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OUTLINE DETAILS:
School:
Harvard Law School
Course:
Contracts
Year:
Fall, 2004
Professor:
Allen Ferrell
Text:
Contracts: Cases and Comment, 8th Ed.
Text Authors: John P. Dawson, William Burnett Harvey, Stanley D. Henderson
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Contracts Outline – Harvard Law School – Professor Ferrell – Fall 2004
1. Background Elements: The Contract Curve and Expectation Damages
a. basic goal of any contract: both parties believe it to be their benefit. not a zero-sum game
b. Basic issues to examine:
i. is there a K formed?
ii. what is meant by the K (interpretation)?
iii. is there a breach of K?
iv. how is the breach to be resolved (damages)?
v. Common Law (probably) or UCC (good = movable commercial items. not land, employment, etc)
2. Consideration and the Bargained-for Exchange – what is the nature of the bargain?
i. §17 – enforceable K requires bargain and consideration, except where “special rules” apply
1. bilateral K – exchange of promises or promise for a promise.
2. unilateral K – exchange of a promise for a performance
3. §31 – presumption favors bilateral K in case of ambiguity
ii. §71 – to count as consideration a performance or return promise (inducement required) must be bargained
for (quid pro quo requirement). bargain theory of liability.
iii. §19 – Promise need not be in writing (“in acts” ok)
1. but see UCC 2-201 (writing required for sales of ‘goods’ > $500)
2. also see SOF (writing required for K not to be performed w/in 1 year)
iv. note: return promise need act as only partial inducement for the promise in order to function as
consideration.
1. If promise is 99% altruistic and only 1% induced by return promise there is still consideration.
2. §81 – (1) what is bargained for need not induce a promise to count as consideration; (2) promise
need not induce performance or return promise to count as consideration
3. legality: consideration / inducement must be legal. illegal = unenforceable K.
b. Promises to Make a Gift
i. Bargain and consideration found?
1. if yes then gift promise is enforceable (see Hamer v Sidway – giving up legal right = consideration)
2. if no then promise may still be enforceable under §90
a. see Ricketts v Scothorn – reliance was induced by gift promise. (reasonable reliance)
b. c.f. Kirksey v Kirksey – widow moves to step-brothers house; promise did not seek to
induce that reliance (moving) so no §90 – no reasonable reliance.
3. if no (and no reliance) and promise merely a gratuity then not enforceable.
ii. Generally: gift promises not enforced with some exceptions (i.e. promisor dies and enforcement is against
estate); desire is to effectuate intent of the parties.
1. Nominal consideration (i.e. $1 in hand paid…) – can be used to make donative/gift promises
enforceable
2. adequacy of consideration is not evaluated by court; existence (not equality) of bargain is what
matters
c. Reliance and Promissory Estoppel
i. rationale: expand the bargain-theory of consideration to protect expenditure of parties when no
consideration
ii. §90 Promissory Estoppel – promise expected by promisor to induce action, and does induce
action/reliance, is binding and enforceable if necessary to avoid injustice. Remedy granted for breach may
be limited as justice requires.
1. Is there actually a promise on which to rely? (See East Providence v Geremia – promise to renew
insurance policy)
2. Did the promisor expect to induce action? (See Ricketts – Uncle expected to induce action –
quitting job)
3. Was there reliance and was it reasonable?
4. What remedy is required to avoid injustice?
a. note: §90 liability does not entail that damages must be reliance damages; just a means of
creating an enforceable K. Could still have expectation damages.
d. Illusory Promises
i. §77 - promise which does not bind one party in any way (unfettered discretion of party to perform) is
illusory.
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1. “as much as you want” – illusory (See Wickham – coal)
2. “as much as you need” – arguably not illusory – can be somehow measured.
3. if the promise as a whole is something that is not entirely discretionary then it is not illusory.
ii. illusory promises is not enforceable as an offer / promise; cannot serve as consideration for a K.
iii. promise to use good faith or best efforts not illusory – can be measured and enforced (See Wood v Lady
Duff – promise to use best efforts implied in fact)
e. Moral Obligation and Past Consideration
i. another exception to the consideration requirement
ii. Generally: unrequested service/performance does not acquire right to compensation but there are
exceptions
1. Beneficiary of voluntary service subsequently promises.
a. promise enforceable if promisor was beneficiary (see Webb v McGowin)
b. promise unenforceable if promisor was not beneficiary (See Mills v Wyman)
2. subsequent promise may support an implied promise at law in absence of traditional consideration
(i.e. actual promise) iff the benefit of the act was received by the promisor himself.
a. note: no actual K for implied promise at law so any suit will be in restitution.
b. ex: doctor providing services to unconscious patient who then dies (In Re Crisan)
c. c.f. implied promise in fact: based on the circumstances/facts of case (See Allegheny
College; Wood v Lady-Duff – implied promise to use ‘best efforts’) as opposed to pure
legal fiction (implied promise at law).
iii. §86 – promise made in recognition of previous benefit binding to extent necessary to prevent injustice (no
requirement of moral obligation) unless §86(2)(a) benefit was conferred as a gift or if promisor would not
be unjustly enriched or §86(2)(b) value of promise is disproportionate to benefit received
3. Contract Formation – has a contract been formed?
i. basically K requires offer and acceptance of that offer. parties must somehow indicate their assent to be
bound by the K. when this is lacking there will be no K.
1. §20 – (1) no mutual assent if parties attach materially different meanings unless (2) one party
knows or has reason to know of the other meaning – then use that meaning
a. meeting of minds is sufficient but not necessary to create K under §20
b. See Raffles v Wichelhaus (Peerless Case) – no meeting of the minds = no K to be enforced.
c. consider prior dealings, trade customs, language / terms of K, etc. in considering what
meaning parties should have attached.
2. reasonable person standard: objective test: what reasonable person can infer from objective actions
about what party intended.
a. EX: if reasonable person would understand there to be a K, and party subjectively does so
understand, then there is meeting of minds and a K.
b. don’t need a true meeting of the minds where subjective intent of both parties matches
(§20)
b. Statute of Frauds
i. applies to (1) interests in land, (2) Ks not possible to perform in one year, (3) UCC goods greater than
$500, (4) promise to pay 3P debt.
ii. Requirements:
1. need a written confirmation of K or written K itself – need not be entire K, just enough to confirm
a. common law requires essential terms
b. UCC needs a confirmation note, doesn’t need to contain all essential terms
2. party being enforced against must have signed somewhere.
c. Offer and Acceptance
i. What constitutes an offer (as opposed to initiation or element of bargain)?
1. consider surrounding circumstances – advertisements or circulars generally not considered offers;
consider reasonable person standard – is it reasonable to view it as an offer?
2. generally price quotations are not offers – it is the order itself that constitutes the offer
ii. Is there actual acceptance (before revocation or is purported acceptance really a counteroffer)?
1. offeror is master of the offer: valid acceptance depends on terms of the offer
a. §31 rebuttable presumption in favor of bilateral K – acceptance presumed to require
promise to perform
b. 2-206(1) – offer may be accepted by any reasonable medium given the circumstance
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c. sometimes (i.e. recurring transactions) commencement of performance counts as
acceptance
i. 2-206: offer (i.e. purchaser order) can be accepted by commencement of perf.
ii. §§32 and 62: commencement of performance or nature / structure of K may
constitute acceptance, act as an implied promise to perform, and thus create a
bilateral K.
