INDEX OF
CONTRACT
PROFESSOR ALISON MORANTZ
Autumn Quarter 2011
Stanford Law School
Prepared by Hans Andersson
THE RÉGIME
1
Sources................................................................................................................................ 1
Common Law & Restatement
Uniform Commercial Code
Fundaments ........................................................................................................................ 1
Justice in Process
“The Statute Of Frauds” (A Misnomer) (UCC 2–201)
Justice in Outcome
FORMATION BARGAINWISE
1
Offer ................................................................................................................................... 1
Invitation & Option
Advertisement
Revocability & Irrevocability
Terms
Acceptance.......................................................................................................................... 1
Reciprocity & Inducement
Insufficient Considerations
Options, Performance, Completion
Forms of Expression
Rejection ............................................................................................................................. 1
Forms of Expression
Validation ........................................................................................................................... 1
From Formalism to Fair Dealing
Mutuality of Obligation
FORMATION OTHERWISE
1
Implied Contract ................................................................................................................ 1
Contract Implied in Law (Quasi-Contract)
Contract Implied in Fact
Equitable Recompense....................................................................................................... 1
Unjust Enrichment
Detrimental Reliance
Moral Obligation & Moral Consideration
Value per not Cost but Receipt
DEFECT
1
Party .................................................................................................................................... 1
Incapacity
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Substance ............................................................................................................................ 2
Ambiguity
Indefiniteness
Form ................................................................................................................................... 2
Unfinished & Duplicated
MISTAKE
2
Materiality........................................................................................................................... 2
Allocation of Risk
Substance / Value
Voidability .......................................................................................................................... 2
Mistake Bilateral
Mistake Unilateral
Bearing the Risk of Mistake
Reaffirmation
Deception & Fraud ............................................................................................................ 2
Degrees of Effort
Material Misrepresentation
Voidability & Recovery
Coercion ............................................................................................................................. 2
Duress, Improper Threat, Undue Influence, Overpersuasion
EXECUTION
2
Delineation ......................................................................................................................... 2
Integration & Parol
Interpretation ..................................................................................................................... 2
Grounds for Interpretation
Coordination ...................................................................................................................... 2
Dependence, Independence, Concurrence
Subdivision ......................................................................................................................... 2
Breaking Down the Contract
Modification ....................................................................................................................... 2
New Undertaking, New Consideration
Substitution
Unforeseeable Changes in Circumstance
AVOIDANCE
2
Conditionality .................................................................................................................... 2
Conditionality, Promise, Duty, Avoidance
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Excuse
Performance Strict/Substantial & Forfeiture
Unconscionability .............................................................................................................. 3
A Nod to Equity
Recission
Restitution
Legality ................................................................................................................................ 3
In Pari Delicto
Statute & Policy
Toward Constraint of Opportunism
FALTERING & FAILING
3
Happenstance ..................................................................................................................... 3
Strategies in Case of Disappointment
Discharge of Duties
Breach ................................................................................................................................. 3
Overview
Repudiation & Anticipation
Failure to Perform
Forfeiture
Self Help: Affirmative & Defensive
REMEDY
3
Posture ................................................................................................................................ 3
Predisposing the Outcome
Offenses .............................................................................................................................. 3
Damages
Specific Performance
Defenses.............................................................................................................................. 3
Circumstances
Mitigations
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THE RÉGIME
Sources
COMMON LAW & RESTATEMENT
Harvard Law School Library
“Restatements are highly regarded distillations of common law. They are prepared by the
American Law Institute (ALI), a prestigious organization comprising judges, professors, and
lawyers. The ALI's aim is to distill the ‘black letter law’ from cases to indicate trends in common
law, and occasionally to recommend what a rule of law should be. In essence, they restate existing
common law into a series of principles or rules.”
UNIFORM COMMERCIAL CODE
Duke Law School Research Guide to the UCC
“The Uniform Commercial Code (UCC), a comprehensive code addressing most aspects of
commercial law, is generally viewed as one of the most important developments in American law.
… The UCC is a model code, so it does not have legal effect in a jurisdiction unless UCC
provisions are enacted by the individual legislatures as statutes. Currently, the UCC, in whole or
in part, has been enacted, with some local variation, in all 50 states, the District of Columbia, and
the Virgin Islands.”
Fundaments
JUSTICE IN PROCESS
Objectivity
We care not about what people think (subjective) but only what a reasonable person should infer
from their actions and words.
“Whether there is assent is determined by asking whether a reasonable person in the position of
one party would believe that the words and conduct of the other party constituted. This is usually
a question of fact for the trier of fact. However, if reasonable persons can reach only one
reasonable conclusion, it is a question of law for the court.”
Embry v. Hargadine, McKittrick Dry Goods, 127 Mo. App. 383 (1907)
In so far as their intention is an influential element, it is only such intention as the words or acts
of the parties indicate; not one secretly cherished which is inconsistent with those words or acts.
It is said that the meeting of minds, which is essential to the formation of a contract, is not
determined by the secret intention of the parties, but by their expressed intention, which may
be wholly at variance with the former.
Good Faith & Fair Dealing
Restatement § 205
The Duty of Good Faith and Fair Dealing is a basic, unwaivable standard for abiding by
community norms of decency, honesty, fairness, &c, encompassing:
• Not threatening to bring lawsuit you know is completely bogus to extort
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• Not taking advantage of midstream vulnerability of the other party to extort
• Not exploiting a loophole to profit unduly from a market opportunity at the other party’s
expense
• Not “slacking off” by making no effort to market a product you have been granted an exclusive
right to market
• Not acting like a total jerk and making it extremely hard for the other party to perform, albeit
without violating the letter of the contract
“THE STATUTE OF FRAUDS” (A MISNOMER) (UCC 2–201)
Contracts falling within the purview of the Statute of Frauds require for enforcement some
stipulated formality beyond mere consideration.
- contracts that cannot possibly be fully and properly performed within one year [this provision
removed in 2003]—a provision deriving from the common law
- sale of goods worth over $500 ($5000 under the new UCC)
- sales of interest in land
- specialized contracts, such as marriage, suretyship, etc
The typical requirements are that the contract be in writing and signed by the parties (writing,
however, usually includes all such documentary evidence as video or audio recordings).
A written “contract” may encompass several documents relating clearly to a single transaction; past (partial)
performance may constitute an exception to the requirement of writing.
See Restatement § 110.
For usage with Promissory Estoppel, see also Restatement § 139.
JUSTICE IN OUTCOME
Unjust Enrichment
Courts work to prevent unjust enrichment, especially in cases of moral obligation, contract in law,
and promissory estoppel.
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FORMATION BARGAINWISE
Offer
INVITATION & OPTION
A mere invitation to bargain is no proper offer, which requires that a reasonable person in the
position of the offeree, given the specific words the offeror utters and the context in which they are
uttered (course of negotiations, prior dealings between the parties, customary trade practice, etc.)
would construe those words to indicate that the offeror intended to bestow upon the offeree the
power to bind him by “accepting”.
Restatement § 24
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another
person in understanding that his assent to that bargain is invited and will conclude it.
Restatement § 26
“knows or has reason to know that the person does not intend to conclude a bargain”
Restatement § 87
[Likelihood of delay between offer and acceptance creates an option when, during this time, the
offeree relies detrimentally on the offer. The offer binds only to the extent necessary to avoid
injustice.]
An offer is binding as an option contract if it is in writing and signed, recites purported
consideration, and proposes an exchange on fair terms within a reasonable time.
An offer which should reasonably induce action or forbearance before acceptance and which
does so is binding as an option contract to the extent necessary to avoid injustice.
Observe that charities are generally thought, as a matter of law, to rely to their detriment upon pledges to
donate.
Nonbinding Options
Options offered for consideration (see supra) bind the offeror from revocation; however, a mere
promise to maintain an option is insufficient.
ADVERTISEMENT
“Prove Me Wrong” as Offer
Leonard v. Pepsico, 88 F. Supp. 2d 116 (1999)
If a person chooses to make extravagant promises … he probably does so because it pays him to
make them, and, if he has made them, the extravagance of the promises is no reason in law why he
should not be bound by them. Carlill v. Carbolic Smoke Ball, 1 Q.B. 256 (Court of Appeal, 1892).
Advertisement as Offer
Leonard v. Pepsico, 88 F. Supp. 2d 116 (1999)
It is possible to make an offer by an advertisement directed to the general public, but there must
ordinarily be some language of commitment or some invitation to take action without further
communication.
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Lefkowitz v. Great Minneapolis Surplus Store, 251 Minn. 188 (1957)
[To constitute an offer, an advertisement must include all the information necessary to determine
the value of an object.]
[Normally, s]uch advertisements have been construed as an invitation for an offer of sale on the
term stated, which offer, when received, may be accepted or rejected and which therefore does
not become a contract of sale until accepted by the seller
The authorities […] emphasize that, where the offer is clear, definite, and explicit, and leaves
nothing open for negotiation, it constitutes an offer, acceptance of which will complete the
contract.
The test of whether a binding obligation may originate in advertisements addressed to the general
public is “whether the facts show that some performance was promised in positive terms in
return for something requested”. (1 Williston Contracts, Revised, § 27)
REVOCABILITY & IRREVOCABILITY
Firm Offer
UCC 2–205
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance
that it will be held open is not revocable, for lack of consideration, during the time stated or if no
time is stated for a reasonable time, but in no event may such period of irrevocability exceed three
months; but any such term of assurance on a form supplied by the offeree must be separately
signed by the offeror.
