Kalpana Kotagal
Contracts, Professor Finkelstein
Fall, 2002
I.
Introduction
II.
Damages
- expectation damages (§ 347, §§§§ 2-708, 11,12,13)
- limitations on expectation damages
o foreseeability (§ 351)
o certainty (§ 349)
o avoidability (§ 350)
- lost volume (§§ 2-708, 18)
- penalty clauses
o liquidated damages (§ 356)
o punitive damages and arbitration
- other remedies: land, unique goods, personal service, 10th vs. 14th amendments
- restitution (§§§ 371,3,4)
III.
Reaching an agreement
- Offer and acceptance
o Revocation (§ 24, 34, 35, 36, 42, 43)
o What is acceptance/Objective Theory of Assent (§ 63, 65, 69)
o Unilateral contracts/ Option Contracts (§ 30)
 Notice (§ 54)
 Acceptance (§ 45, 50)
o Interpreting assent:
 gap filling (§ 2-204, 204)
 Illusory promises (§ 202)
 Objective vs. subjective. (§ 200)
 Parol Evidence Rule (§ 209, 210, 213, 216)
 Statute of Frauds § 110
 Theoretical Approaches to enforceability
- Consideration
o Restatement approach (§ 17, 71)
o Gratuituous Promise vs. Bargained For Exchange (§ 81)
o Doctrine of Past consideration
o Doctrine of moral consideration (§ 86)
o Pre-existing duty rule (§ 89, 2-209)
o Pretextual consideration (§ 79, 21)
o Formalities: Nominal consideration (§ 87)
IV.
Promissory estoppel (§ 90): land, pension, construction, outside of contracts
V.
Performance and breach
- duty of good faith and fair dealing (§§ 205, 2-103)
- implied and express warranties
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o implied warranty of merchantability (§ 2-314)
o implied warranty of fitness (§ 2-315)
o express warranties (§ 2-313)
when can a party end a contract? What damages?
o Anticipatory breach (§§2-610, 2-611)
o Constructive conditions (§ 224), doctrine of substantial performance,
material breach.
o Perfect tender rule: cure and rescission (§§§ 2-106, 2-601, 2-508)
o Damages: cost of completion v. diminution. (§ 346)
VI.
Defenses
- Unconscionability (§§ 208, 2-302)
- Mistake (§§§ 151,152,154)
o Unilateral Mistake (§ 153)
o Misrepresentation (§§160, 161
- Impossibility/Impracticability (§§ 261, 263)
I. Introduction
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Shaheen v. Knight: doctor botched sterilization procedure on P. P got pregnant
and is suing for breach of contract to make him sterile. D files for summary
judgment. Court says (1) this is not an immoral contract. (2) doctor offered a
“warranty of cure,” this is a promise/contract. Court: this was a contract, but D
wins – there were no damages b/c having a child is a wonderful thing. Allowing
damages for normal birth of healthy child goes against public policy.
o How can this be a contract if the law will not enforce it?
o Restatement § 1 – Contract Defined: “a contract is a promise or a set of
promises for the breach of which the law gives a remedy, or the
performance of which the law in some way recognizes a duty.” This
would imply that in order for this to be a contract, law must award some
damages for its breach.
Contract
o At least 1 promise
o must be something that the law will enforce – must be made of own free
will, etc.
o something remains to be done in the future, by at least one party.
o There must be some remedy for its breach (according to the Restatement.)
Promise: promise is a manifestation of an intention to act in a particular way,
made in a manner that justifies another’s belief that promisor has committed
herself to act in that way – Restatement § 2
Focus on objective manifestation of intent. Objective manifestation trumps
subjective intent when they differ.
Required for enforcement:
o Assent: both parties must agree to the terms for the exchange. Traditional
form of assent  offer and acceptance.
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II.
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o Definiteness: terms must be clear enough for court to enforce.
o Consideration – there must be a “bargained for exchange.” (This often
excludes gift promises from enforceability.)
o Some promises require writing – Statute of Frauds.
 Exception for reliance (promissory estoppel)
Defenses: unenforceable contracts
Performance and breach: Is performance due? Has there been a breach
Damages: expectation, reliance, restitution.
Justification for Contracts: The beautiful idea: assuming (1) that people know
what they want. (2) giving people what they want will make them better off:
contracts leave both parties better off. mutually beneficial.
If they make both parties better off, why do we need to enforce them?
o If one party acts first, 2nd party has incentive to renege. Makes them even
better off than they would be under full performance of contract. Party
who acts first is at disadvantage without enforcement. Particularly
important in anonymous societies where there is no societal enforcement
through reputation, etc.
When asking whether a contract should be enforced: return to beautiful idea.
UCC vs. Restatement:
o UCC – adopted by 49 states (not LA). Article II governs the sale of
goods. Good = item movable at time it is identified to the contract, not
including money in which price is to be paid, investment securities, and
things in action. Includes unborn animals, growing crops, and other things
attached to realty, to be severed from realty. Limited to those relating to
present of future sale of goods.
o Restatement – American Law Institute – IDs and summarizes doctrinal
trends in state common law.
Damages
expectation interest: put the promisee in the position he would have been in had
contract been fulfilled. Requires the court to calculate the monetary equivalent of
performance. Standard in contracts.
reliance interest: put promisee back where he would have been had contract not
been made. Standard in torts.
restitution interest: put promisor in situation he was in before promise was made.
Deprive promisor of benefit conferred in course of transaction.
Restatement § 347- expectation interest = value of what was promised + any
other loss (reliance) – any cost/other loss P has avoided by not having to perform
(cost of contract.)
Hawkins v. McGee: before surgery, P’s hand was basically fine, but for a scar. D
hounded P to undergo surgery, guaranteed a perfect hand. After surgery, hand
was much worse – useless, hairy. Trial court awarded P reliance damages: injury
and pain and suffering over and above pre-surgery hand. Rule: correct measure of
damages: difference between value of perfect hand to P, as was promised by D,
and present hand. Critique: how are we to know what the value of the perfect
hand to P is? This subjective measure creates incentives to overstate value.
o Court is trying to award P expectation damages: compensate P for what
was promised = C-A.
o Cannot recover for routine pain and suffering  would have been endured
whether surgery was successful or not.
o ___________promised hand - C______________________________
______________hand before surgery –B_______________________
______________hand after surgery – A_________________________
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o Measure of expectation: should it be subjective value that P puts on hand
or some more objective determination of value? How much P values hand
affects P’s willingness to pay for surgery  affects price paid for
operation. Cost of surgery was anticipated as a cost of fulfilling the
contract, so that amount would have been subtracted even if surgery has
been successful. If WTP and Price are 1:1, then use objective standard.
Price is not necessarily measure of value of performance.
McGee v. U.S. Fidelity and Guaranty Co. doctor sues liability insurer for refusing
to pay damages from original suit. Holding: special contract – warranty for
perfect hand – was not covered in P’s policy.
Nurse v.Barnes: compensated not just for being able to use mills, but also for loss
of business b/c could not use mills – what he would expect to use mills for.
J.O. Hooker v. Roberts Cabinet Co. D- Hooker – general contractor hired PRoberts – sub to build and install new cabinets. As date drew nearer, Roberts
needed more money to get job done on time. Hooker paid. Then there was
disagreement over who was responsible for cabinet disposal. Main contract gave
responsibility of cabinet disposal to general contractor. Was that responsibility
transferred to Roberts in the sub-contract? Issue 1: Should contract be understood
under the UCC or as a normal contracts case? Holding 1: How to enforce mixed
contract service/sales depends on what the dispute is about. In this case, dispute
is not over the construction of the cabinets, but rather over who is responsible for
moving the old ones. Focus on services, rather that sale of goods here. Issue 2:
How should damages be determined? Holding 2: (1) should not award storage
costs, b/c would have been incurred anyway; (2) If administrator’s salary was
included in cost of performing contract, then award these – b/c administrator
could have been working on a different project. (3) lost profits – expected profits
resulting from entire contract, not just 4-day shut down.
