidence of termite
damage. Neither did seller inform buyer of such damage.
-Court finds that integration clause is not valid since “any provision in a contract making it possible for a
party thereto to free himself from the consequences of his own fraud in procuring its execution is invalid
and necessarily constitutes no defense.”
-R.S. §161 says that vendor has an affirmative duty to disclose material facts where:
1) disclosure is necessary to prevent a previous assertion from being a misrepresentation or from being
fraudulent or material
2) disclosure would correct a mistake of the other party as to a basic assumption on which that party is
making the contract and if nondisclosure amounts to a failure to act in good faith and in accordance with
reasonable standards of fair dealing
3) disclosure would correct a mistake of the other party as to the contents or effect of a writing,
evidencing or embodying an agreement in whole or in part
4) the other person is entitled to know the fact because of a relationship of trust and confidence
between them.
-Court states that “suppression of a material fact which a party is bound in good faith to disclose is
equivalent to a false representation.” “A matter is material if it is one to which a reasonable
person would attach importance in determining is choice of action in the transaction in question.
-See Swinton v. Whitinsville Sav. Bank, where SC of MA held that there was no obligation to
reveal termite infestation. This has largely not been followed by most courts. Argument in this
case was that seller can’t possibly convey all of the info. he or she has.
-R.S. §161 rejects Swinton, and treats non-disclosure as equivalent to misrepresentation where the
undisclosed fact concerns a “basic assumption” made by the other party to the contract and where
the non-disclosure “amounts to a failure to act in good faith.” “Good faith” may not require
someone to disclose something after gained from significant research.
Case Notes:
-modern view is that in some situations a failure to disclose a material fact may justify recission of the contract (R.S.
§161). Note that (b) provides basis for relief when nondisclosure amounts to a failure to act in accordance with
standards of good faith and fair dealing. See p.641 for suggestions when this might apply
-Prof. Kronman suggests that we distinguish information that has been casually acquired from that which has been
acquired during a costly investigation.
-Recission typically requires actual knowledge by the other party of undisclosed fact (see Goldfarb v. Dietz: zoning
law confusion for a planned construction project).
Case - Miller v. Sears – A trial court rescinded a sale from Miller to the Sears and awarded Miller fair rental value
for the time the Sears occupied the property.
-Just don’t do business with clients, will violate fiduciary duty unless you’re really careful.
-Sometimes, a person may be able to choose between a tort action and recission (note that in recission, one
must return the goods)
-Sometimes recission may be unavailable even if defrauded party prefers it. If the defrauded party is
unable to return the property received because it has been transferred to a third person, for instance.
-A party may rescind a contract for a material misrepresentation even if the misrepresentation was not
made with fraudulent intent (R.S. §164(1)). Without fraudulent intent (“scienter”), a tort action may be
unavailable.
d) Unconscionabilty
Generally
-Based on the idea that some contracts should be unenforcable should because they are shockingly unfair
-Traditional test is the contract is “such as no man in his senses and not under delusion would make on the
one hand, and as no honest and fair man would accept on the other” Restatement 208
-Made mostly by consumers against merchants
-The judge decides wether an agreement is unconciable or not.
-Found often when price is excessive
-Definitions:
-Procedural unconscionability: refers to the fact that one party was induced to enter the k without
having any meaningful choice. This includes crazy boilerplate clauses, illiterate consumers, and
adhesion contracts (all are times when there is no bargaining possible and thus no real assent).
Restatement 208 comment d
-Substantive unconscionability: White and Summers define this as a case involving excessive
price or unfair modification of either the seller’s or buyer’s normal remedies through clauses. See
Ahern v. Knecht
- Prof Speidel has proposed that UCC 2-302 be interpreted to permit a buyer to make a prima facie case of
price unconsicionability by showing a sufficient disparity (possibility, two to one) between the price
charged by the seller and the "average of all retail prices charged for (like goods) in the community in
which the consumer resides." the seller would then have the burden of justifying the apparent too high
price, which he could attempt to do by shoeing the profit on this transaction. (678)
Example Generally - A, literate only in Spanish, is visited in his home by a salesman of refrigerator-freezers
for B. They negotiate in Spanish; A tells the salesman he cannot afford to buy the appliance because his job will end
in one week, and the salesman tells A that A will be paid numerous $25 commissions on sales to his friends. A signs
a complex installment contract printed in English. The contract provides for a cash price of $900 plus a finance
charge of $250. A defaults after paying $32, and B sues for the balance plus late charges and a 20% attorney's fee
authorized by the contract. The appliance cost B $350. The court may determine that the contract was
unconscionable when made, and may then limit B's recovery to a reasonable sum.
Restatement 208
-Not used too often because most cases involve sale of goods which is covered under the UCC
-If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to
enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or
may so limit the application of any unconscionable term as to avoid any unconscionable result.
UCC 2-301
- (1) If the court as a matter of law finds the contract or any clause of the contract to have been
unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the application of any
unconscionable clause as to avoid any unconscionable result.
-(2) When it is claimed or appears to the court that the contract or any clause thereof may be
unconscionable the parties shall be afforded a reasonable
opportunity to present evidence as to its commercial setting, purpose and effect to aid the court in making
the determination.
-Attempts to define unconscionable as something that is one-sided given commercial dealings, etc.
-The reason behind this section is to prevent oppression and unfair surprise.
-To decide all of this the judge must look at the contract at the time of signing and not after (if some starts
dealing unfairly later while the k is being performed, this is not unconscionablity)
Case- Williams v. Walker-Thomas Furniture Co., - Case involves woman who was renting-to-own furniture with a
cross-collateral clause in the rental contract. Courts says that “unconscionability has generally been recognized to
include an absence of meaningful choice on the part of one of the parties together with the contract terms which are
unreasonably favorable to the other party.” Court also quotes Corbin: unconscionability involves terms that are “so
extreme to appear unconscionable according to the mores and business practices of time and place.”
Notes:
-Note difference between procedural and substantive uncoscionability
-Hillman argues for consideration of three factors: a) plight of the weaker party, b) expectations of the
weaker party and c) commercial setting. Pure unconscionability should “shock the conscience.”
-Epstein argues that these defenses increase transaction costs.
-Remember that in Williams v. Walker-Thomas, unconscionability was held to include: 1) lack of
meaningful choice, and 2) terms “unreasonably favorable” to the seller
Case - Ahern v. Knecht - Air-conditioning case. Court holds that contract may be treated as unconscionable when it
is improvident, oppressive, or totally one-side. See R.S. §208 comments c and d. “Gross excessiveness of price
alone can make a contract unconscionable.” This might also be considered “failure of consideration.” In this case,
it was also held that the repair-man had a superior bargaining position since he was perceived as being
“threatening.”
Notes:
-White and Summers suggest a two-to-one or three-to-one disparity in price charged and price otherwise a
vailable to consider contract unconscionable on the basis of price alone.
-Usually the doctrine of unconscionability is defensive and may not be used to obtain affirmative relief
either by way of damages or restitution. See cases on p.678
Standardized forms and unconscionability:
-See Henningsen v. Bloomfied Motors, Inc., where injury was disclaimed by car sales agreement.
-NJ SC ruled that contractual disclaimer, insofar as it sought to immunize the defendants from personal
injury claims, would be regarded as void.
-buyers had no choice (only 3 producers)
-fine print provision that nobody would understand
e) Public policy
Generally
-Basically the argument here is that the K is legally made, but there is something about it that goes against
public policy considerations and so it should not be enforced.
-Example - A promises to pay B $1,000 if the Buckets win their basketball game with the Hoops, and B
promises to pay A $2,000 if the Hoops win. A state statute makes wagering a crime and provides that a
promise such as A's or B's is "void. " A's and B's promises are unenforceable on grounds of public policy.
Restatement 178
(1) A promise or other term of an agreement is unenforceable on grounds of public policy if legislation
provides that it is unenforceable or the interest in its enforcement is clearly outweighed in the
circumstances by a public policy against the enforcement of such terms.
(2) In weighing the interest in the enforcement of a term, account is taken of
(a) the parties' justified expectations,
(b) any forfeiture that would result if enforcement were denied, and
(c) any special public interest in the enforcement of the particular term.
(3) In weighing a public policy against enforcement of a term, account is taken of
(a) the strength of that policy as manifested by legislation or judicial decisions,
(b) the likelihood that a refusal to enforce the term will further that policy,
(c) the seriousness of any misconduct involved and the extent to which it was deliberate, and
(d) the directness of the connection between that misconduct and the term.
Case - Derico v. Duncan- Home improvement credit scheme. Mortgage arrangements deemed void since lender
was not licensed. D argued that agreements should be valid, and only a fine need be paid. Court rules that since
code is in place to protect public, and not as a revenue-generating mechanism, argument does not work.
Notes:
-See R.S. §178.
-If there is no connection between transaction and regulatory difficulties (recently expired license,
for example) courts may enforce contract or award restitution.
-Court more likely to grant restitution to party not equally at fault (“non in pari delicto”)
-Even if contract is legal, courts may not enforce it if it is directly connected with some illegal
activity.
-Anti-trust actions to invalidate contract are looked upon with disfavor.
Case: Karlin v. Weinberg,
Case where restrictive covenant (in this case between two dermatologists) was upheld. Court considered: 1) scope
of covenant, 2) hardship imposed on the promisor and 3) public interest.
Notes:
-Courts will uphold “blue pencil” theory in which court may strike provisions in so far as they are
unlawful, but leave the rest.
Chapter 9 – Justification for Nonperformance:
Mistake, Changed Circumstances, and Contractual
Modifications
1) Justification for non-performance
a) Mistake
Generally
-This is usually a belief not in accordance with the facts defined by Restatement 151.
-Courts often try to discern between unilateral mistake and mutual mistake.
-Usually in unilateral mistake cases, there may be no recovery by the mistaken party (Restatement
will sometimes allow for recovery in unilateral mistake cases) Restatement 153
-In mutual mistake cases, the contract may be cancelled or reformed based on what type of
mistake occurred. Restatement 152
-Restatement 154 defines when a party bears the risk of a mistake made as well as the two sections
pursuant to wether the mistake was mutual or unilateral.
-Different from misunderstanding because, in misunderstanding the parties do not have a meeting of minds
- The best reason for allowing recissional relief in a mutual mistake case is that otherwise one party would
receive a windfall while the other would suffer a penalty. (Chirl 131)
- The law regarding mistake stresses the notion of risk assumption. ( C. 135)
- Contract law is generally resistant to the suggestion that a contractual obligation might be avoided just
because unforeseen or unprovided for circumstances made it less favorable to one of the parties than had
originally been contemplated. (729)
- Modern contract theory does, however, hold out the possibility of an excuse from performance. The
categories of excuses form case law are: mistake, impossibility, impracticability, and frustration.
Example - A contracts to sell a tract of land to B. Both parties understand that B plans to erect an office building
on the land and believe that he can lawfully do so. Unknown to them, two days earlier a municipal ordinance was
enacted requiring a permit for lawful erection of such a building. There is a mistake of both A and B. Its legal
consequences, if any, are governed by the rule stated in s 152.
Restatement 152 (mutual mistake)
Three requirements before the adversely-affected party may avoid a contracts on account of mutual
mistake1) Basic assumption: The mistake must concern a basic assumption on which the K was formed.
2) Material effect: The mistak must have a material effect on the agreed exchange of
performance
3) Risk of Mistake: The adversely affected part must not bear the risk of the mistake
Restatement 153 (unilateral mistake)
-Same requirements as Restatement 152 but with the addition of two possible requirements
-the mistake is such that enforcement would be unconscionable OR
-the other party had reason to know of the mistake / the mistake was their fault
Case: Lenawee County Board of Health v. Messerly, - P found a defective sewage system on a rental property and
the health board claimed that the land was no longer habitable. P seeks resiccion of K because of mistake.
Rule: A court need not grant a rescission just because of mutal mistake.
Holding: Court found that a party bears the risk of mistake if it allocated to him by agreement or if he is
aware at the time of contracting that he has limited knowledge. Restatement 154
-This corresponds with UCC §2-316(3)(a) which has an “as is” clause
-Mutual mistake
-See cf Gartner v. Eikill, where seller was unaware of zoning law changes, and contract was rescinded.
Relied partially on Sherwood v. Walker.
Case: Wil-Fred’s, Inc. v. Metropolitan Sanitary District, - A case of unilateral mistake, where P contractor
withdrew a bid when subcontractor proved unable to meet a subcontract commitment because they mistakenly
underbid. D tried to hold P to contract and also keep their bid deposit.
-Court held: A contractor can obtain a resicission of a K formed by a bid which was mistakenly too low.
-R.S. §153 provides for unilateral mistake if: 1) enforcement would be unconscionable, or 2) other party
has reason to know it is a mistake. Both aspects might be in this case since the sub might go out of
business if made to do this K and it looks to be that D miss quoted what type of machinary would be used
in job.
-Will not be granted for “mistakes of judgement”
-Note negligence may prohibit recovery, but most courts are lax, only holding gross negligence to bar relief
(see White v. Berenda).
-W/F may have known of mistake b/c price was
1) low compared to similar Dept. estimates
2) Comparison to other bids
b) Impossibility / Frustration /Impractibilty
Generally
-Farnsworth finds impracticability and frustration of purpose practically identical:
1) substantial reduction in value of contract
2) occurrence of event that violated basic assumption
3) without party’s fault
4) party seeking relief does not bear the risk of that occurrence of the event either under the language of the
contract or the surrounding circumstances.
