Contracts Outline - Summer 2008, Professor Weistart
I.
Freedom of Contract
a. No party can be forced into a contract. They must enter into the contract willingly.
b. Hurley v. Eddingfield
i. Quick Facts: Doctor refuses to treat a sickly patient who later dies. Family sues, but
court holds that the Doctor was not obligated to treat the patient due to Freedom of
Contract. Also offer and acceptance. There was an offer for him to enter into a contract,
but doctor never accepted.
II.
The Aristotelian View of Contract Damages
a. Restitution Interest: Unjust enrichment; Two units of injustice: The plaintiff loses something of
value, and the defendant acquires it unjustly.
b. Reliance Interest: Relying on the promise of the defendant, the plaintiff incurs a loss. One unit of
injustice as plaintiff loses, but defendant does not collect. Court may award these “reliance
damages”.
c. Expectation Interests: Promise is broken, but there is no restitution or reliance interests. Zero
units of injustice. Simply, plaintiff incurs damages based upon failed expectations.
III.
Consideration
a. Three essential requirements of enforceable contracts: Bargain, Manifestation of Mutual
Assent, Consideration
b. Bargaining is an essential piece of the contract. If there is no bargain (consideration), can be
interpreted as gratuitous.
c. Consideration is a bargained-for benefit or detriment. Benefit/Detriment does not have to be in
monetary forms.
d. A Promise is supported by consideration if there is:
i. Detriment to the promisee: autonomy of the promisee is constrained.
ii. Detriment is bargained for: Promisor wants the detriment bad enough to exchange the
promise for it, and vice versa. The detriment induces the promise.
iii. The Promise is bargained for: The promise induces the detriment. Promisee wants the
promise bad enough to incur a detriment.
e. Note: Overtime, the strict of interpretation has waned. There is the peppercorn theory that has
emerged. Courts are now accepting implied consideration (usually meaning good-faith
requirements) or even the recital of false consideration (such as in Option Contracts).
f. Salt v. Doherty:
i. Quick Facts: Aunt promises to provide for her nephew. She writes a note to
demonstrate the seriousness of her promise. Court holds that this is not enforceable,
because it is a gift.
ii. This promise is extremely formal, however, it is still missing the elements of bargain,
mutual assent and consideration.
iii. You cannot waive the need for consideration with seriousness or formality.
g. Hammer v. Sidway
i. Quick Facts: Uncle promises to give nephew 5000 if he will cease his problematic
behaviors. Nephew ceases, and seeks 5000. Courts hold that there was consideration
present in this agreement, and therefore the contract was enforceable.
1. If the promisee incurs any detriment (restricting autonomy), even if it is for the
benefit of the promisee, that constitutes consideration.
2. The peace of mind of the include may be enough for consideration. There does
not have to be a tangible benefit (peppercorn theory).
3. Even if a promise appears as a gift, if the finder of fact finds that an actual
agreement took place and there was an exchange, it is enforceable.
h. Langer v. Superior Steele Corp
i. Quick Facts: Company notifies retiring employee that he would be paid 100 every month
for the rest of his life granted he did not go work for a competitor. Was this an
unenforceable gift, or an enforceable promise supported by consideration?
1. Court rules this promise to be an enforceable contract as it is supported by
consideration due to the detriment that the promisee incurred by giving up the
right to work for a competitor.
2. Not doing something is a positive action. Forbearance is a detriment.
i. Feige (Bastardy Proceedings)
i. Quick Facts: Women agrees not to sue man for bastardy if he pays child support. He
quits paying child support and he sues. He argues this contract is not supported by
consideration because he is actually not the father of the child.
ii. Court holds that there is consideration; she entered into the contract under the good
faith impression that he was the father. Therefore there was consideration on her part.
iii. Additionally, there was consideration on his part. The prospect of being the father was
enough consideration for him to enter into the agreement.
j. The Professor’s Vignette
i. Quick Facts: Professor will give students 1000 dollars if they promise to give him rights
to any software they develop in the future. Was this supported by consideration if a
student had absolutely no intention of ever creating sotware?
ii. Yes, this promise is supported by consideration. Similar to Fiege, it is the prospect of
return. The contract is not necessarily between the professor and the one student, but
rather between the professor and a pool of individuals, one of which may design
software.
k. United States v. Meadors
i. Quick Facts: Agreement had been forged between a loan company and 4 individuals;
Meadors did not enter into this agreement until it had already been made. Decided to
sign the agreement without loan’s knowledge. Loan was defaulted, tried to collect on
Meadors.
ii. Court decided that the contract between Meadors and the loan company was not
enforceable. There was no bargained-for-exchange or mutual assent or mutual
inducement. There was no consideration because there was no mutual bargain between
Meadors and the bank. She assented but the business did not.
l. Important distinction between consideration and a condition on a gift.
i. Sometimes there can be conditions placed on a gift; easily confused with consideration
1. Ex. Man offers to give tramp a fur coat if she walks around the corner to get it.
Is walking sufficient consideration? No. Detriment is only one aspect of
consideration, the Man must have benefited, which he did not in this
transaction.
2. Tent hypothetical: Women promises to give man the tent if he would walk to
the store to get it. This is a gift, not a contract supported by consideration.
m. Adequacy of Consideration
i. “The peppercorn view”: The court does not inquire into the adequacy of consideration.
The fact that the promisee did something he or she was not required to do and the
promisor incurred a benefit he or he was not entitled to receive is sufficient.
ii. The adequacy in most cases needs to be real, not just merely a pretense.
iii. Courts also consider equity. If the consideration is grossly disproportionate the promise,
this could be a sign of fraud. Judicial decisions should not “shock the conscience”.
iv. Often times a gross disproportion of consideration is a red-flag to fraudulency.
Therefore, we must examine consideration at times to prevent fraud.
1. Jackson v. Seymore
a. Even though the widow assented to the terms of the contract, the
gross disproportion of the consideration and the promise led the
courts to void the contract. Gross inadequacy of consideration.
2.
IV.
a.
b.
c.
d.
e.
f.
g.
V.
a.
b.
VI.
a.
Vignette where woman pays 2000 for a magazine
a. Court’s would need to inquire here because the consideration is so off.
i. Were there lies about the value of the magazine? Was there
duress? Was she mentally handicapped? Was there mutual
mistake?
b. If none of these conditions are present, then the contract may be
enforceable.
i. Batsakis v. Demotsis
1. Mere inadequacy of consideration will not void a
contract.
Mutuality
In Bilateral Contracts, one party cannot be bound if the other party isn’t.
If there is an illusory promise there is no mutuality.
i. Illusory promise: Imposes no constraint on the promisor. He has complete discretion on
whether or not to perform.
1. Ex. Seller says he will ship as many pounds of coal as the buyer might want. This
contract is unenforceable because all of the autonomy is with the buyer. Not
supported by consideration- no detriment to the buyer if he decides not to
perform.
If there is consideration, then there is mutuality.
McMichael v. Price
i. McMichael agrees to sell Price all the sand he may want, and will not sell sand to
anyone else. McMichael pulls out of the agreement, claiming there was no mutuality.
ii. Court holds that there was mutuality, because there was consideration. McMichael
limited his autonomy to sale sand to anyone else.
Wood v. Lucy, Lady Duff Gordon
i. Lady gives Wood exclusive rights to sell her name. She then begins selling without a split
of profits. He sues for breach, she claims there was no mutuality or consideration on his
part.
ii. Court holds that there was an implication of a promise, that Wood would try to sell the
Lady’s name. Even though the contract did not demand him to, he did intend to act on
his duties and generate profits.
iii. Represents the waning of consideration. Actual consideration was not necessary, only
the implication of it.
The Good Faith Requirement as Sufficient Consideration
i. Ex. Above in Wood v. Lucy; Wood being bound by the good faith requirement to try and
sell Lucy’s name.
ii. UCC 2-306: Parties are bound to act in good faith in Exclusive Dealings contracts: Must
use reasonable diligence to perform the contract.
Athlete Hypothetical
i. Quick Facts: Sports Agent does not charge Athletes a price, telling them to pay for his
services what they think he deserves. If he secured a 10million dollar contract, could the
athlete pay him nothing?
1. Can no longer argue that there was no consideration. Athlete is bound by good
faith to pay him money.
Exclusive Dealings Contracts
Ex. Wood v. Lucy, Lady Duff. McMichael v. Price.
UCC 2-306: Outputs, Requirements, Exclusive Dealings
Requirements and Outputs Contracts.
Definition of a Requirements Contract: Quantity term is no specific amount, but is dictated by
how much the buyer will need at a given time or in a given scenario.
b.
c.
VII.
a.
b.
VIII.
a.
b.
c.
d.
IX.
a.
b.
Output Contract: The quantity is all the goods the seller will supply in a given amount of time.
Both of these types of contracts are inherently exclusive, and governed by good faith, which
precludes activities such as market speculation.
Personal Satisfaction and Termination Clauses
The performance of some types of contracts depends on one party’s satisfaction
i. Courts usually constrain the discretion of this party which prevents their promise from
becoming illusory.
ii. Courts can chose to use a subjective or an objective standard of satisfaction:
1. Subjective: Based on personal preferences of the buyer (More appropriate in
highly idiosyncratic transactions such as the purchase of art for one’s home.)
2. Objective: Based on a reasonable person standard or an industry standard.
Would this be acceptable to a reasonable person? Would this be generally
excepted in the industry?
3. Both the Subjective and Objective Tests are governed by good faith.
Ex. Omni v. Seattle First National Bank
i. Quick Facts: Omni agrees to buy land from Clarks if land is suitable for construction.
Omni decides to forgo inspection and Clarks pull out of the deal, citing promise was
illusory.
ii. Court holds that promise was not illusory. Omni’s obligation to act in good faith
constitutes consideration. Feasibility contracts are a standard in the industry.
Modifying a Contract:
Modifying the terms to which only one party suffers additional detriment can cause problems of
consideration. Court’s have held however, that additional consideration is not always necessary
if the modification of the contract was made voluntarily and in good faith.
i. Modifications should be supported by a commercial reason
ii. Good faith requirement protects against possibilities of extortion.
1. When only one party is obligated to perform, the other party is vulnerable. Ex.
I’ve paid you to dig a hole, I’ve relied on your promise to do it, now you try and
change the terms of the contract to favor you.
a. This is why these agreements must be supported by a commercial
reason, must be in good faith, must be voluntary, must be because of
unforeseen circumstances.
The UCC-2-209 governs this, stating that as long as bad faith is not used to escape the terms of
the contract, modifications are binding.
Also governed by Restatement (2d) 89 which states that when modifying a contract, there
should be circumstances which were generally unforeseen by the parties.
i. Also states that if the modification may not be binding, if it induces reasonably
foreseeable reliance, it may be enforced.
Ex. Levine v. Blumenthol
i. Quick Facts: Tenants cannot pay the rent due to economic hardships. Landlord agrees to
reduce their rent. At the end of the lease, he sues for the amt he would have been paid
under the original agreement. Was this modification enforceable?
1. There was a lack of consideration on the part of the landlord. Had the tenants
agreed to pay the rent even a day early, there would have been consideration.
2. Because there was no consideration, the court ruled that this promise was
unilateral and not enforceable.
Restitution
Restitution governs claims for legal or equitable recoveries which are designed to prevent unjust
enrichment.
i. Restitution can be recovered both within and outside of the context of a contract.
Restatement of Restitution: Essence for a cause of action
i. Person unjustly enriched at the expense of another is required to make restitution
ii. A person who officiously confers benefit upon another is not entitled to restitution
c.
d.
X.
b.
iii. A person cannot profit from his own wrong at the expense of another.
Restitution as a contract remedy:
i. Problems in the performance of contract can arise because of factors such as: mutual
assent, mutual mistake, fraud, impossibility, etc. In these Defective contract cases,
restitution is not controversial.
1. In these scenarios, it is possible that one party has already conferred benefits
upon the other party without receiving anything in return.
2. In these cases, the courts will often award restitution. When measuring
restitution:
a. A party is entitled to restitution to the extent that they benefited the
other party or incurred reliance upon the other party’s promise.
b. Sum to be awarded is usually: value of what other party received.
ii. There can be restitution for both the breaching and non-breaching party:
1. Non-Breaching party: Injured party is entitled to restitution by way of
performance or reliance.
2. Breaching Party: The party who breached may be entitled to restitution for any
benefit that the injured party incurred that was in excess of actual losses.
a. If one party’s breach permits the other party to be able to rescind the
contract, both parties have to make restitution for the benefits
incurred unjustly.
b. Ex. Buyer bails out on the purchase of a 300,000 dollar home; buyer
has already put down a payment of 20,000. Is seller entitled to 20,000
if they can sell home for 300,000? No they are only entitled to
damages and may be required to make 20,000 in restitution to buyer.
Is seller entitled to 20,000 if they can only sell home for 200,000? Yes,
In fact they are entitled to 100,000.
Components of Restitution: Enrichment and Injustice
1. Enrichment:
a. Do you measure the enrichment based upon what was gained or what
was lost? These could be two different values.
i. Ex. Painter accidently paints your house, assume you benefit.
Is painter entitled to cost of supplies, or the value of your
benefit (what if you didn’t like the color).
2. Injustice: The enrichment must be unjust in nature
a. Benefit cannot be conferred officiously
Restitution: Unrequested Benefits:
i. The law does provide restitution in cases even where there was an unrequested benefit.