Tongish v.Thomas: sunflower seeds = good. Regulated by KS UCC. Tongish
breaks contract to sell seeds to Co-op in order to sell them to Thomas for a higher
price. Co-op has contract to sell seeds for same price as bought from Tongish to
Bambino. Tongish pays handling fee = Co-op’s profit. Trial court awarded
damages to Co-op = actual profit = (handling fee)(weight). Co-op appealed:
damages should be difference between market price and contract price. State
statute, being used by Tongish, says damages should be actual lost profits. Co-op
is citing UCC 2-713- market price measure. B/c of structure with contract with
Bambino(required to sell at same price bought from farmer) Co-op would never
have seen the profits from the increasing market price, relative to the contract
price – suffered no lost profits. Issue: should Co-op receive damages that reflect
actual lost profits, as in the general statute, or the difference between contract
price and market price, as in the specific statute (2-713)? Rule of expectation
damages supports Tongish – should put Co-op where he would have been had
Tongish not breached. 2-713 would lead to unjust enrichment of P. P says:
awarding only lost profits creates an incentive for D to breach. Use contract with
Co-op as insurance against falling prices, then breach when price rises. holding:
court applies UCC 2-713 – difference between market price and contract price.
o Implications: Co-op gets windfall – better off than would have been had
contract been fulfilled. Are these punitive damages against D (not
allowed)?
o Argument for using expectation/actual lost profits measure: Tongish
would breach, pay P expectation damages and sell for a greater amount.
Co-op would be indifferent. Tongish, Co-op and Thomas are all better
off:
 Problem with this: Bambino. Co-op would have to buy seeds at
higher market price. Would only have been awarded lower
contract price in damages. Co-op would lose.
- UCC 2-711 – if seller fails to deliver or repudiates or buyer rightfully rejects or
revokes acceptance, buyer may cancel and, in addition to getting back money
already paid, may (1) cover and have damages as under 2-712 OR (2) recover
damages for non-delivery as in 2-713. does not address situation where buyer
HAS to cover.
- UCC 2-712 - if buyer chooses to cover, may recover difference between (cost of
cover) market price and contract price.
- UCC 2-713 - if buyer chooses not to cover, damages for nondelivery/repudiation = (market-contract price) + incidental/consequential losses –
expenses saved by seller’s breach.
- UCC 2-708 – seller’s remedies for buyer’s breach.
- This provision and the Tongish holding: expectation damages sometimes 
windfall for one of the parties.
Limitations on expectation damages:
- limitations on expectation measure of damages – foreseeability, certainty, avoidability.
Foreseeability of harm
- Restatement § 351 - Hadley Rule - Damages are foreseeable that either:
o 1. “arise naturally” from breach of contract. In the natural course of
events  general damages
o 2.) party in breach was notified  special damages
o 3.) § 351 (3) court may limit damages when “justice so requires” to avoid
disproportionate compensation. Creates a huge loophole in (1) and (2.)
o Hadley v. Baxendale (1854)
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crankshaft broke. Mill (P) asked D to deliver it to Greenwich
overnight to be repaired. D delivered late and returned late. Mill
was idle throughout.
 Should D have to pay P lost profits from idle mill?
 2 parties have made a contract which one has broken, the damages
which the injured party ought to receive should be such as “may
fairly and reasonably be considered either arising naturally, i.e.
according to the usual course of things, from such breach of the
contract itself, or such as may reasonably be supposed to have been
in the contemplation of both parties, at the time they made the
contract, as the probable result of the breach of it.”
 If special circumstances of contract were known by both P and D,
Damages = what would be expected from breach of this special
contract. If D did not know special circumstances, then damages
cannot reach this level.
Martinez v. Southern Pacific Railroad Co.
 Dragline was delivered late and damaged. P had planned to rent it.
 What constitutes foreseeable harm? Need the harm suffered be the
most foreseeable harm to recover for it?
 Distinguishes these facts from Hadley – no one would know what
a crankshaft is or how important it is to the mill.
 needn’t be the most likely harm, just must be a foreseeable harm.
 Court found that harm from late delivery was foreseeable here and
should be awarded.
By giving notice, party makes special damages foreseeable, like general
damages.
Neither Hadley nor Martinez award special damages.
when parties contract, they know the law set in Hadley, so they assumed
that foreseeable damages would be awarded in the event of breach.
Foreseeability is a default rule. If parties did not like the Hadley result,
they would have explicitly contracted around it. So it does not matter
which default rule we adopt, as long as we adopt this default consistently.
for special damages, majority rule says notice is enough. Minority rule
requires notice and assent – tacit assent rule
Morrow v. First National Bank of Hot Springs
 Coin collection and safe deposit box. P’s rare coin collection gets
stolen from his house. D did not notify P that his safe deposit box
was available.
 Court held that notice was inadequate for D to be held liable for
the value of the coin collection. Although D knew of coins’ value,
it did not agree to be liable for their loss in its contract with P
 Burden for notice for special damages is higher than just notice.
There must be tacit assent to assume responsibility. Must consider
what terms D would have agreed to had they been put to him.
Would not have agreed to be responsible for coins that were in P’s
house b/c cost of such a contract would far exceed the benefits of
such a contract.
This is the minority tacit assent rule for awarding special damages
Majority notice rule is a default rule.
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Certainty of harm
Restatement §349 - reliance interest – loss that D can prove P would have suffered with
contract’s fulfillment. Includes expenditures made in preparation for performance.
Alternative to 347 – injured parties can receive reliance damages – any loss that party in
breach can prove that injured party would have suffered with fulfillment of contract.
o Chicago Coliseum Club v. Dempsey
Boxer breaches contract with P to fight Tunney. Court awards reliance
damages, rather than expectation damages. Expected profits from the
fight were difficult to determine, no solid evidence on which to base
them. Did not award damages for expenses incurred before D entered
into his contract – were not made in reliance on the contract. Did not
award damages for expenses incurred in attempting restrain D from
any other fights. P knew that D had repudiated the contract. Any
action was at their own risk. Did say that many expenses between
time of contract signing and repudiation are recoverable.
o Anglia Television v. Reed.
P made arrangements for TV show before lead actor was finalized.
Issue is whether D should be liable for expenses incurred before
contract was signed. Court said yes. Expenses were wasted when D
repudiated so close to the broadcast date. P can claim these precontract expenses if it was reasonably in the contemplation of both
parties that the expenses would be wasted if the contract was broken.
It is reasonable that D should have known, when he entered into the
contract, that expenditure would be wasted by his breach.
o Why the difference in rules between Anglia and Dempsey?
 Under Dempsey, can only recover for damages incurred after
contract. Those incurred before were not in reliance.
 Under Anglia, can recover for damages incurred before.
 Court: Reliance damages can include opportunity costs. By
signing contract, D deprived P of opportunity to hire
someone else.
 349 says nothing about whether opportunity costs are part of
reliance costs.
 Problem with awarding opportunity costs – hard to set limits on
liability. How far back do you go to determine what was done in
preparation?
 Another analysis of Anglia – court is awarding expectation
damages in the face of uncertainty. Court assumes that Anglia
expected to at least break even on the project or they would not
have made the movie. 50/50 chance of breaking even or losing
money. If P breaks even, then expectation damages = reliance
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damages + opportunity costs. This is consistent with Dempsey,
but Dempsey did not explicitly apply this methodology.
 Seems better to estimate profits rather than simply rejecting
expectation damages in the face of uncertainty.
o Winston Cigarette Mach. Co. v. Wells-Whitehead Tobacco Co
 Cites to Alison v. Chandler, Mich.
 Better to underestimate damages that overestimate damages and
risk unnecessary taking of property. So award only reliance
damages where there is no clear measure of profits to guide the
jury.