-The UCC includes impossibility, frustration and impractibilty as the same things under 2-615
-The Restatement address impractibilty in sections 261 and 266
-Impractibility is usually seen as just another form of impossibility even though it may be literally possible
to do the K, it just doesn’t make sense because of economics, etc.
-This is the EXAMPLE the restatement gives of impractibilty- A contracts to sell a specified machine to B
for $10,000. At the time the contract is made, the machine has been destroyed by fire without A's fault but
A has no reason to know this. Under the rule stated in Subsection (1 dealing with impractibility) no duty
arose under which A is to deliver the machine, and A is not liable to B for breach of contract. 266Supervening impossibilty is dealt with here which means that the cause of the impossibity occurs after the
formation of the K. Usually if the event happens before the formation of the K then that is covered by
mistake or fraud.
-There are three classes of things that can happen which would cause impossibility:
-destruction
-death or incapacity of one of the parties
-supervening illegality
-Frustration is defined by the fact that events may occur that destroy a party’s reason for making the K in
the first place, eventhough the K still could be enforced literally. These are the Coronation sickness cases
where the king isn’t going to be coronated anymore but the guy renting the apartment to see it could still
ACTUALLY rent the apartment.
-Foreseeablity is a big issue in frustration cases (the event must be totally unforseeable)
-UCC 2-615(a) defines impossibility and frustration basically the same.
-Impossibility paint non-existent house (mistake if house had already burned down)
-Impracticability government regulation intervenes, good example.
-Frustration of Purpose  unusual cases.
-The doctrine of excuse for impossibility required for its application a showing of literal impossibility- the
thing promised simply could not be performed at all. Such a requirement is often referred to as "objective"
impossibility- "no one could do it" - as opposed to "subjective" impossibility- "I cannot do it." See ss 455.
- For cases involving impossibility and frustration it is a question of the parties "intent" (137).
- Impossibility (ss 262, 263, 264) UCC 2-613
- Impracticablity (ss 261, 266) UCC 2-615, 2-616
- Frustration (ss 265-266) (pg. 760)
-3 elements of impossibility:
1) an unexpected occurrence;
2) a failure to have allocated the risk of that occurrence by agreement or by custom, and;
3) commercial impracticablity with respect to the performance of the plaintiff's obligations
- the elements of impracticability of performance and frustration of purpose are essentially identical. Both
require the disadvantaged party to show:
1) substantial reduction of the value of the contract (performance is impracticable) (a party's
principal purpose is frustrated);
2) because of the occurrence of an event, the nonoccurrence of which was a basic assumption of
the contract;
3) without the party's fault and
4) the party seeking relief does not bear the risk of that occurrence of the event either under the
language of th contract or the surrounding circumstances.
Case: Karl Wendt Farm Equipment Co. v. International Harvester Co – D sold its unprofitable farm equipment
division to another company which did not continue all the franchises.
-Court Holding: A party’s performance is not excused where the occurrence of a foreseeable event such as
a market downturn renders a contract unprofitable.
1) Impracticability -D argues that (based on R.S. §261) that contract is discharged through
Supervening Impracticability. Comment d makes note that mere lack of profitability is
insufficient for impracticability, although things like a severe shortage of minerals will. Market
shifts are not usually “basic assumptions.”
2) Frustration of Purpose- under R.S. §265. 3 parts of this test 1) frustrates “principal purpose”, 2)
frustration is “substantial”, and 3) frustrating event is a “basic assumption” of contract.
3) See also contract interp. issues.
-See also UCC §2-615
-Note that “basic assumption” of contract is often strictly construed by courts (Suez canal closed? Could
have gone around Africa (American Trading & Production Corp v. Shell International Marine).
-Many courts consider entire company’s operations when deciding these issues (is company profitable?)
See Eastern Air Lines v. Gulf Oil Corp.
Case - International Minerals and Chemical Corp. v. Llano, Inc., - Case about whether need to comply with
environmental regulations fell under impossibility/impracticability under UCC §2-615.
Court holding: Where a party’s performance is made impossible or impractible due to the occurrence of an
event not the party’s fault, the nonoccurrence of which was a basic assumption of the parties, the party’s
performance will be excused.
-UCC 2-615 and Restatement 264 both excuse performance rendered impractible by regulatory
compliance.
-See Florida Power and Light v. Westinghouse, where change of policy toward nuclear fuel
disposal was grounds for impracticability.
-Parties may sometimes specifically contract to enlarge or decrease scope of 2-615
-Note debate whether courts should reform contracts in these situations p.782. Should court limit
duration of agreement to allow buyer to recoup losses?
-§2-615 applies ostensibly to sellers / usually buyer’s duty is only to pay.
c) Modification
Generally
-Often involves many different elements of contract interpretation.
-In the modification of a preexisting executory contract, consideration, implied obligation of good faith,
and duress may be brought up to decide the relative rights and duties of the parties.
-The restatement requires consideration for modification of a K normally. Restatement 71-73.
-UCC 2-209(1) totally does away with the need for consideration when modifying a sales contract.
-In extreme situations, Restatement 89 allows for modification without consideration (such as in
emergencies where work is needed for more money, etc.)
-Beware of possible statue of frauds items when modification is made.
-In theory, if modification runs in favor of one party only, strict application of the consideration
requirement would prevent enforcement even though the change is reasonable and acceptable to the
promisor. (Chirl)
- "Preexisting duty rule"- is that the performance of an act which the promisee is already bound by K to
perform is not "valid consideration" for the change the promisor has apparently agreed to. (Chirl 63) See ss
73
- ss 89 provides that a promise modifying a contractual duty will be binding on the promisor "if the
modification is fair and equitable in view of circumstances not anticipated by the parties when the K is
made." (Chirl 64)
Case: Alaska Packer’s Association v. Domenico, - Case in which sailors threatened to walk out on contract unless
it was modified. It was not found that there was any voluntary waiver by D, and the court found that there was no
consideration for what was essentially a job that already was under contract. “Pre-existing duty”
-Court Holding: A promise to pay a man for doing that which he is already under K to do is without
consideration. The company did not have to pay the seamen their extra money demanded because there
was no consideration for this K. The company had no choice but to agree with the seamen.
-See R.S. §73, dealing with increased payment for performing what was already under contract. This is
usually not consideration, since that was already in place. It would be past consideration if anything.
Case: Schwartzreich v. Bauman-Basch, Inc - Case where a clothing designer was under contract, and received a
better offer. Employee spoke with employer, and contract was modified. Factual dispute as to details of
conversation.
-Court held: that original contract had been voided, and thus parties were free to execute the new contract.
“Any change in an existing contract, such as a modification of the rate of compensation, or a supplemental
agreement, must have new consideration to support it. In such a case the contract is continued, not ended. Where,
however, an existing contract is terminated by consent of both parties and a new one is executed in its place and
stead, we have a different situation and the mutual promises are again a consideration.”
-In King v. Duluth, (p.798) court holds that if an unforeseen and substantial difficulty arises that
casts upon the party an unexpected burden, and the opposite party promises extra pay or benefits,
the promise to pay is supported by valid consideration. See R.S. §73 (regular rule) and its
modification (as per King) in §89.
-R.S. §89(c) states that if modification induces a material change in position, modification should
be enforced if an non-enforcement will lead to an injustice.
Case: United States ex rel. Crane Co. v. Progressive Enterprises, Inc., - UCC §2-209 Case. Seller was forced to
raise prices, and communicated this to buyer, who accepted without comment.
Court Holding: Modification of a K for the sale of goods is enforceable where the seller’s have increased
and he is unaware of the buyer’s limited avenues of supply.
-UCC §2-209 states “An agreement modifying a contract within this Article needs no
consideration to be binding.” Comment 2 states that this must be done within the bounds of
“legitimate commercial reason and good faith, and a “mere technical consideration support a
modification made in bad faith.” “. . .such matters as a market shift which makes performance
come to involve a loss may provide such a reason even though there is no such unforeseen
difficulty as would make out a legal excuse from performance under §2-615 & §2-616.
-Here, P “possessed the contractual right to refuse to modify and to demand performance on the
original terms, it failed to do so and gave objective assent to the higher price.” Also, duress here
is ruled out since original offer had expired, and thus P could not have been relying on the offer.
-Note difficulty in policing possibility that modifications will be extorted from one party after the
agreement is made. In Roth Steel Products v. Sharon Steel Corp., a two-part test was suggested. First, a
party may seek a modification when “unforeseen economic exigencies existed which would prompt an
ordinary merchant to seek a modification in order to avoid a loss on the contract. And second, it is bad
faith to force a modification by threatening a breach.
-UCC §2-209(3) provides for statute of frauds in modifications. Most courts have held that it
must be in writing if contract was originally in the statute or if the modification brings it into the
statute. §2-209(2) permits a “private statute of frauds”
-Note “accord and satisfaction” that may be invoked if payments are accepted. See R.S. §74
(honest belief in validity of claim sufficient consideration to support settlement). Modern interps.
of UCC §1-207 do not allow for acceptance of payment “under protest.” 1-207 now applies
mostly to ongoing performance.
-See Austin Instruments v. Loral Corporation, where it was closely contested what was “legitimate
commercial interest.” Austin’s threat to stop deliveries “deprived Loral of its free will” in making
its decisions. Note comment to 2-209, where it is discussed how it may be in the interest of the
buyer to renegotiated if money damages for breach are unlikely to make it whole.
SECTION NOT DONE
Chapter 10 – Justification for Nonperformance:
Express Conditions, Material Breach, and
Anticipatory Repudiation
1) Justification for non-performance
a) Express condition
Generally
-A requirement for something to happen before the contract can be fully performed.
-Usually there must be strict compliance to express conditions existent in an agreement. Restatement 225
-Sometimes courts will find that there has been substantial performance such that the condition does not
need to be performed. This mostly happens when there is a possibility of forfieture because there has been
a large benefit to the party imposing the condition. Jacob and Youngs v. Kent could have been a good
example of this (reading pipe v. cohoes). Restatement 227(1)
-When an express condition fails to occur the conditional duty never arises and the promisor is therefore
justified in not performing.
-But when the nonoccurrence of the condition is excused the conditional duty becomes unconditional one
and the promisor’s failure to perform amounts to a breach. This is exemplified in Teachers Union v. Butler
(where they said that a condition of how many tenets Butler needed for the loan was waived)
-The major question that must be asked is what was the magnitude of the breach? This will then determine
what responses.
-Condition Precedent: an event occurring after the making of K, which occur before duty of performance
arises.
-Nonoccurrence of a condition prevents the promisee from acquiring a right or deprives him of one
but subject him to no liability.
-Condition Subsequent: an even that has the effect of discharging an already existing duty.
-If express condition fails to occur, the party whose duty was subject to that condition can refuse to
perform.
-Unless, the nonoccurrence of the condition is excused, and the duty to perform becomes unconditional,
i.e. failure to perform amounts to a breach.
Waiver – an intentional relinquishment of a known right, or intentional conduct inconsistent with claiming it.
- may even result where the obligor does not know his legal rights or foresee the legal effect of his conduct.
Some states rule: a waiver may be effective after the expiration of the time for performance of a condition
has expired, if the condition which is asserted to have been waived is not a material part of agreement.
- unilateral in character; needs no new agreement or consideration; nor need be based upon an estoppel.
as long as condition waived was not a material part of the performance obligor was to receive.
Material condition may not be merely ‘waived’, but its protection may be forgone by the obligor
in return for consideration, or overcome by the obligee’s reliance on the obligor’s
express willingness to perform without it.
- power to waive – rests with the party benefiting from the condition (e.g. below, insurer benefits from filing)
- retracting waiver – depends on type of condition waived, method of waiver, and circumstances.
- if waiver made for consideration or relied on, should remain effective
- prevention doctrine: condition is excused if the promisor wrongfully hinders or prevents condition from
occurring.
Policy: parties should be free to make agreements, to which they will be bound. But, courts will not enforce a
bargain where one party unconscionably takes advantage of the necessities and distress of other.
Factors:
- language of K (it is explicitly a ‘condition precedent’?)
common words: ‘provided that’, ‘on condition’, ‘when’, ‘so that’, ‘while’, ‘after’, ‘as soon as’
- intentions of parties (as a c.p. or as a promise?); interpretation
Where there is doubt as to whether words create an express condition or promise,
they are interpreted as a promise.
To determine intention:
- look at entire contract
- circumstances surrounding the contract’s formation
- parties’ subsequent conduct
- reasonableness of parties respective interpretations
- is condition material to agreement or merely ‘technical’?
material: b/c create risk, most courts will insist on strict performance
technical: i.e. not related in substance to D’s nonperformance but asserted to defeat P’s claim.
Generally excused under various theories.
- also, bargaining power of parties (was condition imposed? Inman v. Clyde)
Relevent Restatement Sections
§ 225 – strict enforcement of express condition unless condition excused
§ 84, 246-48 – excuse by waiver
§ 245 – excuse by prevention
§ 229 – excuse if enforcement ‘would cause disproportionate forfeiture’.
[most courts will adopt this strictly, i.e. in cases where performance of condition impos/imprac.]
§ 227 – Forfeiture: if unclear whether a condition or not, interpretation is preferred that will
reduce obligee’s risk of forfeiture – unless event is in his control or he assumed risk
COMPARISON – Condition, Promise (duty), or Both?