Voluntary Withdrawal
Ever-Tite Roofing Corp v. Green, 83 So. 2d 449 (1955)
The general rule of law is that an offer proposed may be withdrawn before its acceptance and that
no obligation is incurred thereby. This is, however, not without exceptions.
Death
Restatement § 36
Death of the offeree revokes the offer.
Offer to Buy/Sell Goods
UCC 2–205
An offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance
that it will be held open is irrevocable, for lack of consideration, during stated or reasonable
time.
Automatic Termination
Ever-Tite Roofing Corp v. Green, 83 So. 2d 449 (1955)
What is a reasonable time [before automatic termination] is a question of fact depending on the
nature of the contract proposed, the usages of business and other circumstances of the case
which the offeree at the time of his acceptance either knows or has reason to know.
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Commercial Advertisements
Lefkowitz v. Great Minneapolis Surplus Store, 251 Minn. 188 (1957)
While an advertiser has the right at any time before acceptance to modify his offer, he does not
have the right, after acceptance, to impose new or arbitrary conditions not contained in the
published offer.
See Restatement § 46: Revoke advertisements with advertisements.
TERMS
Unilateral & Bilateral
A bilateral contract is a promise for a promise; a unilateral contract is a promise that invites
acceptance by completed performance. Essentially, a unilateral contract gives the potential offeree
the power to accept and perform all at once.
Offeror is Master of the Offer
Pay attention to the requested/invited form of acceptance. See Restatement § 50, enumerating the
forms. Normally, the offer is accepted the moment the recipient posts the letter of acceptance. An
offeror, however, may always make the formation of the contract which he proposes dependent
upon the actual communication to himself of the acceptance.
Fixed & Definite
Lonergan v. Scolnick, 129 Cal. App. 2d 179 (1954)
The language used by the defendant in his letters […] rather clearly discloses that they were not
intended as an expression of fixed purpose to make a definite offer, and was sufficient to advise
the plaintiff that some further expression of assent on the part of the defendant was necessary.
The statement that he expected to have a buyer in the next week or so indicated that the
defendant indented to sell to the first-comer, and was reserving the right to do so.
Restatement § 33
“terms reasonably certain”
Varieties of Acceptance Invited
Before analyzing any (purported) acceptance, clarify which method of acceptance was
invited/tendered:
- Promise only (Lonergan)
- Promise or performance (Ever-Tite)—tendering a beginning of performance constitutes a promise
to finish performance
- Performance only (Glover)—tendering a beginning of performance creates an option contract to
finish performance (? right)
See Restatement §§ 30 & 32.
Implying Condition of Performance Only
Some contracts require acceptance by performance only:
- bilateral contracts, in which one side’s ability to perform is uncertain
- rewards offered to the public or a group (unilateral contracts)
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-“prove me wrong” rewards offered to the public (unilateral contracts)
UCC 2–206
“Unless otherwise unambiguously indicated,” an offer “shall be construed as inviting acceptance in
any manner and by any medium reasonable in the circumstances”.
Acceptance
RECIPROCITY & INDUCEMENT
In the typical bargain, the consideration and the promise bear a reciprocal relation of motive or
inducement: the consideration induces the making of the promise and the promise induces the
furnishing of the consideration.
Restatement § 19
We do require manifestation of mutual assent.
Restatement § 71
To constitute consideration, a performance or a return promise must be bargained for.
Sufficient Consideration
Performance/consideration may consist of
(1) an act other than a promise,
(2) a forbearance,
(3) the creation, modification, or destruction of a legal relation.
We Care Neither For Values of Things Exchanged…
We need not consider gain, advantage, benefit, loss, disadvantage, detriment, equivalence, or
mutuality [of substance (but mutuality of obligation is necessary)].
See Restatement § 79.
Hamer v. Sidway, 124 N.Y. 538 (1891)
Courts will not ask whether the thing which forms the consideration does in fact benefit the
promisee or a third party or is of any substantial value to any one. It is enough that something is
promised, done, forborne, or suffered by the party to whom the promise is made as consideration
for the promise made to him.
Consideration means not so much that one party is profiting as that the other abandons some
legal right in the present or limits his legal freedom of action in the future as an inducement for
the promise of the first.
…Nor for Secret Intentions
Embry v. Hargadine, McKittrick Dry Goods, 127 Mo. App. 383 (1907)
In so far as their intention is an influential element, it is only such intention as the words or acts
of the parties indicate; not one secretly cherished which is inconsistent with those words or acts.
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It is said that the meeting of minds, which is essential to the formation of a contract, is not
determined by the secret intention of the parties, but by their expressed intention, which may
be wholly at variance with the former.
INSUFFICIENT CONSIDERATIONS
Nominal/Sham Consideration
In re Greene, 45 F.2d 428 (1930)
A man may promise to make a gift to another, and may put the promise in the most solemn and
formal document possible; but, barring exceptional cases, such, perhaps, as charitable
subscriptions, the promise will not be enforced.
The parties may shout consideration to the housetops, yet, unless consideration is actually present,
there is not a legally enforceable contract.
Promise of Charity
Kirksey v. Kirksey, 8 Ala. 131 (1845)
“The promise on the part of the defendant was a mere gratuity [charitable act] and [] action will
not lie for its breach.”
Pre-Existing Duty
King v. Duluth, M. & N. R., 61 Minn. 482 (1895)
A promise of a party to a contract to do, or the doing of, that which he is already under a legal
obligation to do by the terms of the contract is not a valid consideration to support the promise
of the other party to pay an additional compensation for such performance.
In other words, a promise by one party to a subsisting contract to the opposite party to prevent a
breach of the contract on his part is without consideration.
Alaska Packers v. Domenico, 117 F. 99 (1902)
Cites King v. Duluth, M. & N. R. Co., supra.
A party cannot lay the foundation of an estoppel by his own wrong, where the promise is simply a
repetition of a subsisting legal promise.
Conditional Promises
Conditional promises collapse into illusory promises and are, therefore, unenforceable.
Renunciation of Unfounded Claim
Fiege v. Boehm, 123 A.2d 316 (1956)
No promise to forbear to prosecute an unfounded claim [is] sufficient consideration.
The surrender of, or forbearance to assert, an invalid claim by one who has not an
[1] honest and
[2] reasonable belief in its possible validity is not sufficient consideration for a contract.
Not only must the plaintiff have good faith but also must a reasonable man be able to share that good faith.
Modern Restatement accepts just one or the other.
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OPTIONS, PERFORMANCE, COMPLETION
Restatement § 45
Whenever a promise invites acceptance by performance only, an option contract forms as soon as
performance begins, requiring the offeror to keep the offer open for whatever period is
“reasonably” required for the offeree to complete performance.
Optional Performance Binds Performer
Restatement § 62
The “tender or beginning of the invited performance or a tender or beginning of it” operates as an
acceptance and forms a contract (thus obliterating the offeror’s power to revoke).
Here, performance “operates as a promise to render complete performance,” so the offeree is
equally bound.
FORMS OF EXPRESSION
Notification
Restatement § 56
Except as stated in § 69 or where the offer manifests a contrary intention, it is essential to an
acceptance by promise
- either that the offeree exercise reasonable diligence to notify the offeror of acceptance
- or that the offeror receive the acceptance seasonably.
See also Restatement § 54.
When Notification is Unecessary
“No notification is necessary to make such an acceptance effective unless the offer requests” it.
But the contractual duties may be discharged if the offeree
1. “has reason to know that the offeror has no adequate means of learning of the performance
with reasonable promptness” and
2. fails to exercise “reasonable diligence to notify the offeror of acceptance”.
“Mailbox Rule”
Adams v. Lindsell, 106 Eng. Rep. 250 (1818)
The defendants must be considered in law as making, during every instant of the time their letter
was traveling, the same identical offer to the plaintiffs; and then the contract is completed by the
acceptance of it by the letter.
The Restatement generalizes that an acceptance is complete the moment it leaves possession of the accepting
party. The mailbox rule makes an offer complete the moment the response goes into the post, but the
same rule makes a rejection or cancelation complete only upon receipt.
Silence
Silence serves normally not as acceptance but as rejection, though some exceptions apply:
- an offeree takes the benefit of offered services
- the offeror has stated or given the offeree reason to understand that assent may be manifested by
silence or inaction
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- because of previous dealings or otherwise, it is reasonable that the offeree should notify the
offeror if he does not intend to accept
See Restatement § 69.
Ammons v. Wilson, 176 Miss. 645 (1936)
Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance […]
where because of previous dealings or otherwise,
1. the offeree has given the offeror reason to understand that the silence of or inaction is
intended by the offeree as a manifestation of assent, and
2. the offeror does so understand.
Tardiness
“There are three views with respect to a late acceptance. (1) The late acceptance is an offer which
in turn can be accepted only by a communicated acceptance. (2) The original offeror may treat the
late acceptance as an acceptance by unilaterally waiving the lateness. (3) If the late acceptance is
sent in what could plausibly be considered to be a reasonable time, the original offeror has a duty
to so inform the offeree within a reasonable time. Failure to do so creates a contract by silence.”