 Parties can deal with this problem by using liquidated damages
provisions where profits cannot be ascertained or expressly
providing for increased responsibility in contract.
o Mistletoe Express v. Locke
 P contracted with D to provide a pickup and delivery service for a
year. P made up-front investments to perform contract. Never
made a profit, but losses decreased every month that contract was
in force. D terminated contract several months before its actual
end. Should P receive damages even though profits would have
been negative had contract been fulfilled? Here P chose to seek
reliance damages (b/c expectation damages would have been
negative.) P can make that choice under 349. Court says here that
in the case of negative profits, burden rests on D to show avoided
costs and prove the amount of the loss under 349. If such a loss is
shown it can be subtracted from reliance damages. In this case, D
did not rise to this burden, so losses cannot be subtracted. It does
not matter whether P proceeds under reliance (349) or expectation
(347). Gets the same damages. The only difference is that the
burden of proof under 349 shifts.
according to § 349 – expectation damages = reliance interest – her losses.
____________A_____________ 0
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AR = Reliance interests
Restatement Sections:
o 346 - Availability of damages - injured party has right to damages for
breach is contract is enforceable unless claim has been suspended or
discharged. 2.) if breach caused no loss or cannot be measured as
specified, award nominal damages (b/c an enforceable contract requires
that there be damages for breach.)
o 352 – Uncertainty as Limitation on Damages – no recoverable beyond
an amount that evidence establishes with reasonable certainty.
Avoidability of harm
- Restatement § 350 – Avoidability as a Limitation on Damages
Except for (2) damages are not recoverable for loss that injured party could
have avoided without undue risk burden or humiliation. (2)injured party is not
precluded from recovery where he made reasonable efforts to avoid loss.
- Rockingham County v. Luten Bridge Co.
o D County had contract with P bridge co. D repudiated on contract and
notified P multiple times after repudiation. P continued work on bridge
and sued for breach of contract. Court ruled that P could not claim
damages for work done after notification of repudiation. Duty to mitigate
damages – after P was given notice of breach, it had responsibility to do
nothing that would increase damages resulting from the breach. Damages
should be calculated to compensate P for expenses and damages incurred
in performance prior to repudiation and profits that would have been
realized had contract been fulfilled. This duty to mitigate damages
prevents deadweight loss.
 If P had stopped making bridge, P could sue for expectation
damages = Reliance interests (R1) + profits (Π)
 If P had completed bridge, R2, R2>R1; expectation damages = R2
+Π
 P should be indifferent between 1 and 2 b/c they simply get back
what they would have put in + expected profits. However, 2
makes D worse-off.
 Deadweight loss in 2.) = R2-R1
- Maclaine v. 20th Century Fox.
o When the film that P was supposed to star in was cancelled, D studio
refused to comply with contract. Offered P the female lead in a western.
Compensation was the same, but other provisions in contract had changed.
Court ruled that P’s decision not to accept other role did not constitute a
failure to mitigate damages b/c offer of substitute employment was not
comparable or substantially similar to previous employment. Dissent:
question of whether P’s rejection of offer of alternate employment is a
matter of fact for the jury. One way to understand this: if value of contract
to victim is primarily non financial, then the loss from forcing Maclaine to
accept the other contract > the loss of her not taking the alternate movie.
- Maclaine vs. Rockingham –
o In Rockingham consideration is money. Luten is an economic actor.
o In Maclaine there are other factors to consider in addition to money –
persona, art, etc.
o Doctrine of avoidability in Rockingham encourages efficient breach.
Maclaine makes efficient breach more difficult.
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Cooter and Ulen
o Where transaction costs = 0, there is no difference between specific
performance and damages. The doctrine of avoidabilty essentially
determines who has Coasian entitlement. With the doctrine of
avoidability, Rockingham gets entitlement. Without the doctrine of
avoidability, Luten gets entitlement. Either way, still reach efficient
outcome. The doctrine simply determines the allocation of the savings.
o Can reach the same conclusions for foreseeability and certainty. We don’t
need these doctrines to reach efficient outcome as long as there are no
transaction costs.
o So why do we need these doctrines?
 Transaction costs > 0, these doctrines make a differences 
provide default rule to decrease transaction costs for both parties.
We have background rules to facilitate efficient outcomes. As
long as Luten fact pattern happens we need a doctrine of
avoidability.
 We have goals other than efficiency.
- Friedman
o Holmes, The Common Law – free to breach a contract as long as you are
willing to pay expectation damages for breach.
o Get absurd results if you apply this same theory to property, torts, etc.
o Friedman is arguing about the importance of equitable factors not included
in the theory of efficient breach.
o Doctrine of avoidability  takes away incentives to breach
Lost Volume – when seller claims that losses from breach isn’t just loss of single item’s
profit, but a whole string of profits.
- Neri v. Retail Marine Corp.: buyer orders boat, makes downpayment, and then
breaches. Seller sells boat to someone else for same price. Buyer sues for
deposit. trial court awarded damages based on ucc 2-718(2)(b) – restitution –
buyer gets deposit - $500 back. Seller: insufficient damages. If buyer had not
breached, would have sold 2 boats, rather than just 1. Appellate court notes UCC
2-718(3)(1)  (2)(b) damages are offset if seller can establish damages through
another provision  2-708(1) (seller’s version of 2-713): damages = (market
price – contract price) + incidental – avoided costs. 2-708(2) If damages from (1)
are not enough, then damages = lost profits + incidental – allowance for costs.
Seller says that 2-708(1) is not enough b/c of doctrine of lost volume. Holding:
damages are based on 2-708(2) problem: it’s unclear whether 2-718(2)(b) applies
where another provision (2-708) is being used.
- Doctrine of lost volume only applies where goods in question are fungible. not
in situations w/ unique good. Assumes infinite stream of same product.
- Why didn’t Maclaine claim lost volume – could have made 2 movies?
Penalty Clauses
1. Liquidated damages  Contracting Around the Default Rule of Damages
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Restatement 356: General rule: if contracting parties articulate their own
damages (liquidated damages), they must estimate actual damages. Cannot be
penalties. CANNOT contract around this.
Limitations: Court will not honor penalty clauses, even if both parties agreed to
them.
Liquidated damages clauses – where damages are uncertain/hard to figure out 
more reasonable to have liquidated damages. Where damages from breach are
clear, liquidated damages clauses are suspect.
Courts consider the contract in the abstract: must have all the earmarks of a
liquidated damages clause, whichever way the breach runs.
o Kemble v. Farren: P – Royal Theater, Covent Garden – agreed to pay D
£3.6s to perform nightly. Liquidated damages clause in contract: If either
party should breach, must pay other party 1000£. Issue: is this clause a
legal liquidated damages clause or is this a punitive damages clause?
Holding: This clause is punitive. Reasoning: but theater’s damages are
probably pretty uncertain. Is this amount really unreasonable? Should not
look at particular application, but rather at the contract ex
ante/overall/facially. If court were to approach this piecemeal, would be
enforceable one way, but punitive the other. Have to do this in the
abstract  enforcement unequal against theater, even though both parties
agreed.
Why not enforce a liquidated damages clause that is actually a penalty clause?
o Lake River Corporation v. Carborundum (Posner): Initially argues that
penalty clauses prevent efficient breach: A pays painter B $500 to paint
living room. If job does not get done, A suffers $700 in damages. If C
offered B $1000 to paint his living room NOW, then it would be efficient
for B to breach and pay A damages somewhere between $700-$1000.
However, B would not breach if there were a penalty clause of $2K for
breach.
 Prosser then debunks this argument.
 Some contracts won’t be entered into without penalty
clauses – way of making parties credible.
 people are rational and have reasonable access to
information, can access possibility of breach and still think
that it is worthwhile to enter into contract.
 Refusal to enforce penalty clauses is paternalistic.
Could contract around prohibition on punitive damages:
o Set up a 2d contract in which A buys insurance of $2K from B.
o Offer reward for completion on time
Makes prohibition of penalty clauses seem pretty arbitrary
Wassenaar v. Towne Hotel: P was hired by D, hotel, has general manager.
Contract stipulates damages in case employer terminates the employment prior to
end of the contract: hotel will be responsible for fulfilling entire financial
obligation set out in contract for full 3 years. Employer terminated contract early.
Issue1: Is this clause a legit liquidated damages clause or is it punitive?