Condition
if cond. does not occur
- no liability for damages
- promisor’s obligations discharged
Promise
Promissory Condition
if promise breached
if promise breached
- liability for damages to injured - liability for damages to injured
- injured party not discharged
- injured party’s obligation dis.
from duty unless breach is
material and no effort made to cure
Case: Inman v. Clyde Hall Drilling Co., - In this case, the express condition of having employee notify company
within 30 days of an action was upheld. It was decided that both parties freely contracted, and P knew of the terms.
Because parties agreed that this would be a condition precedent, Company was not required to plead lack of notice
as an affirmative defense, but instead, that Inman was required to plead performance of the condition or that
performance had been waived or excused.”
-Courts may enforce such conditions if they are material.
-Condition Precedent: clearly stated in language of K as such.
Case - Jones Associates, Inc. v. Eastside Properties, Inc., - Case in which Jones Associates was to provide services
to obtain building permits and such. Permits were denied, and D claimed that their granting was a condition
precedent to the contract.
-Court held: that it was a promise (thus still actionable), but not a condition precedent. Contract was
ambiguous here, and court attempted to make out the parties’ intent. Court partially bases ruling on R.S.
§227(1) which states “In resolving doubts as to whether an event is made a condition of an obligor’s duty, .
. .an interpretation is preferred that will reduce the obligee’s risk of forfeiture, unless the event is within the
obligee’s control or the circumstances indicate that he has assumed the risk.” Comment b continues “if the
event is within the [obligee’s] control, he will often assume this risk [of forfeiture]. If it is not within his
control, it is sufficiently unusual for him to assume the risk that, in case of doubt, an interpretation is
preferred under which the event is not a condition.”
-note cases where an event defining performance is neither a promise or a condition. See cases on p.824
where payments of to subcontractors by GC’s are not really tied to payment by owner, unless language is
extremely strong and both parties are obviously in agreement.
-See Internatio-Rotterdam, Inc. v. River Brand Rice where terms was both a promise and a condition. The
promise was a promissory condition, where breach subjects promisor to liability and excuses promisee
from performance.
Case: United States Fidelity and Guaranty Co. v. Bimco Iron & Metal Corp.,
Two issues: 1) Interpretation issue on whether vandalized items that were then stolen were covered under an
insurance policy, and 2) whether or not the insurance company waived the notification requirement in the insurance
contract. For P on both counts. Court adopts rule that waiver may be effective after expiration of the time for
performance of a condition has expired.
-Contra portferentem usually applied with force against insurance companies.
-See R.S. §84 which expresses concept of waiver. Note that courts will strain to find waivers in cases
against insurance companies, especially when it comes to questionably important procedural issues.
-Waiver will not occur unless obligor “has reason to know the essential facts.”
-R.S. §84(1) states that a waiver is effective without consideration or reliance only if the term is
immaterial.
-Waiver cannot be redacted if beyond deadline for performance. See R.S. §84(2) and UCC §2-209(5)
-Express condition that benefits one party can be waived by that party, and cannot be used as a basis for
recission by party that is not benefited by the condition.
-Note doctrine of “prevention”, where interference by other party with happening of event will cause that
condition to be waived. See R.S §245.
Case: JNA Realty Corp. v. Cross Bay Chelsea, Inc., - Lessor forgets to renew lease, and landlord wants to evict.
Lessor has made improvements to the property, and wants equitable relief. Although options must be exercised
within time specified, equity will intervene because of improvements made. “The benefit of the rule or practice in
equity which relieves against such forfeitures contract of valuable lease terms when default in notice has not
prejudiced the landlord, and has resulted from an honest mistake, or similar excusable fault.” This applies also if
tenant is negligent in renewing. Not, however, if grossly negligent.
-R.S. §229 sets forth a general ground for excusing the failure of a condition: if enforcement “would cause
disproportionate forfeiture.” Failure should not be excused if condition was material. Will be excused if
impossible or impracticable.
b) Material Breach
Generally
a) Is breach material or partial?
b) If material, has it become total?
Total/Material v. Partial Breach
Total Breach: - discharges nonbreaching party from his duties under K; may even enter into alternative Ks.
- can recover actual damages due to breach and future damages that would flow from breach.
Partial Breach: - no discharge; nonbreaching party must continue to perform obligations under K.
- can only recover damages for harm resulting to date – not for future harm.
-
- Factors to determine Total / Partial breach
Ability to Cure: total if breaching party cannot correct of fails to cure, w/in reasonable time
Dependency: If obligations are independent, then if one party stops, other must still perform
If obligations are dependant, then if one party stops, other party’s duty is discharged.
Materiality (Sackett v. Spindler) (also in Restat § 241)
extent to which injured party will still get anticipated benefit
-
“ “
“
“
may be compensated in damages for lack of complete performance
“ “
“ party failing to perform has already partially performed or prepared to do so
the greater or less hardship on the party failing to perform in terminating the K
the willful, negligent, or innocent behavior of the party failing to perform
the greater or less uncertainty that the party failing to perform will perform the remainder of the K
OR
1) whether the breach operated to defeat the bargained for objective of parties
2) whether breach cause disproportionate prejudice to the nonbreaching party
3) whether custom usage considers such a breach to be material
4) whether allowing reciprocal nonperformance would result in an unfair/unreasonable advantage
Restatement § 237 – Material Breach v. Total Breach [courts use terms interchangeably]
Material Breach: Performance by nonbreaching party is suspended until breach cured.
Total Breach: Performance by nonbreaching party is discharged, and party can persue damages.
-
Factors for Total (§242) v. Material (§241)
materiality factors in Restat § 241
extent to which further delay will prevent or hinder nonbreaching party from making substitute
degree of important that the terms of agreement attach to performance w/o delay.
Case - Sackett v. Spindler (1967): P agrees to buy stock from D. P late on payments; does not pay full. P delays.
D gives final conditions for payment and that non-payment = breach. P misses deadline, but later wants to
pay. D says P breached; no sale (K repudiation).
Issue: Did D’s termination of K discharge P’s duty to consummate K or respond to damages?
Court: D’s repudiation of K only justified if P’s breach was total, not partial. Depends on materiality.
- P’s breach was total; P did not intend to perform. D not required to wait for P.
Rule: A material breach of a K constitutes a total breach thereof and is sufficient to permit the non-breaching
party to lawfully repudiate same.
Doctrine of Constructive Conditions:
- judicially created devices to determine the consequences of breach when the parties have failed to so
specify in their agreement. To determine if one party has duty to perform b/c of other party’s breach.
Categories of conditions:
1) express conditions
2) implied-in-fact conditions (inferred by conduct)
3) constructive conditions (created by a court for reasons of justice).
Case - Jacob & Youngs, Inc. v. Kent (1921): P builds house for D. D later realized P uses different (wrong) piping.
Mistake not willful. D refused to pay balance due.
Court: minor or immaterial deviations from K provisions do not amount to failure of a condition to the other
party’s duty to perform.
Rule: - An omission, both trivial and innocent, will sometimes be atoned for by allowance of the resulting
damage, and will not always be the breach of a condition to be followed by forfeiture.
- The transgressor whose default is unintentional and trivial may hope for mercy if he will offer atonement
for his wrong. The willful transgressor must accept the penalty of his transgression.
Dissent: Buyer deserves exactly what he contracted for. P was irresponsible and should fix problem.
Divisible contracts p.865,6
c) Anticipatory Repudiation
Generally
Determining: [Corbin]
-
must be an definite and unequivocal manifestation of intention on part of repudiator that he will not
render the promised performance when the fixed time comes.
- A mere request for a change in the terms or a request for cancellation is not in itself enough to
constitute repudiation.
- Restatement § 250: For mere conduct to constitute a repudiation, a party’s act must be both
voluntary and sffirmative, and must make is actually or apparently impossible for him not to perform.
- Retracting Repudiation: is legitimate as long as other party had not relied on repudiation once
declared.
Pro:
Con:
- helps to prompt earlier settlment & damage
- unfairly increases the obligations of promisors by
payments
requiring them to perform their promises early.
Case - Harrell v.Sea Colony, Inc. (1977): P agreed to buy condo from D. P paid deposit – which would be
forfeited in P breached K. P later sent letters to D requesting cancellation of K. D sold condo to another and kept
deposit. P sued for deposit and resale price. Trial court found for D, saying P had made and anticipatory breach. P
appeals.
Issue: Does a mere request to cancel a K constitute an anticipatory breach thereof?
Court: No. There must be an unequivocal manifestation of intention on the part of repudiator that he will
not render the promise. A mere request for cancellation does not repudiate K.
UCC§2-609 – Right of Adequate Assurance of Performance
- Gives a party to a contract for the sale of goods the right to demand adequate assurance of due
performance by the other party.
- creates a new K enforcement procedure for the situation were one party feels insecure as to the
other’s performance. Insecure party may suspend performance (for which he has not already received
agreed return) until such assurance is given.
- grounds for insecurity between merchants based on commercial standards.
- if all else legitimate, failure to produce assurance w/in reasonable time is a repudiation of K
Case - Pittsburgh-Des Moines Steel Co. v. Brookhaven Manor Water Co. (1976): P was hired by D to build tank;
payment to be made in full w/in 30 days of test/acceptance. D was getting a loan, but wanted to wait until tank was
finished. P thought D had loan and asked D to put loan in escrow. P refused to build until such payment gurantee
made. D sued for damages b/c of P’s ‘anticipatory repudiation.’ On appeal, D argued it was just demanding
assurance of performance (UCC§2-609).
Court: UCC§2-609 applies. BUT, P lacked reason for insecurity.
- The fact that money was not escrowed should not create insecurity since money would not be paid in months.
- reasonable businessmen not to commence paying interest on loans until $ needed.
- P had no right to demand such changes which would have redrafted K.
Chapter 11 – Expectation Damages: Principles and
Limitations
1) Expectation Damages
Generally
-To put the plaintiff in as good a position as he would have occupied had the contract been fulfilled
-98% of cases are expectation damages where the P gets the benefit of his bargain
-Unlike Torts, Contract damages do not award for pain, suffering, loss in reputation (unless physical injury,
Sullivan Nose Job Case)
-Consequential Damages: one causal link away – not direct result of breach. (e.g. lost profits for seller;
costs, loss for buyer) - but other loss that is a related consequence of breach. Include such items as injury
due to breach.
-Indicental Damages: direct result of breach; post-breach costs associated w/ breach (e.g. shipping goods
back). This is loss after breach ocurred in attempt to avoid loss.
-Variable costs (costs specifically for performing task): not in expectation damages b/c not profit; in
reliance damages b/c paid
-Fixed costs (e.g. salaries): part of gross profits. Not calculated unless bankruptcy.
-Restatement 347 instructs how to calculate expectation damages.
-The Economic Waste Standard is used by courts when calculating damages because it is unlikely that the
court is going to award the cost of completion where the defect is minor. This happens when remedying
the defect would require destruction of what has already been completed in an objectively satisfactory way.
Restatement 348 refferring to Jacob and Youngs v. Kent where price of pipe exchange would be crazy to
do.
-Also the Restatement uses the Clearly Disproportionate Standard when evaluting damages. This involves
diminution of value of land and objects which is less then it would be to complete the work contracted for.
Restatement 348(2)(b) reads “if the cost is clearly disporportinate to the probably loss in value to the P”
then only diminution of value just be paid. This applies to the Peevy v. Garland Mining case where it
would have cost $30,000 to do the contracted work properly but it would only increase the price of the
property by $300.
a) Computing the value of Plaintiffs expectation
Main types of Damages in Expectation damages
-Market Damages:
K – Market + I + C = damages
-Resale/Market Damages:
K – Resale = K – Market, if …..
-Value of Proper Performance – Value of job as performed
-Dimunition of Value – Mostly found in Restatement 348 claims.
-Subjective value problem
-Net Expectation – the value of the performance D had promised to render, less the cost of the performance
plaintiff had promised in return as the ‘price’ for D’s performance
-General Measure of Damages (Farnsworth):
loss in value
+
other loss
– cost avoided
–
loss avoided
[K services/goods]
[incid & conseq]
[from not perform.]
[salvaging & reallocating]
depriving party of
costs incurred
promised perform. after breach in attempt
to avoid loss
Market Damages, Resale/Replacement
Case - Kemp v. Gannett – D broke K by not buying land from P. P resold land at lower price and sued for
difference.
Court Holding: P’s damages are the difference between the K price and the market price on the day of the
breach, and resale price if obtained within a reasonable time and at the highest possible amount after
breach, is evidence of market value on the day of the breach.
-K– Market = damages [buyer §2-713, seller §2-708(1)]
market damages act as mitigation – as if party went to the market
Resale Price – if within a reasonable time, made in good faith, and at the highest price attainable
after breach, is evidence of market value on day of breach. Resale is a mitigation.
-K- resale price = damages [seller §2-706]
-So, if land price is fixed, recovery of damages will be mainly incidentals & consequentials
Time for determining Market Damages
Seller’s Damages: UCC § 2-708(1): market price at time and place for tender
Buyer’s Damages: UCC § 2-713: market value from date breach learned of.
Employment Contracts
Case - Handicapped Children’s Education Board v. Lukaszewski – Schoolteacher breaches by leaving school for
a better offer. School sues seeking difference in higher costs for replacement – repl. with same skills has more
experience and hence gets higher salary. P argues that extra experience is to school’s benefit – no damage, no net
loss, at par. Court argues that school never wanted to pay that extra amount – it was imposed on them b/c of breach
– had no other alternative to meet needs.