See Restatement § 70.
Rejection
FORMS OF EXPRESSION
Manifestation of intent not to enter OR definite action inconsistent with intention is termination
of power of acceptance.
Restatement § 36
- rejection or counteroffer
- lapse of time
- revocation
- death or onset of incapacity
Acceptance: Conditional / Grumbling
Conditional acceptance is no acceptance at all, but grumbling acceptance binds.
Counteroffer
Minneapolis & St. Louis Railway v. Columbus Rolling-Mill, 119 U.S. 149 (1886)
A proposal to accept, or an acceptance, upon terms varying from those offered, is a rejection of
the offer, and puts an end to the negotiation, unless the party who made the original offer renews
it, or assents to the modification suggested.
The other party, having once rejected the offer, cannot afterwards revive it by tendering an
acceptance of it.
See Restatement § 39.
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Races: Acceptance & Rejection
“An acceptance dispatched after a rejection has been sent is not effective until received and then
only if received prior to the rejection.”
“When offeree sends acceptance first, but rejection is received before acceptance, the usual holding
is that a contract is formed, but if the offeror relies on the rejection before receiving the
acceptance, the offeree will be estopped from enforcing the agreement.”
See Restatement §§ 42 & 43.
Restatement § 38
Rejection is final.
Irrevocability & Options: Persistence through Rejection
An option holder may complete a contract by communicating his acceptance despite the fact that
he has previously rejected the offer.
Where, however, before the acceptance the offeror has materially changed his position in reliance
on the communicated rejection, as by selling or contracting to sell the subject matter of the offer
elsewhere, the subsequent acceptance will be inoperative.
See Restatement § 37.
Humble Oil & Refining v. Westside Investment, 428 S.W.2d 92 (1968)
A binding option is such a contract (usually unilateral); and an offer in writing, that allows a time
for acceptance (either definite or reasonable) and that is irrevocable by virtue of a statute, is itself a
unilateral contract.
If the original offer is an irrevocable offer, creating in the offeree a binding option, the rule that a
counteroffer terminates the power of acceptance does not apply.
The rule peculiar to offers to the effect that a conditional acceptance is, in itself, in every case, a
rejection of the offer, is not applicable to an option contract, supported by a consideration and
fixing a time limit for election.
Validation
FROM FORMALISM TO FAIR DEALING
Wood v. Lucy, Lady Duff–Gordon, 118 N.E. 214 (1917)
Cordozo, to famous effect: “The law has outgrown its primitive stage of formalism when the precise
word was the sovereign talisman, and every slip was fatal. […] The acceptance [by plaintiff] of the
exclusive agency was an assumption of its duties. […] A promise may be lacking, and yet the whole
writing may be ‘instinct with an obligation’, imperfectly expressed. If that is so, there is a
contract.”
McMichael v. Price, 58 P.2d 549 (1936)
Plaintiff was bound by a solemn covenant of the contract to purchase all the sand he was able to
sell from defendant and fora breach of such covenant could have been made to respond in
damages.
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The argument of defendant that the plaintiff could escape liability under the contract by going out
of the sand business is without force in view of our determination, in line with the authorities
hereinabove cited, that it was the intent of the parties to enter into a contract which would be
mutually binding.
Glover v. Jewish War Veterans, 68 A.2d 233 (1949)
There can be no contract unless the claimant […]
- knew of the offer of the reward and
- acted with the intention of accepting such offer.
If one person expects to buy, and the other to give, there can hardly be found mutual assent.
[If the claimant renders the information sought by an investigator without knowing of the reward,
then] the claiming gives the information not in the expectation of receiving a reward but rather
out of a sense of public duty.
But see Restatement § 51 on continuing to perform after learning about an offer one can thereby accept.
MUTUALITY OF OBLIGATION
The fact that what is bargained for does not of itself induce the making of the promise does not
prevent it from being consideration for the promise.
Lack of Mutuality: One-Sided “Free Way Out”
Rehm–Zeiher v. F. G. Walker, 160 S.W. 777 (Ky. 1913)
Consolidated Pipe Line v. British–American Oil: “The general rule is that in construing a contract
where the consideration on the one side is an offer or an agreement to sell, and on the other side
an offer or agreement to buy, the obligation of the parties to sell and buy must be mutual, to
render the contract binding on either party, or, as it is sometimes stated, if one of the parties, not
having suffered any previous detriment, can escape future liability under the contract, that party
may be said to have a ‘free way out’ and the contract lacks mutuality.”
If, as we think, the contract was nonenforceable by the [supplier], [… then the contract] was
certainly lacking in such mutuality of obligation as rendered it non-enforceable by the
[demander].
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FORMATION OTHERWISE
Implied Contract
CONTRACT IMPLIED IN LAW (QUASI-CONTRACT)
Conditions:
• Conferred measurable benefit on B with beneficiary’s appreciation or knowledge of the benefit
• Expected compensation on the part of A (i.e. A was not a volunteer)
• Although B had no meaningful opportunity to decline, A had a good excuse for failing to
obtain B’s consent; B presumably would have consented if given the chance
• Circumstances make defendant’s retention of the benefit unjust without repayment
In essence, beneficiary would have consented but was unconscious or otherwise unable to do
provide consent and had no chance to do so such that no true contract obtained.
CONTRACT IMPLIED IN FACT
• Defendant’s request to plaintiff to perform
• Plaintiff’s expectation of compensation from defendant for performance
• Objectively reasonable—or actual—knowledge on part of defendant regarding expectation of
compensation
Equitable Recompense
UNJUST ENRICHMENT
Two necessary elements for determining that it would be inequitable for counter-party to retain a
benefit conferred by party without counter-party’s request:
(1) Did party confer a measurable benefit on counter-party with expectation of compensation?
(2) If counter-party retained the benefit after knowing that it had been conferred with expectation
of compensation, did party give counter-party an opportunity to decline the benefit before it
was conferred?
Unjust enrichment is the way of describing the problem to which a quantum meruit is the
solution.
DETRIMENTAL RELIANCE
Promissory Estoppel
“Equitable estoppel … is based upon a representation of existing or past facts, while promissory
estoppel requires the existence of a promise. … Equitable estoppel … is available only as a ‘shield’
or defense, while promissory estoppel can be used as a ‘sword’ in a cause of action for damages.”
The promiser is estopped to deny the absence of consideration. “An equity court possesses some
discretionary power to award damages in order to do complete justice.” This argument is part of a
broader assertion that the primary reason for protecting the expectation interest in bargain
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contracts is to insure that “hidden” reliance, frequently in the form of hard to measure and prove
opportunity costs, is fully compensated.
In short, protecting the expectation interest is a surrogate for protecting reliance in the bargain
contract. Thus, in a non-bargain contract, the assumption should be that the court will protect the
reliance interest, with expectation damages awarded only when necessary to insure that “hidden”
reliance is fully compensated.
See Restatement § 90.
For usage with the Statute of Frauds, see also Restatement § 139.
Ricketts v. Scothorn, 77 N.W. 365 (1898)
But when the payee changes his position to his disadvantage, in [reasonable] reliance on the
promise, a right of action does arise.
An estoppel in pais is defined to be “a right arising from acts, admissions, or conduct which have
induced a change of position in accordance with the real or apparent intention of the party against
whom they are alleged”.
Drennan v. Star Paving, 51 Cal. 2d 409 (1958)
There is no evidence that defendant offered to make its bid irrevocable in exchange for plaintiff’s
use of its figures in computing his bid. Nor is there evidence that would warrant interpreting
plaintiff’s use of defendant’s bid as the acceptance thereof, binding plaintiff, on condition he
received the main contract, to award the subcontract to defendant.
Defendant’s offer constituted a promise to perform on such conditions as were stated expressly or
by implication therein or annexed thereto by operation of law. Defendant had reason to expect
that if hits bid proved the lowest it would be used by plaintiff. It induced action of a definite and
substantial character on the part of the promisee.
Reasonable reliance serves to hold the offeror in lieu of the consideration ordinarily required to
make the offer binding.
MORAL OBLIGATION & MORAL CONSIDERATION
Mere Moral Obligation
Moral obligation concerns such benefit as was not requested by beneficiary; it does not suffice for
present consideration, but reaffirmation of a previous duty invalidated for some reason can bind.
Harrington v. Taylor, 225 N.C. 690 (1945)
However much the defendant should be impelled by common gratitude to alleviate the plaintiff’s
misfortune, a humanitarian act of this kind, voluntarily performed, is not such consideration as
would entitle her to recover at law.
Moral Consideration for Past Material Benefit
Restatement § 86
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.
[Moral consideration is broader than quasi-contract but includes the promise, which makes this
arrangement look more like a contract.]
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Webb v. McGowin, 168 So. 196 (1935)
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.
A moral obligation is 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.
Life and preservation of the body have material, pecuniary values.
VALUE PER NOT COST BUT RECEIPT
The measure of recompense accords with receipt value, not with conferral cost.
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DEFECT
Party
INCAPACITY
Childhood
Minors (of an age of legal incapacity) can contract only for voidable duties.