Holding1: This was a valid liquidated damages clause Issue 2: Did employee
have duty to mitigate damages with liquidated damages clause? Holding2: no
duty to mitigate damages. Test: Restatement 356: was clause reasonable under
totality of circumstances? Consider: (1) did parties intend to contract for damages
or penalty (2) Was injury caused by breach difficult to estimate at time of
contract? (3) are stipulated damages a reasonable forecaset of harm caused by
breach?
Contractarian
interventionist
beautiful idea (posner)
private punishment (wassenaar)
freedom of contract – rational actors should systemic protection
be able to move freely as long as they are
not imposing costs on others
may be efficient if they reflect expectation efficient breach discouraged (posner)
damages. (value > actual cost of contract.)
2.Punitive Damages and Arbitration clauses: parties have contracted around the legal
system itself. Are penalties imposed by arbiters more acceptable than those written into
contract? Conflict between 2 principles: (1) don’t allow punitive awards in contracts
cases vs. (2) advantages of allowing parties to resolve conflicts through arbitration –
efficiency, etc.
o Garrity v. Lyle Stuart: Writer and publisher dispute. Issue: can arbiter
award punitive damages. Holding: only the state should be allowed to
award punitive damages – use of punitive damages as a private remedy
would violate public policy.
o Willoughby Roofing v. Kajima: Holding: default rule: federal law does
not prohibit the award of punitive damages by arbiters, as long as parties
have given that authority in their agreement. Parties can contract around
this and prevent any punitive damages. Garrity decision only deals with
power of arbitrators under state law/state public policy.
Other remedies: specific performance/equity: court will only award specific
performance if damages are inadequate. (1) Uniqueness (land, unique goods, personal
service.) (2) scarcity
- Land: land is a unique good. Presumption in favor of specific performance
o Loveless v. Diehl: Diehls had rented farm with option to buy. Made
many improvements. Sold land to 3rd party, planning to give that
money to Loveless – exercising option. Loveless refused to allow
exercise of option. Diehls sued for breach, asked for specific
performance, and damages in the alternative. L – put D where would
have been had contract been fulfilled - $1000- should only turn to
specific performance where damages are inadequate. D – land is
unique. Presumption for specific performance. It’s about the money
($1000.) Holding: First time, court awarded damages. Then at
rehearing, awarded specific performance.
 Critique: Diehl’s had just planned on selling land – specified
amount – so this isn’t about the land. BUT – court is only
concerned w/ Diehl-Loveless contract, not with Diehl-Hart.
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Unique Goods –
o UCC 2-716 - Buyer’s Right to Specific Performance or Replevin:
specific performance where goods are unique or in other proper
circumstances. Right of replevin if unable to cover after reasonable
effort OR circumstances indicate that effort will be unsuccessful.
 Needn’t be unique in the purest sense – “circumstances…”
o Scholl v. Hartzell: P(scholl) is seeking replevin – specific
performance for goods. D advertised sale of Corvette for $4K. P
entered into contract to buy, put down deposit. D repudiated and
returned deposit. P wasn’t set back, but we care about expectation
damages. holding: there was nothing unique about the car: no
replevin. Damages are sufficient. Reasoning: P can go back into
marketplace and get another one.
o Sedmaks v. Charlie’s Chevrolet: Sedmaks’ entered into contract to
purchase Indy 500 pace car. When car arrived, Charlie’s told
Sedmak’s that they could not purchase it for $15K, but would have to
bid on it. Court used 2-716 to award specific performance on an oral
contract – “other proper circumstances.”
 Notes: injunction prevents efficient breach by Charlie’s. NOT
true: b/c Sedmak’s could sell car to 3rd party just like Charlie’s
could if there are no transaction costs. But since there are trans
costs in the real world, could be harder for Sedmaks to find the
right buyer. Prefer damages on economic grounds –
injunction prevents efficient breach.
 Problems with money damages too: how can we figure
out what car is worth to Sedmaks? This is the Hawkins
v. McGee valuation problem. Courts must approximate
damages.
o Partly an evidentiary problem: incentive to say
they value care more than they actually do.
o $ does not confer same U on different people –
diminishing marginal U of $ - People value $
differently depending on how much they have.
 Even if we know how much Sedmaks
were willing to pay  may not be the
same as how much they value it.
 There can be no interpersonal
comparisons of utility b/c we can ID
ordinal utility, but not cardinal utility.
o where we have a market good, readily available
 market tells us avg value of good  (1)
money damages make sense here. And (2)
disappointed buyer can cover.
o With unique good or difficult cover
circumstances, specific performance is only way
to ensure that buyer gets U they would have
gotten under contract.
-
personal service contracts:
o these are all efficient breach cases – D has gotten better offer.
o General rule: no specific performance for personal service contracts
even though they are unique b/c (1) it feels a little like servitude; (2)
monitoring problem;
o Dual aspect contracts – covenant and negative covenants – promise to
work for one employer implicitly includes a promise not to work for
any other performer. Even though positive covenant cannot be
enforced, negative can: employees who cannot be ordered to work for
one employer CAN be ordered NOT to work for another employer.
 Lumley v. Wagner: (1852) opera singer who breached contract.
P wanted specific performance, or at least that D not be
allowed to sing in other theaters. Holding: for Lumley- D
cannot sing in any other theater – enforce the implied negative
covenant.
 Duff v. Russell: Russell agreed to perform in Duff’s opera for
2 years. Got cold wearing tights and worried about health.
Signed on with another theater. Holding: for Duff. Covenant
not to work for another was implied in the contract.
 Ford v. Jermon: holding: rejects Lumley and Duff – no
specific performance of negative stipulations where specific
performance of contract cannot be ordered – enforcement of
the negative would just be indirect enforcement of the positive.
 (1) mitigated form of slavery
 (2) monitoring problem.
o Bailey v. State of Alabama: this is a criminal case. AL statute makes
criminal breach of personal service contract and thus allows specific
performance. D attacks validity of statute. Holding: no specific
performance here. Reasoning: constitutional argument: AL has used
10th amendment (police powers – can determine what is criminal) to
end-run 13th amend (abolished slavery and involuntary servitude,
except for crimes) by making breach a crime. Critique: Al has broad
powers under 10th to determine what is a crime. This decision is
inconsistent. Dissent: Holmes: if this creates a peonage, then every
contract creates a peonage. State is simply increasing incentives for
people to abide by contracts. Freedom of contract must be protected
by courts. Majority has interfered with state police powers and thus
freedom of contract. If we are mounting a facial attack on the law,
cannot look at intent/implications, only at language. Under a facial
test, law is constitutional.
o Lochner v. New York: NY was trying to deal with bad labor
conditions for bakers  passed law limiting hours. Facial attack –
interferes with 14th amendment freedom of contract. Holding: against
state of NY. Dissent: Holmes: state regulates lots of things – to protect
health and welfare of citizens. To say that this statute interferes with
freedom of contract is not compelling.
 Dissent is consistent with Bailey – Holmes supports 10th
amendment rights of states.
Restitution
- Restatement 371 measure of restitution interest:
1.) reasonable value to promisor of what he received in terms of what he would have had
to pay to get it from someone in the promisee’s position. [Price: not measured by the
contract price, unless representative of market. Time: determined based on the time of
performance, not the time of contract, nor the time of breach]
2.) extent to which promisor’s property has increased in value or his other interests have
increased in value.
- Restatement 373 – restitution when other party is in breach –
1.) injured party is entitled to restitution for any benefit conferred on other party by virtue
of performance or partial performance.
2.) no right to restitution, however, when injured party has performed all of his
obligations and promisor’s obligations may be met simply by payment of a definite sum
of money.
- Cotnam v. Wisdom P performed emergency surgery on a man who was unconscious
when he came into the hospital. Did not survive the surgery. His estate refuses to pay P.
This isn’t actually a contract. It’s an implied contract. Had the man not been
unconscious, he would have agreed to the surgery to save his life. Holding: P could
collect damages under an implied contract.
- Restatement 374 – restitution to breaching party.
(1) If a party refuses to perform justifiably when other party has breached,
party in breach is entitled to restitution for any benefit he has conferred by
partial performance or reliance in excess of loss he has caused by his own
breach. [gets anything more than the damages he caused the other party by
his breach.]