1. Failure to complete perf. would be breach.
2. See Allegheny College (commencement of perf. implies existence of legal
duty) and Wood v Lady-Duff (structure of contract)
d. rationale: promote efficiency – start performing rather than have added step of formal
acceptance. one of promises in bilateral K may be implied promise.
2. Option Contracts
a. §25 basic option K – limits promisor’s power to revoke an offer; may be made in same K
or in a collateral K. must have separate consideration for the option.
b. §87(2) - K which offeror reasonably expects to induce reliance by offeree before
acceptance and does induce reliance is binding as option K to extent necessary to avoid
injustice.
3. Acceptance of a Unilateral K
a. acceptance requires complete performance
b. but §45 – Unilateral Option Contract: treats commencement of perf. as conferring an
option K on offeree – right to complete perf. Offer becomes irrevocable on the part of
offeror
i. offeror not bound to perform until complete perf received; only obliged to hold
offer open
1. offeree is not bound to completely perf. – bilateral K not created by §45
2. if partial performance makes offeree worse off that is too bad - he has no
right of action, should have requested a bilateral K.
ii. preparation to perform and commencement of performance is a judgment call.
4. Mailbox Rule - §63 – default rule that acceptance is effective once out of offeree’s possession, not
upon receipt by offeror. but: If offeror explicitly requires receipt of acceptance or a different form
of acceptance then this is controlling.
a. note: K possible if no meeting of minds –decide to revoke but acceptance already mailed
b. §63(2) does not apply to option Ks
5. Silence as Acceptance - §69 – only if (1) offeree takes benefit of offer w/ reasonable opportunity to
reject and reason to know compensation would be expected OR (2) offeror has indicated
acceptance may be manifested by silence and offeree intends to accept OR (3) on basis of previous
dealings silence can be considered acceptance.
iii. Valid offer and acceptance constitute a binding agreement – note: discuss whether a bilateral or unilateral
K is created
d. Revocation and Counteroffer
i. Termination - §36 – offeree’s power of acceptance terminated by (1) rejection or counter-offer (2) lapse of
time (3) revocation by offeror (4) death or incapacity of offeror.
ii. Revocation – offeror free to revoke at any time before acceptance by offeree (See Dickinson v Dodds;
Petterson v Pattberg)
1. offers presumed to be revocable unless consideration given to make it irrevocable (option K).
consideration distinguishes irrevocable from revocable offers.
2. Reliance exceptions:
a. irrevocable offer without consideration allowed when the offeror’s intention is to induce
reliance on offer by offeree.
b. §87(2) used to convert revocable offer into an option K (See Drennan v Star Paving Co. –
imply promise by sub to hold offer open due to reliance).
i. preparation to perform / accept can be sufficient reliance to keep option open.
ii. promissory estoppel basis for establishing option K.
c. c.f. §90 when used as a tort theory of liability (not K) to allow reliance damages when
there is neither formal offer / acceptance or promise
i. See Hoffman v Red Owl Stores – makes use of equitable estoppel; allow recovery
for pre-K expenditures because of the tort-like liability
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ii. §90 used as independent grounds for relief without regard to theories of bargain,
contract, or consideration.
d. note: §87(2) has higher requirements for demonstrating reliance than §90 because it creates
a legally enforceable, bilateral K
iii. Counteroffer
1. Mirror Image Rule:
a. §59: acceptance is effective only if a mirror image of offer and assents to its terms /
conditions; otherwise it is a counteroffer if it adds new and/or additional terms.
b. UCC 2-207: rejects common law mirror image rule and last shot rule.
i. Last Shot Rule: if forms differ then last form is deemed counteroffer; subsequent
shipment and acceptance will be governed by last form (deemed acceptance of
counteroffer).
c. generally: offer remains on the table only as long as it is not revoked or rejected
(counteroffer)
2. Counteroffer treated as rejection of the original offer. Subsequent effort to accept is ineffective.
a. inquiry exception: §39: counteroffer not treated as rejection if offeree “manifests contrary
intent”
i. leave original offer on the table; matter of interpretation whether inquiry or
counteroffer.
3. Battle of the Forms (2-207): don’t strictly apply common law mirror image rule to form Ks
a. note: Battle of Forms only applies to standardized commercial agreements; handwritten
forms or back and forth, face to face negotiation then use traditional offer and acceptance
doctrine.
b. 2-207(1): offeree’s form treated as acceptance, not counteroffer even if additional/different
terms from purchase order “unless acceptance is expressly made condition to assent to the
additional or different terms.”
i. See Idaho Power – narrow interpretation of “unless” clause - must be very explicit
that acceptance is condition on assent to additional/different terms – mere presence
of additional terms is insufficient
ii. Disputed terms are either supplied by the offeror or by the UCC (knockout rule)
c. 2-207(2): additional terms are included unless (a) the offeror expressly limits his offer to
its own terms (b) the offeror objects to additional terms or (c) the additional terms
materially alter the K (and are not assented to)
i. note: (2) only looks at what terms of K are, not whether or not there is a K. Only
get to (2) if there is a K, otherwise we don’t reach it.
ii. therefore materially altering terms don’t by themselves mean there is no K under
(1); otherwise you would never reach (2)
iii. additional terms: courts are split as to whether additional terms means additional
terms only or also includes different terms. solutions:
1. majority rule: knockout rule – different terms are knocked out (supported
by Comment 6 – but limited because comment 6 only refers to confirming
forms)
2. minority rule: different terms treated like additional terms (supported by
Comment 3) OR different terms always drop out (supported by (2) which
only refers to additional terms)
d. 2-207(3): If no K under (1) but actions (i.e. delivery and payment) indicate parties believed
there was an enforceable K then K consists of terms on which parties do agree
i. note: (3) only applies if no K under (1) – if there is a K under (1) then look to (2)
to determine terms of it.
ii. Knockout Rule:
1. 2-207(2) version: is there actually a knockout rule here? Different terms
knocked out?
2. Comment 6 version: K consists of (1) terms expressly agreed to (2) terms
on which confirmations agree and (3) terms supplied by UCC, including
2-207(2).
a. issue: does knockout rule apply to forms that constitute an offer
and acceptance or to those that confirm existence of agreement.
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b. Comment 1 mentions both kinds but Comment 6 (which contains
knockout rule) only discusses confirming forms courts are split so
discuss both.
e. general aim of 2-207: impart controlling status to the form submitted by buyer/offeror.
4. Unfairness and Unconscionability – is there actual assent to the bargain?
a. Traditional Elements: Duress, Incapacity and Misrepresentation – render a K voidable if present
i. Duress – difficult to establish
1. violence or threat of economic harm constitute duress: standard is whether person making
threatening action reasonably believed or should have believed duress would result.