Restitution in these cases are controversial.
ii. The benefit must be under such a circumstance that the action was necessary for the
protection of the other party’s interest.
iii. There are cases where it would be impractical to request the benefit, but the benefit
was conveyed.
1. Section 116 of the restatement: Restitution is entitled for efforts to save a life
or property.
2. Section 117 of the restatement: Restitution is entitled for efforts to save
property.
a. However, the Salvor must have intended to charge for the efforts from
the start. The efforts must not have been a gift.
Glenn v. Savage
i. Quick Facts: Defendant’s property fell into the river while the defendant was absent,
and the plaintiff recovered the property. The service had the reasonable value of $20.
The plaintiff refused to pay the defendant. Plaintiff is suing for the amount.
c.
XI.
a.
b.
c.
d.
e.
f.
XII.
a.
ii. Court ruled that this could have been an act of courtesy, and therefore the defendant is
not obligated to pay for the service.
iii. Court states that a verdict in favor of the plaintiff would have been contrary to public
policy.
Cotnam v. Wisdom
i. Quick Facts: Surgeons performed emergency surgery when defendant had been injured
in a car accident. Defendant was unconscious and later died. Surgeons suing for cost of
their services.
ii. Court ruled that even though there was no real contract between the defendant and the
plaintiff, there was a fictitious and implied one, therefore a remedy is in order.
iii. The court also ruled that only reasonable compensation was in order- the doctors knew
nothing of defendant’s financial standing when they rendered the services, therefore
they cannot seek restitution on the basis of his financial standing.
Restitution: Past Consideration/ Moral Obligation
In some cases, the benefit has occurred before the consideration.
In these cases, the beneficiary made no promise to pay before the benefit was incurred, but
after.
Governed by Restatement (2d) 86
i. A promise made in recognition of a benefit previously received is binding: “It is well
settled that a moral obligation is a sufficient consideration to support a subsequent
promise to pay…” Material Benefit Rule
1. Exceptions:
a. Promisor has not been unjustly enriched (Mills v. Wyman)
b. Promisee conferred the promise as a gift (Mills v. Wyman)
c. Value of the promise is disproportionate to the value
Mills v. Wyman
i. Plaintiff cared for defendant’s son for 15 days prior to his death. In gratitude, father
promised to compensate plaintiff. Was this promise enforceable?
ii. Court determines that this promise was not enforceable. Moral obligations are not to be
equated with legal ones. There was no consideration on the part of the father, and the
care of the son was likely offered gratuitously. The case for no consideration was
strengthened by the fact that the defendant’s son was not a minor.
Webb v. McGowin
i. Quick Facts: To prevent injury to the defendant, plaintiff fell with a block and suffered a
debilitating injury. In gratitude, defendant agreed to pay plaintiff 15 dollars/week for
the rest of the week. After defendant died, payment ceased. Was this promise
enforceable?
ii. Court rules that a subsequent promises eliminates a lack of consideration. Furthermore
it is believed that there is sufficient consideration because the promisor benefited even
though the act was unrequested.
Mills v. Wyman (v) Webb v. McGowin
i. In Mills, the burden of unjust enrichment is questionable. Did the father get the benefit
or did the son, especially because the son was not a minor. In McGowin, there is little
contention with the fact that McGowin received a direct benefit.
ii. Also the question of detriment. It is clear that Webb suffered a direct detriment,
unlikely he would injure himself to that extent as a gift. Not an unlikely possibility that
Detriment to Mills was a gift.
iii. Clear that Wyman believed in this promise as he continued the payments. In Mills,
father could have made promise in a moment of emotion.
Restitution: Reliance/ Promissory Estoppel
If a promise (otherwise enforceable or not) induces reliance, there may be a cause of action for
remedy.
b.
c.
d.
e.
f.
g.
h.
Restatement (1) 90:
i. If a promise induces action or forbearance of a definite and substantial character on the
promisee is binding if injustice can be avoided only by the enforcement of the promise.
Restatement (2d) 90:
i. The promisor’s promise should REASONABLY EXPECT to induce action or forbearance on
the part of the promisee OR A THIRD PERSON, and which does, is binding if injustice can
be avoided only by enforcement of the promise. Remedy may be limited as justice
requires.
Promisory Estoppel: Estoppel is where we make promises enforceable if a third party relies on
that promise, and incurs detriment in the form of changing his/her position to one that is
disadvantageous, based on the expectation that the promise will be fulfilled and will remove
injury. Promissory Estoppel is only possible when there is no contract.
Damages under promissory estoppel
i. Damages may sometimes depend on the extent of the promisee’s reliance rather than
on the promise itself.
ii. Damages should not put the promisee in a better position than the promise would have
put him/her in.
Requirements of Reliance:
i. The promise must be what induces the reliance
ii. The reliance must be foreseeable
iii. Enforcement must be necessary to prevent injustice.
Ricketts v. Scothorn
i. Quick Facts: Grandfather promised to give granddaughter 2000 dollars a year so she
would not have to work. Daughter quit her job for a period but then regained
employment. Was promise enforceable?
1. Court ruled that it was because it induced the grandaughter’s reliance on this
money.
Reliance in Commercial Promises
i. Fienburg v. Pfieffer Company
1. Quick Facts: Company decided to make the gift of $200/ month to the plaintiff
upon her retirement for her long service. Payments were reduced. Plaintiff sues
for enforcement of the promise.
2. Court held that on the grounds of promissory estoppel, the promise is
enforceable. It is likely the case that the plaintiff relied on the promise in some
shape or form.
ii. Forrer v. Sears, Robuck
1. Quick Facts: Sears induced plaintiff to sell his farm in exchange for permanent
employment. Plaintiff sold his farm and was later fired. Entitled to promissory
estoppel?
2. Court held that no, because the defendants actually kept up their end of the
bargain. Even though things don’t work out for the best, if the promise was
upheld, there can be no promissory estoppel. All employment contracts under
US law are terminable at will, so Sears had the right to fire him.
iii. Grouse v. Group Health Plan (Employment-at-will)
1. Grouse, who worked at A was offered employment at B. As a result, Grouse
leaves A and turns down C. B decides not to employ Grouse, but does not
notify him. Grouse sues for reliance costs on their promise to hire him.
2. Court holds that there is a promissory estoppel claim because even though
employment contracts are terminable at will, the employee must be given the
good faith opportunity to work. B knew that Grouse relied on their promise,
was foreseeable.
iv. Hoffman v. Red Owl Stores
1.
XIII.
a.
b.
c.
d.
e.
f.
g.
Hoffmans relied on Red Owl Store’s promise to give him a business franchise
for a certain amount. Relying in this promise, Hoffman sold his business and
relocated. Red Owl then went back on the original promise, and the
negotiations eventually fell apart. Are the Hoffmans entitled to restitution?
2. Court awards promissory estoppel reliance in this case. Even though the
contract had not been complete, reliance can be induced during the
negotiation stage.
3. Court also held that certain commercial risk that the promisee incurs are
beyond the scope of reliance. Court thereby did not award damages for the
Hoffman’s willingness to relocate.
Prioritizing Public Policy over Contract Enforcement
In deciding whether or not to enforce some contracts, courts become faced with huge public
policy implications, and are reluctant to enforce promises that would set a precedent against the
public interest.
i. Explains why the courts refuse to enforce illegal contracts (see below).
ii. Explains court’s refusal to allow minors to contract
iii. Explains outcome in IVF cases
Illegality and the Enforcement of Contracts/ Public Policy Cont
Contracts that are illegal are generally unenforceable.
i. Concerns for public policy, however, may provide exceptions (Holland)
Contracts that violate US laws aren’t the only ones deemed to be illegal, but also contracts which
violate the rules and regulation of a third party (Walters v. Fullwood).
Holland v. Morse Diesel International
i. Facts: Contractor doing work illegally claims racial discrimination against his employer.
He was dismissed without pay. Can he recover damages?
ii. The Business and Professions Code bans unlicensed workers from seeking compensation
for performance of their work. The issue of racial discrimination, however, is beyond the
scope of that code.
iii. Not all rights are dismissed under illegal contracts. He can still seek damages under the
statute which prohibits racial discrimination. To prevent this would be against public
policy.
Walters v. Fullwood
i. Quick facts: Prohibited for college athletes to sign with agents while in college under
rules of the NCAA. Athlete and agent entered into such prohibited agreement. Athlete
breaches, is agent entitled to damages?
ii. Court Rules "The law 'will not extend its aid to either of the parties' or 'listen to their
complaints against each other, but will leave them where their own acts have placed
them.'"
iii. To enforce contracts that are against public policy would be counterintuitive.
Minors and Contract Enforcement/ Public Policy Cont
i. Forcing the enforcement of a contract where one party may lack the capacity to
contract may be against the public policy.
1. Contracts involving minors, mentally impaired, intoxicated parties.
2. Known as The Issue of Capacity
3. Although courts still do not enforce contracts entered into by minors, Weistart
argues that this rule is fossilized and should be changed because it is not
relevant to our current cultural context.
ii. Halbman v. Lemke
1. Quick Facts: Minor entered into an agreement to purchase car. Disaffirmed the
title of the car, however car seller refused to pick up car. Car suffered
vandalism, but minor still wants a refund on the money paid for the car.
2. Court held that in normal circumstances, the minor must return the
consideration of the contract to rescind the contract (in this case is the car). But
h.
XIV.
a.
b.
c.
even in cases where the consideration cannot be returned, the minor is still
entitled to keep the money. Demanding that he return the money as well
would be inadvertently enforcing the contract. Because he is a minor, he is not
liable.
IVF Cases/ Issues too important to be governed by Contracts Law
i. Some contracts cases may be beyond the traditional contracts law. Enforcing these
contracts would drastically injure the public.
ii. Kass v. Kass
1. Quick Facts: Couple agreed that their pre-zygotes were to be used for research.
Couple then divorced and agreed that no one could lay claim to the prezygotes. Mother then wanted to claim them.
2. Court holds that mother is not entitled because there was an original
agreement which was not made unenforceable by change of circumstances.
Also the enforcement of this contract is not against public policy.
iii. AZ v. BZ
1. Quick Facts: Husband in Wife agreed that the Wife would have discretion over
pre-zygotes; however, husband signed contract after Wife filled in the
provision. Couple successfully had children, but later divorced, and conditions
deteriorated between the two drastically. Husband wants to prevent wife from
using the pre-zygotes for implantation.
2. Even though husband assented to wife’s wishes, the court held that the
dramatic change in circumstances renders the contract unenforceable.
3. Issues of assent, as to whether or not the husband agreed to the wife’s terms
(He did not know what she was writing in the blanks)
4. Even so, forcing procreation is against public policy and has even been banned
by the legislature.
Subjective/Objective Dichotomy
Should court’s enforce subjective (party’s intent) or objective (words, acts) in contracts.
i. Objective Theory: Words have a meaning that a reasonable person would attribute to
them.
ii. Subjective Theory: Words that have a private and personal meaning.
iii. Generally, the courts have chosen to employ the objective standard in contracts law.
Industry Standard
i. Contracts drafted pertaining to a particular industry, the typical definitions and
meanings of that industry will govern. Individuals are usually expected to know the
language o the industry.
1. Susan’s Grass-seed Vignette.
a. Susan purchases grass seed, and does not understand that 100% grass
seed does not literally mean 100% grass seed, which is a normal
understanding of the trade.
b. But most reasonable people in the trade would have known the real
meaning of the 100% grass seed lable. Susan is bound, unless she
could prove that she was totally brand new to the business.
Meeting of the Minds
i. Some courts argue that there cannot be a meeting of the minds if the subjective intent
is completely discarded.
ii. Sometimes court’s will accept that both parties were able to reasonably extract two
different meanings, and this will be enough to void the contract under a lack of mutual
assent.
1. Peerless Case
a. One party contracts to buy goods from the other from the ship
Peerless. There are many ships named peerless, and the seller believes
d.
XV.
a.
b.
that buyer is referring to another ship peerless. Court rules that this
contract is not enforceable due to a lack of meeting of the minds.
b. The parties did not necessarily have the responsibility to inquire into
which ship “peerless”, whereas you could argue that Susan needed to
understand the rules of the trade. Parties could use the same word
and have no idea that they were not referring to the same thing.
iii. If one party claims there is a mutual assent, but their behavior dictates otherwise, the
court will employ a standard of reasonability: What would a reasonable person taken
these actions to have meant.
iv. Somewhat protects against fraud. A party attempting to get out of a contract can always
so, “oh, well I was just kidding”. Court must have a mechanism to be able to interpret
intent of the parties.
1. Lucy v. Zehmer
a. Quick Facts: Plaintiff offers defendant 50,000 for his farm. After
negotiations and other formalities, defendant accepts. He then states
that his actions were a joke. Setting of agreement was in a bar over
drinks.
b. Court rules that the formalities that the defendant took allow a
reasonable person to conclude that he is serious. There was an offer
and there was acceptance.
c. “The law imputes to a person an intention corresponding to the
reasonable meaning of his words and acts” A person cannot claim that
he was merely jesting when his conduct and words would warrant a
reasonable person in believing that he intended a real agreement.
Secret intentions don’t control, only outward manifestations.