Incompetence
Restatement § 15
Mental illness regarding the content of a transaction or the manner in which to respond thereto
are grounds for avoidance; however, where the contract is made on fair terms and the sane party is
without knowledge of the mental illness or defect, the power of avoidance under Subsection (1)
terminates to the extent that the contract has been so performed in whole or in part or the
circumstances have so changed that avoidance would be unjust.
Where the sane party knows of the mental illness of the contracting partner, the transaction may
constitute fraud.
Intoxication
Age of legal consent for contracting purposes and for intoxication varies by jurisdiction—what
remains constant is the categories alone.
Lucy v. Zehmer, 196 Va. 493 (1954)
We must look to the outward expression of a person as manifesting his intention rather than to
his secret and unexpressed intention. ‘The law imputes to a person an intention corresponding to
the reasonable meaning of his words and acts.’
The mental assent of the parties is not requisite for the formation of a contract. If the words or
other acts of one of the parties have but one reasonable meaning, his undisclosed intention is
immaterial except when an unreasonable meaning which he attaches to his manifestations is
known to the other party.
Restatement § 16
If the sober party knows that the other is incapacitated by reason of intoxication, the contract is
voidable by the intoxicated person.
Substance
AMBIGUITY
Inter alia, part performance may remove uncertainty toward full enforceability, while action in
reliance may make remedy appropriate despite persistent uncertainty.
Konic International v. Spokane Computer Services, 109 Idaho 527 (1985)
There is no manifestation of mutual assent to an exchange if
- the parties attach materially different meanings to their manifestations and
- neither knows or has reason to know the meaning attached by the other.
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[T]here was no meeting of the minds [….] We conclude that no contract […] was ever formed.
Restatement § 20
“Materially different meanings” preclude the formation of a contract.
INDEFINITENESS
Courts can salvage indefinite contracts—and will often try to do so—by sending to jury or by
deciding on “reasonableness” as a matter of law.
Metro–Goldwyn–Mayer, Inc. v. Scheider, 40 N.Y.2d 1069 (1976)
“[Where] the parties have completed their negotiations of what they regard as essential elements,
and performance has begun on the good faith understanding that agreement on the unsettled
matters will follow, the court will find and enforce a contract even though the parties have
expressly left these other elements for future negotiation and agreement, if some objective method
of determination is available, independent of either party's mere wish or desire. Such objective
criteria may be found in the agreement itself, commercial practice or other usage and custom. If
the contract can be rendered certain and complete, by reference to something certain, the court
will fill in the gaps” (see Restatement §§ 219 on usage customary and habitual, 222 on usage
commercial, 223 on usage in dealings, 230).
Filling the Gaps
If a material term is missing, the court can try to salvage the contract by using
- reasonableness,
- industry standards, (See Restatement §§ 219 on custom and habit, 222 on commerce and trade.)
- prior dealings, (See Restatement 223.)
- &c
as guidelines.
Restatement § 204
The Court can fill material gaps with provisions reasonable given the circumstances.
Good Faith & Fair Dealing
Or the court can try to “read between the lines”, as was the strategy in Lady Duff–Gordon.
McMichael v. Price, 58 P.2d 549 (1936)
Plaintiff was bound by a solemn covenant of the contract to purchase all the sand he was able to
sell from defendant and fora breach of such covenant could have been made to respond in
damages.
The argument of defendant that the plaintiff could escape liability under the contract by going out
of the sand business is without force in view of our determination, in line with the authorities
hereinabove cited, that it was the intent of the parties to enter into a contract which would be
mutually binding.
Form
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UNFINISHED & DUPLICATED
Unfinished or deferred contracts, however, which are more akin to “agreements to contract later”
are harder to enforce.
168th & Dodge v. Rave Reviews Cinemas, 501 F.3d 945 (2007)
No implied contract can exist “where there is an express agreement between the parties relative to
the same subject-matter”.
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MISTAKE
Materiality
ALLOCATION OF RISK
Mistake focuses on the allocation and assumption of risk—no single fact will be dispositive (even
in the case of an “as is” clause, the court can construct the clause against the seller, if the court
thinks it reasonable to do so).
Errors by scriveners, however, are simple problems: we know what the parties intended mutually,
and the court will correct the formal contract accordingly.
SUBSTANCE / VALUE
Mistake regarding only the value of the thing bought or sold affords no viodability.
Sherwood v. Walker, 66 Mich. 578 (1887)
A party who has given an apparent consent to a contract of sale may refuse to execute it, or may
avoid it after it has been completed, if the consent was founded, or the contract made, upon the
mistake of a material fact, — such as
- the subject-matter of the sale,
- the price, or
- some collateral fact materially inducing the agreement;
and this can be done when the mistake is mutual.
Where, in such a case, the thing actually delivered or received is different in substance from the
thing bargained for and intended to be sold, there is no contract; but if it be only a difference in
some quality or accident, even though the mistake may have been the actuating motive to the
purchaser or seller, or both of them, the contract remains binding.
Voidability
MISTAKE BILATERAL
When both parties make mistake regarding the material substance of the contract, the contract is
voidable by the adversely affected party unless he bears the risk of the mistake.
See Restatement § 152.
Lenawee County Board of Health v. Messerly, 417 Mich. 17 (1982)
Both the buyers and the sellers believed that the property was suitable for human habitation
when they entered into the land sale contract. Both parties were blameless because neither the
sellers nor the buyers knew of the defective septic system. The court was faced with two equally
innocent parties and concluded that the risk should be allocated to the buyers.
The parties’ land sale contract also contained an “as is” provision allocating the risk to the buyers.
MISTAKE UNILATERAL
If one party makes an adverse mistake such that
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- enforcement would be unconscionable and/or
- the other party knew of the mistake,
the disadvantaged party may void the contract.
See Restatement § 153.
Donovan v. RRL Corp, 26 Cal. 4th 261 (2001)
Rescission was warranted here because the evidence established that
- defendant’s unilateral mistake of fact was made in good faith,
- defendant did not bear the risk of the mistake, and
- enforcement of the contract with the erroneous price would be unconscionable.
BEARING THE RISK OF MISTAKE
Restatement § 154
- he affirms the allocation to himself,
- he is aware of limitations of his knowledge regarding the facts about which he makes mistake,
- circumstances reasonably place the risk upon him
Restatement § 157
Fault, short of fraud (&c), in mistake bears no relation to the allocation of the risk.
REAFFIRMATION
Restatement § 85
Reaffirming a voidable contract binds the promisor anew.
Deception & Fraud
DEGREES OF EFFORT
Affirmative misrepresentation (lying) is fraudulent.
Affirmative concealment is equally fraudulent.
Negative failure to disclose is just that—it may be fraudulent or not, depending on the case.
Understand that fraud must be viewed relative to the capacity of the victim to detect it before entering the
fraudulent contract—even given fraud in the factum, if the defrauded person was negligent, the court may
choose to enforce the terms of the contract.
MATERIAL MISREPRESENTATION
Restatement § 162
Misrepresentation is fraudulent under certain conditions.
Mere Opinion
Vokes v. Arthur Murray, Inc., 212 So. 2d 906 (1968)
Generally, a misrepresentation, to be actionable, must be one of fact rather than of opinion.
See Restatement § 168.
But see Restatement § 173 concerning opinion in fiduciary relationships.
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False Assertion
Restatement § 159
“A misrepresentation is an assertion that is not in accord with the facts.”
The effect of such an assertion by one party including another to enter into a contract may be to
provide the latter with a tort claim for damages, or alternatively, the aggrieved party may sue to
rescind the contract because of the other’s deceptive language or conduct.
The misrepresentation may be fraudulent or innocent. [… T]he usual effect of wrongful
misrepresentation
is to render the contract “voidable”,
but courts have identified a kind of fraud in the “execution” which
precludes the formation of any contract at all[: for example,] where a party secures
another’s signature by misrepresenting the character of the document.
Duty to Disclose
A statement may be true with respect to the facts stated, but may fail to include qualifying matters
necessary to prevent the implication of an assertion that is false with respect to other facts.
See Restatement §§ 160, 161.
Hill v. Jones, 151 Ariz. 81 (1986)
Where a misrepresentation is fraudulent or where a negligent misrepresentation is one of material
fact, the policy of finality rightly gives way to the policy of promoting honest dealings between the
parties. Under certain circumstances, nondisclosure of a fact known to one party may be
equivalent to the assertion that the fact does not exist.
[Whether a fact is material and, therefore, subject to mandatory disclosure is a question of fact.]
Vokes v. Arthur Murray, Inc., 212 So. 2d 906 (1968)
“Generally, a misrepresentation, to be actionable, must be one of fact rather than of opinion.” […]
[This statement of law] does not apply where
- there is a fiduciary relationship between the parties, or
- there has been some artifice or trick employed by the representor, or
- the parties do not in general deal at “arm’s length” as we understand the phrase, or
- the representee does not have equal opportunity to become apprised of the truth or falsity of the
fact represented.
Even in contractual situations where a party to a transaction owes no duty to disclose facts within
his knowledge or to answer inquiries respecting such facts, the law is if he undertakes to do so he
must disclose the whole truth.
Restatement § 161
1. Disclosure is necessary to prevent a previous assertion from being a misrepresentation or from
being fraudulent or material;
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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.
VOIDABILITY & RECOVERY
Restatement § 164
If a party’s manifestation of assent is induced by either a fraudulent or material misrepresentation
by the other party upon which the recipient is justified in relying, the contract is voidable by the
recipient.