2. do not enforce opportunistic use of leverage.
ii. modification of an existing K
1. § 73: preexisting legal duty rule: performance of an act which the promisee is already bound by
contract to complete is not valid consideration for a K modification (See Alaska Packers)
2. but where there is valid consideration or changed circumstances / good faith dealing parties are free
to modify. (see Goebel v Linn – ice crop case. modify K; see Schwartzreich – tailor case. rescind K
and enter into new K)
a. § 89: modification of K allowed if it is fair and equitable under circumstances not
anticipated by parties.
b. 2-209: Modification, Rescission and Waiver: no consideration required; modification must
simply be made in ‘good faith’ and for a ‘legitimate commercial reason.’; extortion,
coercion, or bad faith will render modification ineffective and void.
i. market shift may constitute a good faith reason for K modification and, if not
assented to by other party, to breach
ii. parties must weigh cost of breach vs. cost of K modification – it may be better for
both parties to modify even though it would be best for one party to stick with
original K.
3. generally: look to the motives of the party threatening breach if no modification – are they acting
in bad faith / trying to extort or simply responding to circumstances that have rendered K
unprofitable?
iii. Misrepresentation and Non-Disclosure
1. assent implies that both parties have a reasonable understanding of what they are bargaining over –
if this is lacking then no K. note: must be as to a material fact.
2. Misrepresentation of material fact used to induce K results in voidable K. (See termite case)
a. as an affirmative tort action – used to collect reliance damages if you are injured. (See
Goodman v Dicker – radio distributorship case) equitable estoppel
i. need to have culpable state of mind (scienter) – i.e. gross negligence, fraud, etc.
b. as a defense to breach of K – if you are accused of breach. (doesn’t require scienter)
c. note: pressure to find actions that count as misrepresentation, since nondisclosure is not
generally a basis for liability at common law (termite case)
3. Non-Disclosure:
a. § 161 – non-disclosure constitutes misrepresentation where the undisclosed fact concerns a
‘basic assumption’ made by the other party and non-disclosure ‘amounts to a failure to act
in good faith.’
b. difficult to argue for non-disclosure, so consider misrepresentation as alternative.
c. general policy: require disclosure of casually obtained / public info; not information that is
private and you have invested in obtaining (see policy section).
b. Standardized Forms and Unconscionability
i. Policy Rationale: Balance freedom of contract against preservation of important individual rights and
customer expectations.
1. balance unwanted intervention in consumer’s lives with the obvious lack of understanding about
Ks.
2. are the courts or the sellers in a better position to determine what consumers actually want in
bargain?
ii. Misrepresentation
1. were the terms on the standardized form fully explained or could they be understood by the
average person?
2. misrepresentation of fact: tort action (See Goodman v Dicker)
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iii. Unconscionability §208 – unconscionable K not enforceable (See Williams v Walker-Thomas Furniture
Co.)
1. court may refuse to enforce entire K, or the unconscionable term, or limit application of
unconscionable term to avoid unconscionable result.
2. Determination: look to context, gross inequality of bargaining power, public policy concerns,
impossible to understand, lack of meaningful choice.
3. Courts don’t rule on inadequacy of consideration but overall imbalance may demonstrate
unconscionability.
iv. Contacts of Adhesion
1. Reasonable Expectations Test: §211
2. policy concerns to consider:
a. assent: if there real assent if K is long, difficult to understand, no negotiation or bargaining
(see Williams v Walker-Thomas). did individual know what he was getting into?
b. tort-like concerns: don’t want to allow clauses that are unsafe, etc.
c. structural concerns: if quality cannot be observed (or is not observed) the market may
deteriorate (Market for Lemons) – Ks of adhesion present this danger.
3. Ks of adhesion – typically long, standardized Ks which are difficult to understand and contain an
unreasonable or onerous provision. “take it or leave it” Ks.
v. UCC 2-302 – K between competent adults is binding w/out regard to fairness. If comprehension of
meaning of K is lacking the court can use judgment to determine fairness of K terms.
1. Determining fairness: consider what parties would have agreed to at the time if they fully
understood the terms. Is there an element of duress to the term itself?
vi. Generally: including more favorable consumer terms will result in increased price. Is this desirable?
5. Contract Interpretation – what have the parties promised each other?
i. § 201(1) – if parties agree on interpretation of K language then that is what is used, regardless of what
seems reasonable to 3P. If parties do not agree on interpretation (even if 3P thinks they do/should) then
neither is bound by the understanding of the other (unless one party had reason to know of the other’s
interpretation).
1. if the disagreement of interpretation is material then there is no meeting of minds and no K
(Peerless)
ii. generally: emphasize a subjective, party-oriented approach in rules to K interpretation. rely on general
good sense
1. note: subjective understanding of a party must be consistent with an objective meaning of the term
2. if terms are simply left out courts may supply the missing element (look to trade usage, prior
dealings)
b. The Parole Evidence Rule
i. When to Use: PER does not apply to subsequent agreements – only applies to prior or contemporaneous
agreements (written or oral) that seek to establish legal enforceability of a promise.
ii. §213 – a written agreement that is completely integrated (i.e. final expression under §209) and binding
discharges all prior or contemporaneous agreements (oral or written) w/in its scope or inconsistent w/ it.
1. judge determines whether or not the agreement is integrated and thus whether to allow parol
evidence.
2. admission of parol evidence only if (a) agreement is collateral in form (i.e. capable of expression
in a separate agreement; not w/in the scope) and (b) the written K is not fully integrated.
iii. Integration: Complete vs Partial (see Mitchell v Laith – ice house removal case)
1. Completely Integrated – full and complete embodiment of contractual relationship. Earlier or
contemporaneous agreements w/in this scope are unenforceable; unrelated agreements are still
enforceable.
2. Partially Integrated – complete with respect to some aspect of contractual relationship. Earlier
agreements consistent w/ written agreement (and w/in scope) are enforceable. only collateral
promises will be enforceable.
iv. Two approaches to Parol Evidence:
1. Williston approach: four corners approach: if K appears to be fully integrated on its face do not
include parol evidence (See Mitchill v Laith). Objective: emphasize preeminence of written K.
2. Corbin approach: examine parol evidence to see if K fully integrated and, thus, if parol evidence is
to be included. Doesn’t matter if K appears integrated on its face. (See ) Objective: satisfy the
actual intent of the parties. But: seems circular.
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a. this is the approach adopted by §213 and generally used by courts.
b. more lenient in allowing parol evidence in interpreting Ks.
v. Exceptions to PER:
1. §214 – Exceptions: prior agreements admissible to establish (a) whether writing is integrated (b)
degree of integration (c) meaning of the writing (d) anything that might invalidate the K (i.e. fraud
or mistake) (e) which remedy is appropriate.
2. §216 – Consistent Additional Terms: admission of consistent additional terms unless agreement is
completely integrated. not completely integrated if consistent additional term was (a) agreed to for
separate consideration or (b) would naturally be omitted from the writing
a. parol evidence cannot modify the K or contradict express terms of the K.
3. Conditions to a K: PER applies to legal enforceability of a promise, not to a condition to existence
of a K.
a. note: this exception does not apply to conditions subsequent or precedent – those alter the
K
b. condition precedent inherently varies the K – discharges performance obligation
c. if parole evidence is to clear up ambiguity about whether condition is precedent or
subsequent, this is more likely to be OK.