“Damages for breach of K are measured by the expecations of the parties” – School did not expect
to pay that much for the services desired.
-Rule: An employer who has to obtain an employee at a higher price upon breach of an employment K may
recover the difference if that is all that is available.
-For employment contracts the measure of damages is K- replacement = damages
Dimunition of Value, Cost of Completion
Case - American Standard, Inc. V. Schectman (1981) – P hires D to level land and remove structures. Realizing
that costs would way exceed K payment, D defaults after partial performance. D claims that cost of completion
would give windfall damages to P, and that damages should be measured by dimunition of value of land. D cites
Jacob & Youngs, but court disagrees that situation is parallel and that current case does not fulfill requirements for
dimunition of value.
Court Holding: “That the burdens of performance were heavier than anticipated and the cost of completion
disproportionate to the end to be obtained does not … alter the rule that the measure of P.’s
damages is the cost of completion”
-Dimunition of Value test: has there been 1) substantial performance in 2) good faith with 3) no
intentional breach, where 4) defects exist which correction for would be 5) unreasonable economic
waste or irremediable? Or where defects can be excused as incidental to the main purpose of contract (v.
fundamentally against contract)? Or where public interest is at stake. [P. 914]
-Fits for J & Y. In Peevyhouse, court only awards d.v. damages. However, policy later changes and cost
performance damages granted, as in the John Wunder case.
-Reasoning: The court reasoned that the grading issue was not incidental, and that P had a right to
request the land be graded. Also, D’s performance would not have undone what in good faith had been
already done properly, but would have only involved doing what was promised and left undone. Finally,
the court reasoned that the $90,000 in damages was hardly inconsequential or trivial, as the breach was in
Jacob & Youngs v. Kent.
-Damages = value of proper performance – value of job as performed
-Something else coming into play here may be Subjective Value – where not monetary, difficult to ascertain
value of K to parties, and to award appropriate / adequate expectation damages
-R.S. §348(2), cost to complete should be awarded in cases of “defective or unfinished construction”
providing that completion was indeed possible and did not involve “unreasonable economic waste”.
There is also an emphasis on cases where loss in value is difficult to determine. (see Eastlake Construction
Co. v. Hess). Cost to complete even more likely where breach is “willful” (see Kangas v. Trust). See
note 7 for cases on who has burden to prove that cost to complete is not economically reasonable (p. 916)
b) Restrictions on the recovery of expectation damages
Generally
-
Foreseeability: The loss must be reasonably foreseeable by breaching party at time of K
Certainty: Must be able to prove the amount of loss with certainty
Causation: That one event led to another
Mitigation of Damages: Must attempt to mitigate damages inorder to recover expectation damages
i) Forseeability
Generally
-Forseeability is covered by UCC §2-715 and Restatement 351.
-Damages are not recoverable for loss that was not reasonably foreseeable by breaching party at time of K
UCC “[party] at time of contracting had reason to know”
-Protecting breaching party from damages not foreseeable:
a) encourages more contracts to be made
b) facilitates exchange of info & appropriate pricing of K
-Injured party may recover:
1) damages that may reasonably be considered arising from breach
2) damages that may reasonably be supposed to have been in contemplation of parties, at the time
of K, as the probable result of a breach of K
Restatements §351
(1) Damages are not recoverable for loss that the party in breach did not have a reason to foresee as a
probable result of the breach when the contract was made.
(2) Loss may be foreseeable as a probable result of a breach b/c it follows from the breach:
(a) in the ordinary course of events, or as a result of special circumstances, beyond ordinary
course of events, that the party in breach had reason to know.
Case - Hadley v. Baxendale (1854) – [landmark for foreseeeability] Courier late in delivering mills shaft to mill.
Mill suffers lost profits and holds Courier responsible. Court says Courier not responsible for damages because they
were not reasonably foreseeable at time of contract.
Court Holding: “Where two parties have made a contract which one of them has broken, the damages
which the other party ought to receive … should be such as may fairly and reasonably be considered either
arising naturally [from breach itself], i.e. according to the usual course of things, or such as may be
responsibly be supposed to have been in the contemplation of both parties, at the time they made the
contract …”
Case - N.A.R.P.C. v. United Bank Alaska (1984) – Complex loan taken out by NARPC from UBA. UB revokes
loan after NARPC has already taken action on reliance. NARPC seeks alternative financing but cannot obtain –
sues UBA for damages covering transaction they were involved in. UBA denies that they are responsible for
damages. Multiple issues. Re: Foreseeability, appellate court finds that it was reasonably foreseeable to UBA that if
they breached, NARPC would be unable to find new lender.
Rule: Damages are recoverable for loss that party in breach had reson to foresee as a probable result
when K was made.
-R.S. §351(3) suggests that we limit consequential damages where they are greatly out of proportion with
the value of the contract.
-See R.S. §351 and UCC§2-715(2): court in this case interprets these as demanding that foreseeability be
judged at the time of contract
ii)Causation/Certainty
Generally
-Certainty of damage is an important issue here. See Contemporary Mission, Inc. v. Famous Music Corp.,
where damages were awarded for a recording contract, but not for a lost tour, since it was too speculative
(p. 937)
-Usually it is impossible to recover expectation damages when the amount of money expected is uncertain.
In this situation the court would order damages calculated by relaince probably.
-UCC 1-106 instructs that remedies should “be liberally administred to the end that the aggreived party
may be put in as good a position as fi the other party had fully performed.” Thus certainty is not as
important to UCC
-Also it is important to note UCC 2-715 comment 4 which talks about recovery of consequential damages
and how the burden of proving loss is on the aggrieved party but this section rejects any doctrine of
certainty which requires mathmatical certainty. Loss may figured in a reasonable manner given the
circumstances.
iii) Mitigation
Generally
-An injured promisee cannot recover damages for losses that, with reasonable effort, he could have
avoided after the promisor’s breach became known. Legal obligation on injured party to minimize
cost of breach, make substitute arrangements where applicable.
-Market damages for buyer can count as mitigation
-There can be a reduction in damage recovery for failure to avoid loss [mitigate]
-It is a general principal that “the plaintiff may not recover for those injurious consequences of the
defendant’s breach that the plaintiff herself could by reasonable action have avoided” the doctrine is called
“avoidable consequences”.
Case - Rockingham County v. Luten Bridge Co. (1929) – City contracts builder to construct bridge. Before
erection, city asks builder to stop construction. In hopes that minds will change, builder constructs and eventually
sues for breach. Court does not award full damages b/c:
“[Once contract is broken, the other party]” cannot continue to perform and recover damages
based on full performance” - the party has a responsibility to mitigate damages.
Rule: After an absolute repudiation or refusal to perform, the other party may not continue his performance
in order to recover damages based on full performance.
-There is no “duty to mitigate”, there is simply a limitation on P’s right to recover damages.
Case - Stewart v. Board of Ed. Of Ritenour Consolidated School District (1982) – School Board fires teacher
causing a breach. Court finds for teacher. Board appeals on damages and says that they should be reduced b/c she
could have mitigated. Appellate court finds that she did not fail to mitigate.
-Court Holding: To prove a terminated employee did not mitigate damages, a former employer must prove
comparable work existed, the employee did not apply therefor, and it was likely that the employee wold have
secured the position. There was no oppurtunity for Stewart to mitigate so she did not have to.
-Burden of proof showing failure to mitigate falls on Board.
-Burden to show not only failure to mitigate, but that opportunities to mitigate existed
-Usually specific performance (forcing school district to hire back an employee) will not be demanded by a
court.
-Incidental expenses can be awarded in the hunt for a new job (see Mr. Eddie, Inc. v. Ginsberg)
Case - Parker v. 20th Century Fox (1965) – Shirley MacLaine asked to do a big film and guaranteed specific
payment; film cancelled. To make it up they offer her role in another film. She refuses arguing that it is clearly not
the equivalent.
Court holding: the court agrees that film 2 is not a comparable substitute and therefore does not find her legally
obligated to mitigate damages, and awards her damages of the specific payment.
-Where issue of job “comparability” came strongly into play. MacLaine was not forced to accept a job in a
cheesy western in replacement of a high drama.
c) Nonrecoverable damages : items excluded from
plaintiffs damages
Generally
-3 Types of damages not typically covered:
1) Damages for attorney fees
2) Damages for mental distress
3) Punitive damages
Attorney Fees
Case - Burnett v. Smallwood - Absent a contractual agreement or statutory or rule authority, the nonbreaching
party to an agreement not to sue is not entitled to attorney fees and costs.
Issue: Can attorney fees be recovered as damages when there is a “no sue” clause in a contract? (this was an
oral contract here.) No.
Rule:
1) Agreement must expressly provide for that remedy
2) Such an award is permitted by statute or court rule
-The “American Rule” of not awarding attorney’s fees has some exceptions: if the contract
explicitly indicates attorney’s fees, then they may be enforced. Occasionally not though (see
Cable Marine, Inc. v M/V Trust Me II (attorney’s fees denied when P had refused generous
settlement offer). In “battle of forms”, UCC 2-207(2)(b) prohibits attorney’s fees since it
materially changes contract (see Comark Merchandising, Inc. v. Highland Group, Inc.)
-In the absence of a statute of private contract to the contrary, attorney fees are generally not
recoveable by the prevailing party in a breach of contract case. But possible if suit brought in bad
faith. POLICY – it discourages settlement agreements & discussions
-IF AGREED REMEDY and included in terms, e.g. for legal fees incurred when collecting rent, courts
may enforce.
-Numerous statutes exist for the provision of attorney’s fees. It has been argued without success
that UCC §2-710 allows for attorney’s fees (incidental damages)(East Girard Savings Assn. v.
Citizens National Bank and Trust Co.) & Devore v. Bostrom (not incidental or consequential
under §2-715). Contra Cady v. Dick Loehr’s.
-In Cal and Wash, if one party gets attorney’s fees in contract, then prevailing party gets them in
judgment (see p. 971)
-Based on Washington Law, P may recover attorney’s fees related to wage loss claim
Damages for Mental Distress
Case - Gadliardi v. Denny’s - Gag who was discharged for breaching employment K, sued former employer for
emotional distress damages.
Court Holding:
The impact of allowing emotional distress damages for breach of contract would be
erroneous. The court posits a test that says the issue must be one “uniquely intended
to protect some personal interest and. . .incapable of compensation by reference
to the terms of the contract
-R.S. §353 states two types of cases where emotional distress can be awarded:
1) bodily harm (e.g. Sullivan v. O’Connor (nose job case)
2) contracts in which it is particularly likely to cause emotional distress (see Meyer v. Nottger where
mortician’s misfeasance caused a chain of misfortune. . .”).
-Mostly emotional distress damages denied. See Carpel v. Saget (lost wedding pictures), Levin v.
Halston (improperly made dress to be worn to daughter’s wedding), Deitsch v. Music Co.
(wedding band no-showed), but cf. Mieske v. Bartel Drug Co (D lost 32 reels of family films)
-Chung v. Kaonohi Center Co., Emotional distress awarded when mall promised to lease space for
their store but simultaneously was negotiating with others.
-In dissent, Utter argues that denying emotional damages is not consistent with theory of “efficient
breach”
Punitive Damages
Seaman’s v. Standard Oil - Main Point: Seaman’s was denied tortious damages because it was not put to
the jury to decide whether D breached in bad faith (and hence the case was remanded). It was implied that there
was a good chance that the contract was broken in bad faith and significant punitive damages would eventually yield
significant tort damages.
Court Holding: It is not a tort to deny the existence of a K, if the denial is based on good faith belief
-There is significant movement to award tort damages in insurance cases, since the insured is extremely
vulnerable to “stonewalling”.
d) Justification for expectation damages rule
Generally:
-In a purely executory (unexecuted) contract: Attayah would say the following: if we took 1,000 executory
contracts, nothing would happen. Why? Market doesn’t shift that fast (the contract wouldn’t become that much
more or less valuable. Also, he adds in earlier times, there was much less credit-based contracting and more
spot transactions. Hence, there was little cause for expectation damages.
-To encourage reliance on contracts.
-To compensate for forgone opportunities (Eisenberg)
 Why not go beyond expectation damages? Because it would prevent an efficient breach (by incurring
unnecessary costs on one of the parties)
< ------------x------------------------------x--------------------------------x-----------------------------------x-------- >
No Expectation
Expectation
Specific Performance
Punitive D’s

How would this
Effect specific perf?
1) more breaches?
2) Fewer breaches?
3) Fewer contracts?
4) More settlemets (JJ’s answer)
i) Protecting expectation interest in a wholly
executory k
-Basically you should get expectation damages because you should be allowed to get the benefit of your
bargain…even if absolutely nothing has happened on the K.
ii)Encouraging breach of k through effiecient breach
Generally
-Breach where it is in best economic interests of all parties. No loss to parties. No party worse off.
-If there is a value lost to any party, it is not efficient. So it works well were one party may be paying
more than they actually value, so breach by other party for better deal would benefit them.
-Efficient if compensation to nonbreaching party adequately mirrors value of performance, so that they
receive the same benefits as performance while other party is able to do better.
-Courts should distinguish between willful and nonwillful breaches in selecting remedies for breach of K.
-Problems:
- moral obligation to fulfill contract
- transaction costs – if high, may not be efficient breach
- emotional costs
- consequential damage costs
- reputation costs (to party breaching) – reputation / trust
-MacNeil has criticized the very notion that the law should encourage efficient breach. He suggests that the
bargaining that specific performance will bring about will increase the overall efficiency of the
transactions. MacNeil also suggests that it is basically impossible to factor in all costs of the breach
(precontract planning, prebreacg planning, postbreach negotiation and litigation, relational costs, and so
forth.