Materiality concerns whether the substance bears on assent—if misrepresentation is not fraudulent, then to
create voidability, the innocent misrepresentation must be material.
Contrast Restatement § 163.
Statutory Treatment: UDAP & RICO
Many States address “unfair and deceptive acts or practices”, though the laws vary. Common
features are [1] vague criteria and [2] private remedy.
On October 15, 1970, Congress enacted the Racketeer Influenced and Corrupt Organizations
Act—among the key provisions is that which allows a private litigant to recover treble damages,
costs and attorney fees if it is established that the form of fraud constitutes a “pattern of
racketeering activity” cognizable under the statute. […] The widespread use of RICO by civil
plaintiffs, particularly when using state and federal fraud statutes to satisfy the statute’s predicate
acts requirement, has generated heated controversy.
Coercion
DURESS, IMPROPER THREAT, UNDUE INFLUENCE, OVERPERSUASION
Restatement § 175
1. If a party’s manifestation of assent is induced by an improper threat by the other party that
leaves the victim no reasonable alternative, the contract is voidable by the victim.
2. If a party’s manifestation of assent is induced by one who is not a party to the transaction, the
contract is voidable by the victim unless the other party to the transaction in good faith and
without reason to know of the duress either gives value or relies materially on the transaction.
[The wrongfulness of the coercer’s conduct must be related to the unreasonableness of the
alternatives which he presents to the weaker party, and the inherent wrongfulness of either
alternative is relevant only insofar as it shows the unreasonableness of the alternatives.]
Restatement § 176
Always improper:
• crime or tort
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• criminal prosecution
• use of civil process in bad faith
• breach of good faith and fair dealing under existing contract
Improper on unfair terms:
• harm the recipient without benefiting the threatener
• inducement of assent from previous breach of good faith and fair dealing
• use of power to illegitimate ends
[Threat of breach of contract, even toward inducement of modification, is not necessarily
improper threat, in particular when underlying conditions have shifted.]
UCC § 2–209
“Under this provision of the UCC the extortion of a modification without a legitimate
commercial reason is ineffective as a violation of the good faith provisions of the Code.
Conversely, a modification based upon a legitimate commercial reason does not constitute duress
unless undue coercion is applied. Nor, under this provision, can a mere technical consideration
support a modification extracted in bad faith.”
Odorizzi v. Bloomfield School District, 246 Cal. App. 2d 123 (1966)
Undue influence is a shorthand legal phrase used to describe persuasion which tends to be
coercive in nature, persuasion which overcomes the will without convincing the judgment. The
hallmark of such persuasion is high pressure, a pressure which works on mental, moral, or
emotional weakness to such an extent that it approaches the boundaries of coercion. In this sense,
undue influence has been called overpersuasion. Misrepresentations of law or fact are not essential
to the charge, for a person’s will may be overborne without misrepresentation. […] While most
reported cases of undue influence involve persons who bear a confidential relationship to one
another, a confidential relationship between the parties need not be present when the undue
influence involves unfair advantage taken of another’s weakness or distress.
Overpersuasion is generally accompanied by certain characteristics which tend to create a pattern.
The pattern usually involves several of the following elements:
(1) discussion of the transaction at an unusual or inappropriate time,
(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.
See also Restatement § 177 on undue influence.
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EXECUTION
Delineation
INTEGRATION & PAROL
Restatement § 209–210, 212–217
If a contract is not integrated, then evidence extrinsic to the writing of other agreed terms will be
admitted under the usual rules of evidence; else, then some agreed terms extrinsic to the writing
may be excluded by the so-called parol evidence rule.
An integrated agreement discharges prior (and contemporaneous) agreements inconsistent and,
if the integration is complete, prior (and contemporaneous) agreements within the scope of the
new one. Courts permit evidence of additional terms only when integration is incomplete.
By comment (b) of § 212, of course, we must admit all evidence relevant to establishing whether,
in the first place, the terms are ambiguous; afterward, we can admit evidence disambiguating the
terms.
Parties who agree to an agreement only on condition of some additional oral term bind themselves
to that oral term regardless of the completeness of written integration.
Subsequent statements are altogether another matter.
See also UCC 2–202.
Mitchill v. Lath, 247 N.Y. 377 (1928)
The parol evidence rule applies to attempts to modify such a contract by parol not to a parol
collateral contract distinct from and independent of the written agreement.
Before an oral agreement is received to vary a written contract at least three conditions must exist:
(1) the agreement must in form be a collateral one;
(2) it must not contradict express or implied provisions of the written contract; and
(3) it must be one that parties would not ordinarily be expected to embody in the writing.
Or, put in another way, an inspection of the written contract, read in the light of surrounding
circumstances, must not indicate that the writing appears to contain the engagements of the
parties, and to define the object and measure the extent of such engagement.
Or again, it must not be so clearly connected with the principal transaction as to be part and parcel
of it.
Interpretation
GROUNDS FOR INTERPRETATION
The Plain-Meaning Test
Many courts still apply the “plain meaning test”: When parties set down their agreement in a clear,
complete document, their writing should as a rule be enforce according to its terms. “Extrinsic and
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parol evidence is not admissible to create an ambiguity in a written agreement which is [otherwise]
complete and clear and unambiguous upon its face.”
A Postmodern Rebuttal: Context & Interpretation
Pacific Gas & Electric v. G. W. Thomas Drayage & Rigging, 69 Cal. 2d 33 (1968)
Words […] do not have absolute and constant referents. […] The meaning of particular words or
groups of words varies with the verbal context and surrounding circumstances and purposes in
view of the linguistic education and experience of their users and their hearers or readers (not
excluding judges). A word has no meaning apart from these factors; much less does it have an
objective meaning, one true meaning.
A rule that would limit the determination of the meaning of a written instrument to its fourcorners merely because it seems to the court to be clear and unambiguous would either deny the
relevance of the intention of the parties or presuppose a degree of verbal precision and stability our
language has not attained.
Siding with One Party
Frigaliment Importing v. B.N.S. International Sales, 190 F. Supp. 116 (1960)
Defendant’s subjective [understanding] would [be insignificant] if [it] did not coincide with an
objective meaning of [the term in question].
Restatement § 201
[We attach to a term in a contract the meaning that one of the parties understood
(i) if that party knew of no other meaning while the other party knew of the first meaning or
(ii) if that party had no reason to know of another meaning while the other party did have reason
to know the first meaning.]
Restatement § 206
In choosing among the reasonable meanings of a promise or agreement or a term thereof, that
meaning is generally preferred which operates against the party who supplies the words or from
whom a writing otherwise proceeds.
Special Usage/Meaning in Trade
Frigaliment Importing v. B.N.S. International Sales, 190 F. Supp. 116 (1960)
When one of the parties is not a member of the trade or other circle, his acceptance of the
standard must be made to appear by proving
- either that he had actual knowledge of the usage
- or that the usage is so generally known in the community that his actual individual knowledge
of it may be inferred.
Other Helps
Restatement §§ 202, 203
Toward a meaning “reasonable, lawful, and effective”.
express terms > course of performance > course of dealing > usage of trade
supplemental terms > standardized terms
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Admissibility of Extrinsic Evidence
Pacific Gas & Electric v. G. W. Thomas Drayage & Rigging, 69 Cal. 2d 33 (1968)
The test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not
whether it appears to the court to be plain and unambiguous on its face, but whether the offered
evidence is relevant to prove a meaning to which the language of the instrument is reasonably
susceptible. […] Rational interpretation requires at least a preliminary consideration of all credible
evidence offered to prove the intention of the parties.
Although extrinsic evidence is not admissible to add to, detract from, or vary the terms of a written
contract, these terms must first be determined before it can be decided whether or not extrinsic
evidence is being offered for a prohibited purpose. The fact that the terms of an instrument
appear clear to a judge does not preclude the possibility that the parties chose the language of
the instrument to express different terms.
Coordination
DEPENDENCE, INDEPENDENCE, CONCURRENCE
Promises
Promises are (1) independent, if the parties intend that performance by each is in no way
conditioned upon performance by the other, or (2) dependent, if the parties intend performance
by one to be conditioned upon performance by the other.
Relations of promise dependence:
(a) precedent—a promise that to be performed before the counterpart promise
(b) subsequent—a promise to be performed after the counterpart promise
(c) concurrent—promises to be performed simultaneously by parties bound respectively to perform
both sides
Courts may infer dependence even when the relationship is not express on the terms of the
contract.
Performance
Restatement § 234
(1) Performance should be simultaneous [except in case of express contraindication].
When performance is to be simultaneous, one party cannot claim breach unless he has begun to tender his own
performance, since the contractual obligations of neither party attach before those counterpoised.
(2) Where performance by only one party requires a period of time, his performance is, except in
case of express contraindication, due beforehand.
Subdivision
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BREAKING DOWN THE CONTRACT
Tit for Tat (Severability)
Lowy v. United Pacific Insurance, 67 Cal. 2d 87 (1967)
A contract under which the whole performance is divided into two sets of partial performance,
each part of each set being the agreed exchange for a corresponding part of the set of
performances to be rendered by the other promisor, is called a divisible contract. A contract is
divisible where by its terms, performance of each party is divided into two or more parts, and the
number of parts due from each party is the same, and the performance of each part by one party
is the agreed exchange for a corresponding part by the other party.