4. UCC 2-202, 2-208; §203 – PER does not exclude evidence of ‘usage of trade’ or prior ‘course of
dealing’ which might help explain or supplement the written K (i.e. figuring out which ‘Peerless’ is
meant). (this is the Corbin approach)
c. Filling the Gaps: ‘Best Efforts’ and Other Flexible Commitments – indefinite or incomplete Ks.
i. exs: exclusive dealing contracts (i.e. distributorships and licensing), purchasing or output requirements.
ii. “Best Efforts” or “Reasonable Efforts”
1. “best efforts” can act as consideration for a more specific and binding promise (See Wood v Lady
Duff)
2. No means to quantify best efforts. One solution is to think of two parties as partners, and determine
what is best for the partnership.
iii. UCC 2-306
1. Distributor: 2-306(2) – requires distributor to perform in ‘good faith’ by using ‘best efforts’ to sell
goods. (codifies Wood)
2. Requirements / Output Ks: 2-306(1) – when quantity is not specified the requirement is for actual
output in good faith, “except that no quantity unreasonably disproportionate to…any normal or
otherwise comparable prior output or requirements may be tendered or demanded.”
a. requirement/output K only when you have exclusivity
3. Generally: performance of merchant must satisfy standards of good faith and reasonableness.
iv. Certainty and Open Terms
1. §33 – Certainty – (1) terms of K must be reasonably certain. (2) reasonably certain if terms provide
a basis for determining existence of breach and for giving remedy. (3) Open terms may indicate
that offer or acceptance was not intended.
2. UCC 2-204 – K does not fail for indefiniteness if parties have intended to make a K and there is a
reasonable basis for remedy.
3. UCC 2-305 – Open Price Term – (1) K can omit price (use reasonable price at time for delivery)
unless parties intended not to be bound unless there was a fixed price (4).
6. Performance and Breach – have parties kept their promises?
i. a valid claim of breach may entitle a party to (a) regard performance obligations as discharged (or perhaps
suspended) and (b) sue for expectation damages.
ii. objective: social and private interest in preventing collapse of Ks (inefficient). The law thus prefers to have
K continue and acts to prevent parties from determining breach has occurred and their perf. obligations are
discharged.
iii. Underlying requirement of good faith. (§205 and §1-304)
b. Conditions
i. Express Conditions – Conditions Precedent vs Conditions Subsequent
1. Condition Precedent – must be met in order for any obligations to be imposed on parties. (see Gray
v Gardener – whale oil case; must be strict performance before obligation to pay arises)
a. c.f. Condition to Existence of K – no K until the condition is satisfied; interpretive
question. (i.e. identity of ship in Peerless – cotton must arrive on ‘Peerless’ for there to be
K)
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2. Condition Subsequent – K in effect but if condition met then remaining obligations are discharged.
“discharges a preexisting obligation”
3. §227 - unclear conditions will be interpreted so as to reduce the risk of forfeiture and minimize
reliance losses.
4. General points:
a. strict performance required: express condition must be 100% satisfied before duty arises
(c.f. constructive conditions – substantial performance). no doctrine of substantial
performance
b. burden of proof
i. condition subsequent – burden is on breaching party – prove obligation discharged
ii. condition precedent – burden on party bringing suit – prove condition satisfied and
obligation exists
c. Parole Evidence Rule – does not apply to conditions to existence of a K; does apply to
condition subsequent (modifies K by discharging obligation) and may apply to condition
precedent (if it is not determining the existence of a K)
i. parol evidence not barred if it addresses ambiguity of a condition in the written K
ii. Condition, Promise, or Promissory Condition:
1. Is it a condition? in analyzing whether a clause is a condition (esp. condition precedent) or a
promise look to whether it creates risk of forfeiture, how parties intended to allocate risk, language
of K, importance of clause to overall K (materiality).
2. Damages Claims
a. important to consideration of whether or not there are damages claims (breach) or not.
b. yes when it is a promise or promissory condition, no when it is merely an express
condition.
3. Consequences of failure
a. promise: failure of event to occur discharges obligations of the injured party if material
breach. Otherwise, other party has opportunity to cure. substantial performance allowed.
b. condition or promissory condition: performance obligations are discharged. no substantial
performance allowed.
4. forfeiture: construing something as a condition instead of a promise more likely to result in
forfeiture. avoid this if possible
5. concern: construing a clause (i.e. a payment schedule) as just a promise may give party a free
option (see Rice Packets case)
iii. Oral Modification and Waiver
1. PER does not apply to agreements made subsequent to written K.
a. but: consider potential problems of duress and consideration
2. Can specify that K cannot be modified by subsequent oral agreement but can also waive this
provision.
iv. Implied Conditions
1. Implied Warranty: UCC 2-314 (Merchantibility) and 2-315 (Fitness for particular purpose).
a. only an implied warranty if agreement is silent - there is no express warranty (or warranty
disclaimer provision) or other risk allocation.
b. note: if express provision deemed unconscionable (i.e. K of adhesion) then there may be
implied warranty.
2. rationale: allocate the risk between the two parties.
c. Problems of Performance
i. Constructive Conditions of Exchange
1. constructive conditions address the timing of performance under K – determine when promises
become due
a. if other party does not meet a constructive condition they still may substantially perform
b. non-breaching party not excused from performing unless breach is material
2. bilateral K – promises are conditional and mutually dependent (See Kingston v Preston – creates
this rule); exchange of promises (bilateral K) requires exchange of performances as well.
3. unilateral K – no constructive conditions. The condition is 100% performance.
4. Ks can be performed in one instant (i.e. sale) or over a period of time (i.e. service, building a
house)
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a. §234(1) for the former, if performance can be rendered simultaneously it is due
simultaneously, unless K specifies otherwise
i. §238 – if performance due simultaneously, each parties performance obligation is
condition on the other party either performing or offering to perform his part of
simultaneous exchange
ii. either party can trigger the obligation to perform by offering to perform
iii. if no party ever offers to perform then no breach – promises given by both parties
but they never become due
b. §234(2) for the latter the return performance is conditional upon completion (or substantial
performance) of prior performance; unless K specifies otherwise.
c. these are just defaults - parties are allowed to explicitly set whatever timing scale they
want. but must be extremely clear you want to opt out of constructive condition. high optout hurdle
5. substantial performance – constructive conditions are satisfied by substantial performance (c.f.
Express Conditions require strict performance)
6. 2-307 – timing: all goods must be tendered in single delivery and payment due upon such tender
unless otherwise specified.
ii. Material Breach – excuses performance obligation of non-breaching party
1. §235 – any non-performance of duty constitutes breach; but if breach is not ‘material’ in character
the injured party is required to continue with performance but may claim damages for loss
sustained.
2. §§225 237 – material breach results in either suspension (if it is reasonable to suspect the breach
will be cured) or discharge of performance obligations. Damages for the former are for partial
breach (loss incurred by delay in cure) and total breach for the latter.
iii. Substantial Performance – breach but performance obligation of non-breaching party not excused
1. Breach must be material in order to serve as basis for forfeiture of the K. If there is substantial
performance the injured parties remedy is in damages calculated by diminished value (as opposed
to cost of specific performance) (See Jacob & Youngs v Kent)
a. rationale: want to avoid unfair forfeitures.
b. note: breaching party can also sue if breach is not material
2. Whether or not there is specific performance (and thus whether breach is material) depends on
what the K specifically requires, whether there is idiosyncratic valuation, what is a reasonable
preference, etc.