Exceptions to the Objective dichotomy
i. If one party knows the other party’s special meaning, then the special meaning will
govern the contract.
ii. “An agreement is interpreted in accordance with a relevant usage if
each party knew or had reason to know of the usage and neither party
knew or had reason to know that the meaning attached by the other was
inconsistent with the usage”
1. Must not intentionally take advantage of someone else’s ignorance to the
terms if you know they are ignorant.
iii. Embry v. Hargadine: INSERT HERE
Fraud/Misrepresentation
In the formation of a contract, the law seeks to regulate how much a party is obligated to
disclose.
Fraud: If one party induces another to rely on a promise based on false information that is
considered fraud. A party is prohibited by law to supply false information if he/she has reason to
believe the other party will rely on it.
i. Fraud may be innocent, (innocent misrepresentation with no intent to deceive) This is
still grounds for the rescission of contract, but no damages will be awarded. Should
move quickly before there is a massive reallocation of resources.
ii. Can be based in words or the failure to correct a mistaken belief
iii. Vokes v. Arthur Murray, Inc
1. Quick Facts: Dance studio fed old woman lies that she was improving and
would one day be able to dance with famous dancers. Relying on these
flatteries, the woman was induced to purchase tens of thousands worth of
dance lessons.
2. Court held that the contract for these lessons is not enforceable. The dance
company knew that they were being dishonest and that the woman was relying
on this false statements as a reason to enter into more lesson contracts.
3.
XVI.
a.
b.
Usually, the law requires that in order for a misrepresentation to be actionable,
it must be one of fact, not opinion, but when there is a fiduciary relationship
between the parties, and where the representee cannot easily infer what the
truth is, these are exceptions. “…A statement of a party having…superior
knowledge may be regarded as a statement of fact although it would be
considered as opinion of the parties were dealing on equal terms”. She is
relying on their critique of her performance.
iv. Norton v. Poplos
1. Plaintiff sold property to defendant which was to be used for commercial
purposes. Plaintiff informed defendant that he know of restrictions on the lot,
and would supply them if he could find them. Contract was formed, and
defendant later found there were restrictions that would prohibit the
commercial purposes. Defendants attempt to rescind on fraud, want
downpayment returned and attorney’s fees.
2. The court did not believe the plaintiff intended to defraud the defendant. But
there was a misrepresentation that there were no restrictions beyond the
normal M-1 zoning. This, however, is grounds for contract rescission, and the
down payment should be returned based on theories of restitution. Parties are
responsible for their own attorney’s fees.
Warranties
A warranty is a promise or affirmation about a good or service. Warranties can be express or
implied.
i. Express Warranty: Direct statements made by the seller. There is almost always an
express warranty. A mere description of the product is an express warranty.
ii. Implied Warranty: Even if the seller makes no mention of warranty, one is implied.
Warranties and the UCC:
i. 2-312:
1. If the goods sold were stolen, the rightful owner has the right to reclaim them
from the purchaser, and you have the right to get your money back from the
seller. Good title is covered in implied warranty.
ii. 2-313: Express Warranty by Affirmation, Promise, Description, Sample
1. Any affirmation, promise, description, sample which relates to the goods and
becomes part of the basis for the bargain creates an express warranty that the
goods shall conform to the affirmation, promise, description, sample.
2. An affirmation merely of the value of the goods, or a statement purporting to
be merely the seller’s opinion or commendation of the goods does not create a
warranty.
iii. 2-314: Implied Warranty: Merchantability, Usage of Trade
1. Definition of merchantability: The goods will pass without objection in the
trade, and they fit for their ordinary purpose.
2. If the seller is a MERCHANT: A warranty that the goods are merchantable is
implied in the contract for sale.
a. Ex: I purchase lawnmower that does not cut 4ft grass, is this a breach
of merchantability? Need to see if these types of lawnmowers in the
industry are expected to cut this grass. If yes, breach. If no, no breac.
iv. 2-315: Implied Warranty for a particular purpose
1. If the seller knows the buyer is relying on his expertise to select or furnish
suitable goods, the goods need to be fit for the buyer’s purpose.
2. If you tell the seller you need the goods for a special use, and the buyer
depends on the seller’s recommendation, the goods need to be suitable for
that use.
a.
XVII.
a.
b.
c.
d.
e.
If I tell them I need a lawnmower to cut 3ft grass, and the lawnmower
they provide me with for that purpose does not work, this is a breach
of warranty.
v. 2-316: Exclusion or Modification of Warranties
1. The seller must explicitly state that there is a modification or exclusion on the
warranty. (Ex: “As is”, “With all faults”).
2. The buyer may assume some responsibility in insuring her goods are quality:
a. If before entering into the contract, the buyer examines the goods or
sample fully, there is no implied warranty on the defects that ought to
have been revealed to her upon examination.
b. If she unreasonably fails to examine the goods before she uses them
i. HOWEVER…
1. The seller must demand that the buyer examine the
goods before purchase. By this, the seller is implying
that the buyer is assuming the risks of the defects
that examination ought to reveal.
2. if the examination is accompanied by words as to
their merchantability or specific attributes and the
buyer indicated that he relying on those words
rather than on his examination, they give rise to an
express warranty
c. The buyer’s skill and method of examining the goods determine which
defects may be excluded by examination:
i. A failure to notice obvious defects do not excuse the buyer
ii. Latent defects cannot be excluded by simple examination
iii. Professional buyers vs. non-professional buyers incur
different risks.
vi. Point from Class- If the buyer has knowledge that undermines the express warranty,
this is not a basis of the bargain. (These chips are all tested- but the buyer knows only
10% are tested, this is not a basis for the bargain).
Duty to Disclose
When entering into a contract, there are rules governing how much both parties are expected to
disclose to one another. Related to doctrine of mutual mistake. The courts do not want to
enforce agreements where there is a flaw on the basic understanding of one party.
Generally, the courts seem to be moving away from buyer beware with warranties and duty to
disclose rules. But there are inconsistencies; courts differ widely on the application of buyer
beware.
There is generally not a duty to disclose information which would enhance the value of the good.
Proprietary information is also generally protected.
Three theories when applying duty to disclose:
i. Economic Theory: The better-information gatherer should disclose, making the
transaction less expensive.
ii. Relational Theory: Disclosure on the basis that a trusting relationship should be formed
between the parties, still protects proprietary information.
iii. Distributive Theory: Blame shouldn’t be all-or-nothing. Both parties should take some
responsibility.
Restatements governing non-disclosure.
i. Restatement 161: When non-disclosure is equivalent to an Assertion
1. Non-disclosure is equivalent to saying the fact doesn’t exist in the following
circumstances:
a. When disclosure of a fact is necessary to prevent a previous assertion
from being fraudulent
b.
2.
f.
g.
h.
When he knows that disclosure of a fact would correct a mistake of
the other party as to a basic assumption on which that party is relying
in making the contract…and if non-disclosure amounts to a failure to
act in good faith and in accordance with reasonable standards of fair
dealing.
c. When disclosure of the fact would create a known mistake of the
other party as to the contents or effect of a writing.
d. Where the other party is entitled to know the fact because of a
relationship of trust or confidence.
Concealment of Facts:
a. You cannot prevent another from learning of a fact that is significant,
this is a misrepresentation.
b. Not necessarily required to disclose all that you know, even if you
know the other party lacks some knowledge about the transaction
(esp when information is proprietary).
c. Cannot tell half-truths that would fail to correct a misrepresentation.
d. A fact cannot be intentionally withheld for the purpose of inducing
action.
e. If you make an assertion that turned out to be untrue, you should
correct that assertion if the other party is relying on it
f. The whole process is governed by good faith, the seller can expect the
buyer to do his on investigative work, but should always be
reasonable.
Laidlaw v. Organ
i. Quick Facts: The end of the war drove up tobacco prices significantly, which the buyer of
the tobacco was aware. When the seller asked if there were any changes in tobacco
prices, the buyer was silent, and the transaction followed. Upon hearing of the end of
the war, the buyer seeks contract rescission on the basis of fraud.
ii. The court has difficulty in balancing whether or not the defendant had a duty to
disclose. They want to protect proprietary information(rewarding defendant for waking
up early) while at the same time condemning the suppression of material facts. This is
the paradox in duty to disclose.
iii. The court does not believe there was a duty to disclose, but sends it back to the jury for
decision.
Hill v. Jones
i. Quick Facts: Sellers of a home had a long history of termite infestation, yet did not
disclose this information to the buyers, even after buyers asked if the ripple in the deck
was from termites. Inspector found no termites, yet evidence of termite damage was
strategically hidden by boxes.
ii. Court orders that if there was no way for the sellers to find out that there were
termites, then the contract to buy the house could have been rescinded. Suppression of
a material fact which a party is bound in good faith to disclose is equivalent to a false
misrepresentation. The doctrine of “buyer beware is waning”. Generally, if the fact
materially affects the contract, it ought to be disclosed.
iii. The sellers knew that the buyers were relying on a termite report which stated there
were no termites in the house. It was their duty to correct this mistake, and by them
saying nothing, it was equivalent to stating that the fact did not exist.
iv. The Hills attempted to contract out of fraud by incorporating a clause which stated the
seller was not bound by any understanding or representation that was not reflected in
the contract. This does not mean they are free to lie, conceal, and make shit up. You
cannot contract out of fraud.
Richey v. Patrick
XVIII.
a.
b.
c.
d.
e.
f.
i. Quick Facts: Sellers issued an “as is” contract explicitly stating that it was the buyer’s
responsibility to examine the house. Sellers did not take advantage of the right to
inspect and purchased house. Later found there was an issue with the well water, which
the sellers had known about. Sued for Fraud and misrepresentation.
ii. Court held that this could not be fraud because the buyers supplied no fraudulent
information to the buyers. Court held that their negligence led to the non-disclosure of
the condition of the well- they did not even turn on a faucet, but rushed the purchase of
the house. Buyers knew that it was their responsibility from the contract. The buyers
severed any relationship of dependence, which existed in Hill v. Jones.
iii. Limits of cognition, people generally do highlight the risks.
Good Faith
All parties acting in a contract are obligated to operate in good faith, including in commercial
transactions with sophisticated parties. The doctrine spans three broad categories: contract
formation, employment-at-will, contract performance.
The underlying principle of “good faith” dictates that it is implied in every contract that each
party will not do anything to undermine the other party’s access to the benefits of the
agreement. This violates community standards of decency, fairness or reasonableness.
Typical types of bad faith recognized in judicial decisions: evasion of the spirit of the bargain, lack
of diligence and slacking off, willful rendering of imperfect performance, abuse of a power to
specify terms, interference with or failure to cooperate in the other party’s performance,
harassing demands for assurances of performance, rejection of performance for unstated
reasons, willful failure to mitigate damages, and abuse of power to determine compliance or to
terminate the contract.
Carmichael v. Adirondack Bottled Gas Corp
i. Quick Facts: Carmichaels have contracted with ABG to supply petroleum. Husband dies,
and wife wants to take over business. ABG does not inform her that she needs to recontract, and they abruptly shut her down, taking over her clients. Court awards her
damages under a breach of the implied covenant of good faith.
ii. The relationship between the parties in a contract evolves and fluctuates over time, as a
context is created surrounding the agreement. Even after a contract ends, the parties
are engaged in a relationship that is still governed by good faith. The evidence
(unreasonably short deadlines, bullying after the death of husband, shady meetings,
taking clients) are sufficient to show that ABG in fact did not act in good faith in postcontract dealings.
Market Street Associates v. Frey
i. Quick Facts: Clause in a contract which states if the lessor refused to make requested
improvements on a property, the leasee had the right to buy property. Market Street
petitioned for improvements, which Frey rejected, so they attempted to buy property.
Frey stating MS is acting out of bad faith, did not notify them of this provision in the
contract.
ii. Continues the point of the Carmichael case that contract relationships evolve over time.
In pre-contract negotiations, there is less of a duty to act on good faith. Every woman
for herself, however, once parties have entered into the contract, parties are expected
to operate on a greater basis of trust (“silence more apt to be deceptive”). You cannot
exploit a known oversight of the other party concerning his/her rights in the contract.
Court sent this case back to the jury to determine if the actions of MS conformed to
characteristics of bad faith.
Fortune v. the National Cash Register Company
i. Quick Facts: Fortune was an employee under NCRC. He was credited for a large deal for
which he was entitled commission. NCRC fired him before he received all of his
commission and refused to pay him.
XIX.
a.
b.
c.
d.
e.
f.
XX.
a.
b.
ii. Court held that it was possible that NCRC was acting in bad faith. Even though
employers have the right to terminate employees at will, they must do so in good faith,
ie, they cannot fire someone so they will not have to pay him/her a commission. Cannot
prevent one party from access to the fruits of the contract.
Mutual Mistake
Where parties on entering into a transaction that affects their contractual relations are both
under a mistake regarding a fact assumed by them as the basis on which they entered into the
transaction, it is voidable by either party if enforcement of it would be materially more onerous
to him than it would have been had the fact been as the parties believed it to be.
Restatement 152: When Mistake of Both Parties Makes Contract Voidable
i. (1) Where a mistake of both parties at the time a contract was made as to a basic
assumption on which the contract was made has a material effect on the agreed
exchange of performances, the contract is voidable by the adversely affected party
unless he bears the risk of the mistake under the rule stated in §154.
ii. In determining whether the mistake has a material effect on the agreed exchange of
performances, account is taken of any relief by way of reformation, restitution, or
otherwise.