In the case of a building contract where the owner has taken possession of the building and is
enjoying the fruits of the contractor’s work in the performance of the contract, if there has been a
substantial performance thereof by the contractor in good faith, if the failure to make full
performance can be compensated in damages to be deducted from the price or allowed as a
counterclaim, and if the omissions and deviations were not wilful or fraudulent and do not
substantially affect the usefulness of the building or the purpose for which it was intended, the
contractor may, in an action upon the contract, recover the amount of the contract price
remaining unpaid, less the amount allowed as damages for the failure of strict performance.
Bit by Bit
Britton v. Turner, 6 N.H. 481 (1834)
If a special contract for labor is made and a party actually receives labor, and thereby derives a
benefit and advantage over and above the damage which has resulted from the breach of the
contract by the other party, the labor actually done furnishes a new consideration, and the law
thereupon raises a promise to pay to the extent of the reasonable worth of such excess. This may
be considered as making a new case, one not within the original agreement, and the party is
entitled to recover on his new case, for the work done, not as agreed, but yet accepted by the
defendant.
It is easy, if parties so choose, to provide by an express agreement that nothing shall be earned, if
the laborer leaves his employer without having performed the whole service contemplated, and
then there can be no pretense for a recovery if he voluntarily deserts the service before the
expiration of the time.
Modification
NEW UNDERTAKING, NEW CONSIDERATION
On Preexisting Duty
Levine v. Blumenthal, 186 A. 457 (1936)
The subsequent agreement, to impose the obligation of a contract, must rest upon a new and
independent consideration.
A promise to do what the promisor is already legally bound to do is an unreal consideration. Yet
any consideration for the new undertaking, however insignificant, satisfies this rule. […] The test is
whether there is an additional consideration adequate to support an ordinary contract and
[beyond that] which the debtor was [] legally bound to do or give.
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Alaska Packers v. Domenico, 117 F. 99 (1902)
Cites King v. Duluth, M. & N. R. Co., supra.
No astute reasoning can change the plain fact that the party who refuses to perform, and thereby
coerces a promise from the other party to the contract to pay him an increased compensation for
doing that which he is legally bound to do, takes an unjustifiable advantage of the necessities of
the other party.
SUBSTITUTION
Performance
See Restatement § 278.
Contract
See Restatement § 279.
UNFORESEEABLE CHANGES IN CIRCUMSTANCE
King v. Duluth, M. & N. R., 61 Minn. 482 (1895)
What unforeseen difficulties and burdens will make a party’s refusal to go forward with his
contract equitable, so as to take the case out of the general rule and bring it within the exception,
must depend upon the facts of each particular case. They must be
- substantial,
- unforeseen, and
- not within the contemplation of the parties when the contract was made.
They need not be such as would legally justify the party in his refusal to perform his contract,
unless promised extra pay, or to justify a court of equity in relieving him from the contract; for
they are sufficient if they are of such a character as to render the party’s demand for extra pay
manifestly fair, so as to rebut all inference that he is seeking
- to be relieved from an unsatisfactory contract, or
- to take advantage of the necessities of the opposite party to coerce from him a promise for further
compensation.
Angel v. Murray, 322 A.2d 630 (1974)
The courts will not enforce an agreement that has been procured by coercion or duress and will
hold the parties to their original contract regardless of whether it is profitable or unprofitable.
[Section 89D(a)] enforces a modification if the parties voluntarily agree and if
(1) the promise modifying the original contract was made before the contract was fully performed
on either side,
(2) the underlying circumstances which prompted the modification were unanticipated by the
parties, and
(3) the modification is fair and equitable.
The modern trend appears to recognize the necessity that courts should enforce agreements
modifying contracts when unexpected or unanticipated difficulties arise during the course of the
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performance of a contract, even though there is no consideration for the modification, as long as
the parties agree voluntarily.
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AVOIDANCE
Conditionality
CONDITIONALITY, PROMISE, DUTY, AVOIDANCE
Restatement § 224
A condition is an event, not certain to occur, which must occur, unless its nonoccurrence is
excused, before performance under a contract becomes due.
Restatement § 225(3)
Nonoccurrence of a condition is not a breach by a party unless he is under a duty that the
condition occur.
Precedence/Subsequence
- Conditions precedent are those as must occur before the contract enters into effect.
- Conditions subsequent are those the occurrence of which discharge the contractual duty.
The primary importance of this distinction lies in procedure and in burdens of pleading and
proof.
Promise/Condition
In the terms of a contract, if a phrase is…
- a matter simply of convenience, then nonoccurrence nohow affects parties’ rights or duties.
- a promise only, then nonoccurrence constitutes breach and triggers liability for damages, though
substantial compliance might be good enough.
- a condition only, then nonoccurrence constitutes no breach, but performance must comply
strictly with the condition to obtain the return duty.
- both promise and condition, then nonoccurrence by the strictest interpretation both constitutes
breach and discharges return duties.
EXCUSE
Clark v. West, 193 N.Y. 349 (1908)
Waiver is the intentional relinquishment of a known right.
Waiver
Waiver can arise from a party’s…
- election to perform in spite of conditions that should have discharged the duty.
- assurance (viz. not to enforce a condition) that induces other party’s detrimental reliance
producing material change in position (estoppel prevents the party from renewing the condition).
- statement—after other party’s performance—that the condition will not be enforced.
Clark v. West, 193 N.Y. 349 (1908)
If the words and acts of a party reasonably justify the conclusion that with full knowledge of all the
facts it intended to abandon or not to insist upon the particular defense afterwards relied upon,
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a verdict or finding to that effect establishes a waiver, which, if it once exists, can never be
revoked.
A condition precedent can be waived and if so waived expressly, a defendant is clearly not in a
position to insist upon the forfeiture which his waiver was intended to annihilate. The forfeiture
[of the right to insist upon performance] must stand or fall with the condition.
Judicial Discretion toward Equity
Restatement § 229
To the extent that the nonoccurrence of a condition would cause disproportionate forfeiture, a
court may excuse the nonoccurrence of that condition unless its occurrence was a material part of
the agreed exchange.
PERFORMANCE STRICT/SUBSTANTIAL & FORFEITURE
Dove v. Rose Acre Farms, 434 N.E.2d 931 (1982)
A party seeking enforcement of a contract must show that he has done everything the contract
requires of him or that the party against whom he seeks relief received that to which the contract
entitles him.
Clark v. West, 193 N.Y. 349 (1908)
If [a condition] is waived, [then it] is no longer a part of the contract. A defendant still has the
right to counterclaim for any damages which he may have sustained in consequence of plaintiff’s
breach, but he cannot insist upon strict performance.
Dove v. Rose Acre Farms, 434 N.E.2d 931 (1982)
Substantial performance applies where performance of a nonessential condition is lacking, so
that the benefits received by a party are far greater than the injury done to him by the breach of the
other party.
Generally, impossibility of performance is a defense to an action for damages.
Unconscionability
A NOD TO EQUITY
Formation & An Arms Race
Without provision for dealing with unconscionability per se, finding defects in the formation of a
contract in order to void it on broader grounds leads simply to “arms races”—if we want to
invalidate a whole class of contracts, we really have to rely on unconscionability.
Mandatory arbitration clauses are an example: courts were loathe to enforce them, so they sought
defects, but the result was just that employers became increasingly savvy. Eventually, these
contracts and clauses became almost airtight, until direct legislative intervention (at least in
California).
Procedure/Substance
The indicators of procedural unconscionability generally fall into two areas: (1) lack of knowledge,
and (2) lack of voluntariness. We want the reasonable person to have had a reasonable opportunity to
understand and consider the terms of the contract.
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Procedural unconscionability requires generally the following:
1. Imposition without meaningful choice
2. Imposition oppressive
Substantive unconscionability is found when the terms of the contract are of such an oppressive
character as to be unconscionable.
Consider that lopsided agreements, unconscionable in substance though appearing procedurally sound, may
evidence underlying procedural defects.
California alone holds, “A sliding scale is invoked which disregards the regularity of the procedural process of
the contract formation, that creates the terms, in proportion to the greater harshness or unreasonableness of the
substantive terms themselves”.
Adhesion
When the services contracted for are desperately and urgently needed, and the party to perform
the services presents a form without explanation or a reasonable opportunity to read, in
circumstances that make bargaining burdensome or futile, it should not be very difficult to make a
case for procedural unconscionability.
Gratuitous Services
That a party has contracted an obligation entirely unnecessarily may be ground for substantive
unconscionability.
RECISSION
Restatement § 208 (cf. UCC 2-302)
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.
The determination that a contract or term is or is not unconscionable is made in the light of its setting,
purpose, and effect.
An Example: Purchases on Account Pro Rata
Williams v. Walker–Thomas Furniture, 350 F.2d 445 (1965)
[Case concerns purchases such that the title for no item would transfer to the buyer until the
payments for all items were complete.] The effect of this rather obscure provision was to keep a
balance due on every item purchased until the balance due on all items, whenever purchased, was
liquidated.