(2) if both parties agree that one party must perform even in the event of a
breach, that party is not entitled to restitution IF value of performance as
liquidated damages is reasonable (loss or anticipated loss caused by breach
and difficulty in proving loss.) [if parties contract around restitution damages,
then there can be no restitution damages.]
 Britton v. Turner
 D hired P to work for him for a year in exchange for
$120. P worked for 9.5 months and then quit.
 Court held that P was entitled to damages quantum
meruit – for the work done b/c employer had accepted
work as it was done.
 This is based on a theory of unjust enrichment whereby
the employer would get a windfall out of refusing to
pay for work done.
III. Reaching an Agreement
-
-
Restatement § 17 – Requirement of a Bargain: (1) except as in (2), formation
of a contract requires a bargain in which there is manifestation of mutual
assent to the exchange and consideration. (2) whether or not there is a bargain
a contract may be formed under special rules applicable to formal contracts or
under the rules stated in §§ 82-94
contract requires 2 things:
o consideration – exchange. Separates gift from contract.
o Manifestation of mutual assent  offer and acceptance both
parties must make promises
 Restatement § 18: each party must make a promise and/or
begin or render a promise
Offer and Acceptance
1. Revocation: Has offer been revoked before acceptance?
- Restatement § 24- Offer Defined: an offer is the manifestation of willingness
to enter into a bargain so made as to justify another person in understanding
that his assent to that bargain is invited and will conclude it. Offer =
conditional promise, conditioned on other parties’ promise or performance.
- Restatement § 35-Offeree’s Power of Acceptance: (1) Manifestation of
mutual assent is completed with acceptance (2) UNLESS offer was terminated
under § 36.
- Restatement § 36- Methods of Termination of Power of Acceptance: (1)
offeree’s power of acceptance may be terminated by
o Rejection or counter offer by offeree OR
o Lapse of time OR
o Revocation by offeror OR
o Death or incapacity of offeror or offeree
o (2) may also be terminated by the non-occurrence of any condition of
acceptance under the terms of the offer.
- Restatement § 39 – (2) counter-offer by offeree = rejection, terminates power
of acceptance UNLESS, offeror has manifested a contrary intention or unless
counter-offer manifests a contrary intention of the offeree.
- Restatement § 42- Revocation by communication from offeror received by
offeree: offeree’s power of acceptance is terminated when offeree receives
from offeror a manifestation of an intention not to enter into the proposed
contract.
- Restatement § 43-Indirect Communication of Revocation: Offeree’s power
of acceptance is terminated with the offeror takes definite action inconsistent
with an intention to enter into the proposed contract and the offeree acquires
reliable information to that effect.
o General Rule: Offeror is free to revoke until acceptance. Revocation
is only effective when offeree receives it. However, he need not
receive it directly from the offeror, only from some “reliable
information.” exceptions: option contracts, reliance/promissory
estoppel.
o Dickinson v. Dodds: Dodds offered to sell some land to Dickinson,
indicated that Di must accept by Friday morning. On Thurs, Di heard
that Do had offered the land to another buyer at same price. Di
accepted either late Thurs or early Fri, within time allowed by offer.
Holding: Offer was revoked before it was accepted. B/C Di knew that
Do was offering land to another, he knew that the offer had been
revoked.
 Is Dickinson consistent with Restatement? Offering to sell
land to another is not necessarily inconsistent with a
willingness to sell land Di. Di could reasonably believe that
offer remained open for stated period, or at least it remained
open if he accepted before the other party. Unless Di knew of
terms of other offer, could not know whether it was
inconsistent – offer could have been contingent on his refusal.
2. what constitutes acceptance?
Objective Theory of Assent:
- Objective: If a reasonable person would have construed interaction as an
assent, then intent does not matter if conduct suggests that he did agree to be
bound  manifestation of mutual assent
- Consistent with Restatement 17 – objective approach to offer and acceptance
– “manifestation of mutual assent.”
- subjective – was there actual assent?“meeting of the minds” approach
- Embry v. Hargadine Dry Goods: P made offer: “renew my contract now, or I
quit.” Purported acceptance: “Go ahead, you’re alright…don’t let that worry
you.” This was believed by P to constitute an acceptance of his offer and
contract was renewed. D did not intend to renew contract by his statement,
was trying put off the issue. Trial court jury instruction: parties had to intend
to make contract. Issue: Does meeting of the minds depend on intent or is
outward behavior sufficient? Holding: intention of the parties cannot bind
where outward behavior does not, neither can intent unbind where outward
behavior binds. There was a contract. actions and words matter in
determining whether there has been offer and acceptance, not intended
meaning. Objective approach to manifestation of mutual assent
- Lucy v. Zehmer: sale of land – one party believed it was a joke, but engaged
in negotiation and signed a contract (on a napkin). Holding: there was a
contract here. Reasoning: D may have been joking, but actions could be
construed by a reasonable person to have been serious. Objective indices.
Holding: court finds a contract.
- Restatement § 19: Assent: (351) (1) how to assent to contract; (2) not
manifestation of assent unless he intends to engage in the conduct AND
knows or has reason to know that other party will infer…
o Not inconsistent with 17 – was the conduct engaged in as a
manifestation intentional. Objective approach also.
o What if Lucy had KNOWN that Zehmer was joking, even if
reasonable person would have interpreted Z’s conduct as intent to sell?
- Acceptance, general rule: (1) offeror, in receiving acceptance, is reasonable
in interpretation of acceptance as manifestation of assent. (2) offeror sincerely
believes that offeree plans to be bound by this acceptance.
-
U.S. v Braunstein: U.S. government covered and sued for difference (2-712).
What was wrong w/ CCC’s acceptance telegram – did not provide same terms
as offer. Mirror image rule: terms of acceptance must match terms of offer.
If acceptance sets out different terms, it’s a counter offer – Restatement 59.
Holding: no contrac. interpreting contract is different than reading in a
contract where none exists. CCC screwed up – sloppy.
- NE Seed Co v. Harsh: D sent P and perhaps others a letter announcing
willingness to sell millet seed for 2.25/hundredweight. P wired acceptance. D
sold seed to another. Farmer claims that initial memo was a request for offers,
not an offer itself. Holding. Not an offer – request for bids b/c did not fix a
delivery time
- Lefkowitz v.Harsh: suggest that courts will find an offer when the advertiser
includes sufficient provision to protect itself from acceptances it did not really
want, but will refuse to find an offer when advertiser has left itself open to
unwanted acceptances. Qualified ad was an offer. Unqualified letter was not.
- Empro v. Ball Co.: P, Empro, agreed to buy D. Both parties signed letter of
intent setting forth basic terms of agreement. Letter contemplated more
complete writings. Also contained several escapes for P, such as approval by
board of shareholders. D became dissatisfied with security it would receive
for future payments and refused to go forward. holding: for D. reasoning:
parties did not intend the original letter to be the binding event. Escape
provisions existed in letter  made clear that neither party expected to be
bound until final writing was executed. Critique: do gaps in terms of
agreement necessarily mean that parties did not intend to be bound?
- Texaco v. Pennzoil: court found sufficient intent to be bound.
- Inconsistent holdings in Empro v. Texaco.
- Restatement § 63:Time When Acceptance Takes Effect: Unless offer says
otherwise: (1) acceptance made in manner and by medium invited by offer is
operative and completes the manifestation of mutual assent as soon as put out
of offeree’s possession without regard to whether it ever reaches offeror –
mailbox rule. BUT (2) an acceptance under option contract is not operative
until received by offeror.
o When offer is deemed accepted and contract formed by mail is when it
is posted. Mailbox rule does not apply to revocations.
o Treat option contracts differently – offeror himself is bound
- Restatement § 65 (381) – if there’s a customary mode of acceptance, offeree
may accept according to custom. Custom may override terms in the offer.
Acceptance by Silence:
- Rule: Failure to reject cannot = acceptance.