Restatement 154: When A Party Bears the Risk of Mistake
i. A party bears the risk of the mistake when:
1. The risk is allocated to him by the agreement of the parties
2. He is aware at the time the contract is made that he has only limited
knowledge with respect to the facts to which the mistake relates but treats his
limited knowledge as sufficient
3. The risk is allocated to him by the court on the grounds that it is reasonable to
do so considering the circumstances.
Beachcomber Coins Inc., v. Bosket
i. Quick Facts: BC bought from B what both parties believed to be a collector’s dime. It
turned out to be a counterfeit.
ii. Court ruled that this contract was rescindable under the doctrine of mutual mistake.
Both parties were convinced that this was a real coin, if they had not been sure, then
there would have been more of an allocation of risk placed on the purchaser of the coin.
But in this case, the court is able to re-establish the status quo and avoid unjust
enrichment.
iii. This would be a complete waste of resources, hundreds of thousands of dollars
exchanged for junk. This case might also be a breach of express warranty.
Lenawee County Board of Health v. Messerly
i. (M) bought a property in which an illegal septic tank had been installed. Land was later
sold from the M to the Pickles (P). Clause in the contract said that buyers purchased the
property as is, and had it examined. Ps later found raw sewage leaking, and the health
department condemned the building.
ii. It is true that both parties were mistaken about the capacity of the property to generate
income; however, the fact that it is now of less value than the plaintiff expected is not
sufficient grounds for relief. Rescission is not available to relieve a party who has
assumed the risk of loss in connection with the mistake.
Peerless is not a mutual mistake case
i. To have a mutual mistake case, both parties have to be agreeing to the same thing, in
Peerless, although they thought they had agreed to the same thing, they had not. In
beachcomber, they had both agreed to the same thing, although mistakenly.
Changed Circumstances
When is a change of circumstances sufficient to void a contract?
Taylor v. Caldwell
c.
d.
e.
i. Quick Facts: Plaintiffs rented concert hall for four days, but the hall burned down. Are
the defendants liable for lost profits/reliance, or can the contract be rescinded?
ii. Court ruled that the contract is indeed rescindable. The nature of the contract it is
apparent that the parties contracted on the basis of the continued existence of the
particular person or chattel. When the existence of the particular object centered
around the contract ceases to exist, the contract is void…be it that the object ceased to
exist by an “act of god” something unforeseeable that was not taken into account by the
original contract.
Canadian Industrial Alcohol Company v. Dunbar Molasses Company
i. Quick Facts: Defendant agreed to supply refined molasses to the plaintiff. The National
Sugar Refinery, however, cut production of the molasses, and the defendant was unable
to secure enough to send to plaintiff. Is he liable?
ii. Court rules that these changed circumstances were not necessarily unforeseeable, and
the defendant could have been more diligent and could have possibly changed the
circumstances. The defendant, for example, could have entered into a cover contract
with the refinery to insure that enough molasses was produced for his order. If
negligence is the cause of the impossibility, then the contract is not rescindable.
Krel v. Henry:
i. Quick Facts: The defendant agreed to rent a chamber to view the procession of the king.
Defendant put down a deposit. The procession of the king was canceled, and the
defendant did not pay the balance he owed on the room. The hotel sued for the
balance, defendant counterclaimed for his deposit to be returned.
ii. The court ruled that the contract was rescindable. The defendant rented the room
exclusively to see the procession, and the plaintiff advertised the room solely for that
purpose. That was the basis for the contract on both sides.
Hypos from Class
i. Market fluctuations are not unforeseen and are typically not rescindable. However,
something totally unforeseen (like a terrorist attack) is more likely to be recoverable.
ii. Rock star vignette:
1. Musician books venue for a concert, but is unable to make it due to inclement
weather. The Musician should still pay the fee to rent the ballroom. The
landlord did not contract specifically for this event, but he is in the business of
renting out spaces all the time. He has nothing to do with how the ballroom is
used, and he does not have the responsibility to make the venue a success.
Furthermore, the contract is still possible. The landlord can still provide the
room, the musician can still provide the cash.
iii. Denver Hypothetical:
1. Hotels renting out rooms for the democratic convention vs. people renting out
their homes for the first time and sole purpose of attending the convention.
a. If the convention is unexpectedly canceled, people WILL still be
responsible for paying their hotel reservation, however people who
rented from the private residences will not need to pay.
b. Hotels rent out rooms every day, and they are not concerned with
why people are staying there. Homeowners on the other hand are
renting out their homes for the sole purpose of the democratic
convention. The fact that it is not canceled renders the contract
unenforceable.
iv. Catering:
1. Business cancels picnic because it is going to be raining. They are still
responsible for paying. She can still provide food and they can still provide
cash, she does not promise good weather.
XXI.
a.
b.
c.
d.
e.
Offer and Acceptance
An offer is the manifestation of willingness to enter into a bargain, so made as to justify another
person in understand that his assent to that bargain is invited and will conclude it (Restatement
24). Offeror is willing to put the deal beyond his or her control and empower the other side to
make an enforceable contract.
i. Example from class: “I grant you an option to purchase my cabin at a price I will
determine when you indicate your willingness to buy”. This is not an offer, the price is
left open, meaning the mere assent to it will not conclude it.
A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is
addressed knows or has reason to know that the person making it does not intend to conclude a
bargain until he has made a further manifestation of assent (Restatement 26)
Restatement 50: Acceptance of Offer Defined; Acceptance by Performance; Acceptance by
Promise
i. Acceptance: Manifestion of assent to the terms thereof made by the offeree in a
manner invited or required by the offer.
ii. Acceptance by performance requires that at least part of what the offer requests be
performed or tendered and includes acceptance by a performance which operates as a
return promise.
iii. Acceptance by a promise requires that the offeree complete every essential act to the
making of the promise.
iv. Mode of Acceptance
1. Must manifest assent to the same bargain proposed by the offeror
2. Acceptance by performance:
a. The beginning of performance or the tender of part performance of
what is requested may both indicate assent and furnish consideration
for an option contract.
b. Generally, preparation to perform is not acceptance.
3. Acceptance by promise:
a. The offeree can accept an offer by promise or by performance. Can be
made in words or other symbols of assent, or implied by conduct. Has
to be in a form invited or required.
Restatement 51: Effect of Part performance Without knowledge of Offer:
i. Unless the offeror manifests a contrary intention, an offeree who learns of an offer after
he has rendered part of the performance requested by the offer may accept by
completing the requested performance
ii. Performance without knowledge
1. when an offer contemplates no commitment as in cases of offers of reward, it
is ordinarily essential to the acceptance of the offer that the offeree know of
the proposal made
2. if performance is made after the offer is learned of, the terms of the offer are
not satisfied by the performance.
Restatement (2d) 63 and 66: Time when acceptance takes effect
i. **Unless the offer provides otherwise**
1. An acceptance made in a manner and by a medium invited by an offer is
operative and completes the manifestation of mutual assent as soon as put out
of the offeree’s possession, without regard to whether it ever reaches the
offeror; but
2. An acceptance under an option contract is not operative until received by the
offeror.
ii. Acceptance must be properly dispatched: An acceptance sent by mail or otherwise from
a distance is not operative when dispatched unless it properly addressed and such other
precautions taken as are ordinarily observed to insure safe transmission of similar
messages.
f.
g.
h.
i.
Restatement 32: Invitation of Promise or Performance
i. In case of doubt, an offer is interpreted as inviting the offeree to accept either by
promising to perform what the offer requests or by rendering the performance, as the
offeree chooses.
1. Ex. “If you mow my lawn, I’ll give you $20.” Can accept by saying yes or mowing
the lawn.
2. Sometimes, unrealistic to accept by promise (rewards for lost items, etc).
Restatement 53: Acceptance by Performance; Manifestation of Intention not to Accept
i. An offer can be accepted by the rendering of a performance only if the offer invites such
an acceptance.
ii. Except as stated in 69, the rendering of a performance does not constitute an
acceptance if within a reasonable time the offeree exercises reasonable diligence to
notify the offeror of non-acceptance.
iii. Where an offer of a promise invites acceptance by performance and does not invite a
promissory acceptance, the rendering of the invited performance does not constitute an
acceptance if before the offeror performs his promise the offeree manifests an
intention not to accept.
iv. Invitation by Performance:
1. Where either acceptance by performance or acceptance of a promise is
reasonable the offeree may choose.
2. Where no return commitment is invited and the performance takes time, the
beginning of performance creates an option contract.
v. Rejection by the performing offeree:
1. The offeree can reject the offer even though he engages in conduct invited by
the offer.
a. If he has reason to know that the offeror may reasonably infer from
his conduct that he assents, he runs the risk of being bound by his
manifestation of assent.
b. Must make reasonable diligence to inform offerror that he does not
intend to assent.
Restatement 54: Acceptance by Performance; Necessity of Notification to the offeror
i. Where an offer invites an offeree to accept by rendering a performance, no notification
is necessary to make such an acceptance effective unless the offer requests such a
notification.
ii. If an offeree who accepts by rendering a performance has reason to know that the
offeror has no adequate means of learning of the performance with reasonable
promptness and certainty, the contractual duty of the offeror is discharged unless:
1. The offeree exercises reasonable diligence to notify the offeror of acceptance
2. The offeror learns of the performance in a reasonable time
3. The offer indicates that notification of acceptance is not required.
iii. If notification is not sent within a reasonable time in such a case, the offeror may treat
the offer as having lapsed before acceptance.
iv. (from ii)- Notification is requisite only when the offeror has no convenient means of
ascertaining whether the requisite performance has taken place.
Restatement 56: Acceptance by Promise; Necessity of notification to the Offeror
i. It is essential of acceptance by promise that the offeree exercise reasonable diligence to
notify the offeror of acceptance or that the offeror receive the acceptance seasonably.
ii. Where the offeree has performed in whole or in part, notification to the offeror is not
essential to acceptance, although failure to notify may discharge the offeror’s duty of
performance.
1. Ex: A gives an order to B Company's traveling salesman for a $ 2000 machine
"to purify water of the character shown by sample to be submitted," shipment
to be made in one month. The order provides: "This proposal becomes a
contract when approved by an executive officer of B Company at its home
office." Notation of such approval on the order is an acceptance by promise
without any notification, but A's duty to perform is conditional on reasonable
notification to send the sample.
iii. Failure of Communication:
1. An acceptance may be effective on dispatch even though it fails to reach the
addressee.
2. Failure of diligence becomes immaterial if the offeror receives acceptance
seasonably.
j. Restatement 58: Neccesity of Acceptance complying with the terms of the offer:
i. An acceptance must comply with the requirements of the offer as to the promise to be
made and the performance to be rendered.
ii. The offeror is the master of his offer and is entitled to insist on a prescribed type of
acceptance.
k. Restatement 59: Purported Acceptance Which Adds Qualifications
i. “A reply to an offer which purports to accept it but is conditional on the offeror’s assent
to terms additional to or different from those offered is not an acceptance but is a
counter-offer”
ii. Qualified Acceptance: Proposes an exchange different from that proposed by the
offeror. This terminates the power of acceptance of the original offeree.
iii. Statements of Conditions implied in the offer:
1. The offeree must assent unconditionally to the offer as made, but the fact that
the offeree makes a conditional promise is not sufficient to show that his
acceptance is conditional.
2. Example: A makes a written offer to sell B a patent in exchange for B's promise
to pay $ 10,000 if B's adviser X approves the purchase. B signs the writing in a
space labeled "Accepted:" and returns the writing to A. B has made a
conditional promise and an unconditional acceptance. There is a contract, but
B's duty to pay the price is conditional on X's approval.
3. A offers to sell B land, B accepts stating, “if you can give me a legal title”. There
is a contract, usage of the trade implied that the title would be legal.
l. Restatement 60: Acceptance of an offer which states place, time, or manner of acceptance
i. If an offer prescribes the place, time or manner of acceptance its terms in this respect
must be complied with in order to create a contract. If an offer merely suggests a
permitted place, time or manner of acceptance, another method of acceptance is not
precluded.”
ii. offeree may not have to comply with the terms if there is any way to interpret the
language of the requirement differently.
m. Restatement 61: Acceptance which Requests a Change of Terms
i. An acceptance which requests a change or addition to the terms of the offer is not
thereby invalidated unless the acceptance is made to depend on assent to the changed
or added terms.
ii. Examples:
1. B replies, “I accept your offer. I hope you can deliver in installments”. There is a
contract, and A does not have to deliver in installments.
2. B replies, “I accept your offer. Please also send 5 widgets”. There is a contract.
Asking for widgets is not a counter-offer but a separate offer.
n. Restatement 62: Effect of performance by offeree when offer invites promise or performance
i. When an offeror invites acceptance by performance or promise, the beginning or tender
of the performance is acceptance.
ii. Such acceptance operates as a promise to render complete performance.
iii. Unless an option contract is contemplated, the offeree is bound by his performance.
o.
p.
q.
r.
s.
iv. Preparation to perform is not usually sufficient. (Carpenter buying lumber before he
accepts, and A revokes offer- no contract).