Unconscionability has generally been recognized to include an
- absence of meaningful choice on the part of one of the parties together with
(In many cases the meaningfulness of the choice is negated by a gross inequality of bargaining
power. […] When a party of little bargaining power, and hence little real choice, signs a
commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely that
his consent, or even an objective manifestation of his consent, was ever given to all the terms.)
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- contract terms which are unreasonably favorable to the other party.
(In determining reasonableness or fairness, the primary concern must be with the terms of the
contract considered in light of the circumstances existing when the contract was made. […]
Corbin suggests the test as being whether the terms are “so extreme as to appear unconscionable
according to the mores and business practices of the time and place”.)
RESTITUTION
The court will attempt to restore both parties to their ex ante state.
Legality
IN PARI DELICTO
If parties to a contract are equally culpable under law, the court may choose simply to leave the
situation as it presents.
STATUTE & POLICY
Restatement § 178
[Unenforceable if legislation so provides.]
[Enumerated factors figure into a balancing test that may serve alternatively to void a contract on
ground of public policy.]
Homami v. Iranzadi, 211 Cal. App. 3d 1104 (1989)
A contract must have a lawful object. (California Civil Code)
If the plaintiff cannot open his case without showing that he has broken the law, the court will not
assist him, whatever his claim in justice may be upon the defendant.
“Whenever the evidence discloses the relations of the parties to the transaction to be illegal and
against public policy, it becomes the duty of the court to refuse to entertain the action.”
“No principle of law is better settled than that a party to an illegal contract cannot come into a
court of law and ask to have his illegal objects carried out; nor can he set up a case in which he
must necessarily disclose an illegal purpose as the groundwork of his claim.”
Facial Legality
Homami v. Iranzadi, 211 Cal. App. 3d 1104 (1989)
Even though a written contract is legal on its face, evidence may be introduced to establish its
illegal character. And if the substance of the transaction is illegal, it matters not when or how the
illegality is raised in the course of the lawsuit.
TOWARD CONSTRAINT OF OPPORTUNISM
Opportunistic behavior tends to drive out contracting and different doctrines of contract law can
be seen as an attempt to constrain contractual opportunism. The refusal to enforce illegal
contracts or order restitution has the socially valuable effect of encouraging opportunism with
regard to substantively illegal agreements.
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FALTERING & FAILING
Happenstance
STRATEGIES IN CASE OF DISAPPOINTMENT
When an unforeseen event impairs the value of a contract for one party, that party will have an
uphill battle toward recovery. Some litigative strategies include
- “mutual mistake”,
- “constructive conditions”, and
- “impossibility or frustration”.
Note that impossibility and frustration are defenses—if performance is merely an option, that it
proves impossible is no help. For party to exploit impossibility or frustration, that party must have
an obligation the failure of the performance of which is due merely to happenstance.
DISCHARGE OF DUTIES
Unforeseen Difficulties, However Great
Dermott v. Jones, 69 U.S. 1 (1864)
If a party by his contract charge himself with an obligation possible to perform, he must make it
good, unless its performance is rendered impossible by the act of God, the law, or the other
party. Unforeseen difficulties, however great, will not excuse him.
When a plaintiff has been guilty of fraud, or has willfully abandoned the work, leaving it
unfinished, he cannot recover in any form of action.
Accord Restatement § 230 on events that do not discharge duties.
Canadian Industrial Alcohol v. Dunbar Molasses, 258 N.Y. 194 (1932)
Defendant is not excused from its duty to make delivery under its contract of sale of molasses
because the output of the refinery was less than the amount defendant had agreed to deliver.
There being nothing to show that …
- the defendant would have been unable by a timely contract with the refinery to have assured itself
of a supply sufficient for its needs, or
- when plaintiff gave the order it was informed by defendant that such a contract had not been
made, or
- performance would be contingent upon obtaining one thereafter, or
- defendant tried to get a contract from the refinery during the period between the acceptance of
plaintiff’s order and the time when shipments were begun,
… there is no basis for the implication that the output of the refinery was to be the measure of the
defendant’s duty.
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Frustration of Primary Purpose
Washington State Hop Producers v. Gaschie Farms, 112 Wash. 2d 694 (1989)
The doctrine of discharge by supervening frustration is as follows: where, after a contract is made,
a party’s principal purpose is substantially frustrated without his fault by the occurrence of an
event the nonoccurrence of which was a basic assumption on which the contract was made, his
remaining duties to render performance are discharged, unless the language or the circumstances
indicate the contrary.
Foreseeability is merely a relevant factor in determining whether nonoccurrence of a frustrating
event is a basic assumption of the frustrated party in entering the transaction. […] The fact that a
frustrating event is unforeseeable is significant as suggesting that its nonoccurrence was a basic
assumption of a contract.
However, the fact that it is foreseeable, or even foreseen, does not, of itself, argue for a contrary
conclusion, since the parties may not have thought it sufficiently important a risk to have made it a
subject of their bargaining. Another significant factor may be the relative bargaining positions of
the parties and the relative ease with which either party could have included a clause regarding the
risk in the contract.
Supervening Impracticability
Restatement § 261
Where, after a contract is made, a party’s performance
(a) is made impracticable
(b) without his fault
(c) by the occurrence of an event the nonoccurrence of which was a basic assumption on which the
contract was made, his duty to render that performance is discharged,
(d) unless the language or the circumstances indicate the contrary.
See also Restatement §§ 270–271 on frustrations temporary and partial.
Dermott v. Jones, 69 U.S. 1 (1864)
Where [a performer] has in good faith fulfilled, but not in the manner or not within the time
prescribed by the contract, and the other party has sanctioned or accepted the work, he may
recover upon the common counts in indebitatus assumpsit.
In such cases the defendant is entitled to recoup for the damages he may have sustained by the
plaintiff's deviations from the contract, not induced by himself, both as to the manner and time of
the performance.
Breach
OVERVIEW
Taxonomy
(1) failure without justification to perform a contractual promise or bargain at the time agreed;
(2) repudiation of the promise or bargain
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(3) bad faith in the form of preventing or hindering the other party’s performance or failing to
cooperate
Material Breach
Material breach gives the non-breaching party the option to suspend performance or to cancel the
contract and sue for damages; immaterial breach gives no option to cancel, but the aggrieved party
can recover damages.
See also Restatement § 241, determining whether a failure is material.
Efficient Breach
Under an expectation damages régime, the seller can breach efficiently whenever cost of
production is greater than total value to buyer.
Implicit in the efficient-breach argument for an expectation damages régime is the inability of
parties to reach low-cost settlements on the private market.
REPUDIATION & ANTICIPATION
Timing Breach: Actuality/Anticipation
Taylor v. Johnston, 15 Cal. 3d 130 (1975)
There can be no actual breach of a contract until the time specified therein for performance has
arrived. Although there may be a breach by anticipatory repudiation: by its very name an essential
element of a true anticipatory breach of a contract is that the repudiation by the promisor occur
before his performance is due under the contract.
Identifying Repudiation
Taylor v. Johnston, 15 Cal. 3d 130 (1975)
Anticipatory breach occurs when one of the parties to a bilateral contract repudiates the contract.
The repudiation may be express or implied. An express repudiation is a clear, positive, unequivocal
refusal to perform; an implied repudiation results from conduct where the promisor puts it out of
his power to perform so as to make substantial performance of his promise impossible.
There is no implied repudiation, that is, by conduct equivalent to unequivocal refusal to perform,
unless the promisor puts it out of his power to perform.
To constitute an express repudiation, the promisor’s statement or conduct must amount to an
unequivocal refusal to perform: A mere declaration, however, of a party of an intention not to be
bound will not of itself amount to a breach, so as to create an effectual renunciation of the
contract; for one party cannot by any act or declaration destroy the binding force and efficacy of
the contract.
Restatement §§ 250–257
Repudiation must be clear and unequivocal if performance remains within the power of promisor
and the realm of possibility.
Taylor v. Johnston, 15 Cal. 3d 130 (1975)
To justify the adverse party in treating the renunciation as a breach, the refusal to perform must be
of the whole contract and must be distinct, unequivocal and absolute.
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Restatement §§ 250–257
Repudiation entails no liability for damages when facts post hoc show that promisee would have
been unable able to uphold his end of the bargain or when the duty repudiated would have been
otherwise discharged by some external inevitability.
Taylor v. Johnston, 15 Cal. 3d 130 (1975)
If the injured party disregards the repudiation and treats the contract as still in force, and the
repudiation is retracted prior to the time of performance, then the repudiation is nullified and the
injured party is left with his remedies, if any, invocable at the time of performance.
Restatement §§ 250–257
Repudiation is nullified if the promisee makes no material change of position while the promisor
returns to a course that indicates performance.
Adequate Assurance
In certain circumstances, the promisee may suspend performance and “demand adequate
assurance”; the promisee may treat failure to deliver adequate assurance of due performance as
repudiation.
Preemptive defense may end up a breach itself if the other, supposedly offending party did not
actually breach.
FAILURE TO PERFORM
A failure to perform an independent promise does not excuse nonperformance on the part of the
adversary party, but each is required to perform his promise, and, if one does not perform, he is
liable to the adversary party for such nonperformance.
Regarding goods, see UCC 2–508: the perfect tender rule applies, directing that substantial
performance does not apply.