- Exceptions: Restatement § 69(1)-Acceptance by Silence or Exercise of
Dominion: silence and inaction = acceptance ONLY where:
a. offeree takes benefit of offered services with reasonable opportunity to
reject them
b. where offeror has state of given offeree reason to understand that
assent may be manifested by silence, and offeree, in silence, intends to
accept..
c. b/c of previous dealings, it’s reasonable that offeree should notify
offeror if he does not assent.
d. Restatement 69(2) – An offeree who does any act inconsistent w/ the
offeror’s ownership of offered property is bound …
2.) offeree who acts inconsistently with offeror’s ownership of offered property, is
bound by offered terms, unless they are manifestly unreasonable [by what standard?] if
offeror is wronged, then it is an acceptance only if he says so.
- Hobbs v. Massanoit Whip Co: trapper Hobbs. M Whip Co. had bought eel
skins from H before. M retained skins from H for several months without notifying P
whether or not he had accepted them, didn’t pay. P had made several prior shipments to
D, which it had accepted and paid for. Jury charge at trial: Did buyer have reason to
suppose that seller would interpret buyer’s silence as acceptance? D objected to this
instruction. Issue: was there tacit acceptance by silence? Holding: silence, combined
with keeping the goods for an unreasonable time = acceptance in the situation of a
standing offer. reasonable for jury to find that actions of D = acceptance. Instruction
was fine. There must be a pattern for silence = acceptance.
- Hobbs is consistent with 69(1)(a) and 69(1)(c). NOT (1)(b) – no intent to accept.
Unilateral Contract – Acceptance by Performance
- Restatement § 30 Form of Acceptance Invited: (1) offer may invite or require
acceptance by words, or by performing or restraining from performing some
specified act. (2) unless otherwise indicated, offer invites acceptance in any
manner reasonable under circumstances.
- UCC § 2-206- where sale of goods in concerned, an offer, usually a purchase
offer, can be accepted by any reasonable “medium”, including the
commencement of performance.
- Restatement 32, 62 – similar idea – where there is a choice in the method of
acceptance, either by performance or by promise, if offeree accepts by
performance  bound to complete performance. Offeror is also bound by
commencement of performance. Performance  expressly stated promise.
- Offeror determines whether it’s unilateral or bilateral contract in the terms of
offer.
- Unilateral: at the moment of acceptance, only one party has a promise
outstanding b/c the other party has performed = acceped. Acceptance only by
performance – promise is exchanged for performance. Problems arise when
offeror tries to revoke after performance has begun.
- Bilateral: acceptance by promise or performance – promise is exchange for
promise. Must be at least one promise outstanding at the time of acceptance.
- Notice under Unilateral Contracts:
o Restatement § 54: Acceptance by Performance; Necessity of
Notification to Offeror: (1) where offeror invite offeree to accept by
performance, no notification is necessary to make such an acceptance
effective, unless offer requests notification. (2) If an offeree who
accepts by performing has reason to know that offeror has no adequate
means of learning of performance with reasonable promptness and
certainty, contractual duty of offeror is discharged unless (a) offeree
-
exercises reasonable diligence to notify offeror; (b) offeror learns of
performance w/in reasonable time OR (c) offer indicates that
notification was not required.
o Carlill v. Carbolic Smoke Ball Co: D, owners and sellers of medical
preparation called Carbolic Smoke Ball. Advertised in paper - £100,
reward to any person who contracts flu or cold after having used
smoke ball in a specific way. £1000 deposited in bank to show
sincerity. P bought smoke ball, used it, and contracted the flu. D
would not pay reward. Issue: When is acceptance by performance
with no additional notification allowed? Holding: this was a
unilateral contract  performance = acceptance. D is bound to pay
reward.
When Does Acceptance Occur under a Unilateral Contract?
o Petterson v. Pattberg: Peterson took out 3d mortgage on house. Pberg offered him a chance to decrease amount he owed by paying off
entire mortgage at once. Peterson says that he’s come to pay off the
loan, and P-berg says that has sold the mortgage interest to someone
else – revokes offer. Holding: P-berg revoked before acceptance by
performance, before Peterson could actually give him the money.
Rule: acceptance of unilateral contract requires completed
performance. Performance does not constitute acceptance UNTIL
it’s complete. So p-berg could revoke up until performance was
completed.
o Petersen v. Ray-Hof Agencies: holding: acceptance of unilateral
contract takes place when performance is BEGUN.
o Petersen v. Peterson? Which is the right approach?
 Petersen v. P-berg  advantage to offeror.
 Peterson v. Ray-Hof  advantage to offeree. Peterson can
retract acceptance and drive back to Miami despite the fact that
Ray-Hof is bound as soon as Peterson leaves Miami.
Ultimately the FL Supreme Court brought Peterson in line with
Pettersen – contact is formed where “last act necessary to
complete contract was formed.”
o Restatement § 50: Acceptance of Offer Defined; Acceptance by
performance; Acceptance by promise:
 (1) acceptance of offer is manifestation of assent to the terms
of thereof made by the offeree in a manner invited or required
by the offer.
 (2) 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.
 (3) acceptance by promise requires that offeree complete every
act essential to the making of the promise.
o Traditional Approach: Applying the traditional rule (Dickinson) to
unilateral contracts: offeror free to revoke the offer any time before
o
o
o
o
o
o
performance was completed b/c offer in such a case calls for
performance and acceptance is governed by the terms of the offer.
Traditional doctrine supports the holding in Pettersen v. Pattberg. very
harsh.
Alternative Approach: acceptance takes place once performance is
begun  Peterson v. Ray-Hof. Problem with this approach: principle
of mutuality suggests that once the offeror is bound, the offeree should
also be bound. Why should offeree be compelled to continue
performance just b/c he started it? Offeree’s own action would oblige
him to finish.
Mixed approach: sacrifice mutuality of obligation. Offeror is bound
and cannot withdraw the offer. Offeree is free to discontinue
performance. At the time of the beginning of performance, offeror is
conditionally bound IF offeree completes performance. Restatement
45 takes this approach by saying that an option contract is formed
when performance is begun on a unilateral contract. This addresses
the problem where performance is not instantaneous, but takes some
time. It prevents the offeror from revoking offer during performance
b/c the traditional rule would allow this.
Restatement § 45 – Option Contract Created by Part Performance or
Tender: option contract is created when offeree tenders OR begins
OR tender a beginning.
 Beginning of performance = consideration. Since an option
contract binds the offeror, but not the offeree, one would
expect offeree to have to pay something for the option. Already
completed part of performance = consideration for the option.
 Sets threshold for acceptance very early.
 Comment to 45 makes clear that offeree is not bound to
complete performance once it’s started.
Restatement § 37- Termination of Power of Acceptance Under
Option Contract: option contract is not terminated by revocation.
Offeror cannot revoke option contract for set time period..
So Restatement § 50(2) means that beginning a performance counts as
a return promise. In the case where contract calls for acceptance
EITHER by performance OR by promise, offeree will count as
having accepted if he begins performance. In that case ONLY,
offeree would be bound to complete performance once begun b/c
beginning performance = promise to complete it. E.g. I promise to
pay you $100 if you walk across Brooklyn Bridge OR promise to walk
across by midnight.” If you start walking across the bridge in this
situation, bound to complete, b/c starting to walk = promise to
complete walking. This does not apply if offer allows acceptance
ONLY by performance. Also consistent with 62.
Reconciling 45 and 63(mailbox rule) – mailbox rule binds offeree right
away, but offeree of a unilateral contract is not bound until
performance is complete under 45. Not a problem: if someone is
accepting by mail, offer is almost certainly bilateral NOT unilateral.
Rules for timing of acceptance in bilateral are different than for
unilateral. 63/mailbox rule is general rule, but it makes an
exception for option contracts in (2) – acceptance by performance
only creates a binding contract when offeror has received it i.e.
performance is complete.
o Now add in 54(1) – which says that notification is not necessary. Read
this to mean that advance notification is not necessary, but offeror
must receive notice of completed performance/acceptance in order to
have duty to fulfill his end of contract  54(2).