Restatement 63: Time when acceptance takes effect
i. Acceptance made in a manner and medium invited by the offer is operative and
completes manifestation of mutual assent as soon as put out of the offeree’s possession
without regard to whether or not it reaches the offeror, but
ii. An acceptance under an option contract is not operative until it reaches the offeror.
iii. Revocation of an offer is not operative if received after an acceptance is dispatched.
iv. Loss or Delay in Transit:
1. Usually the contract will have language that will inform of how to deal with
these situations, but if this language is lacking, acceptance is binding upon
dispatch.
v. Revocation of Acceptance:
1. An attempt to revoke the acceptance by overtaking communication is
ineffective even though revocation is received before acceptance. The
recapture of acceptance does not deprive it of its legal effect. But if they
attempt to recapture the acceptance upon learning of a mistake, it may be a
different situation.
2. Ex: A mails an offer to B to appoint B A's exclusive distributor in a specified
area. B duly mails an acceptance. Thereafter B mails a letter which is received
by A before the acceptance is received and which rejects the offer and makes a
counter-offer. On receiving the rejection and before receiving the acceptance,
A executes a contract appointing C as exclusive distributor instead of B. B is
estopped to enforce the contract.
3. If the acceptance is in hand of the offeree’s employee, it is still treated as if it
were in the hands of the offeree.
vi. Option contracts are the exception. Must reach offeror by the deadline, so the risk of
getting lost in transit, etc falls on the offeree.
Restatement 65: Reasonableness of Medium of Acceptance
i. Unless circumstances known to the offeree indicate otherwise, a medium of acceptance
is reasonable if it is the one used by the offeror or one customary in similar transactions
at the time and place the offer is received
Restatement 67: Effect of a receipt of acceptance improperly dispatched.
i. Where an acceptance is seasonably dispatched but the offeree uses means of
transmission not invited by the offer or fails to exercise reasonable diligence to insure
safe transmission, it is treated as operative upon dispatch if received within the time in
which a properly dispatched acceptance would normally have arrived.
ii. Once acceptance reaches the offeror, the means of transmission becomes immaterial.
iii. This means if the acceptance is received timely, there is an irrevocable contract.
Restatement 68: What Constitutes Receipt of Revocation, Rejection, or Acceptance
i. A written revocation, rejection, or acceptance is received when the writing comes into
the possession of the person addressed, or if some person authorized by him to receive
it for him, or when it is deposited in some place which he has authorized as the place for
this or similar communications to be deposited for him.
1. A says acceptance needs to be received by Tuesday. A is away on holiday, but
acceptance reaches his mailbox on Monday. There is a contract.
Restatement 69: Acceptance by Silence or Exercise of Dominion
i. Where an offeree fails to reply to an offer, his silence and incation operate as an
acceptance in the following cases only:
1. Where an offeree takes the benefit of offered services with reasonable
opportunity to reject them and reason to know that they were offered with the
expectation of compensation.
2.
t.
u.
v.
Where the offeror has stated or given the offeree reason to understand that
assent may be manifested by silence or inaction, and the offeree in remaining
silent and inactive intends to accept the offer.
3. Where because of previous dealings or otherwise, it is reasonable that the
offeree should notify the offeror if he does not intend to accept.
4. Basically two main cases when silence where silence is acceptance: offeree
silently takes on offered benefits, and those where on party relies on the other
part y’s manifestation of intention that silence may operate as acceptance.
(May be limited by the statute of frauds).
5. No right to restitution if the services are offered officiously or gratuitously. But
when the recipient knows or has reason to know that the services are being
rendered with an expectation of compensation, and by a word could prevent
the mistake, he is held to acceptance if he fails to speak.
ii. An offeree who does any act inconsistent with the offeror’s ownership of offered
property is bound in accordance with the offered term unless they are manifestly
unreasonable.
1. See illustrations.
iii. The mere fact that an offeror states that silence will constitute acceptance does not
deprive the offeree of his privilege to remain silent without accepting. But the offeree is
entitled to rely on such a statement if he chooses.
1. Ex: B makes no reply and remains inactive with the intention of thereby
expressing his acceptance. There is a contract.
UCC 2-206. Offer and Acceptance in Formation of Contract
i. Unless otherwise unambiguously indicated by the language or circumstances:
1. An offer to make a contract shall be construed as inviting acceptance in any
manner and by any medium reasonable in the circumstances.
2. Where the beginning of a requested performance is a reasonable mode of
acceptance an offeror who is not notified of acceptance within a reasonable
time may treat the offer as having lapsed before acceptance.
Class Notes: When does an offer come to an end?
i. The offeree does not have the power to accept the offer indefinitely. Terminates when:
1. The offeror can revoke the offer prior to acceptance
2. The offeree, by rejection of the offer or a counter-offer proposing different
terms
3. Lapse of time
4. Death or legal incapacity of either party
5. The non-occurance of any condition of acceptance that the offeror imposed in
making the offer.
ii. Mailbox Rule
1. The acceptance being effective upon dispatch is a high high level of formalism
in the law. Problem: Offerors do not know when they are bound, there is a
period of ambiguity when acceptance is floating around the mail system. What
if they entered into a contract with someone else?
2. Easiest way to get rid of the mailbox rule: stipulate a condition on the mode of
acceptance.
Lonergan v. Scolnick
i. Quick Facts: Defendant entered into Negotiations with plaintiff to sell a tract of land.
Several transactions by letter between the P and D, and defendant ultimately told the P
that he would need to act fast to purchase land. Then, Defendant sold land to a third
party, and plaintiff was not aware of this because of the overlap with the mail. The
plaintiff then went through the provisions necessary to purchase the land.
ii. The court ruled that there was no contract, because there was never an offer. The
language of the letter made this clear, “if you are interested, act fast”, meaning it was
likely that someone else would purchase the land soon.
w. Advertising and Price Listings are not offers and are not binding. Consider the shaky thing
vignette:
i. Scientist sees price in catalog, places an order, company calls to notify him of price
change. There was no offer and acceptance, but the catalog price cannot be considered
an offer.
ii. Same facts, but catalog says “price guaranteed for 90 days”. Still not binding. This is still
just an advertisement to get heads in the door. They have no idea how many orders
they will have, if they’ll run out, etc.
iii. Same facts as (i), but credit card number is taken. Still not an offer. Have to consider the
industry context. Would you be surprised if after ordering something online, they told
you it was not in stock and that you could not have it afterall? No. Still not an offer.
Think of the transaction as: Give me your credit card number to secure your purchase,
and IF we have it, we’ll send it.
x. Dickinson v. Dodds
i. Quick Facts: Defendant agreed to sell a swelling house to plaintiff, that was to expire on
Friday at 9oclock. Plaintiff then wrote a letter of acceptance to the defendant upon
learning he was planning to sell the land to someone else. The letter was given to his
mother-in-law, and it never reached the defendant. He had sold the property to
Defendant2, Allen and had received a down deposit.
ii. Court ruled that there was never an offer, and the plaintiff knew that Dodds did not
intend for the offer to be binding. There was no meeting of the minds, as one intended
the contract to be binding and the other did not.
y. Morrison v. Theolke
i. Quick Facts: Plaintiffs sent to defendants an agreement to purchase land. Defendants
signed contract and mailed to plaintiffs. After mailing, but before it reached plaintiffs,
defendants canceled contract.
ii. Defendants are bound due to the mailbox rule (highhhh formalism). Once it leaves
possession of the offeree, acceptance is binding. At that moment, there has been a
meeting of the minds.
XXII.
Unilateral Contracts/Option Contracts
a. Unilateral Contracts: Formed when a promise for future performance (the offer) is exchanged for
actual performance itself (the acceptance) rather than a promise for future performance.
Promisees may be willing to attempt, but not promise performance.
b. Bilateral Contracts: Formed when a promise for future performance (the offer) is exchanged for
another promise of future performance (the acceptance).
c. Restatement 45: Option Contract created by part performance or Tender
i. Section is limited to unilateral contract. (Rewards, prizes, non-commercial exchanges
between relatives and friends)
ii. Where the offeror invites acceptance only by performance and does not invite
promissory acceptance, an option contract is created when the offeree tenders or
begins performance.
iii. The offeror’s duty to perform under any option contract is conditional on completion or
tender of the invited performance in accordance with the terms of the offer.
iv. A reservation to revoke after performance means that there is no promise and no offer.
1. B owes A $ 5000 payable in installments over a five-year period. A proposes
that B discharge the debt by paying $ 4,500 cash within one month, but
reserves the right to refuse any such payment. A has not made an offer. A
tender by B in accordance with the proposal is an offer by B.
2. A proposal to receive payment of money or a delivery of goods is an offer only
if acceptance can be completed without further cooperation by the offeror.
d.
e.
f.
v. Cannot revoke an option contract once the offeree has began performance. Offeror is
bound even though the offeree is not. But offeror does not have to perform until
offeree’s performance is complete.
vi. Beginning to Perform:
1. In most cases, beginning to perform carries an express promise to complete the
performance.
vii. Preparations to perform:
1. Not usually sufficient to bind offeror, but if reliance is produced, may be
binding (see 87).
viii. See illustrations in text.
ix. BASICALLY: Under this restatement, if you begin performance, the offeror cannot
revoke.
Restatement 87: Option Contracts (Merchants see 2-205).
i. An offer is binding as an option contract if:
1. is in writing and signed by the offeror, recites a purported consideration for
the making of the offer, and proposes an exchange on fair terms within a
reasonable time; or
2. is made irrevocable by statute.
ii. An offer which the offeror should reasonably expect to induce action or forbearance of
a substantial character on the part of the offeree before acceptance and which does
induce such action or forbearance is binding as an option contract to the extent
necessary to avoid injustice.
1. Could enforce the contract or provide restitutional remedies. Reliance must be
substantial and foreseeable. Also depends on the context (was it at his own
risk, relative bargaining power, etc).
2. A leases a farm to B and later gives B an "option" to buy the farm for $ 15,500
within five years. With A's approval, B makes permanent improvements in the
farm buildings, builds roads, drains and dams, and contours plow land, using his
own labor and expending several thousand dollars. Toward the end of the five
years, A purports to revoke the option, demanding a higher price. B then gives
written notice of acceptance in accordance with the terms of the offer. Specific
performance by A may be decreed.
iii. Consideration in option contracts:
1. Requirement for consideration under an option contract is nominal. You can
even say “for a dollar” and never pay it.
2. False consideration is acceptable.
UCC 2-205: Firm Offers
i. 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 ofereee must be separately signed by the offeror.
ii. This is a movement away from the formality of consideration. You don’t have to have a
false recital, now it is not needed at all.
Petterson v. Pattburg
i. Defendant wrote up a contract that he would give plaintiff 780 dollars off of his
mortgage granted that it is paid before a certain date. Plaintiff went to pay the
mortgage before that deadline, but defendant had already sold the mortgage.
ii. Under restatement 45, the offeror is not bound to perform under an option contract
until performance is complete, but cannot revoke the offer if offeree has begun
performance. The question is, when do we consider performance? When he is saving up
g.
h.
i.
XXIII.
a.
b.
c.
money to pay, or when he’s walking up his steps to hand over the cash? Court’s
interpretation is highly formalistic and not too contextual.
iii. The drafting of restatement 45 generally overrides this verdict. Coming up the stairs
with cash in hand is at least the beginning of performance. If he had of said, “until you
place the money in my willing palm” that would have been a different story.
Carlill v. Carbolic Smoke Company
i. CSBC put out ad saying that they’d give 100 to anyone who contracts a disease after
using some ball. Plaintiff used the ball, caught the flu, and she is suing for 100.
ii. Court ruled that she is entitled to payment. Her completion of performance was
sufficient to bind the offeror. The company gave no reason to believe that they would
need notice of people intending to accept the promise.
iii. The court is slowly abandoning formalism in this case as compared to the Petterson
case.
iv. Like Lucy v. Wood, sometimes implied terms will function just as importantly as express
terms.
Glover v. Jewish War Veterans
i. Jewish war veterans put out reward for information leading to the arrest of the
murderers of a pharmacist. Plaintiff in the case provided the police with information
which led to the arrest of one of the murderers. Plaintiff did not learn of the reward
until the day after she provided the police with information.
ii. Court ruled that the plaintiff was not entitled to the reward, because she did not learn
of it until post-performance. She acted out of a public service. Mutual assent is lacking
and so is bargained-for consideration.
Industrial America v. Fulton Industries
i. Fulton issued an advertisement stating that they would pay brooker’s fees for a merger.
IA ended up setting up a merger for Fulton, but they did not pay. Question is whether or
not Fulton should pay IA even though he may not have initially relied on their offer and
intended to capitalize on it.
ii. The court rules that the intent is irrelevant when assent is manifested in actions.
Performance will make the performance-inviting offer binding despite subjective intent
if there was a conscious will to do it. Motive is immaterial. The primary motive for
performance does not have to be the offer. Unless it is explicitly stated that you are not
accepting the offer, interpreting actions is enough. Plus, not much weight should be
placed on human intent. Too difficult to understand. Consider unjust enrichment claim
in this case as well.
Qualified Acceptance
Mirror Image Rule: In order to have a contract, the terms of the acceptance must be exactly the
same as the terms of the offer.
i. This rule has seriously dwindled over time. Form contracts have necessitated flexibility
in this rule.
Two basic tests when terms are missing:
i. Are the missing points so important that they indicate that there is no mutual
assent/agreement between the parties? If not,
ii. are there reliable external standards/references that the court can use to resolve these
terms.