3. Consumer preference can be disregarded when (a) cost of satisfying that preference is high and (b)
the change in market value of specific performance is insignificant (See Jacobs & Young; Plante v
Jacobs)
iv. Sales of Goods and Perfect Tender
1. 2-601 – adopts old common law perfect tender rule with corresponding right of rescission for nonconforming goods.
a. Rationale: possibility of rescission encourages sellers to conform with Ks.
2. But 2-602(1) requires buyer to ‘seasonably notify’ seller of intent to rescind and, then, 2-508(1)
allows seller to respond with intent to cure defect in tender (if time for perf. has not yet expired).
3. And 2-608(1) – buyer may revoke acceptance of previously accepted non-conforming goods only if
(a) non-conformity substantially impairs the value of goods and (b) he had reason to assume that
non-conformity would be cured by seller (but it hasn’t been) or defect could not have been
discovered on initial inspection. 2-608(2) – revocation of acceptance must be w/in a reasonable
time and before any additional alteration occurs in condition of goods.
4. 2-714 – if non-conforming goods are accepted buyer still has right to sue for conventional K
damages.
5. Common Law: allows substantial performance, perfect tender not required.
v. Anticipatory Breach
1. repudiation of K obligation in advance of time performance is due discharges injured party from
his own obligations and allows him to immediately bring a suit for total breach (§253)
2. UCC – requires cover at the time repudiation is made known; good faith.
d. Demand for Assurance - §251 and 2-609 provide a promisee who has ‘reasonable grounds’ for believing K will be
breached to ‘demand adequate assurance of due performance’ and suspend their own performance until such
assurance is received. What constitutes reasonable grounds is determined by facts and good faith.
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7. Mistake and Impossibility – implied excuse doctrines; excuse performance by voiding the K.
a. Mistake – separate real mistake (voids K) from misjudgment (no legal remedy)
i. §152 mutual error in basic assumption material to transaction renders K unenforceable when there is no
assumption of risk (Sherwood v Walker; Peerless)
1. close line between mistake and misjudgment (or even calculated risk);
2. if that risk is assumed (i.e. that the cow might not be barren is considered in K price) then mistake
cannot be used as a defense.
ii. unilateral mistake: also renders K voidable provided the mistaken party was not allocated risk of mistake;
exception if the other party did not know or have reason to know of the mistake and has relied on it.
1. exs: include clerical or mathematical error (See Elsniore Union); does not apply to mistake in
judgment
2. If non-mistaken party realizes the mistake and relies on it anyway, courts generally allow
reformation of K by mistaken party. rationale: similar to last clear chance rule – party w/ last
chance to avoid harm has obligation to do so. create incentive to avoid harm.
iii. lack of complete information does not necessarily invoke the mistake doctrine; if better-informed party has
made expenditures to acquire information then they are entitled not to disclose it. rationale: want to
encourage / reward information gathering.
iv. Similarity to Hadley:
1. only hold parties responsible for what they contemplate
2. i.e. foreseeable expectation damages (Hadley); conditions / states of the world for which risk has
been explicitly allocated (mistake)
v. generally: want loss resulting from mistake to lie w/ mistaken party if possible.
b. Impossibility and Frustration
i. General Elements Required:
1. unexpected occurrence not covered by the K
2. failure to have allocated risk of that occurrence by agreement or custom
3. commercial impracticability with respect to performance or decrease in value of obligations
ii. Impossibility:
1. Implied Condition Precedent: courts willing to imply condition precedent if a certain thing or state
of the world is necessary in order to carry out K and there has been no allocation of risk (See
Taylor v Caldwell, Krell v Henry) – voids the K.
2. generally: look to intent of parties – what would they have intended ex ante if they had
contemplated the event. parties usually do not intend to provide insurance for the other party in
case of unforeseen event but look to which party is in better position to insure against the event.
iii. Impracticability
1. needs to be a substantial increase over initial cost of performance – (i.e. 15% in American Trading
– Suez Canal not enough) mere added expense is not sufficient to satisfy ‘commercial
impracticability’
iv. Frustration of Purpose
1. similar to impossibility, if supervening events frustrate the K or substantially decrease its value
then K is unenforceable (Krell v Henry)
2. consider: is the K really frustrated or was the event unlikely but not unimagined and, thus, the risk
of its occurring allocated (See American Trading – Suez Canal); if risk allocation is not specific
consider which party is in the better position to insure.
v. Intended Performance?
1. to determine if it is impracticability or frustration, determine what the promised performance is.
2. just because particular means of performance intended is frustrated / impossible does not mean that
it was the only possible performance (i.e. if there were other music halls in Taylor, alternative route
in American Trading)
vi. Policy Considerations
1. Fault – could the problem have been prevented (i.e. had warning of canal closing)
2. Insurance – was one party in a better position to ensure against this event (i.e. do lots of shipping;
insure against wars / canal closings / etc.)
3. generally: courts seem to take Ks and cease to enforce them at the time the unforeseen event
occurs; let losses lie where they are (Kull excerpt)
c. Mistake vs. Impossibility vs Frustration
i. Assumption pre or post K formation
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1. Mistake – concerns basic assumptions that are made and are false at time of K formation
2. Impossibility – basic assumptions that turn out to be false ex post
ii. Performance – cost or value
1. Impossibility – concerns cost of performance
2. Frustration – concerns value of performance (may be completely or substantially destroyed)
8. Remedies
a. Expectation Damages
i. rationale: forward looking as well as remedial; need to provide security for potential / future contracting
parties as well as give the currently injured party the benefit of his bargain.
ii. default rule of damages: put the non-breaching party in as good a position (not better – that is unjust
enrichment) as if K performed.
1. calculation of damages:
a. Basic Calculation: §347 (a) value lost due to other party’s breach (lost profit) + (b) value
of reliance expenditures – (c) cost avoided through non-performance
b. UCC: 2-712 (buyer breach) or 2-706 (seller breach) – damages are equal to the cost of
cover (incidental + consequential damages)
i. 2-715: incidental damages = costs incurred in rejecting goods, effecting cover;
consequential damages = injury / lost profits the result of breach.
c. §348 Other Possibilities if §347 cannot be calculated:
i. Cost of Performance when that cost is calculated into initial K price. (See Groves v
John Wunder – leveling/grading case; Great Depression - $60K v $12K)
ii. Difference in market valuation when breach is not material or if cost of
performance cannot be justified. (See Jacobs & Young) [this is the default
calculation]
iii. if no idiosyncratic valuation and cost of completion is efficient then these two
measures should be very similar.
2. Three Rationales for Expectation Damages (see policy section for more):
a. Efficient Breach: ensure widget ends up w/ highest value user.
b. Efficient Precautions: ensure efficient investments in production of goods.
c. Efficient Insurance: ensure risk-averse buyer is in same position whether or not there is
breach – either gets performance of K or expectation damages. Encourage K formation.
iii. Damages or Specific Performance
1. specific performance only if the K involves ‘unique’ property (i.e. real estate) or idiosyncratic
valuation or the particular mode of breach is expressly addressed in the K (See Peevyhouse, c.f.