Option Contract
- Revocable offer subject to a deadline vs. option contract - irrevocable for a set
time period, consideration required under Restatement for right to exercise
option during time period. This is the question that should be asked of
Dickinson v. Dodds.
- Offers must presumed to be revocable UNLESS a fee or premium
(consideration) is paid to the offeror. (Dickinson)
- Test: Restatement § 87, Dickinson: to determine whether contract is
revocable: If there has been consideration, even nominal consideration 
irrevocable option contract.
o Exception: Where offeror’s aim is to induce the offeree to rely on the
offer and to the make commitments of its own on the basis of such
reliance  § 90 waives the requirement of consideration and turns
offer into binding promise. (Drennan v. Star Paving.)
 Contrasted with Baird v. Gimbel bros – doctrine of promissory
estoppel did not apply to commercial contracts.
o Alternative Approach: UCC 2-205 – rejects the Restatement and
Dickinson  option contract can be created in writing for a term of no
more than 3 months with no consideration required.
- Smith v. Wheeler is an option contract.
- Restatement 87 – restatement approach requires consideration for right to
exercise offer (nominal is sufficient under 71). (2) Reliance also creates an
option contract to the extent necessary to avoid injustice (this would be
included under 90 also.)
- Restatement 25 –( text book)
- Restatement 63- Time When Acceptance Takes Effect: no acceptance under
option contract until it’s received by offeror (exception to the mailbox rule.)
- Restatement 37 – termination of power of acceptance under option
contracts: not withstanding 38-49, power of acceptance under an option
contract is not terminated by rejection or counter offer, revocation, death or
incapacity of offeror, unless requirements are met for discharge of contractual
duty.
- Restatement 45 Option Contract Created by Part Performance or Tender.
-
UCC 2-205 – Firm Offers – defines option contract for sale of goods.
Option/period of irrevocability can not last longer than 3 months. Requires
separate signature of offeror on contract. Does not require consideration.
Interpreting Assent
Unspecified Terms- Gaps in Contracts
- UCC:
o UCC 2-204(3) – Formation in general – there can still be a contract,
even where there are missing terms, IF the parties intended for there to
be a contract AND there is a reasonably certain basis for giving an
appropriate remedy. SUBJECTIVE in deciding whether or not to fill
the gaps.
o Gaps are filled w/ untailored default provisions.
o UCC 2-305(1)(c) – use the market to set a price where it is uncertain.
o UCC 2-309 (2) – Absence of Specific Time Provisions; Notice of
termination – where the contract provides for successive
performances, but is indefinite in duration, valid for a reasonable time,
but can be terminated at any time by either party.
o Default provisions – 2-305etc etc.
- Restatement:
o Restatement § 204 – Supplying an Omitted Essential Term – no
discussion about what parties intended like UCC 2-204 (3)
Restatement focuses on manifestation of assent (words and conduct)
and less on intention. OBJECTIVE in determining whether to fill
gaps. However, the gaps will be filled w/ terms “reasonable under the
circumstances” – tailored default.
- Penalty default: designed to give at least 1 party incentive to contract around
the default. Purposefully set to what the parties would not like.
- Tailored default – Restatement approach – “reasonable in the circumstances”what these parties would want vs. untailored default – single “off-the-rack”
standard – what majority of parties would want.
- Tailored approach stems from transaction cost understanding of why contracts
are incomplete – transaction costs of contracting for a given contingency >
beneifits.
- Untailored approach stems from the idea that parties will try to save
themselves money by shifting burden to courts. At some point this becomes
inefficient – taxpayers bear burden that private parties contracting should
bear. Expensive for courts to determine what parties would want. Penalty
defaults work to shift incentives to parties to contract ex ante rather than
forcing the court to fill gaps ex post where ex post costs more than ex ante.
- Penalty defaults can also be justified where incompleteness is the product of
rent-seeking strategic behavior, where parties want to keep information secret.
Choose not to contract around a default where that would reveal more
valuable information. e.g. UCC’s zero quantity default – if parties leave out
quantity  no enforcement. justification: cheaper for parties to set quantity
-
-
-
-
beforehand than for the court to determine ex post what they would have
wanted.
How should default rules be set: 1 theory: deter inefficient gaps at least social
cost. (1) When rationale is to provide information, non-enforcement default is
efficient. One-sided penalties can create opportunism. (2) When rationale is
to inform the relatively uninformed party, penalty default should be against
the relatively informed party, esp where uninformed party does not even know
about the default rule (no opportunism)
Share of the pie vs. size of the pie.
Sun Printing v. Remington Paper and Power Co. (Cardozo) – multiple gaps in
the contract – price and length of term. Each gap depending on the other.
Court was not going to step in to fill these big holes. Holding is inconsistent
with UCC 2-204 and 2-305.
Should court’s fill gaps?
o If yes, reduction in transaction costs – whatever holes they have courts
will fill in. But taxpayers bear that costs.
o If no, then how is a contract ever valid? There will always be gaps in
the contract.
Which gaps should be filled and which terms, when excluded, should make
contract void?
Texaco v. Pennzoil: terms are so uncertain as to render contract fatally
indefinite. Court: There was a contract.
Illusory Promises
- Wood v. Lucy, Lady Duff Gordon: Implied promise means that there is a
binding contract. This case is interpreting a contract vs. gap-filling – hard to
make this distinction between these too.
Objective Theory of Assent: traditional approach is to use objective indices to
determine whether there was assent – meeting of the minds. However, there are
alternative approaches to this.
-
-
-
-
Raffles v. Wichelhaus – Peerless – two parties did not have the same ship in
mind – no meeting of the minds. No contract. This is a subjective standard.
Under an objective theory of assent, there would be a contract here.
Restatement (1st) § 71(a) –Adopts rule of Raffles.
Oswald v. Allen – coin collectors – Swiss Coin Collection vs. swiss coins. No
contract. No contract. No sensible basis for choosing between the acceptable
understandings – no one party is any more or less reasonable than the other
party.
How do we square these decisions with objective manifestation of assent
(Lucy v. Zehmer). This case takes a subjective approach and looks into minds
of parties. Under the rule of Lucy, there would be a contract here.
Restatement § 200-01:
Was there Assent?
o 1. Where parties intend the same meaning, use that meaning, even if
it’s unreasonable.
o 2. Where parties disagree,
 a. Use the meaning of the party who did not know that there
was another meaning, if the other party knew the meaning
attached by the first party.
 b. Use the meaning of the party who HAD NO REASON TO
KNOW of any different meaning attached by the other and
the other had reason to know the meaning attached by the
first party.
o 3. Except for exceptions (2a,b), neither party is bound by the
meaning attached by the other, even if that means that there is no
mutual assent and therefore no contract. If parties are both
unreasonable or reasonable in believing completely different things
 no contract (Oswald, Peerless)
1. S believes Ship 1, B believes Ship 2 –
No contract. (court says that we have no
objective way of deciding who was
right, so they’re both reasonable or both
unreasonable) (Oswald v. Allen,
Peerless)
2: L thinks there is a contract, Z believes
Seller believes 1, Buyer believes 2.
he’s joking. L knows Z is joking, but L
Seller is aware of buyer’s
knows objective manifestation is what
understanding. Contract: ship 2. Party
counts. No good faith. No contract ( b/c L who is aware of situation is in best
is aware of situation, and can avoid
person to avoid costs loses. Other
incurring costs based on Z’s assent, he isn’t party’s understanding governs.
reasonable to assume that there is contract
Lucy/Seller have a duty to mitigate
when he is aware of Z’s interpretation.) *** damages b/c they are in position to
avoid relying on other parties’ objective
manifestation of assent. information
asymmetry.
3. Same as except that L is unreasonable in Seller believes ship 1. Buyer believes
thinking that there is a contract, no
ship 2. Seller is unreasonable in his
contract. Not so different from 2, where L belief. Contract: ship 2 – where S
knows or should have known that Z was
knows or should have known (2-201 2b)
joking. There is no contract (asymmetry
between the parties, reasonable beliefs
govern.)