Case - Roth v. Speck: When an employee wrongfully terminated his employment, he will be liable for any lostr
profits which can be established and the difference in salary the employer would be forced to pay someone of
comparable skills. [not an efficient breach]
Damages: injured party gets [sig. part of] breaching party’s gain (this can be greater than Mkt damages)
Chapter 12 – Alternatives to Expectation Damages:
Reliance and Restitutionary Damages, Specific
Performance, and Agreed Remedies
1) Alternatives to expectation damages
a) Reliance Damages
Reliance Interest: An interest that is given when P incurs expenses because of a reliance on D (e.g., paying
monies for a title review of a property).
-Reliance damages are usually hidden inside the calculation used to figure expectation damages.
-Reliance damages are usually used when profits are too speculative to use expectation damages as the
remedy method.
-Courts usually refuse to award expectation damages to parties brining suit on promissary estoppel and so
they reward reliance damages.
-If P can prove damages, given the doctrine of promissory estoppel, she may be able to recover full
expectation damages
-Most jurisdictions award expectation where either would be possible (see Walters v. Marathon Oil)
Example: A contracts to sell his retail store to B. After B has spent $100,000 for inventory, A repudiates the
contract and B sells the inventory for $60,000. If neither party proves with reasonable certainty what profit or loss B
would have made if the contract had been performed, B can recover as damages the $40,000 loss that he sustained
on the sale of the inventory
Restatement 349
- the injured party has a right to damages based on his reliance interest
- including expenditures made in preparation for performance or in performance
- less any loss that the party in breach can prove with reasonable certainty the injured party would
have suffered had the contract been performed.
-Comment (a) explicitly allows recovery for incidental reliance damages and essential reliance damages.
UCC 2-715
-UCC does not explicitly address reliance damages
-2-715 (1)(2) both address incidental damages and consequential damages respectfully, and so this courts
have construed this as addressing reliance damages as well.
Types of Reliance (Fuller & Purdue)
Essential: (direct) damages limited to K price; cannot shift contractual losses (such as 3 rd party contract)
The money spent preparing to perform the exact contract being disputed or in actually performing it.
Incidental: (conseq.) b/c reliance natural and forseeable, can receive damages amounting to more than K price.
Damages related to anticipation of a contract but not directly related to the performance of it.
Limitations on Reliance Recovery-Contract Price: D will almost never pay P more than the price committed to through the contract because
this would be a windfall for the P, since it overshadows even his possible expectation damages. However,
see Universal Computer Systems v. Medical Services Assn, where reliance damages can be as high as expectation damages – agent failed to pick up bid at airport, and reliance
damages were given for profit P would have made since it would have gotten contract.
-Limit of Profits: This controversial limit has to do with allowing the P to recover on a losing contract if D
breaches. In theory, if this limit is not applied, a P could recover more than his expectation damages.
-If there is no evidence of cost of completion then the P is limited to what has been spent up to the point of
breach on the contract
-If there is evidence provided by D that there would have been a net loss, then the P can only recover the
cost of the contract minus cost of completion. (K - full performance)
-Incidental reliance damages: Sometimes courts will not allow recovery based on these damages, but the
restatement allows for them and so most courts will.
-Expeditures made prior to signing contract: These types of reliance cannot be said to be made for the
contract being disputed.
-Also can be limited by : causation, certainty, mitigation and foreseeability.
Important Difference between Reliance and Restitution damages: reliance damages are usually calculated
according to the cost to P of performance and not the value to D. Even if P has spent all his money on preperation to
perform and thus not incurring any thing on D, D would still have to pay P for expenditures up to the point of
breach. However, Restitution damages are usually calculated by the benefit to the D rather than the cost incurred
by P.
Important J.J. Comment: reliance should not be used to shift the damages of a losing K. If expectation damages
can be calculated and are losing, that party cannot claim reliance damages to get better reward.
Cases based on RELIANCE DAMAGES
Case: Wartzman v. Hightower Productions - Flagpole sitting operation fails because of failure of lawyer to
properly issue securities.
Issue: 1) can P recover damages for reliance costs when its attorney killed the company
2) Does P have the duty to mitigate damages when it is impossible for them to do so
Holding/Rule: P can collect such damages, because P relied on D.
Notes:
-Reliance damages may normally be a fall-back when expectation cannot be predicted with
certainty
-Reliance damages should not be limited to cost of contract (in above case, the cost paid to the
attorney) (see Nurse v. Barnes, 1664 (warehouse w/ goods that burned down)
-D may be able to reduce reliance damages by showing P would have lost money if contract
performed.
-Causation, mitigation, foreseeability and certainty should be factors in reliance damages as well
as others.
-Giving up income can be seen as a cost, and awarded as reliance damages (see Dialist v. Pulford,
where person left job to become distributor)
-The above may also relate at times to at-will employment!
b) Restitution Damages
Restitution Interest - To prevent unjust enrichment to the promisor by the promisee. To put P in as good as a
position he was in before entering the contract. "A party's restitution interest is his interest in having restored to him
any benefit that he has conferred on the other party. Restitution is, therefore, available to a party only to the extent
that he has conferred a benefit on the other party. The benefit may result from the transfer of property or from
services, including forbearance." (From Restatement 370)
-Restitution can only be recovered when the plaintiff has NOT fully performed.
-Restitution can be recovered by BREACHING party (Restatement 374)
-If K was oral, and had defect, but some performance took place, and can’t choose expectation damages b/c
can’t establish terms of K. can do restitution.
-All restitution is reliance but not all reliance is restitution
-Restitution can be recovered in a losing K. Restatement 373 (d)
-If breaching party’s performance is complete, injured party CANNOT elect restitution damages.
-Can be brought in suit for quasi-contract (not really a contract at all but instead is applied by some courts
to denote a recovery imposed by law where justice so requires, even when there has not been a traditional
agreement. EXAMPLE: A doctor saves an unconcious person on the street. They could recover restitution
damages based on a quasi-contract)
-Restitution is NOT limited to the K price like reliance and can far exceed it.
-Restitution damages can be awarded when the performance obligations of a contract have been discharged
for some reason by one or both parties
-Restatement 375: restitution used when a K is unenforcable because of statute of frauds
-Restatement 376: restitution used when K is voidable because lack of capacity, mistake,
misrepresentation, duress, undue influence, or breach of fiduciary relationship.
-Restatement 377: restitution used when K is discharged because of impractibility, frustration or
failure of a condition.
Measure of recovery: reasonable value of performance undiminished by any loss that would have been
incurred by complete performance. Performance MUST have some value to D inorder for P to recover.
-Market value is the standard of recovery. It is the sum which the D would have to pay to acquire
the P's performance on the open market. This is not the subjective value to the D, nor the amount
D could resell P's partial performance. Restatement 371(a)
-This is sometimes not true however, if P's performance has no market value, but does have some
subjective value to the D. This is then used to recover. However, this is rarely used.
Example Generally of Restitution: A contracts to sell a tract of land to B for $100,000. After B has made a
part payment of $20,000, A wrongfully refuses to transfer title. B can recover the $20,000 in restitution. The result is
the same even if the market price of the land is only $70,000, so that performance would have been disadvantageous
to B.
Restatement 373 (main section on Reliance)
-It is available regardless of whether the breach is by non-performance or by repudiation.
-If, however, the breach is by non- performance, restitution is available only if the breach gives rise to a
claim for damages for total breach and not merely to a claim for damages for partial breach
-In the case of a contract on which P would have sustained a loss instead of having made a profit, his
restitution interest may give him a larger recovery than would damages on either expectation or reliance.
Restatement 371(measure of restitution interest)
-If a sum of money is awarded to protect a party's restitution interest, it may as justice requires be measured
by either
(a) the reasonable value to the other party of what he received in terms of what it would have cost
him to obtain it from a person in the claimant's position, or
(b) the extent to which the other party's property has been increased in value or his other interests
advanced.
UCC 2-718 (allows for restitution recovery by a breaching buyer)
-Where the seller justifiably withholds delivery of goods because of the buyer's breach, the buyer is
entitled to restitution of any amount by which the sum of his payments exceeds
-The buyer's right to restitution is subject to offset to the extent that the seller establishes damages incurred
by her (assuming prostatution as my example)
Specific Restitution- If the benefit given to the breaching party is something easily returned in kind to the
injured party, then the court may order specific restitution. That is the court can order the breaching party to return
the benefit rather than pay damages. Generally the injured party decides this. This is usually used in the transfer of
land. It is not available if services have been rendered. Restatement 372.
Restitutionary Reliance: (p.1071)
Cases Based on RestitutionCase - United States Coastal Steel Erectors, Inc. v. Algernon Blair, Inc. (1973) Coastal, at own expense,
provided Blair with labor and equip use. Blair breached contract and retained benefit without having fully paid
for them.
“Quantum meruit” – value of labor & equip – Miller Act: the promisee upon breach has the option to
forego any suit on the contract and claim only the reasonable value of his performance.
Rule: A subcontractor who justifiably ceases work under a K because of the prime contractor’s breach
may recover in q.m. the value of the labor and equipment already furnished pursuant to the K irrespective
of whether he would have been entitled to recover in a suit on the K.
-Restitution for breaching party is hard to get. Usually done to prevent forfeiture.
Restrictions:
- restitution given only for net amount (value conferred - damages from breach)
- problem when value conferred is not money; conflict of subjective values
Case - Lancelloti v. Thomas (1985) – ‘Limited restitution’ granted to breaching party (Restatement 2nd §774).
Party who committed breach should be entitled to recover any benefit in excess of the loss that he has caused by his
own breach, to prevent forfeiture, if
-breach not willful or deliberate
-Def., if after knowledge of breach, accepts P.’s part performance
-Would not be prejudice to injured party
-Relies heavily on UCC §2-718.
-Case here to show that defendant breacher can get back some money under restitution
c) Equitable relief (Specific Performance & Injunction)
Classical Examples-Specific performance: promisor has promised to convey a piece of land and then without justification with
holds this conveyance. The court then order D to fulfill his promise through the doctrine of specific
performance.
-Injunction: Employee breaches an employment K. The court can order an injunction against D so that he
cannot work for a competitor.
-This is in accordance with Farnsworth, who points out that there are two kinds of specific performance:
1) when the relief does not require the cooperation of the defaulting promisor
2) when cooperation is needed
Equitable Relief:
PRO:
it gives to the injured party exactly what they contracted for; good when there is an inability to calculate
damages.
CON: difficult to enforce/supervise, may cause undue hardship to breaching party, may be manipulated by one
Party, may be coercive and in cases may smack of servitude.
Issues with Equitable Relief-Not normally used…basically a last resort when common law damages (expectation, reliance, etc.) cannot
be adequete.
-Specific perfomance is common for land deals or unique items (art, etc).
-Injunction exists because courts cannot order specific performance of personal service since it smacks of
servitude.
-Typically, court doesn’t order (or enforce) S.P., but finds party responsible. Therefore, self-enforcement
- Often because of this, there is no insurance that a party will carry out S.P. fairly
-However, if a party does not carry out court order for S.P., P can have authorities seize property
-Theoritically, if courts heavily applied equitable relief:
- people would contract less (for fear of this punishment)
- more settlements/negotiations
- fewer breaches
-Usually, specific performance will not be granted for a construction contract (see Fran Realty v. Thomas,
where D has promised to construct a building).
-Court may not grant specific relief if it interferes significantly with third parties (see Joneil Fifth Avenue
Ltd. v. Ebeling & Reuss Co., where specific performance would have enforcement would have impinged
on contractual rights of other buyers)
Issues involved with Injunction
-Generally an employer seeking injunctive relief must overcome three hurdles (Restatement 367)
1)Unique skills: the employer must show that the employee’s services are unique, special or
extraordinary or that the employee has acquired a special skill while being employed by P. This is
true with athletes and entertainers.
2)Other way to make a living: The injunction cannot take away the employees ability to
reasonably be able to make a living.
3)Employer’s willingness to perform: It must appear that if the employee decides to come back
to work, the employer will allow this to happen in good faith.
Restatement 360/359(main equitable relief section.
Talks about all forms of relief available to an injured party)
-Under the rule stated in s 359, specific performance or an injunction will not be ordered if damages would
be adequate to protect the injured party's expectation interest.
-The breach of a requirements contract may cut off a vital supply of raw materials. In such situations,
equitable relief is often appropriate.
-If goods are unique in kind, quality or personal association, the purchase of an equivalent elsewhere may
be impracticable, and the buyer's "inability to cover is strong evidence of" the propriety of granting specific
performance.
UCC 2-716
-Specific performance may be decreed where the goods are unique or in other proper circumstances.
-The decree for specific performance may include such terms and conditions as to payment of the price,
damages, or other relief as the court may deem just.
-The buyer has a right of replevin for goods identified to the contract if after reasonable effort he is unable
to effect cover for such goods or the circumstances reasonably indicate that such effort will be unavailing
or if the goods have been shipped under reservation and satisfaction of the security interest in them has
been made or tendered.