O.W. Grun Roofing & Construction v. Cope, 529 S.W.2d 258 (1975)
Substantial performance requires that a party have in good faith intended to comply with the
contract and substantially done so in the sense that the defects
(a) are not pervasive,
(b) do not constitute a deviation from the general plan contemplated for the work, and
(c) are not so essential that the object of the parties in making the contract and its purpose cannot,
without difficulty, be accomplished by remedying them.
The doctrine of substantial performance is especially common in cases involving building
contracts, although its application is not restricted to such contracts.
The deficiency will not be tolerated if it is so pervasive as to frustrate the purpose of the contract
in any real or substantial sense. The answer is arrived at by weighing
(a) the purpose to be served,
(b) the desire to be gratified,
(c) the excuse for deviating from the letter of the contract, and
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(d) the cruelty of enforcing strict adherence or of compelling the promisee to receive something
less than for which he bargained.
Acts of God, &c
Dermott v. Jones, 69 U.S. 1 (1864)
Where [a performer] has in good faith fulfilled, but not in the manner or not within the time
prescribed by the contract, and the other party has sanctioned or accepted the work, he may
recover upon the common counts in indebitatus assumpsit.
In such cases the defendant is entitled to recoup for the damages he may have sustained by the
plaintiff's deviations from the contract, not induced by himself, both as to the manner and time of
the performance.
FORFEITURE
Forfeiture is the act of losing or surrendering something as a penalty for a mistake or fault or
failure to perform, &c.
Grounds
Restatement § 242
- Preventing the adverse party from making substitute arrangements, or
- missing a contractual stipulation for, e.g., date of completion.
Jacob & Youngs v. Kent, 230 N.Y. 239 (1921)
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 a forfeiture
[i.e. will be a breach but immaterial].
From the conclusion that promises may not be treated as dependent to the extent of their
uttermost minutiae without a sacrifice of justice, the progress is a short one to the conclusion that
they may not be so treated without a perversion of intention. Intention not otherwise revealed
may be presumed to hold in contemplation the reasonable and probable.
The law will be slow to impute the purpose [to enforce every condition strictly], in the silence of
the parties, where the significance of the default is grievously out of proportion to the oppression
of the forfeiture.
Defensive Maneuvers
- construe the condition as a “matter of [mere] convenience”
- find the condition was waived
- find that the parties modified the contract
- excuse the nonoccurrence (viz. of a nonmaterial part of the exchange) to avoid “disproportionate
forfeiture”
- construe the term as a promise and not a condition, in which case substantial performance is
usually sufficient
- try to raise a defense of impossibility of performance
- severability
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- guilty party restitution
SELF HELP: AFFIRMATIVE & DEFENSIVE
Taylor v. Johnston, 15 Cal. 3d 130 (1975)
When a promisor repudiates a contract, the injured party faces an election of remedies:
- he can treat the repudiation as an anticipatory breach and immediately seek damages for breach
of contract, thereby terminating the contractual relation between the parties, or
See Restatement §§ 237–239.
- he can treat the repudiation as an empty threat, wait until the time for performance arrives and
exercise his remedies for actual breach if a breach does in fact occur at such time.
Walker v. Harrison, 347 Mich. 630 (1956)
The injured party’s determination that there has been a material breach, justifying his own
repudiation, is fraught with peril, for should such determination, as viewed by a later court in the
calm of its contemplation, be unwarranted, the repudiator himself will have been guilty of
material breach and himself have become the aggressor, not an innocent victim.
Restatement §§ 250–257
For promisor’s material breach, promisee gains both
- affirmative (sue) and
- defensive (suspend/cancel)
remedies.
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REMEDY
Posture
PREDISPOSING THE OUTCOME
Burden & Equity
Contrast Konic and Frigalement: If the buyer has the burden of proof and the gain, then equipoise
may result in restitution; otherwise, if the seller has the burden of proof and the loss, then
equipoise may leave the losses where they lie.
Offenses
DAMAGES
See Restatement § 344, 346, 347.
Reliance
Reliance Damages: money required to restore promisee to financial position she would have
occupied if no contract had been formed. Promissory estoppel, which involves no proper
contract, likely leads to reliance damages.
Restitution
Restitution: monetary value of benefit conferred on unjustly-enriched party.
Although both restitution and reliance recovery seek to restore the injured party to an earlier
position, restitution focuses on the unjust enrichment of the party from whom restitution is
sought, and may require the disgorgement of a benefit. Reliance focuses on the expenditures of
the aggrieved party, which are not limited to losses that enriched the other party.
So-called “guilty party restitution” has important limitations. First, the victim must receive his full
measure of damages first. Only if there is “surplus” value in the hands of the non-breacher will it
be available to the guilty party for recovery in restitution. Second, if there are multiple ways to
calculate the value of the benefit conferred, the guilty party is likely to receive the less generous
measure.
See Restatement § 371.
Expectation
Expectation Damages: money required to put promisee in the financial position she reasonably
expected to occupy if the contract had been fulfilled.
Restitution may be preferable to expectation damages for a non-breaching party when the contract
proves to be a losing contract.
Volume
When seller’s loss due to buyer’s breach reduces the overall volume of sales, seller can recover.
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Cost of Replacement & Difference in Value
Jacob & Youngs v. Kent, 230 N.Y. 239 (1921)
In this case, we think the measure of the allowance is not the cost of replacement [i.e. expectation,
strictly], which would be great, but the difference in value [i.e. expectation, loosely, when
invocation of this measure would be unjust], which would be either nominal or nothing. […] The
rule that gives a remedy in cases of substantial performance with compensation for defects of trivial
or inappreciable importance, has been developed by the courts as an instrument of justice.
See Restatement § 348.
Liquidated
One of the main reasons for inserting a liquidated damages clause is to satisfy both parties by
resolving the uncertainties surrounding damages—liquidated damages stipulate the damages ex
ante. Many courts will not, however, enforce liquidated damages that appear to reach punitive
levels.
See Restatement §§ 356, 361.
SPECIFIC PERFORMANCE
The “property rule” prescribes equitable remedies; the “liability rules” prescribe monetary damages.
Adequate monetary damages will substitute for specific performance wherever possible—specific
performance is an extraordinary remedy that can provide relief when legal remedies are
inadequate.
There is no legal right to specific performance. Specific performance should not be granted when
it would be unjust, oppressive, or unconscionable.
When making its decision, the court must balance the equities between the parties to determine
whether specific performance is appropriate.
Courts have begun to grant greater favor to remedies in equity, though the injured party must
prove the damages (otherwise the remedy will be only nominal).
See Restatement §§ 357, 359.
Curtice Bros. Co. v. Catts, 66 A. 935 (1907)
By reason of the fact that damages for the breach of contract for the sale of personalty are, in most
cases, easily ascertainable and recoverable at law, courts of equity, in such cases withhold equitable
relief.
Where no adequate remedy at law exists, specific performance of a contract by defendants will be
decreed on their refusal to sell tomatoes grown on certain land, as agreed, where it leaves the
company helpless, except to whatever extent an uncertain market may supply the deficiency.
Defenses
CIRCUMSTANCES
Foreseeability
If the damage was not foreseeable, that damage is not recoverable.
See Restatement § 351.
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Hadley v. Baxendale 9 Exch. 341 (1854)
Where two parties have made a contract which one of them has broken, the damages which the
other party ought to receive in respect of such breach of contract should be such as may fairly and
reasonably be considered either arising naturally, i.e., according to the usual course of things,
from such breach of contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they mad the contract, as the probably result of the
breach of it.
Wartzman v. Hightower Productions, 53 Md. App. 656 (1983)
A contracting party is expected to take account of only those risks that are foreseeable at the time
he makes the contract and is not liable in the event of breach for loss that he did not at the time
of contracting have reason to foresee as a probable result of such a breach.
Profits lost due to a breach of contract are recoverable. […] The breaching party is authorized to
prove any loss that the injured party would have suffered had the contract been performed.
Uncertainty & Speculation
See Restatement § 352.
Wartzman v. Hightower Productions, 53 Md. App. 656 (1983)
Where anticipated profits are too speculative to be determined, monies spent in part
performance, in preparation for or in reliance on the contract are recoverable.
Freund v. Washington Square Press, 34 N.Y.2d 379 (1974)
If damages that would have compensated plaintiff for anticipated royalties cannot be proved with
the required certainty, then nominal damages alone are recoverable.
MITIGATIONS
If the defendant establishes that the plaintiff failed to mitigate damages, then those damages might
be unrecoverable.
When a breaching employer offers comparable work for equal pay, the choice of the employee not
to accept the substitute offer counts as failure to mitigate damages.
See Restatement § 350.
Parker v. Twentieth Century-Fox Film, 474 P.2d 689 (1970)
The Supreme Court pointed out that before projected earnings from other employment
opportunities not sought or accepted by a discharged employee can be applied in mitigation of
damages, the employer must show that the other employment was comparable, or substantially
similar, to that of which the employee was deprived by wrongful discharge.
The court held that the trial court correctly ruled plaintiff's failure to accept defendant’s tendered
substitute employment in the “western” could not be applied in mitigation of damages; the offer
was of employment both different and inferior to a musical review calling on plaintiff’s talents as a
dancer and actress; and additionally, the substitute offer proposed to eliminate or impair the
director and screenplay approvals accorded to plaintiff under the original contract.
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