Jacobs & Young – specific performance more likely when dealing w/ land)
a. damages are the default – rather compensate with money than performance.
b. uncertainty as justification: if can’t calculate expectation damages (or place a value on
performance – i.e. unique / priceless) then consider specific perf.
2. §359 and 2-716 – desire to liberalize granting of equitable relief; expand classes in which monetary
damages are considered inadequate. Use equitable relief (i.e. injunction) if it best serves justice.
a. See Walgreen Co. v Sara Creek – issue injunction and let parties decide what the value is
to remove it; works well when damages are (a) difficult to calculate and (b) equitable relief
is easy / inexpensive to enforce. supported by Coase Theorem.
b. rationale: parties themselves are in better position to determine actual cost of breach. but
consider transaction costs of bargaining (vs. court investigation / trial) and possibility of
complete breakdown (very inefficient)
3. generally: try to consider what parties would have agreed to as measure of damages ex ante – did
they demand specific performance in the K? Was it bargained for as part of K cost?
iv. Cost Avoided and ‘Overhead’ – subtract costs avoided due to breach from damages award but do not
subtract overhead costs that would have been paid regardless of whether K ever existed.
b. Limitations on Expectation Damages
i. Avoidability and Mitigation
1. avoidability: §350 - injured promisee cannot recover for damages (i.e. reliance expenditures)
avoidable once breach is known; legal obligation to use reasonable efforts not to ‘run up damages’
(See Luten Bridge – cont. building bridge)
2. mitigation: responsibility to minimize lost-profits claim by reasonable efforts to cover (i.e. find
another seller or buyer)
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a. But See Parker v 20th Cent. Fox – Shirley MacLaine case – ‘duty to mitigate’ does not
include accepting different or inferior employment.
b. Jacobs & Young – use diminished value rule; installed pipe not substantially diff. or
inferior.
ii. The Lost-Volume Seller Exception – 2-708(2) and §350 – if seller is able to expand inventory / output to
sell to as many buyers available then standard damage measure (involving mitigation) is inadequate. Use
lost profit + overhead from actual K.
iii. Foreseeability – implicit duty to premitigate
1. breaching party is liable only for damages which arise naturally or were reasonably contemplated
by parties at time of K formation (See Hadley v Baxendale – take pre-breach efficient precautions
to minimize loss resulting from breach)
a. Disproportionality: codified in §351 – don’t allow recovery of lost profits when it is
disproportionate to the K price
b. effect: under-compensatory measure of damages – don’t always include lost profits if they
are not foreseeable.
2. rationale: want to limit breaching parties liability to what they could reasonably foresee and insure
against; don’t want to give injured party an incentive to withhold info, keep K price down, and
receive free insurance policy. encourage promisee to be efficient, cost-saving, before breach
occurs.
iv. Certainty
1. §352 - damages for breach recoverable only to the extent that they can be determined w/
reasonable certainty
2. otherwise will need to consider reliance and restitution measures of damages
c. Reliance and Restitution
i. Reliance Damages – still operates under the K (like expectation damages)
1. §349 - compensate for expenditures reasonably made under K
a. if breaching party can prove it was a losing K, the amount of loss under the K can be
deducted from reliance. (§349)
b. often used when expectation damages are speculative or difficult to calculate (See Sullivan
v O’Connor – botched nose job case; c.f. Hawkins v McGee – botched hand surgery –
expectations damages were deemed calculable and awarded)
c. proxy for expectation: use reliance as a proxy (a good ground floor) for expectation
damages
2. return parties to status quo ante – position before the K (tort notion of liability (equitable estoppel)
– See Security Stove, Goodman v Dicker – radio distributor case; misrepresentation allows P to
receive reliance expenditures, no lost profits)
a. recovery for pre-K reliance will depend on there actually being a K
b. if there is no K and you want to recover you will need to work in equity (i.e. restitution or
make use of PE)
3. note on estoppel: §90 PE does not mean damages are limited to reliance but equitable estoppel (tort
notion) will limit damage collection to reliance.
ii. Restitution – quasi-contractual remedy / quantum meruit (all three interchangeable) - damages not
necessarily limited by K. based on preventing unjust enrichment. measure benefits conferred rather than
losses sustained.
1. The Breaching Plaintiff
a. generally factored into damages calculations anyway – breaching party gets credit for the
value of the goods / services actually supplied; must pay the difference in cover.
b. quantum meruit – injured party still bound to pay for “reasonable worth” of services
received (See Britton v Turner); can counterclaim for damages sustained (if any)
c. generally: breach does not validate unjust enrichment (but it does void K) so breaching
party still compensated (but must sue in reliance).
i. but note: quasi-K claim here still governed by original K. value of services to nonbreacher may be less then under K (but they may not be more) when breacher sues
in restitution.
ii. but note: in some jurisdictions if there is a willful breach of K courts may not
allow breacher to bring restitution action.
d. burden of proof: breaching party bears burden of proof for showing unjust enrichment.
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2. Losing contracts – good reason to consider restitution; breach is fortuitous and ‘injured’ party
doesn’t want to enforce the K
a. Rule #1: Restitution
i. §373 – support recovery of entire value of work up to date of breach, even if it
exceeds K price provided that non-breaching party has not fully performed.
Material breach so K no longer acts as limit on damages.
ii. Recovery under quantum meruit rather than K so potential loss is irrelevant –
measure of recovery is reasonable market value of performance (See Algernon
Blair / Coastal Crane)
iii. problem: gives breacher incentive to just let K finish up even if it no longer desires
the end result; this keeps liability tied to the K price.
b. Rule #2: Contract Damages §349 allows recovery of reliance costs minus expected losses
if K had been performed. Who would ever use this?
c. Rule #3: Loss Sharing: P recovers in damages portion of K price equal to portion of work
completed thus far.
d. Liquidated Damages
i. §356(1) – allows for liquidated damages provided they do not exceed what is “reasonable in the light of the
anticipated or actual loss caused by the breach and the difficulties of proof of loss” at time of K formation.
ii. create a new damages ‘rule’ but excessive liquidated damages (not a reasonable ex ante proxy) are deemed
a penalty and are unenforceable – then use traditional damage calculation rules
1. See Lake River v Carborundum – steel powder bagging – liquidated damages did not reflect cost
avoided due to breach; thus constituted a penalty. But was this ‘penalty’ factored into K price?
2. penalty liquidated damages more commonly found in individual consumers (See Walker-Thomas)
9. Third Party Beneficiaries
a. Intended Beneficiaries – any person intended to be benefited by the K (even if not specifically named) can enforce
against the promisor.
i. §304 – distinguishes between intended and incidental K beneficiaries
ii. who is an intended beneficiary is done on a case-by-case basis; what did contracting parties intend /
contemplate.
b. Defenses – promisor can assert any defenses against 3P beneficiary that could have been asserted against promisee.
Can’t raise defenses that have already been settled or waived as to promisee.
i. Post-contractual modification or discharge – contracting parties generally retain control to discharge rights
of 3P beneficiary but there are limitations (i.e. reliance or if the 3P directly participated in the initial
bargaining)
ii. at some point (either at suit or perhaps earlier) the 3P’s rights vest and cannot be removed.