Limitations on the use of equity1)Inadequacy of damages: relief will not be granted unless traditional damages (money) are not adequate
to protect injured party (Restatement 360)
This is the case for speculative items (land, art, etc) Restatement 360 (e) or the impossibility of purchasing
a substitute contract for the performance orginally sought in the breached K. It also applies to breached
contracts that involve land parcels, forbearance (where a company has contracted not to compete with
another company- nothing but injunction would adequetly serve justice), sale of business (if there is no
other business like the one contracted to be sold) or patents/copyrights (damages invlolving intellectual
property are usually not adequete). Restatement 360 (c)
2)Definiteness: court will refuse equitable relief if the orginal breached K does not specify the rights and
obligations of the parties out in great definiteness. (Restatement 363)
3)Difficulty of enforcement or supervision: Courts will not grant equitable relief where there would be
significant difficulty enforcing that performance. (Restatement 362/366)
Cases Based on Equitable reliefCase - City Stores Co. v. Ammerman - option contract involving further negotiations on details (non-material) is a
K, and may be specifically enforced where damages would be inadequate or impractible, and importance of S.P. to
plaintiff outweighs the difficulties of supervision.
-Failure to agree on material terms may result in denial of specific relief (see Oblebay Norton Co V.
Armco, where shipping contract specifically enforceable despite failure to agree on pricing mechanisms,
and Van v. Fox, -letter of intent to engage in JV enforceable despite inability to agree on some
terms)(compare w/ Genest v John Gleen, option to purchase real estate not enforceable since many matters
not decided re: financing).
Rule: An option K involving further negotiations on details and construction of a building may be specifically
enforced where damages would be inadequate or impracticable, and the importance of s.p. to the
plaintiff outweighs the difficulties of supervision.
Case - American Broadcasting Co. v. Wolf - In this case, court refused to grant injunctive relief for ABC for
broadcaster Wolf, who violated a “non-competition” clause in his contract. Much of the rationale involved the
court’s reluctance to grant an injunction on an already expired contract
- employment contracts will not be affirmatively enforced, after K expiration (policy issue)
unless it would be necc. to prevent injury to the employer from unfair competition (e.g. trade secrets)
or to enforce an express and valid anticompetitive covenant.
- can’t force someone to work, but can prevent from working other places (injunction)
- injunction granted where services would be unique
-court unlikely to grant specific performance to wrongfully discharged employee re: employer’s breach
-Often times “negative enforcement” has been granted in personal services contracts (see Lumley v. Wagner,
where in 1852, an opera singer breached her contract).
Rule: Negative enforcement of an employment contract may only be granted, once the K has terminated, to
Prevent injury from unfair competition or to enforce an express and valid anticompetitive K.
d) Agreed remedies
Liquidated Damages- Remedy within contract which usually represents expectation interest invested in the
contract before perfomance occurs.
-May be the only compensation to injured party
-Must be a reasonable estimate at time of K what damages may be if breach
-Judicial review – if deemed as a penalty, it is unenforceable (but rest of K stands & convential damages awarded)
-“take or pay” may be a LD, where supplier’s fixed costs are a large fraction of total costs (e.g. gas
pipeline it is already laid down at time of K, so not a variable cost, but a ongoing cost and cost of
laying down
pipeline. Not unfair to award such damages. If variable costs are major part, it would be unjust enrichment
to award as damage b/c those wouldn’t be utilized.) p.112
-If the sum in question is large, it may have an in terrorem effect on the other party, thus forcing
performance. This would be characterized as a penalty, and is thought to detract from the goal of promoting
efficient breaches.
-Although the effects of this clause seem time saving and beneficial, courts have been relectant because it
takes the damage calculation power out of their hands.
-Advantages to parties may be that agreed remedies may facilitate the calculation of risks and reduce the
cost of proof. For society as a whole, it may cut down on the use of court resources.
-Argument for liquidated damages clauses- parties know better than court what is fair, so if it was agreed
by parties, court shoud leave it
-If damages are less then a reasonably calculated liquidated damage clause calls for, the injured party still
recovers the amount specified in the LD clause.
-If the damages are excessive, but the LD clause called for unreasonably high amount of recover (viewed
from the point of orginally creating the contract), the injured party can recover these excessive damages
because they are inline with what actually happened.
-If there is no loss at all, the breaching party does not have to pay the liquidated damages clause per
Restatement 356(b)(4).
-The opponent of LD’s in a case may present evidence that no injury was suffered (see Lind Building Corp.
v. Pacific Bellevue Developments.
General Example: A contracts to build a house for B for $50,000 by a specified date or in the alternative to pay
B $1,000 a week during any period of delay. A delays completion for ten days. If $1,000 a week is unreasonable in
the light of both the anticipated and actual loss, A's promise to pay $1,000 a week is, in spite of its form, a term
providing for a penalty and is unenforceable on grounds of public policy.
Penalty:
-If actual damages can be ascertained, then must see if liquidated damages is within this. If more than
actual damages (i.e. grossly disproportionate), it is a penalty.
-“late charges” sometimes = liquidated damages
-Penalties cannot be hidden within the contract and courts will scrutinize rewards as disguised
penalty clauses such as alternate performance contracts (alternative performance k can be one in
which a party is rewarded for early completion, but the completion date may be unreasonable
making it a liquidated damage clause in reality. Or it can give the option to perform or take be
billed. In this way it gives an option to the possible buyer between actually taking a product or
not, but either way paying for it in the end.)
UCC 2-718
-more powerful party uses damages clause to give them unfairly high damages
-to have liquidated damages, must show that the amount is reasonable in light of:
a) anticipated breach or actual harm caused by breach,
b) the difficulties of proof of loss
c) the inconvenience or nonfeasibility of otherwise obtaining adequate remedy (e.g. overseas
trial)
-includes a default liquidated damages clause which goes into effect when a seller with holds goods
because a buyer breaches. This is 20% of the full K price or $500 whichever is smaller. Also the seller
may may attempt to recover actual damages.
-Seems to allow the party creating the K two chances to prove that the stipulated amount is reasonable:
either at the time the K is made or after the breach, which makes the UCC even more progressive than
common law was.
-Designed to protect against clever or powerful person who puts their own terms it.
UCC 2-719
-Allows for a limitation on consequential damages liability (which could be seen as a liquidated damages clause)
pursuant to it not being unconscioncable.
-more powerful party, as D, puts in limitation of warranty (e.g. repair warranty), but no progress
-where remedy fails its purpose, it is no longer valid
UCC 2A-504
-A version of 2-718 specific to leasing agreements. Much more liberal than 2-718 or Restatement.
-Only need to prove anticipated harm (actual harm not even mentioned like 2-718)
Restatement 356
-Damages for breach by either party may be liquidated in the agreement but only at an amount that is
reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of
loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as
a penalty.
-A term in a bond providing for an amount of money as a penalty for non- occurrence of the condition of
the bond is unenforceable on grounds of public policy to the extent that the amount exceeds the loss caused
by such non- occurrence.
-The central objective behind the system of contract remedies is compensatory, not punitive.
-Neither the parties' actual intention as to its validity nor their characterization of the term as one for
liquidated damages or a penalty is significant in determining whether the term is valid.
Note changes 2-718  §356  2A-504  creeping towards a greater recognition of liquided damages.
Cases Based on Agreed remedies clauses-
CASE - Colonial at Lynnfield, Inc. v. Sloan -In this case, P was attempting to collect on a liquidated damages
provision in a contract to sell a share of a hotel. The court held that since P actually benefited (through selling
basically the same share at a higher price later, after considering discount rates), it could not collect any of the
liquidated damages prescribed by the contract.
Rule: Liquidated damages are considered uneforceable penalties where the actual damages turn out to be
easily ascertainable and grossly disproportionate
-Traditionally, a three pronged test has been used to determine the validity of clauses providing for
agreed remedies:
1. The damages to be anticipated from the breach must be uncertain in amount or difficult to
prove
2. the parties must have intended the clause to liquidate damages rather than to operate as a
penalty
3. the amount set in the agreement must be a reasonable forecast of just compensation for the
harm flowing from the breach
-The “intent” prong has atrophied, hence the restatement second has only two prongs
1) a provision for liquidated damages would be enforceable if the amount fixed “is a
reasonable forecast of just compensation for the harm that is caused by the breach; and
2) harm is “one that is incapable or very difficult of accurate estimation."
-The best case for enforcement will be one in which it appears that defendant’s breach has inflicted on
the plaintiff an injury that is in the circumstances impossible or at least difficult to quantify with any
degree of accuracy (see Kvassay v. Murray, where contract providing LDs -business entitled to estimate
lost profits even if it is new, and Baker v. International Record Syndicate, where LD of $1500 per lost
negative was not enforced since value of picture was impossible to determine given new rock group).
-Some courts have held that the clause should be judged at the time of contract, not at breach (hence
actual damages are irrelevant)(see Frick Co. v. Rubel Corp.)
-Other courts have held that the lack of actual damage will make the clause invalid as a penalty (see
Norwalk Door Closer Co. v. Eagle Lock & Screw Co. The Restatement seems to take this approach.
-Construction contracts, LD’s will usually be upheld (see Moore v. St. Clair County, where clause in
right of way agreement caused unforeseen delays), and especially if they are in a government contract
(because of the public interest)(see Westinghouse Electric Corp. v. County of Los Angeles).
-Interest on late payments will be considered a penalty, given the court’s view of money as an
available commodity (see Highgate Associates Ltd. v. Merryfield, where owners of subsidized housing
were penalizing tenants with late fees).
Case - Lake River Corp. v. Carborundum - D agreed to process 22,500 tons, only sent P 12,000 tons. In this case,
Lake River was denied liquidated damages as they were judged to be a penalty in the context of a long-term
distribution contract.
Rule: A minimum quantity supply contract may not liquidate damages without estimating the likely
damages of a breach .
-There are arguments that say that LD’s allow companies to allocate risk as they see fit.
-Posner says that amount recovered by non-breaching party in “mitigation” of damages should not
be deducted from the amount recovered under a liquidated damage clause (see Wassenaar v. Panos,
where wages from other job not subtracted from LD’s)
-UCC §§2-718 & 2-719 may limit LD’s that are too small because of “unconscionability". However,
underliquidated damages do not have an in terrorem effect and may be judged only in terms of rules
relating to fraud, duress, mistake, and the like.
Chapter 13 – UCC Article Two: Warranties and
Remedies
A. Warranties of Quality Under the UCC and Related
Tort Theories
Generally
- The normal remedy for breach, expectation damages, are limited by several doctrines: mitigation,
foreseeability, and certainty.
- Alternatives to expectation damages are: reliance, restitutionary damages, specific performance and
agreed remedies.
- UCC 2-102- does not apply to transactions that deal purely with services or real estate.
- In transactions involving a mixture of goods and services, courts have adopted a predominant factortest in
deciding to apply the Code. If goods are the predominant factor in the transaction, the Code is applicable,
the relative cost of the goods and services is an important consideration in applying the predominant factor
test.(1138)
- The UCC does not apply to Ks involving real estate, but the applicability to Article 2 to leases of goods
has been a subject of dispute among the courts.
-Some have argued that the UCC does not apply, but have used UCC warranty concepts by analogy.
- In 1987 Article 2A was approved applying many Article 2 concepts to leases of goods.
1.Creation of Warranties
a. Express Warranties
-UCC 2-313- deals with creation of Aexpress warranties. Seller can make an express warranty in
several ways: by words, description, sample or model.
-Four factors are listed for courts to assess in deciding whether statements amount to warranties or
puffing. (1141
b. Implied Warranties of Merchantability
-UCC 2-314- Goods to be merchantable must be at least such as:
a) pass without objection in the trade under the K description; and
b) in the case of fungible goods, are of fair average quality within the description;
c) are fit for the ordinary purposes for which suc good are used; and
d) run, within the variations permitted by the agreement, of even kind, quality and
quantity within each unit and among all units involved; and
e) are adequately contained, packaged, and labeled as the agreement may require; and
f) conform to the promises or affirmations of fact made on the container or label if any.
- Most 2-314 cases in which courts have found breaches of the warranty of merchantibility
involved goods that because of defects either did not work or were unexpectedly harmful.
- Assuming the buyer is able to establish that the goods are not merchantable, the buyer must in
addition establish: 1) a sale of goods has occurred; 2) seller is a Amerchant with respect to goods
of that kind; and 3) the defect in the goods caused the damage to the plaintiff.
c. Implied Warranties of Fitness for a Particular Purpose
-UCC 2-315- This warranty is created only when the buyer relies on the seller=s skill or judgment
to select suitable goods for the buyer’s particular and the seller has reason to know of the reliance.
(1142)
d. Implied Warranties of Title
-UCC 2-312- the seller makes a warranty of good title, a warranty of freedom from
encumberances, and a warranty against infringement.
2. Defenses to Actions for Breach of Warranty
a. Disclaimers of Warranties-Warranty obligations arise as a matter of K, and the UCC allow sellers to contractually eliminate
or modify the Code warranties. UCC 1-102(3)
-A disclaimer is a contractual provision in which a seller of goods attempts to eliminate a
warranty. Validity of disclaimers is governed by UCC 2-316.
-Under 2-316(1), a disclaimer of an express warranty is inoperative if the disclaimer cannot be
construed to be consistent with the express warranty.
- 2-316 is subject to the parol evidence rule.
- Under 2-316(2) to disclaim the implied warranty of merchantibility, the language must mention
merchantibility and in the case of a writing must be conspicuous. (1145)
- Disclaimers of both the implied warranty of merchantibility and the implied warranty of fitness
for a particular prupose must be conspicuous. Conspicuous is defined in 1-201 (10)- Awhether a
reasonable person against whim it is to operate ought to have noticed it. (1146)
- Additional methods to disclaim are found in 2-316(3), probably the most common is the Aas is A
disclaimer. (1147)
- A theory that a seller could use to enforce a post contract disclaimer is that the parties have
entered into a modification of the K under UCC 2-209; modification enforceable without
consideration.
b. Lack of Privity of K
-Privity refers to the existence of a contractual relationship between the parties.