UCC 2-207: Additional Terms in Acceptance or Confirmation
i. A definite and seasonable expression of acceptance or a written confirmation which is
sent within a reasonable time operates as an acceptance even though it states terms
additional to or different from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to the additional or different terms.
ii. The additional terms are to be construed as proposals for addition to the contract. Such
terms become part of the contract unless
1. They materially alter it
2.
3.
The offer expressly limits acceptance to the terms of the offer
Notification of objection is given or is given in a reasonable time after notice of
them is received.
iii. Conduct by both parties which recognizes the existence of a contract is sufficient to
establish a contract for sale although the writings of the parties do not otherwise
establish a contract. In such case the terms of the particular contract consist of those
terms on which the writings of the parties agree, together with any supplementary
terms incorporated under any other provisions of this act.
iv. Class Notes: Additional terms are PROPOSALS that become part of the contract UNLESS
they materially alter it. If it does materially alter, then the proposals are never formally
integrated into the contract
d.
XXIV.
a.
b.
c.
d.
e.
Poel v. Brunswick
i. Series of letters were exchanged between the plaintiff and defendant concerning the
purchase of rubber. The defendants sent a “contract” making an offer agreeing to
purchase rubber, with a clause which stated that the contract would be enforceable on
the prompt acceptance of the order. The plaintiffs in response sent a standard form
which accepted their offer, but added a small difference.
ii. Court rules that there was no actual contract. The fact that the plaintiffs sent a standard
form with different terms constituted a counter-offer. This is a traditional ruling in these
types of circumstances- there is now much more flexibility.
iii. These are the types of cases that the UCC is trying to avoid. They are treated every piece
of language in the contract as important, which is not the case. Not all words have
value.
Incomplete Agreements
Whether intentionally or otherwise, sometimes terms are left open in contracts to be agreed
upon at a later date.
Restatement and UCC governs when these types of contracts are enforceable and how they will
be enforced.
Restatement 33: Certainty
i. Even though a manifestation of intention is intended to be understood as an offer, it
cannot be accepted so as to form a contract unless the terms of the contract are
reasonably certain.
ii. The terms of a contract are reasonably certain if they provide a basis for determining
the existence of a breach and for giving an appropriate remedy.
iii. The fact that one or more terms of a proposed bargain are left open or uncertain may
show that a manifestation of intention is not intended to be understood as an offer or
as an acceptance.
iv. actions of parties may show that they have intended to conclude a binding agreement,
even though terms are missing.
1. in this case, uncertainty as to incidental or collateral matters is seldom fatal to
the existence of a contract.
UCC 2-204: Formation in General
i. A contract for sale of goods may be made in ANY MANNER SUFFICIENT to show
agreement, including conduct by both parties which recognizes the existence of a
contract.
ii. An agreement sufficient to constitute a contract for sale may be found even though the
moment of its making is undetermined.
iii. Even though one or more terms are left open a contract for sale does not fail for
indefiniteness if the parties have intended to make a contract and there is a reasonably
certain basis for giving an appropriate remedy.
UCC 2-305: Open Price Term
f.
g.
h.
i. A party can conclude a contract even if the price isn’t agreed upon. The price will be a
reasonable price at the time of delivery if:
1. nothing is said of price.
2. price is left to be agreed by the parties and they fail to agree.
3. the price is to be fixed in terms of some agreed market or other standard as set
or recorded by a third person or agency and it is not so set or recorded.
ii. A price to be fixed by the seller or by the buyer means a price for him to fix in good
faith.
iii. When a price left to be fixed otherwise than by agreement of the parties fails to be
fixed through fault of one party the other may at his option treat the contract as
cancelled or himself fix a reasonable price.
iv. Where, however, the parties intend not to be bound unless the price be fixed or agreed
and it is not fixed or agreed there is no contract. In such a case the buyer must return
any goods already received or if unable so to do must pay their reasonable value at the
time of delivery and the seller must return any portion of the price paid on account.
UCC 2-309
i. If there is not a time provision, it is implied that the time should be reasonable.
1. based on good faith and commercial standards
ii. You should tell the person when so much time has passed that the contract is about to
be breached
1. the longer you don’t say anything, the longer the “reasonable time” standard
becomes
iii. if the duration of successive performances isn’t explicitly stated, it is valid for a
reasonable time, but may be terminated at any time by either party
1. notice and negotiation is favored, good faith, avoid surprise
a. governed largely by circumstances (how long the relationship has
been)
b. should give other party time to seek a substitute arrangement
iv. Termination of a contract by one party except on the happening of an agreed event
requires that reasonable notification be received by the other party and an agreement
dispensing with notification is invalid if its operation would be unconscionable
Class Notes: Exception to Open Price Terms
i. There are three main situations in which a contract with an open price term may not be
enforceable:
1. When you are selling a truly unique item (There is no fair market value because
it is so unique and rare).
2. When the contract specifies that the price is to be set by a third party, but that
third party dies or refuses to set the price.
3. If the contract expressly states that the price must be determined on
agreement of the party.
Empro Manufacturing v. Ball-C Manufacturing
i. Empro sent a letter of intent to purchase assets of Ball. Letter said, “Empro’s purchase is
subject to satisfaction of certain conditions precedent to closing, including, not limited
to…” Both parties signed the letter, but had difficulties negotiating some of the terms of
the agreement. Ball then began negotiations with another party, empro files suit stating
that the letter obliges ball to sell only to them.
ii. Even though terms of the agreement may be left open in a binding contract, that is not
the case here. The key is that the parties have to intend to be bound (iii under
restatement 33). The court felt that the language in the letter was sufficient to show
that ball did not intend to be bound. “subject to”. Furthermore, Empro made it clear
that they had a way out of the bargain (Board of directors must approve). The court saw
this as a stage of negotiations which may ultimately lead to a former contract.
Negotiations, of course, are not binding. Court’s are very hesitant to enforce letters of
intent in connection with the sale of the business. This is because the process of
negotiating the sale of business is a multi-stage process.
i. Joseph Martin Deli v. Schumacher
i. Lease stated that tenant could renew lease at annual rentals to be agreed upon. When
the tenant wished to renew the lease, the landlord wanted to start rent at 900, although
the appraisal was at 545. The plaintiff filed in court a motion for the landlord to perform
to extend the lease at the appraiser’s figure. Landlord wanted to evict the tenant.
ii. The price terms were left open and the court ruled that the terms were too open-ended
for a third party to determine the costs fairly. The court did not want to compromise
issues of mutual assent. Landlord did not state he would be bound my market value,
and the parties did not even agree for a third party to interpret the contract. Too
uncertain (restatement 33).
iii. W questions the validity of the court’s argument. Can’t they look at what surrounding
leases are and determine what a fair price would be?
XXV.
Bargaining and Power
a. My view of Bargaining Power rules:
i. The responsibility of due diligence is generally to be put on the signatory party granted
they possess the basic intelligence and resources necessary to understand the terms of
the contract. However, these burdens may shift to the other party under the following
circumstances:
1. Where bad faith practices are utilized by the other party to induce assent.
2. Where the contract is substantively unconscionable: “contracts so extortionate
and unconscionable on their face as to raise the presumption of fraud in their
inception”.
3. Where there is a reasonable reliance on established material industry
standards, however the contract precludes these standards in a nonconspicuous manner.
4. Where the signatory party justifiably relies on the other party’s
representations, although these representations may be negated in the actual
contract.
ii. Just because the parties are on an unequal bargaining foot does not mean the contract
will not be enforced. Rather, the court looks at major discrepancies as a red-flag and as
a starting place for analysis.
b. UCC 2-302: Unconscionable Contract or Clause
i. If a contract is unconscionable, the court may refuse to enforce it in whole, or it may
omit just the unconscionable portion, or it may limit the unconscionable portion.
ii. If a contract is accused of being unconscionable, parties may present evidence to
persuade the court otherwise.
c. Merit Music v. Sonneborn
i. MM allegedly approached The Sonneborn’s with a handwritten note asking them to
sign. The Sonneborns stated that they did not read it. The terms of the contract were
unusually favorable to MM. When MM enforced the contract, having the Sonnebornes
pay him a guarantee, the Sonnebornes had the machines withdrawn. MM sues for a
breach of contract.
ii. The court ruled that because there was no presence of fraud, duress, mutual mistake,
etc, and that because the Sonneborns were of reasonable intelligence and had the
resources to be able to interpret the contract, they are therefore bound by their
signatures. This was a foolish mistake, but the courts are not willing to bail them out.
d. Skagit State Bank v. Rasmussen
i. Flint innocently misrepresented what it was Hayton was signing. Hayton signed the
documents without reading them. He believed they were necessary only to allow the
other parties to use their interests in the Farm to secure the loan. Instead, he had signed
the guaranty. The loan defaulted, and the bank came after all parties, including Hayton
to collect.
ii. Court ruled that Hayton was responsible for what he signed. The language of the
contract was clear and unambiguous, each page was short and clearly labeled, even a
casual skim of the documents would have notified him of the documents’ meaning, no
conduct of fraud was involved, he signed voluntarily, he had experience with land
transactions, he could have consulted with an attorney but chose not to. Furthermore,
innocent misrepresentation could not have been applied here- Flint was not an agent of
the bank, therefore his statements should not have been relied on. Also, when the
terms are clearly in writing before you, there is no justifiable reliance.
e. Cate v. Dover Corporation
i. Cate purchased lifts from Dover. Lifts never functioned properly. Cate sues for breach
of implied warranty. Dover states that implied warranty was barred by a disclaimer
contained within a written express warranty.
ii. Court rules that even though an implied warranty of merchantability can excluded or
modified in a contract, it must be done in a conspicuous manner. Court feels that this
was too non-conspicuous. The seller did nothing to bring to the buyer’s attention that
the warranty was excluded.
f. Powertel v. Bexley
i. After Bexley filed a lawsuit against Powertel, she received a pamphlet that all claims
against Powertel had to be sent to arbitration. Powertel maintains that this was a part
of the original terms and agreements. By Bexley keeping her cell phone plan for ten
days, she accepted terms of the contract.
ii. Court rules that this was this contract was substantively unconscionable and is therefore
unenforceable. The contract asks too much- that costumers give up their legal remedies
against Powertel. There is an absence of choice, the costumers are unable to reject
these terms without the inconvenience of losing their cell phones. Furthermore, the
notice of this material change in the contract was not conspicuous.
g. Williams v. Walker-Thomas Furniture Company
i. Purchases made from furniture company, paid for by monthly installments. Until all
payments were made, furniture company retained title of the items and could
repossess. Could also repossess all items previously purchased.
ii. The court refused to enforce this contract on the basis of unconscionability. The court
asked the following questions to determine if the contract was indeed unconscionable:
1. Meaningful choice may be negated by disparity of bargaining power
2. Were the terms so clear that a reasonable party could understand?
3. Are the terms unreasonably favorable to one party?
iii. The court found the answers offered failed to satisfy the requirement that a contract be
conscionable.
h. Jones v. Star Credit Corp
i. Welfare recipients paid over 1000 dollars for a freezer which had a retail value of 900
dollars.
ii. The court held that charging a vulnerable person far more than what a product is worth
can be a form of unconscability. The poor and illiterate have a horrible bargaining power
and the court should step in when necessary to protect them.
iii. From class: We have vaguely floating around in the legal system a 3x rule. If you sell
something for 3x the market value, you are suspect for price unconscionability. Cleary
there are plenty of conscionable situations where people pay 3x the market value.
XXVI. Deference to Writings: The Statute of Frauds and the Parol Evidence Rule
a. UCC 2-201: Formal Requirements, Statute of Frauds
i. For sale of goods above 500 dollars:
1. Must be in writing and signed by the party against whom enforcement is
sought
2.
A writing is not insufficient because it omits or incorrectly states a term agreed
upon but the contract is not enforceable under this paragraph beyond the
quantity of goods shown in such writing. Must also state the subject matter,
not just “goods”.
3. Between merchants if within a reasonable time a writing in confirmation of the
contract and sufficient against the sender is received and the party receiving it
has reason to know its contents, it satisfies the requirements of subsection (1)
against such party unless written notice of objection to its contents is given
within 10 days after it is received.
4. A contract which does not satisfy the requirements listed in number one but
which is valid in other respects is enforceable if:
a. If the goods are made specifically for the value and cannot be sold to
others (l don’t’ know??)
b. if the party against whom enforcement is sought admits in his
pleading, testimony or otherwise in court that a contract for sale was
made, but the contract is not enforceable under this provision beyond
the quantity of goods admitted; or
c. with respect to goods for which payment has been made and
accepted or which have been received and accepted
5. Note from class: Just because a writing meets all of these requirements does
not necessarily mean it will be enforced. What if there were fraud involved,
what if the price term is left open and parties cannot come to agreement?
b. The Parol Evidence Rule
i. a rule of contract interpretation which forbids the admission of evidence concerning
prior or contemporaneous agreements for the purpose of varying or contradicting a
later writing.
1. If a contract expresses all or part of the contract, the parol rule limits the court
to examining only that document.
2. protects against jury bias, who are not equipped to handle complex
agreements with numerous oral and written contract terms
3. protects against admission of inaccurate info, parties may forget or change
terms of oral contracts to their advantage, intentionally or not.
c. The Statute of Frauds:
i. The statute of frauds traditionally applies to the following 6 categories (MY LEGS), but
this is not an exhaustive list, and the application of the statute varies in importance.
1. Marriage promises, performances longer than a year, real estate/land sales,
executor, goods over $500, Suretyship promises.