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POLICY CONSIDERATIONS
1. Basic Contract Policy Goals
a. Efficiency:
i. Posner – especially economic efficiency – allocate resources to highest value user
ii. c.f. redistribution of wealth / value – rather than giving widget to highest value user what about giving it to
the one who needs it the most? contract law doesn’t actually do this – isn’t economically efficient.
iii. c.f. some areas of law where efficiency is definitely against public policy for other reasons. not all Ks are
commercial.
1. i.e. contracts of adhesion, Baby M (baby doesn’t go to highest value user), familial relations
2. also public policy where it contracts conflicts with other areas of law (torts = punitive damages)
b. Autonomy / Freedom of Contract
i. Fried – argues from Kant; enable individuals to pursue free choice and their own objectives through
contract.
ii. compare Unger – ‘critical legal studies’ – consider ideology and power structure, whose interest does law
and contract doctrine serve. Interests of those already w/ wealth, trying to maximize it. law serves power
hierarchy
c. Rules v Standards (see PER and Default Rules below)
i. Rules create accountability and predictability
ii. Standards allow for justice and flexibility: law should not be mechanical.
2. Consideration and Bargain
a. Consequences of §90 PE
i. Fears: Grant Gilmore – the Death of Contract (K law going to be subsumed by tort) suggesting PE will
displace traditional K doctrines (consideration, bargain theory, expectation measure of damages).
1. tort-like notion – enforce agreements between parties whether they like it or not; hold person who
made the promise that resulted in reliance responsible.
2. see Hoffman; Drennan
ii. Reality: This is not happening – traditional bargained-for consideration is still basis of K law and damages
based on §90 tort-like liability are rare and get reversed often. (Hillman)
b. Inadequacy of Consideration: courts don’t get involved in evaluating whether or not a bargain / consideration is fair
or a good one to make. rationale: support freedom of K. c.f. want of consideration – if no consideration at all then
promise not enforceable.
3. Contract Formation
4. Unfairness and Unconscionability
a. Contracts of Adhesion
i. Monopoly Power:
1. businesses w/ market power / monopoly should not be considered to create unconscionable Ks –
give consumers the terms they want at the price they want. (Schwartz)
2. rationale: not enforcing adhesion Ks requires consumers to pay more for better terms which they
may not want. goes against freedom of K. otherwise we take a paternalistic approach – consumers
don’t know what they really want or is in their best interests.
ii. Market for Lemons Description
1. competitive market may not satisfy consumer desires; gradual decrease in quality of goods
available when consumers cannot observe quality.
a. end up with low-quality goods; consumers not overpaying but no high-quality goods on the
market
b. overall social welfare loss – race to the bottom in terms of quality. no market for
consumers who want to pay more for higher quality.
iii. Solutions to Market for Lemons:
1. Government Intervention:
a. Rakoff – freedom of K should not apply to Ks of adhesion – these actually threaten
freedom to enter into Ks because right goods / K terms aren’t being offered.
b. gov’t (judiciary or legislature) should step in and provide quality terms – this will help
prevent an efficient market with a “competitive pathology”
c. critique: efficiency and information problems – how is going to identify the situation and
determine maximal consumer preferences?
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2. Market Mechanisms:
a. reputation – build a reputation for high quality; incentive to provide high quality to
maintain that reputation.
b. advertising – may be able to overcome or mitigate information asymmetry in the
marketplace by advertising your high quality of goods.
c. warranties – convince buyer of high quality by backing up sale with a warranty.
b. Non-Disclosure
i. Disclosure of Public v Private Information (Kronman):
1. public information: casually acquired information/fact obtained by a party without any cost must
be disclosed.
a. rationale: didn’t invest anything – so no need to provide return on investment
2. non-public information: deliberately acquired information (if time/energy/money is invested in
obtaining) has no requirement of disclosure.
5. Contract Interpretation
a. Parole Evidence
i. Willistonian approach – penalty default approach; want to incentivize parties to draw up completely
integrated agreements.
1. assumption: parties know in advance what court will do; not the reality that parties are aware of
rule/penalty default and that they can predict how it will be applied.
ii. Corbin approach – majoritarian approach – want to effectuate intent of the parties.
iii. Rule v Standard – Williston uses a Rule, Corbin uses a Standard. But even Williston’s Rule is riddled w/
exceptions; clear-cut rule of PER may be impossible – standard is better.
1. Scalia – argues for rules, bind judges to them.
2. standards – give judges discretion; look to do justice in deciding a case.
b. Default Rules
i. Default Rules serve an instrumental purpose – pursue main policy goals (i.e. efficiency or autonomy)
ii. Apply ex post default terms for what parties didn’t address ex ante
1. areas where parties are silent, where they have failed to contemplate a particular event
2. ex: mutual mistake – default term w/ respect to low-probability events is to void the K
iii. How to choose default terms?
1. majoritarian approach – ask what most parties would want most of the time (if they had thought
about it). set that as default and allow opt out. intent of parties.
2. efficiency approach – what are the default terms that are most economically efficient. expand the
pie.
a. ex: expectation measure of damages - save transaction costs; add predictability and
consistency.
b. ex: doctrine of mistake – let party off the hook for unanticipated events; reduce transaction
costs
3. efficiency + autonomy: if parties know what default rules are and are able to contract around them
then we can set default rules to promote efficiency w/out impinging on autonomy. critique: not a
reasonable assumption.
iv. Focus on risk allocation and incentives in constructing default terms
1. risk allocation – default allocation between parties
2. incentives – defaults create incentives to do desirable thing. penalty defaults.
a. EX: Hadley v Baxendale (non-breaching party can’t recover for unusual damages unless
they give notice to other party before)
b. EX: Willistonian PER (parol evidence not included – force parties to put it in writing to
effectuate their intent)
c. Mandatory Rules (can’t opt out)
i. no K for illegal behavior
ii. unconscionable Ks not allowed
iii. doctrine of consideration is a mandatory rule of K law (but can get around with PE)
iv. liquidated damages – not honored if unreasonable proxy for expectation measure of damages
6. Performance and Breach
a. Express Conditions
i. Determining condition precedent or condition subsequent:
1. Langdell – look at wording – semantic approach
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2. Holmes – critiques Langdell. look at policy justifications - which party is better placed (in terms of
record-keeping or other information/ability) to establish that the conditioned is satisfied.
ii. Forfeiture: Hesitation to construe contracts as containing express conditions; this leads to forfeiture
b. Constructive Conditions
i. avoids multiplicity of actions – solve everything form the same contract in one case.
ii. comport with the “evident sense and meaning of the parties”
iii. Constructive conditions are quasi-mandatory – very difficult to overcome default timing provisions
c. Implied Warranty – Cigarette Litigation – is there an implied warranty that cigarettes are safe?
i. main point: fundamental tension between insurance and incentives (precautions)
ii. precautions policy argument
1. consumer information: if consumers have information that cigs are dangerous they can take
precaution of not smoking; this argues against implied warranty – consumers need to pay for their
choices.