- Vertical nonprivity plaintiffs are in the chain of distribution, btu do not have a contractual
relationship with the defendant they are suing. (A consumer who purchased an automobile from a
dealer would be a vertical nonprivity plaintiff in an action against the manufacturer.
- Horizontal nonprivity plaintiffs are not in the chain of distribution but either use or affected by
the goods. (Household member, employees, and bystanders.)
- If the action is brought under a warranty (K) theory, lack of vertical privity is not a defense.
-A horizontal nonprivity plaintiff, however, may still encounter difficulties in recovering under
breach of warranty for personal injury or property damage. UCC 2-318 (1149).
-If the manufacturer has made an express warranty, almost all courts will allow for economic loss,
despite tha absence of privity. (1150).
-Courts have been reluctant to dispense with the vertical privity requirment in acitons seeking
damages for economic loss when the basis for liability is implied rather than express warranty.
c. Other Defenses: Plaintiff’s Contributory Behavior, Statute of Limitations,
and Failure to Give Notice
-Under UCC 2-725 the statute of limitations for breach of warranty is four years from the date of
tender and delivery.
-UCC 2-607(3) provides that when the buyer has accepted the goods “the buyer must within a
reasonable time after he discovers or should have discovered any breach notify the seller of the
breach or he is barred from remedy. (1151)
3. Strict Tort Liability for Defective Products
a.
Background – Unlike negligence, strict liability may apply even if the defendant has
exercised due care ss 402A Comment M.
-The defenses of lack of privity, buyer’s failure to give proper notice, and warranty disclaimers by
the seller could all prevent recovery under warranty law, but these defenses are eliminated under
strict tort liability.
-Strict tort liablity based on several policy considerations:
1)
Purchaser of products arre unable to protect themselves from contractual
disclaimers or limitations of remedy because of superior bargainig power exercised
by maufacturers and seller.
2)
Sellers and manufacturers ard ordinarily in a better position than buyers to bear the
loss resutling from defective products, either through spreading or insurance.
3)
Accident prevention may be promoted by imposing greater liability on seller and
manufacturers.
b. Recovery of Economic Loss in Strict Tort- Most courts will not allow strict liability
recovery for cases of economic loss.(1153)
c. Recovery of Property Damage in Strict Tort- Many courts have allowed strict
liability recovery for injury to property.
4. Recovery of Economic Loss Under a Negligence Theory- Courts have generally held that
economic loss is not recoverable under a negligance theory; instead, the plaintiff must seek recovery in a
warrany action. (1156)
Buyers’ Remedies
Under the UCC there are 3 ways in which a seller may commit a breach:
1) Delivers goods that fail to “conform” to the K.
2) Fails to deliver goods at all
3) “Aniticaptory repudiation
there are 3 types of emedies for these breaches, which are not mutually exclusive: Cancellation of the K, damages,
specific relief.
1. Cancellation
a. Rejection- UCC rules differ from contracts involving sales of goods from normal rules.
Under normal rules of constructive conditions, a nonperformance must be material to justify
the other part’s refusal to perform. IN 19th Century, American courts adoped the “pefect
tender rule” for contracts involving the sale of goods. UCC 2-601
-
There is some controversy among legal professors regarding the rule of perfect tender. J.J. maintains that the
UCC and case law have “so eroded” the perfect tender rule “that relatively little is left”.
- Under the UCC, if the buyer is entitled to reject the goods, several results will follow. 1) The buyer is not required
to pay for the goods. 2)After rejection of the goods, if the seller is unable to “cure” his nonperformance(UCC 2508), the bueyr is entitled to cancel the K. Many courts refer to this as recission. 3) A buyer who has canceled the K
may recover any prtion of the price tht she has paid, pls damages for breach of K. (UCC 2-711(1))
b. Acceptance- Acceptance can happen in 3 ways under UCC 2-206:
1) Acceptance occurs whn th buyer, after a resonable opportunity to insepct the goods (2-513), “signifies” to the
seller that they are confoming or tht she will take them despite any nonconformity.
2) After a reasonable opportunity to inspect the goods, the buyer will be deemed to have accepted if she “fails to
make an effective rejection,” as defined ss 2-602.
3) A buyer accepts goods if she does any act “inconsistent with the seller’s ownership”.
c.
2.
Revocation of Acceptance-Rvocation of acceptance substanitlly more difficult than
rejection because of additional requirements are imposed. (listed on 1163)
d. Cure- Even if buyer accepts the goods, the seller may still have ther right “to cure” any
nonconfomity.
e. Installment Contracts
Damages
-
3 methds for measuring buyers damages under the UCC:
1) cover damages UCC 2-712 (1166-1168)
2) market damages 2-713 (1168-1172)
3) warranty damages 2-714 (1172)
1) and 2) apply when the buyer has rejected goods or revoked acceptance. 3) applies when the buyer has accepted
goods and not revoked.
- By the common law principle of mitigation of damages, a failure to cover when it would have been reasonable to
do so will only bar a claim for consequential, not direct, damages.
SUPPLIER’S DAMAGES
-Cancellation (§2-703)
-After a breach involving repudiation, wrongful rejection, or wrongful revocation of acceptance, the seller may
cancel the contract (f), and recover damages (d&e).
-measurement of seller’s damages turn on whether the buyer has accepted the goods. .
-if no resale, the seller may recover resale damages (2-706), market damages (2-708(1)), or the
seller’s lost profit (2-708(2)).
RESALE DAMAGES (§2-706)
-equivalent to seller’s right to cover.
-seller may recover “the difference between the resale price and the contract price together with any
incidental damages. . . but less expenses saved in consequence of buyer’s breach.”
-To recover Resale damages, buyer must go through 3 steps.
1) First, seller must identify the resale contract to the contract that has been breached (Apex Oil v. Belcher Co.
(seller waited three weeks to sell, when fungible the day after breach).
2) The seller must give the buyer notice of resale
a) if a private sale, must notify buyer of intent to resell
b) if a public sale, must give buyer notice of time and place of sale.
3) Resale must be made in good faith and in a commercially reasonable manner.
-Failure to comply with these requirements deprives it of resale damages and limits it to market damages.
MARKET DAMAGES (§2-708(1))
-Major problem with market damages is the interrelation between §2-706 (resale).
-May the seller recover damages under §2-708(1), if that section would produce a greater recovery
than the formula of 2-706? (This may happen when market price at the time of recovery is less than
resale price). Peters and others say yes (and that sellers should not have to elect remedies), but
White and Summers state that this would be in violation of §1-106).
-What if Seller does not mitigate damages (through resale)? Though the UCC does not require it
specifically, there is a view (expressed in Copymate Marketing v. Modern Merchandising), there is a common
law obligation to do so. In Desbien v. Penokee Farms Union Cooperative, P’s were not allowed to recover market
damages when they did not attempt to resell wheat on the open market.
LOST PROFITS (§2-708(2))
-In appropriate cases, lost profits may be awarded.
-If §2-708(1) is inadequate to put the seller in as good a position as performance would have done.
-Case law and commentary, however, have identified three situations in which §2-708(2) should apply:
1) lost volume seller: (who would sell as much as they can anyhow)
2) Components seller: (where item is incomplete, or there is no market for product)
3) “Jobber” (intermediary who purchases for resale)(breach before jobber acquires goods).
-Some scholars have argued that a seller shouldn’t be entitled to recover lost volume. . .
-Shanker s assertion that if buyer resold, Seller wouldn’t get 2 profits (so what?)
-How are damages computed?
-“reasonable overhead” may be calculated. This includes “variable,” but not “fixed” costs.
-§208(2) requires “due allowance for costs reasonably incurred and due credit for payments and
proceeds of resale.
-This passage has been debated, since it could mean that all of seller’s profits are eliminated.
courts have avoided problem by only allowing this to refer to scrap sales or incomplete sales.
-In similar problem as to the one re: cover, can seller elect to reap better damages from contract instead of
lost profits? Debatable. In Trans World Metals v. Southwire Co., P was given market damages that
exceeded expected profits because the court said they took the risk of market changes, and should have
been able to reap the benefits of them. This is in opposition to Nobs Chemical v. Koppers Co.
SELLER’S ACTION FOR THE PRICE, (§2-709)
-Seller may recover price from buyer in three situations:
1) accepted goods (W&S believe that this is wrong in the case of rejection, but not in cases of revocation
of acceptance).
2) damaged goods where risk of loss has passed to buyer
3) unaccepted goods that seller cannot resell.
INCIDENTAL AND CONSEQUENTIAL DAMAGES (§2-710)
-consequential damages not permitted for buyer’s breach.
OTHER REMEDIES:
1) rights in the event of buyer’s insolvency (§2-702)
2) right to withhold delivery after the buyer’s breach (§2-703(a))
3) Rights regarding incomplete or unidentified goods (§2-704)
4) Right to stop delivery in transit (§2-705)
RECIPIENT’S DAMAGES
-Under UCC, a seller may commit a breach in three ways:
-A seller may deliver goods that fail to conform to the contract.
-A seller may fail to deliver goods at all.
-A seller may breech a contract before the date set for performance by an “anticipatory
repudiation”.
-Analysis of Buyer’s rights begins with UCC §2-711
-Provides Buyer with three types of remedies:
-1) Cancellation of Contract
-2) Damages
-3) Specific Relief
-Multiple remedies are available, but not in excess of harm suffered.
1) Cancellation
-UCC §2-711(1) buyer may cancel contract
a) rejection, the perfect tender rule: (§2-507, each sides duty to tender are condition to the other) -as in
Jacobs & Young, nonperformance must be material.
-“perfect tender rule” any material defect in seller’s performance justifies buyer not paying price
-See Filley v. Pope in which contract was allowed to be cancelled because seller shipped from
wrong port (S.C. ruled that court has no right to determine why parties included provisions in the
contract.
-In construction contracts, perfect tender (in relation to time of delivery) is not valid, since it
would clearly be unfair to the contractor.
-“Work & Labor” is distinguished from “Delivery of Goods” (Beck & Paul Lithographing Co. v.
Colorado Mining & Elevator). This invokes “substantial performance” rather than “perfect
tender”.
-While in one instance (§2-601), perfect tender rule is stated, it is watered down in other sections
(see §§2-508, 2-608 and 2-612) [see pp. 1161 for debate regarding this]
-In DP Technology v. Sherwood Tool, court refused to punish company for making the delivery of
a highly specialized product 16 days late.
-Under code, if buyer rejects goods, several results follow:
-buyer is not required to pay for goods (§2-607(1))
-seller may recover price for goods that have been accepted (§2-709)
-After rejection, if seller is unable to “cure”(§2-508), then buyer is entitled to cancel
contract (§2-711)
-Recission refers to termination of contract for some justifiable reason other than breach
(such as “mistake” or “commercial impractibility”)
-Third, a buyer who has cancelled the contract may recover any portion of the price that she
has paid, plus damages (§2-711(1)). (A buyer will not necessarily be forced to return goods
already delivered.
-A buyer has a “security interest” in the goods for any portion of the price that she has paid
plus expenses (§2-711(3)).
b) Acceptance
-The buyer’s right to reject the goods in many cases turns on whether she has first accepted
them, which can happen in three ways under §2-606.
-First, after a buyer has inspected the goods (§2-513), she signifies to the seller that she will
take them (§2-606(1)(a)). (note that acceptance does not bar buyer from damage remedy for
breech of warranty (§2-714(1)).
-Second, acceptance is made after failure to make an effective rejection within a
reasonable time.
-White and Summers propose four circumstances that should be relevant to its
determination:
-Difficulty in discovering the defect
-terms of the contract
-relative perishability of the goods
-course of performance after the sale and before the rejection.
-Third, a buyer accepts if she does not act “inconsistent with the seller’s ownership.
c)
Revocation of Acceptance
-buyer must establish the following:
1) a nonconformity which substantially impairs value of goods
2) if the goods were accepted with the knowledge of nonconformity, that acceptance was
induced by promise of cure
3) if goods were accepted without discovery of nonconformity, this was due either to
difficulty in discovery of nonconformity, or to seller’s assurances of conformity
4) notice to seller is given within a reasonable period of time after the discovery of the
nonconformity
5) revocation before any substantial change in condition of the goods other than a change
caused by the nonconformity
6)
d) cure
-even if buyer properly rejects goods, seller will have chance to “cure” defects.
-Question, when does seller have right to cure?
1) under §2-508(1) if time for performance has not passed, seller has an
opportunity to cure.
2) After time for performance expires, if seller was acting in good faith, cure may
be acceptable. (see T.W. Oil v. Consolidated Edison)
-What if buyer already has accepted goods?
1) §2-508 mentions availability of cure after buyer has rejected goods, but
2) §2-608’s allowance of acceptance and revocation mentions, but does not
specifically allow for cure (buyer accepts, then revokes, can seller then cure?)
-courts are divided on this issue
a) see Johannsen v. Minn. Valley Ford Tractor for opin. that denies
right to
cure.
b) see Fitzner Pontiac v. Smith for opin. that provides buyer must allow
seller reasonable opportunity to provide cure.