2. Modern additions: Insurance contracts, loans, leasing capital, etc.
d. Comparing Statute of Frauds and Parol Evidence
i. Both require exclusion of of extrinsic evidence which would vary, contradict, or add to
the terms of the written agreement
ii. Both permit extrinsic evidence which would explain ambiguous, abstruse, or technical
expressions, and assist in interpreting the intentions of the parties.
iii. However, the premise of the parol rule is that the parties have expressed agreement in
a complete integration of understanding in the contract.
1. Parties, however are not required to put everything in writing. Proof of oral
agreements collateral to and non-inconsistent with the contract and where a
contract is incomplete is allowed.
iv. The Statute of Frauds is designed to prevent fraud and perjury by requiring certain
contracts to be in writing.
1. requires every material term to be reduced to written form, whether parties
want to or not.
v. Courts are showing more flexibility in the application of both the statute of frauds (as
shown in the flagship case) and parol evidence (interpretation of language). Courts
recognize that the strict application of the rules can lead to manipulations.
1. Ex. Parties function under oral agreement for years and then one party can
suddenly breach. Parties may be able to obtain a deal more favorable than was
originally agreed to.
2. Refusing to permit parol evidence may upset the economic transaction. In
Mitchell v. Lath, for example, what if the parties were paying 8400 for the
house AND the removal of the icehouse, weren’t the Laths then unjustly
enriched.
3. When you apply the SoF you may not be able to recover even if there is a
relevant oral agreement out there.
vi. Traynor view: One reaction for the dissatisfaction with Parol evidence is the Traynor
view (Pacific Gas), which states that you should look at the events surrounding the
formation of the contract. “Words…do not have absolute and constant referents. A
word is a symbol of thought but has no arbitrary and fixed meaning like a symbol of
algebra or chemistry…”
1. This rule is at odds with more formalistic views seen in Mitchell v. Lath
e.
f.
g.
Klewin v. Flagship:
i. Oral agreement between the parties that Klewin would be put in charge of a major
construction project to span over 10 years. Flagship was unsatisfied with Klewin’s work
in the completion of the first phase, so they hired a new construction company. Klewin
sues for performance. Flagship claims that the enforcement of the contract was barred
by the statute of frauds, because performance would take longer than a year.
ii. This court, like others, has attempted to get around the one year rule under the statute
of frauds. To do so, they interpret the one-year rule to mean that performance CANNOT
POSSIBLY be performed within a year. They then interpret that requirement as,
performance of the contract within the year must be expressly prohibited by the terms
of the contract. “The question is not what the probable, or expected, or actual
performance of the contract was; but whether the contract, according to the
reasonable interpretation of its terms, required that it should not be performed within
the year." Under this interpretation, the contract was not barred by the statute of
frauds and is enforceable.
Mitchill v. Lath
i. Mitchills wanted to purchase land owned by Lath’s under the condition that they
remove an icehouse. Laths orally agreed to do so. After Mitchill moves in, Laths have not
removed the icehouse and have no intention in doing so.
ii. Due to the parol evidence rule, the court refused to consider the evidence that the Laths
promised to remove the icehouse. The court ruled that in order to consider oral
evidence, the evidence must:
1. Be collateral in form
2. It must not contradict the implied or express provisions of the contract
3. It must be information that parties would not ordinarily expect to put in
writing.
iii. The court found that the third requirement was not met. It would have been perfectly
reasonable and almost necessary to put the icehouse provision in the contract, because
it was material.
Masterson v. Sine
i. Masterson conveyed their land to Sine, with an option of repurchasing the contract.
Masterson went bankrupt and creditors came after the land. Sine states that there was
an understanding that the land was to be kept in the family even though this was not
expressed in the option contract.
ii. The court took a more open interpretation of the parol evidence rule. They state that if
the contract is integrated, parol evidence should be introduced to prove the elements of
the agreement which were not reduced to writing. If there are matters on which the
contract is silent, parol evidence should be consulted, especially when the parties did
not intend for the writing to be an exclusive embodiment of their agreement.
Furthermore, the court believes that parol evidence should be excluded only when the
evidence is not credible or the finder of fact is likely to be misled.
iii. In this situation, the court felt that it was reasonable that there may have been other
agreements. The deed could have surved the sole purpose for leaving the option to
purchase open. The deed is silent on issues such as assignability, and parol evidence
should be permitted.
iv. Because this is a transaction between family, the courts recognize that context and
recognize that a contract may not be as formal, say than it should be in Mitchell v. Lath,
which was only a one-on-one transaction.
v. Parol evidence is traditionally prohibited if there is a total integration, but this case
suggests that in order to even determine if there is a total integration, the context needs
to be examined.
h. Parol Evidence and Interpretation
i. Mitchell and Matterson are parol evidence cases while Pacific and Trident are
interpretation cases.
ii. The parol rule does not bar interpretation. The question of parol evidence should arise
after we figure out what the words on the paper mean.
iii. Example: You contract to buy a piece of 2 x 4 piece of wood, but in the trade 2 x 4 is
actually a 1.5 x 3.5 piece of wood.
1. To interpret, we first need to determine what the real meaning of 2x4 is.
Interview people in the industry perhaps.
2. Then if there is still a dispute, you apply the parol evidence rule: “But we had a
side agreement saying that we will be getting 1.7 x 3.7 anytime we say 2 x 4.
3. Under Mitchell, we would disregard the parol rule, not because 1.7 x 3.7 isn’t
equal to 2 x 4, but because it is not equal to 1.5 x 3.5.
i. Pacific Gas and Electric Company v. GW Thomas Drayage and Rigging Company
i. Defendant agreed to incur all risk associated with the performance of the contract for
the plaintiff, indemnify. Defendant’s work injured property of plaintiff and plaintiff
wants to recover amount spent on repairs. Defendant said that indemnify language was
meant to cover damage to third parties, not plaintiffs.
ii. The court ruled that parol evidence should be admitted in order to discover what it was
that the parties actually assented to. Furthermore, the court does not want the meaning
to corrupted by the bias of judge’s background and education. The court may attach
legal meanings to words that the parties did not intend.
iii. The court also introduced this theory that no words have one meaning, but are relevant
to their surrounding context and surrounding circumstances. -“When a judge refuses to
consider relevant extrinsic evidence on the ground that the meaning of the words is to
him plain and clear, his decision is formed by and wholly based upon the completely
extrinsic evidence of his own personal education and experience”.
iv. The court ended up stating that parol evidence should be introduced when the
interpretation of a contract is under dispute. This is necessary to meet the high
standards of mutual assent.
j. Trident Center v. Connecticut General Life Insurance
i. Two parties entered into a contract for a loan. Defendants had a provision which stated
that they could not pre-pay the loan, but then had another clause which stated that “in
the event that you default and pre-pay”. Plaintiffs argued this rendered the language of
the contract ambiguous, and parol evidence should be introduced to interpret it.
ii. The court is strongly against admitting parol evidence, but decide to allow it based on
the precedent established by Pacific Gas. Other than the precedent, they believe that
the words on the contract are perfectly precise and clear- but Pacific Gas suggests that
all words are ambiguous. If the pacific rule were not set, the traditional rule would be to
ban parol evidence which is used to interpret, contradict, or add to the terms of the
contract.
k. Fragiliment Importing v. BNS INTL Sales Corp
i. When the chicken arrived, plaintiff found it was not young chicken suitable for broiling
and frying, but it was stewing chicken. The second shipment had the same problem.
Plaintiff felt that it implied the chickens needed to be young, therefore the defendant
breached by sending old chickens.
ii. Court held that the definition of chicken was ambiguous and allowed parol information
for interpretation. The plaintiffs, however, were unable to prove that the defendants
interpreted the contract incorrectly constituting a breach. There were indeed wide
interpretations of what “chicken” meant, and the plaintiffs should have been more
specific.
XXVII. Contract Breach and Remedies. Definitions.
a. When a party breaches a contract, there are remedies available.
b. Sometimes it may be more efficient for a party to breach a contract even the wake of being
forced to pay damages.
i. Theory of efficient Breach: Where the breaching party will be economically better off
even after he pays damages measured by the expectation measure. Damages will put
the other party in the position he/she would have been in, so neither party is worse off.
ii. If a person enters into a contract but then finds a much better deal elsewhere efficiency
is promoted by allowing him to break his promise.
c. Types of Recovery: Traditional Damages, Rescission and Restitution, Punitive Damages,
Liquidated Damages. Definitions:
d. Expectation Damages:
i. The goal of expectation damages is to put the injured party in the same position he/she
would have been in had the contract been performed. The types are:
ii. Direct: How much the party directly lost from the breach. Assume you tell me you’ll sell
the car for 5000 and you breach. I find a comparable car for 5500, you have to pay me
500.
iii. Incidental: Cost incurred getting from the breach to the alternative (Gas and time I
spend looking for another car, or I must pay for the other car to be shipped). This is
usually the smallest damage amount, and you are not usually compensated for time
spent litigating.
iv. Consequential: Damages that are forseeable as a result of the promise not being
fulfilled. (Lost profits). There is a third party who wanted this car and gives me 1000 for
finding it. I had plans for this car and it would have produced a thousand dollars.
e. Reliance Expenditures:
i. Reliance damages allow the injured part to damages based on what was already
expended.
f. Rescission and Restitution:
i. The injured party can cancel the contract and will be reimbursed for expenditures made
that are presently in the hands of the breaching party (they have to give it back).
ii. Expectation damages are forward looking (what would have happened in the future if
the contract had of been performed- we want to put you where you would have been).
Rescission and Restitution is backward looking, we want to put you in the position that
you were in before you entered into the contract.
g.
h.
i.
j.
XXVIII.
a.
b.
c.
d.
iii. Examples: You sold me a house with bad water, and I don’t want it; You want a painting
back (can’t be replaced with money); You just began a franchise and it would be difficult
to determine lost profits.
Punative Damages:
i. Punitive Damages have nothing to do with losses incurred due to a breach, and these
types of damages are not enforced in contract law, even if the party acted in bad faith.
There are excpetions:
1. If there is a tort
2. Unsafe products, warranty violation
3. If the breach of contract imposes unusual emotional distress
Liquid Damages:
i. Liquidated damags are damages that will agreed upon in their original contract. Before
there is a breach, the party determines a flat rate for damages in the event of a breach.
1. Has to be a reasonable estimate of your likely actual damages. If it is way too
high, it is an unenforceable penalty.
Specific Performance
i. This is highly unusual. Courts are rarely to employ forced labor.
ii. Usually only available when the subject matter is so unique that money will not
compensate for your loss.
General Breach Formula:
i. Loss in value of the other party’s performance + Any other loss (including
incidental/consequential) – costs saved by not having to perform.
Remedies and the UCC/ Restatement
UCC 2-703: Seller’s Remedies in General
i. If the buyer wrongfully rejects or revokes acceptance of goods, or repudiates the
contract in part or in whole, with respect to the goods affected, or if the breach is of the
entire contract, the seller can:
1. Withhold delivery of such goods
2. Stop delivery
3. Resell and recover damage (2-706)
4. Cancel the contract
UCC 2-708: Seller’s Damages for Non-acceptance or Repudiation
i. The damages for the seller can be measured as followed:
1. (Market price at time and place of tender – unpaid contract price) +
Incidental/Consequential Damages – expenses saved.
2. If the measure of damages provided in subsection (1) is inadequate to put the
seller in as good a position as performance would have done then the measure
of damages is the profit (including reasonable overhead) which the seller would
have made from full performance by the buyer, together with any incidental
damages provided in this Article (Section 2-710), due allowance for costs
reasonably incurred and due credit for payments or proceeds of resale.
UCC 2-706: Seller’s Resale Including Contract for Resale
i. Under 2-703, the seller can resell the goods concern or the undelivered balance.
1. If the sale is made in good faith, and in a commercially reasonable manner, the
seller can acquire damages for the difference between the contract price and
resale price.
UCC 2-709 Action for the Price
i. When the buyer fails to pay the price as it becomes due the seller may recover, together
with any incidental damages under the next section:
1. Of goods accepted or of conforming goods lost or damaged within a
commercially reasonable time after risk of their loss has passed to the buyer:
and
2.
Of goods identified to the contract if the seller is unable after reasonable effort
to resll them at a reasonable price or the circumstances reasonably indicate
that such effort will be unavailing (W says that this has been written out of
most statutes because you can almost always sell for some price)
3. Where the seller sues for the price he must hold for the buyer any goods which
have been identified to the contract and are still in his control except that if
resale becomes possible he may resell them aat any time prior to the collection
of the judgments. The net proceeds of any such resale must be credited to the
buyer and payment of the judgment entitles him to any goods not resold.
4. After the buyer has wrongfully rejected or revoked acceptance of the goods or
has failed to make a payment due or has repudiated, a seller who is held not
entitled to the price under this section shall nevertheless be awarded damages.
e. UCC 2-710: Seller’s Incidental Damages
i. Incidental damages to an aggrieved seller include any commercially reasonable charges,
expenses or commission incurred in stopping delivery, in the transportation, care and
custody of goods after the buyer’s breach, in connection with return or rsale of the
goods or otherwise resulting from the breach.
f. 2-711 : Buyer’s Remedies in General:
i. (1) Where the seller fails to make delivery or repudiates or the buyer rightfully rejects or
justifiably revokes acceptance then with respect to any goods involved, and with respect
to the whole if the breach goes to the whole contract (Section 2-612), the buyer may
cancel and whether or not he has done so may in addition to recovering so much of the
price as has been paid
1. “cover" and have damages under the next section as to all the goods affected
whether or not they have been identified to the contract; or
2. recover damages for non-delivery as provided in this Article (Section 2-713).