2. manufacturer information: if they know cigs are dangerous they could produce healthier cigs,
inform consumers about dangers of smoking
a. only have incentive to do this if they are on the hook for health costs of smoking
b. this would be a precautions argument for implied warranty
iii. Insurance policy argument
1. Implied warranty acts as insurance against dangers of smoking
a. cig maker sells cigs + health insurance policy
b. increase price acts as an incentive against smoking – force makers to bear true costs of cigs
which they will pass along to consumers
2. but insurance against dangers of smoking dulls incentive not to smoke – moral problem.
3. can attempt to solve by finding compromise between insurance and precautions
4. problem:
a. insurance: turns cig maker into seller of insurance – this is not what they do best – may not
be most efficient provider of insurance; force people to pay for insurance they might not
want
i. depends on who has better information – cig makers or insurers
b. cross-subsidization: all smokers pay for health costs, including those who smoke but don’t
actually have health problems
i. reduces incentives – high risk smokers being subsidized by low risk smokers
ii. but heavy smokers (greater risk) will pay more because they buy more – lowers
level of cross-subsidization
7. Mistake and Impossibility
a. Implied Excuses – three possibilities for remedy
i. let losses fall where they are at time of implied excuse (Kull)
1. parties can prepare for this up front; specify in the K or provide insurance against this.
2. Hard to know how courts will decide issues about fault/insurance months or years later and
whether implied excuse will be applicable.
3. implied excuse doctrines are so unpredictable they create no incentive effect – so parties cannot
prepare for them. so just let things lie as they are.
4. critique of Kull:
a. avoid uncertainty by addressing it in the K
b. Ferrell – Kull’s reasoning is bizarre. letting losses lie only applies once it is decided there
is an implied excuse and K is suspended – does not address any of the uncertainty
problems.
ii. full reliance recovery – return all money that has been paid out under K so far (i.e. 25# deposit in Krell)
iii. full recovery minus reliance of other party (majority position)
1. i.e. return deposit in Krell v Henry but subtract reliance expenses of apt. owner
2. reliance must be reasonable; can only be recovered up to the value of transfer, not more.
b. Ferrell – What if we had a true penalty default?
i. implied excuses not allowed, period.
ii. clear rule – if you want to get out of a K if something happens, you must put that in the K specifically.
iii. merits?
1. con: increased transaction costs, hard to overcome lack of complete information – without
complete information and with limited time it is impossible to write a complete K.
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2. pro: predictable, parties know up front what will happen.
a. but: penalty default rule may not even be that clear and predictable.
b. Sykes: even if there are no implied excuses we still need to deal with the risk allocation
question – whether there is an implied warranty or implied promise
c. but: remedy is different for implied promise / warranty (expectation damages) then it is for
implied excuse (restitution b/c no K)
8. Remedies
a. Expectation Measure of Damages
i. law does not require keeping of promises; treats monetary compensation as sufficient. generally no
recovery for non-pecuniary harms §353 (efficient precautions is the exception)
ii. Three Rationales for why Expectation Damages are economically efficient:
1. Efficient Breach:
a. ensure widget winds up with highest value user – willingness to pay expectation damages
indicates that somebody else values the widget more (Posner)
b. but: Friedmann – maybe there should be supra-compensatory damages – punish people
for moral depravity of breach; selling something that they don’t actually own.
i. otherwise efficient breach is really efficient theft – can break the law as long as
you leave the right amount of money in an envelope
ii. critique: making damages supra-compensatory does not change this; just deters
breach more. still punch and pay
iii. consider rights of people instead of economic efficiency – punishment/deterrence
model; protect rights and fairness
iv. critique: this makes more sense in personal contracts, less in commercial
c. critique: why not enforce K, let buyer then sell to higher value user.
i. increases transaction costs (B1 may not know of B2) but limits court costs / time
d. public policy critique: may not want widget to go to highest value user (See Baby M)
2. Efficient Precautions:
a. ensure efficient investments in production of goods (i.e. how hard do you try to avoid
breach?)
b. Learned Hand Formula: B=PL gives optimal amount of investment (in maintenance,
production) by seller
i. P – reduction in the probability that the machines breakdown; that is, the reduction
in probability that there is breach of K.
ii. L – the harm that is caused by breach of K.
1. note: this can take into account non-pecuniary harms
iii. B – socially optimal level of investment
c. critique: assumes no externalities – no benefits or costs to anybody but buyer/seller.
d. Efficient Precautions (deterrence and precautions in general) is a tort notion.
3. Efficient Insurance:
a. ensure risk-averse buyer is in same position whether or not there is breach – either gets
performance of K or expectation damages (predictable outcome)
i. risk-preferring buyers prefer supra-compensatory damages (but they should go
buy a lottery ticket instead) (Craswell’s argument)
ii. risk-neutral buyers don’t care; expectation damages is fine for them.
b. Encourage K formation and efficient allocation of risk
c. critique: values desires of risk-averse buyers above those of risk-preferring buyers.
d. rationale: insurance only against pecuniary harms
i. people not risk-averse w/ respect to non-pecuniary harms (i.e. hurt feelings due to
breach)
ii. thus don’t force people to buy insurance against non-pecuniary harms (breach) by
awarding supra-compensatory damages
b. Critiques of Expectation Damages and Efficient Breach
i. Coase Theorem – allocation of a legal right will not affect efficiency if transaction costs are zero; the
highest value user will end up with widget at the end of the day.
1. rationale: argues against expectation measure of damages (particularly efficient breach); measure
of damages really doesn’t matter
2. note: this model depends on transaction costs being zero but so does efficient breach.
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ii. Litigation Costs: Posner / Efficient Breach assumes this is costless – this might not be true.
iii. Renegotiation: this might make more sense than efficient breach; still get widget to highest value user,
allow original buyer to share in the extra profit. Avoid litigation costs.
iv. Expectation Damages are sometimes inaccurate:
1. See Hadley – awarded less than expectation measure of damages; under-compensatory damages
when you want to incentivize non-breaching party to take efficient precautions
a. encourage information exchange by creating threat of loss of compensation
b. concern: if this is applied to mass markets (i.e. FedEx instead of Hadley)
2. if they can’t be accurately determined (too speculative) then all you get is reliance. burden of proof
is on non-breaching party.
3. efficient breach assumes that expectation measure of damages can actually be determined and
awarded
c. specific performance:
i. Coase Theorem supports this; enforce the K and, with zero transaction costs, let parties determine how
much the breach is worth. Increases certainty.
1. critique: negotiations still required – what if they break down?
ii. Schwartz – ‘The Case for Specific Performance’ – courts often award under-compensatory damages;
award specific perf to protect interests and because non-breaching party has better information than court
about how much damage is sustained.
1. but: may create an incentive for parties to seek specific performance (supra-compensatory
damages) even when court could provide compensatory damages
2. loss of efficiency: breakdown in bargaining could lead to inefficient result
3. transaction costs: bargaining costs may exceed court transaction costs in determining
compensatory damages
iii. Efficient Precautions: if potentially breaching party is worried about specific performance (and possible
supra-compensatory damages) that might increase K price.
d. Reliance: not inconsistent with freedom of K; designed to effectuate intent of parties.
e. Liquidated Damages: striking down liquidated damages clauses as penalties under §356(1) is paternalistic; goes
against freedom of K – especially in commercial settings where clause is figured into K price.
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