-What type of cure is effective
1) if problem is minor, repair should be sufficient
2) if problem is substantial, replacement may be necessary. (see Zabriski Chevrolet
v. Smith, where court did not allow seller to replace transmission on a new car).
3) Is money allowance sufficient?
-§2-508 mentions, but does not specifically authorize cure by “money
allowance”.
-McKenzie v. Alla-Ohio Coals, seller not entitled to cure w/ money allowance since it did not have reason
to believe product would be accepted.
-Leitchfield Development Corp. v. Clark, review of fact of whether seller
reasonably believed that cure would be acceptable with money allowance.
e. Installment Contracts
-under §2-612 buyer may reject a particular installment of a contract if only that installment
is defective.
-under §2-612(3), there is only total breach when a defective installment substantially
impairs value of entire contract.
2- Damages
-3 methods for recovery
1) Cover under §2-712.
2) Market damages under §2-713
3) Warranty damages under §2-714
a) Cover.
1) Buyer may collect difference between cover price and contract price, plus incidental and
consequential damages (§2-715).
2) Covering purchases must me made in good faith and without unreasonable delay.
3) The buyer need not purchase identical goods, but goods that are commercially reasonable
substitutes. Purchase of superior goods will not qualify as cover.
4) Some courts allow internally manufactured cover, (see Cives Corp. v. Callier Steel Pipe and
Tube, Inc.)
5) §2-712(3) states that cover is elective, and failure to cover does not bar the buyer from any other
remedy. However, this must be viewed in light of buyers obligation to mitigate damages that
meet forseeability test of Hadley v. Baxendale.
6) A failure to cover when it would have been reasonable to do so only bars consequential, not
direct damages.
b) Market Damages
1) If buyer fails to comply with requirements for cover, he may still recover damages under §2-713
measured by “difference between market price at the time when the buyer learned of the breach
and the contract price together with any consequential or incidental damages."
2) Under §2-713, market prices are calculated at place of tender (distinguish “shipment” and “delivery”
contracts)
3) What if market price at time and place of delivery is less than market price, can buyer recover
cover and market damages? Usually, buyer is limited to cover, although Judge Ellen Peters
disagrees.
4) If seller has committed an anticipatory repudiation of the contract and buyer elects not to cover.
As of what point in time should the market measure of damages be determined?
-Three possibilities
i)
when the buyer learned of the repudiation
ii)
when the buyer learned of the repudiation plus a commercially reasonable time
iii)
when the seller’s performance is due.
-Most courts have adopted the first position.
-Summers and White disagree, citing §2-610 (which supports ii), and §2-708
(which specifies place of tender).
c- Damages for Accepted Goods (§2-714)
1) if the damages flow from breach of warranty, §2-714(2) provides that the measure of damages is
“the difference at the time and place of acceptance between the value of the goods accepted and
the value they would have had if they had been as warranted, unless special circumstances
should proximate damages of a different amount.”
2) the cost of repair has often been taken as evidence of the difference in value under §2-714, provided
that time of repair is reasonably close to the date of acceptance.
d- Incidental and Consequential Damages (§2-715)
1) under §2-316(4), parties may contractually limit their liabilities under §2-715, as long as
conditions under §2-719 are met (that resort to limited remedy is optional unless the remedy is
expressly agreed to be exclusive.
2) When a limited remedy fails (seller is unable to repair goods) buyer can recover direct damages
under §2-714(2).
3) If limited remedy fails, can buyer recover incidental & consequential damages in addition to direct
damages for breach of contract? Courts are divided on this issue.
4) Limited remedies in many cases may be declared “unconscionable” by the court (see pp. 1174 &
1175 for discussion & cases)
In Avenell v. Westinghouse, it was ruled that clauses limiting remedies must be conspicuous and in writing.
2-713 says that you must calculate damages from date of breach
-mitigation is built into this formula and assumed.
-if price of a commodity changes, this is relevant.
-If you learn of breach ahead of tender, you are bound to that date (see anticipatory
repudiation)
Compare 2-713 w/ 2-708(1)
Chapter 14 – Rights and Duties of Third Parties
Generally
- Other persons may have rights or duties, or both, enforceable by or against them as a result of the making of
contracts to which they were not themselves parties. Such persons are referred to as “third parties”.
A. Rights of Third Parties as K Beneficiaries
Generally
- The making of a K is often likely to have effects on persons who are not parties to it.
- The kind of legally enforceable obligations that result from the making of a private agreement generally
cannot destroy or impair the rights of anyone who is not a party to that agreement; nor can it impose duties
on such a person.
- It does not follow from this proposition, however, that the parties to a K should not be able, if they so
desire, to create by K a right in some third person.
Case - Lawrence v. Fox- Suppose A has loaned money to B, on the strength of B’s promise later to repay the sum to
A. Later, B loans the same amount of money to C. In that case it may make sense for B to request that C promise
in return to make repayment not to B himself, but B’s creditor A. In that event, C’s performance of his promise
would result in not only the satisfaction of C’s obligation to B, but also of B’s debt to A.
If C does make such a promise to B but later fails to perform it, does A have a cause of action against C,
for breach of that promise made to B? Or does A only have this cause of action against B, on the original
debt?
Court holds: A could sue C and that, although there was no privity between A and C, A was a
“beneficiary” of the promise made by C. An analogy was made in which C was like a “trustee” with
instructions to sell the trust poperty and convey the proceeds to A.
- The plaintiff (A) is now typically referred to as a “third party beneficiary”. Since the plaintiff in
Lawrence was a creditor of the promisee, the Lawrence-type plaintiff came to be called a “creditor
beneficiary. ( The First Restatement 133(1)(b) defined the “creditor beneficiary” case as one where
performance by the promisor would satisfy an “actual or supposed or asserted duty of the promisee to
the beneficiary.”)
- Many courts have since permitted third-party enforcement of promises where it appears that the
promisee’s intention was to make a gift to the plaintiff third party. Such plaintiff’s are often referred to
as “donee beneficiaries”. (1200)
- The Second Restatement (302, 304) continues its approval of the this principal, but the drafters have
attempted to deemphasize somewhat the distinction between “creditor” and “donee” beneficiaries,
stating that the fundamental distinction is between “intended” beneficiaries (who enjoy a right of direct
action) and “incidental” beneficiaries (who do not). This shift in emphasis is somewhat undercut by
the appearance in Restatement 302(1)(a) and (b) of what are obviously moderness versions of the old
creditor and donee beneficiaries.
Relevant Cases to Rights and Duties of 3rd Parties
Case- Guy v. Liederbach: Attorney Liederbach (D) failed to poperly execute Kent’s will, invalidating the intended
gift to Guy (P), who sought to bring malpractice claim against Liederbach (D).
Court held: Intended benificiaries of testamentary gifts may bring K actions against attorneys under general
third-party beneficiary principles.
-The traditional rule has been that attorneys were liable only to their clients, not to third parties, for negligent
performance of legal services. First, this is because liability to third parties would expose attorneys to
potentially unlimited liability. Second, if attorneys were subjected to liability to third parties, concern about this
potential liability might interfere with attorneys’ duty of undivided loyalty to their clients.
-The requirement of privity only applies to bar negligence actions against attorneys. Attorneys who engage in
fraud can be held liable to third parties even in the absence of privity.
-Traditionally, courts have looked primarily to the intention of the promisee, particularly in cases involving
purported donee beneficiaries, to determine whether the third party should have rights under the K as a third
party beneficiary. Restatement 302 (applied in Guy) appears to broaden the inquiry by providing that
recognition of the rights of a third party beneficiary turns on whether such recognition is “appropriate to
effectuate the intention of the parties.” (1213).
Case- Biggins v. Shore: Biggins’ (P) late husband, who had sold his interest in a realty firm and provided for
payments to Biggins (P) in the event of his death, later attempted to modify this arrangement, prompting Biggins (P)
to attempt to enforce her rights under the original K.
Court held: A contractual gift to a donee beneficiary is irrevocable upon execution of the K.
-The court in Biggins applied the First Restatement 142 which makes the rights of a donee beneficiary
vest irrevocably as soon as the K is made, unless the right to modify the K has been expressly reserved.
The Second Restatement 311 allows modification without expressly reserving the right. This is the rule
used by courts now.
Case- Zigas v. Superior Court: Certain owners of rental property charged rents in excess of amounts that they
contracted with HUD they would charge.
Court Held: When the federal government has contracted with landlords to provide apartment financing in
return for ceilings, tenants have standing to seek enforcement of damages.
-
Some courts have held that tenants are only incidental beneficiaries of regulatory agreements between HUD and
property owners.
B. Assignment and Delegation of Contractual Rights and Duties
Generally
-
There was an initial resistance of courts to the notion that righs of parties to any K might be transferred, or
“assigned”, to persons not originally privy to the agreement.
-Today in every American jurisdiction it is generally true- either by statute of court decision, or both- that
the assignee of a K right may herself bring suit to enforce the assigned right, without regard to distinctions
between law and equity.
-Bilateral contracts create both “rights” and “duties” (both parties having one or more of each). A K right
(the ability to require the other party either to perform or to pay damages) can today in most cases be
“assigned”. Restatement 317(2). Such an assignment at once creates in the assignee a new right, while at
the same time it extinguishes the corresponding right previously held by the assignor. Restatement 317(1).
The assignment of a right is thus in practical effect a transfer in the true sense.
-The transferring of a contractual “duty” has more limitations. In many cases, a person who is subject to a
duty of performance may properly “delegate” that duty, that is, may satisfy it by employing other to
perform it for her. Restatement 318(1). (particularly true of a corporation, whose every performance must
obviously be through agents of some kind.) Such delegation of performance is not always permissible,
however; whether it is will depend in a given case on the degree to which individual performance was
called for by the K in question. Restatement 318(2)
-The mere procuring of a substitute to render performance- even if delegation is proper- does not by itself
extinguish the duty of performance created by the K. The person originally bound to perform will remain
subject to that duty (unless released by the obligee) until performance is actually rendered. Restatement
318(3).
Relevant Cases
Case- Herzog v. Irace: Although notified of Jones’ assignment of a personal injury claim to Herzog (P), Jones’
attorneys, Irace and Lowry (D) failed to pay the settlement to Herzog (P).
Court Holds: An assignment is binding upon the obligor where there is an intent to relinquish the r ight to
the assignee and the obligor is notified.
-
Almost every state has some form of statutory restriction on assignment of wages.
- Courts have traditionally been reluctant to enforce assignments of future rights because of a “public policy which
seeks to protect the assignor and third parties against transfers which may be impovident or fraudelent.
Restatement 321(1) Comment b. An exception to this prohibition is made in Restatement 321(1):
Except as otherwise provided by statute, an assignment of a right to payment expected to arise out of an
existing empoyment or other continuing business relationship is effective in the same way as and
assignment of an existing right.
- In addition to statutory and public policy restrictions on assignment of rights, an assignment K right may be
invalid if the assignment would have a material adverse effect on the other party to the original K (the obligor)
Restatement 317(2). Similar limitations are contained in UCC 2-210(2).
-
In light of the public policy in favor of assignability court will generally be reluctant to find that the assignment
would have a material adverse effect on the obligor. Some early cases held that the typical requirements K was
not assignable because of the seller’s substantial interest in the particular circumstances and creditworthiness of
the buyer. UCC 2-210 Comment 4 suggests strongly that the application of 2-306 and 2-609 should ordinarily
overcome this objection, unless “material personal discretion” is involved.
Case- Sally Beauty Co. v. Nexxus Products Co: Nexxus Products Co. (D) abrogated an exclusive distribution
agreement when the distributor was purchased by Sally Beauty Co. (P), a direct competitor of Nexxus (D).
Court Held: A distribution agreement may be abrogated by the manufacturer if the distributor is purchased
by a direct competitor of the manufacturer.
-
Where a K imposes on an idividual the duty of personal service, that duty is almost always regarded as
inherently undelegable, unless the other party assents. Restatment 31 See Illustations 3,6,7
Case- Julian v. Christopher: Julian (D) and Gilleland (D) wanted to sublease their apartment, but landlord
Christopher (P) would not let them unless they were paid more rent.
Court held: I the terms of a lease require the landlord’s consent to a sublease, such consent may not be
unreasonably withheld.
- Julian is part of a judicial trend in favor of construing clauses that require consent to an assignment to
mean that the consent cannot be unreasonably withheld.
-
The Restatement and the UCC include rules against contractual prohibitions of assignment and delegation,
particularly assignemnt. Restatement 322, UCC 2-210(3)
-
In UCC 2-210(2) and 9-318(4), provides that in some cases the right to payment of money can always be
assigned. Limited to cases where the seller has earned payment by full performance (or either party has
breached “the entire K” leaving the other with a right to damages.)
-
Even if a valid clause in the K effectively prohibits assignment or delegation, the other party may lose the
benefit of that clause if, when the purported assignment takes place, it fails to make a sufficient protest but
acquiesces in the assignee’s demand for performance. (1258)
-
With a contract that is assigned, generally the asignee “stands in the shoes” of the assignor. Thus the asignee
will be subject to any claims or defenses that the obligor has that arise out of the K assigned. Restatement
336(1) , UCC 2-210(4), UCC 9-318(1)(a)
-
In some cases the obligor can not only assert the defenses against the assignee’s attempt to enforce the assigned
right, she can affirmatively assert damage liability against the assignee for nonperfomance of the assignor’s
obligations under the original K, even if the liability shoud exceed the amount of the right assigned. UCC 2210(4)