3. Where the seller fails to deliver or repudiates the buyer may also
a. (a) if the goods have been identified recover them as provided in this
Article (Section 2-502); or
b. (b) in a proper case obtain specific performance or replevy the goods
as provided in this Article (Section 2-716).
4. (3) On rightful rejection or justifiable revocation of acceptance a buyer has a
security interest in goods in his possession or control for any payments made
on their price and any expenses reasonably incurred in their inspection, receipt,
transportation, care and custody and may hold such goods and resell them in
like manner as an aggrieved seller (Section 2-706).
g. UCC 2-712: Cover; Buyer’s procurement of substitute goods
i. (1) If the seller wrongfully fails to deliver or repudiates or the buyer rightfully rejects or
justifiably revokes acceptance, the buyer may "cover" by making in good faith and
without unreasonable delay any reasonable purchase of or contract to purchase goods
in substitution for those due from the seller
ii. (2) The buyer may recover from the seller as damages the difference between the cost
of cover and the contract price together with any incidental or consequential damages
as hereinafter defined (Section 2–715), but less expenses saved in consequence of the
seller's breach.
iii. (3) Failure of the buyer to effect cover within this section does not bar the buyer from
any other remedy.
h. UCC 2-714: Buyer’s Damages for breach in regard to Accepted goods
i. (1) Where the buyer has accepted goods and given notification (subsection (3) of
Section 2-607) he may recover as damages for any non-conformity of tender the loss
resulting in the ordinary course of events from the seller's breach as determined in any
manner which is reasonable
i.
j.
k.
ii. (2) The measure of damages for breach of warranty is the difference at the time and
place of acceptance between the value of the goods accepted and the value they would
have had if they had been as warranted, unless special circumstances show proximate
damages of a different amount.
iii. (3) In a proper case any incidental and consequential damages under the next section
may also be recovered.
UCC- 2-716 Buyer’s Right to Specific Performance
i. (1) Specific performance may be decreed where the goods are unique or in other proper
circumstances.
ii. (2) The decree for specific performance may include such terms and conditions as to
payment of the price, damages, or other relief as the court may deem just
iii. (3) The buyer has a right of replevin for goods identified to the contract if after
reasonable effort he is unable to effect cover for such goods or the circumstances
reasonably indicate that such effort will be unavailing or if the goods have been shipped
under reservation and satisfaction of the security interest in them has been made or
tendered.
UCC 2-713: Buyer’s Damages for non-delivery or repudiation:
i. (1) Subject to the provisions of this Article with respect to proof of market price (Section
2-723), the measure of damages for non-delivery or repudiation by the seller is the
difference between the market price at the time when the buyer learned of the breach
and the contract price together with any incidental and consequential damages
provided in this Article (Section 2-715), but less expenses saved in consequence of the
seller's breach.
ii. Market price is to be determined as of the place for tender or, in cases of rejection after
arrival or revocation of acceptance, as of the place of arrival.
Restatement 347: Measure of Damages in General:
i. Damages to the injured party will be measured as followed:
1. (a) the loss in the value to him of the other party's performance caused by its
failure or deficiency, plus
2. (b) any other loss, including incidental or consequential loss, caused by the
breach, less
3. (c) any cost or other loss that he has avoided by not having to perform.
ii. Expectation Interests
1. Designed to put the injured party in as good of a position as he/she would have
been.
iii. Other Losses:
1. Damages are not recoverable for loss beyond an amount that the evidence
permits to be established with reasonable certainty. If the damages cannot be
estimated with certainty, reliance damages are granted. Generally nominal
amounts awarded.
2. Incidental: Costs incurred in a reasonable effort (successful or not) to avoid loss
3. Consequential Lossess: Injury to person or property resulting from defective
performance.
iv. Cost or other loss avoided:
1. The injured party is expected to tak reasonable steps to avoid further loss.
2. Must subtract money the injured party saved by not having to go through with
the breach.
a. Only savings as a direct result of the breach
3. If the injured party is able to make substitute arrangements for the use of his
resources that are on longer needed to perform the contract, the profits from
those arrangements should be subtracted.
v. Actual Loss
1.
l.
If he makes an especially favorable substitution transaction, so that he sustains
a smaller loss than ight have been expected, his damages are reduced by the
loss avoided as a result of that transaction.
a. A contracts to build a house for B for $ 100,000, but repudiates the
contract after doing part of the work and having been paid $ 40,000.
Other builders would charge B $ 80,000 to finish the house, but B finds
a builder in need of work who does it for $ 70,000. B's damages are
limited to the $ 70,000 that he actually had to pay to finish the work
less the $ 60,000 cost avoided or $ 10,000, together with damages for
any loss caused by the delay.
vi. Lost volume
1. If the contract had not been broken, and could have had the benefit of both, he
can be said to have “lost volume” and the subsequent transaction is not a
substitute for the broken contract. The injured party’s damages are then based
on the net profit that he has lost as a result of the broken contract.
350: Avoidbility as a limitation on damages
i. (1) Except as stated in Subsection 2 damages are not recoverable for loss that the
injured party could have avoided without undue risk, burden or humiliation.
ii. The injured party is not precluded from recovery by the rule stated in Subsection (1) to
the extent that he has made reasonable but unsuccessful efforts to avoid loss.
iii. Effect of failure to make an effort to mitigate damages:
1. Party cannot recover for damages that he could have avoided through
reasonable efforts.
2. Should take steps to prevent damages from accruing, and should seek
substitutes.
iv. Substitute Transactions
1. Should find a substitute place to sell goods/ buy goods/ find another job etc.
2. Damages are still recoverable, but this formula is used: contract price – market
price.
v. Defining “substitute”
1. Defined by a similarity of circumstances- performance, time and place of
rendering, etc. May be awarded damages accounting for the differences.
2. A substitute should be sought in a reasonable time after the injured party
learns of the breach.
3. On May 1, A contracts to sell to B a stated quantity of grain for $ 100,000,
delivery and payment to be made on July 1. On July 1, A breaks the contract by
refusing to deliver the grain, but B does not buy substitute grain on the market
on that date although he could do so for $ 110,000. On July 10, B buys
substitute grain on the market for $ 120,000. B's damages for A's breach of
contract do not include the $ 20,000 above the contract price that he paid on
July 10, but he can recover $ 10,000 from A.
vi. Efforts Expected:
1. Sometimes, the breach may be accompanied by assurances that performance is
forthcoming. In these circumstances, the injured party is not expected a
substitute, but may still need to take some steps to avoid loss.
2. If steps to find a substitute will result in more serious loss, inconvenience, risky
contacts, etc, humiliation, less honor and respect, etc.
a. Ex. A contracts to build a building for B for $ 100,000. B repudiates the
contract shortly before A has finished work. Because A has duties to
subcontractors and will have difficulty in calculating his damages, A
spends an additional $ 10,000 and completes the building. If stopping
work would not have been reasonable in the circumstances, A can
recover the full $ 100,000, including the $ 10,000 that he spent after
B's repudiation.
b. A, a motion picture company, contracts to have B star in a musical
comedy for $ 100,000. A breaks the contract and engages C, a rival of
B, to star in the musical comedy, but offers B an equally good role
under an identical contract as a star in another musical comedy for $
100,000. Because B would be humiliated to work for A after A hired a
rival in B's place, B refuses to accept the offer. If rejection of the offer
was reasonable in the circumstances, B can recover the full $ 100,000.
m. Restatement 351: Unforeseeability and Related Limitations on Damages
i. (1) Damages are not recoverable for loss that the party in breach did not have reason to
foresee as a probable result of the breach when the contract was made.
ii. (2) Loss may be foreseeable as a probable result of a breach because it follows from the
breach
1. (a) in the ordinary course of events, or
2. (b) as a result of special circumstances, beyond the ordinary course of events,
that the party in breach had reason to know.
iii. (3) A court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise if it
concludes that in the circumstances justice so requires in order to avoid
disproportionate compensation.
iv. Requirement of foreseeability:
1. A contracting party is generally expected to take account of those risks that are
foreseeable at the time he makes the contract. He is not, however, 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.
2. Nor must he have had the loss in mind when making the contract, for the test is
an objective one based on what he had reason to foresee.
3. Nor must he have had the loss in mind when making the contract, for the test is
an objective one based on what he had reason to foresee.
4. The facts being otherwise as stated in Illustration 5, the profit that B would
have made from the use of the machine was unusually large because of an
abnormal use to which he planned to put it of which A was unaware. A is not
liable for B's loss of profit to the extent that it exceeds what would ordinarily
result from the use of such a machine. To that extent the loss was not
foreseeable by A at the time the contract was made as a probable result of the
breach.
5. A contracts to lend B $ 100,000 for one year at eight percent interest for the
stated purpose of buying a specific lot of goods for resale. B can resell the
goods at a $ 20,000 profit. A delays in making the loan, and although B can
borrow money on the market at ten percent interest, he is unable to do so in
time and loses the opportunity to buy the goods. Unless A had reason to
foresee at the time that he made the contract that such a delay in making the
loan would probably cause B to lose the opportunity, B can only recover
damages based on two percent of the amount of the loan.
v. Other Limits on Damages:
1. One such circumstance is an extreme disproportion between the loss and the
price charged by the party whose liability for that loss is in question. The fact
that the price is relatively small suggests that it was not intended to cover the
risk of such liability.
2. Courts also take into consideration the formality of the agreement (was there a
contract, etc)?
a.
A, a retail hardware dealer, contracts to sell B an inexpensive lighting
attachment, which, as A knows, B needs in order to use his tractor at
night on his farm. A is delayed in obtaining the attachment and, since
no substitute is available, B is unable to use the tractor at night during
the delay. In an action by B against A for breach of contract, the court
may, after taking into consideration such factors as the absence of an
elaborate written contract and the extreme disproportion between B's
loss of profits during the delay and the price of the attachment,
exclude recovery for loss of profits.
n. 353: Loss due to Emotional Disturbance:
i. Recovery for emotional disturbance will be excluded unless the breach also caused
bodily harm or the contract or the breach is of such a kind that serious emotional
disturbance was a particularly likely result.
ii. Two excpetions:
1. Bodily injury is caused by the breach
2. If serious emotional disturbance was likely to result from the breach
3. A makes a contract with B to conduct the funeral for B's husband and to
provide a suitable casket and vault for his burial. Shortly thereafter, B
discovers that, because A knowingly failed to provide a vault with a suitable
lock, water has entered it and reinterment is necessary. B suffers shock,
anguish and illness as a result. In an action by B against A for breach of
contract, the element of emotional disturbance will be included as loss for
which damages may be awarded.
XXIX. Remedies Cases
a. West Peevyhouse v. Garlan Coal and Mining Co
i. Plaintiffs leased coal mining operation to defendant. Defendant breached by refusing to
do remedial work. Plaintiffs want damages based on how much it will cost them to
perform, defendants want to award damages based on how much performance would
have improved the land.
ii. The court refused to give plaintiff damages based on performance, because they found
it was unlikely the plaintiffs would have payed 29,000 for something which would have
inhanced their land value by only a few hundred. The cost of performance is usually the
proper measure of damages but…”damages must in all cases be reasonable, and where
an obligation of any kind appears to This is different than in cases of realty, because the
lessor cannot lease the same property twice. Create a right to unconscionable and
grossly oppressive damages, contrary to substantial justice no more than reasonable
damages can be recovered”.
iii. Basic rule to take away: Where the economic benefit which would result to lessor by full
performance o the work is grossly disproportionate to the cost of performance, the
damages which lessor may recover are limited to the diminuition in value resulting to
the premises because of the non-performance.
b. Locks v. Wade
i. Plaintiffs leased to defendant a jukebox, in which the plaintiff would be paid a minimum
of 20/week. Contract breached, defendant seeks damages in lost profit. Defendant said
the plaintiff could re-lease the jukebox, so he shouldn’t get lost profits.
ii. This is a volume case. If the plaintiff did find another customer, he could have leased a
second machine and had the benefit of two bargains.
c. Hadley v. Baxendale:
i. Plaintiffs contracted with defendants to have a crank shipped for repair. Negligence
delayed the return of the crank and plaintiffs lost profit on their mill operation. Plaintiffs
attempted to sue for lost profits.
ii. The court ruled that the plaintiffs could recover for lost profits only if this was
forseeable by the defendants.
d. Wasserman v. Town of Middleton
i. Defendants breached lease, and the contract called for liquidated damages based on
25% of Wasserman’s profit for a year.
ii. The court ruled that this clause was only enforceable if it could proven that this
reflected the actual damages suffered by the Wassermans. If it did not, this would be
considered a penalty clause which is not enforceable.
iii. “Liquidated damages is the sum a party to a contract agrees to pay if he breaks some
promise, and which, having been arrived at by a good faith effort to estimate in advance
the actual damages that will probably ensue from the breach, is legally recoverable as
agreed damages if the breach occurs”.
e. Examples from Class
i. Seller’s Remedy (See class notes).
XXX.
Covenant not to Compete