1. L believes Z is joking. There is a
contract (reasonable party governs the
result – L was reasonable.
o Where there is disagreement, party whose beliefs are reasonable
govern the contract.
o Raffles and Lucy are not in conflict.
o We don’t actually use an objective manifestation of intent. We use a
reasonableness standard in combination with subjective standard.
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But when there is actually a meeting of the minds, it trumps, even
when parties are unreasonable
o 1.) try to figure out whether parties actually agreed and to what they
agreed – subjective
o 2) if we cannot figure that out.
 Use objective indices – reasonabless- where there is
asymmetry.
Restatement 202:Rules in Aid of Interpretation:
o (1) Words and other conduct are interpreted in light of all the
circumstances, and if the principal purpose of the parties is
ascertainable, it is given great weight.
o (2) A writing is interpreted as a whole, and all writings that are part of
the same transaction are interpreted together.
o (3) unless a different intention is manifested.
 (a) where language has a generally prevailing meaning, it is
interpreted in accordance with that meaning
 (b) technical terms and words of art are given their technical
meaning when used in a transaction in their technical field.
UCC 1-205 – Course of Dealing and Usage of Trade
UCC 2-208 – Course of Performance or Practical Construction
Weinberg v. Edelstein – Issue: what was intended by “dress” in restrictive
convenant? Should 2-piece matching ensemble be considered a dress or a
skirt and blouse? P wants injunction to make D stop selling 2-part dresses.
Reasoning: There was nothing in the contract to explain what was meant by
“dress.” So court turned to objective sources: industry standards and
practices to determine what they should have known. Industry standards (1)
determine what parties meant and (2) what it would have been reasonable for
them to mean/know. Sometimes look to industry standards to determine who
was more reasonable. BUT if parties actually agree, even if agreement is not
in line with industry standard  enforce their intent. At the time leases
were made, both should have known that there were these 2-part things. Could
have accounted for them if they had wanted. They failed to do so. Industry
does not call them “dresses.” Holding: No injunction
Friglament Importing Co. v. B.N.S. International Sales Corp: Issue: What is
chicken? P: D should have known that “chicken” = young chickens. D chicken means everything, no reason to know that chicken meant only young
chickens. Court uses industry practice/customary use to determine meaning
of a term. Seller believes chicken means everything. Buyer believes chicken
means young chickens. Buyer needs to prove that Seller was aware. If Buyer
can, then there’s a contract on Buyer’s terms. Seller must stick to their story
that they were not aware. Holding: no contract.
Parol evidence rule – can we look outside the contract to evidence that might
help us interpret, supplement, contradict written contract? applies to spoken and
written evidence. Extrinsic evidence rule. parol evidence is admissible in
unintegrated or partially integrated contract, NOT in a completely integrated
contract, but increasingly courts allow parol evidence in completely integrated
contracts to interpret(where there’s a question about a term), but not to
supplement or contradict.
- Parol Evidence Rule- if everything that the parties intended to contract for is
covered by written contract, may not use extrinsic evidence to supplement
written contract
- 3 Possibilities
o Partial integration: parties intend that everything they agree to is in
the contract, but not that every part of that agreement is explained in
that contract. No subject matter that parties have agreed on that is not
in the contract, use outside evidence to explain nature of that
agreement. E.g. price to be determined.
 contract refers you to some extrinsic investigation. Must look
to something outside the contract to determine the exact
meaning of the term.
o Complete integration: parties intend that everything needed to
understand the agreement is contained in the agreement itself.
 Technically no parol evidence at all. But this is being
loosened. Allowing parol evidence to interpret, but not to
supplement or contradict.
o no integration – other agreements on side not at all represented in
contract.
 Can introduce extrinsic evidence here w/ no problems.
- Restatement 210 – Completely and Partially Integrated Agreements:
o (1) a completely integrated agreement is an integrated agreement
adopted by the parties as a complete and exclusive statement of the
terms of the agreement.
o (2) a partially integrated agreement is an integrated agreement other
than a completely integrated agreement.
o (3) whether an agreement is completely or partially integrated is
determined by the court as preliminary to determination of a question
of interpretation or to application of the parol evidence rule.
- Restatement 213: Parol Evidence Rule: (1) a binding integrated agreement
discharges prior agreements to the extent that it is inconsistent with them. (2)
a binding completely integrated agreement discharges prior agreements to the
extent that they are within its scope (ie no extrinsic evidence.) (3) an
integrated agreement that is not binding or that is voidable and avoided does
not discharge a prior agreement. But an integrated agreement, even though
not binding, may be effective to render inoperative a term which would have
been part of the agreement had it not been integrated.
- How to determine whether or not to allow parol evidence?
o Cannot look outside 4 corners of contract to make this determination.
 Thompson v. Libbey – Made contract for sale of marked logs
to D. Seller sent logs to D. Buyer didn’t pay, says that logs
were not of the quality agreed to in a warranty after the written
-
contract. D argues that there was an oral contract that went
along with the written contract, and that the written contract
cannot be interpreted without it. Reasoning: D wants to
introduce evidence to show that the contract is not completely
integrated. This is circular. Cannot look to outside evidence to
determine whether contract is integrated without doing the very
thing that the parol evidence rule is designed to protect against.
So all you can do it look to the contract itself i.e. treat contract
as if it were completely integrated. Holding: no parol evidence
admitted.
o Majority: look outside agreement in preliminary determination to
decide whether or not to allow parol evidence. Can look outside a
contract as a preliminary question to figure out whether a contract is
integrated and how integrated it is.
 Restatement 214(a)
 Restatement 209: Integrated Agreements: (1) integrated
agreement is a writing or writings constituting a final
expression of one or more terms of an agreement. (2) whether
there is an integrated agreement is to be determined by the
court as a question prelimary to the determination of a question
of interpretation or to application of the parol evidence rule. (3)
where parties reduce an agreement to a writing which in view
of its completely and specificity reasonably appears to be a
complete agreement, it is taken to be an integrated agreement,
unless established by other evidence that writing did not
constitute a final expression.
 Restatement 215.
 Restatement 216 Consistent Additional terms: (1) Once a
court decides that an agreement is integrated or not integrated,
evidence of a consistent additional term (not in the writing, but
supports the writing) is admissible UNLESS court finds that
the contract is completely integrated. (2)- if there is a
consistent, additional term which is left out of the contract, but
which we need to interpret the contract, the contract is partially
integrated, NOT completely integrated. This adds to definition
of partial integration from 209 and 210.
 Inherent tension: No such thing as completely integrated: there
will always be unfilled gaps, contingencies unaccounted for in
the contract. language is “open-textured.” It’s always possible
to find an ambiguity in a phrase, a word, a sentence. We’ll
always require assistance to interpret. Even if parties try to
fully represent and interpret entire agreement within the terms
of the contract, it’s not at all certain that this will work out.
E.g. even an integration clause requires interpretation.
Brown v. Oliver – steals furniture in the middle of the night a year after the
sale. Parol evidence admitted.
- PG&E v. Thomas Drayage – indemnified P against damage arising out of D’s
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actions. D: real meaning of the indemnity clause is to protect P against
damage to 3rd parties. Court: Words have no meaning without their context.
(this case is the extreme of the linguistic relativism streak.) Shared practice
tells you how to interpret words. Therefore, intention matters b/c of
subjectivity and imprecision of words (491.) test should not be whether
language is plain, but rather, whether language of contract is reasonably
susceptible that interpretation – should be able to introduce extrinsic evidence,
even if it’s completely integrated.
Trident Center vs. Connecticut General Life Insurance Co. P wants to have the
right to prepay the loan before it expires. The language of the contract looks
like they don’t have that right. P wants to introduce outside evidence to show
that they do have the right. Under common law (Pacific Gas), P has the right
to introduce extrinsic evidence, but the Court thinks that that the law is wrong,
that P should not have the right. Court disagrees w/ Pacific Gas. When
contract is clear on its face and parties clearly intended to be bound, should
not allow extrinsic evidence. Pacific Gas will spawn all kinds of litigation of
parties trying to get out of their contracts. (498) Pacific Gas would essentially
throw the parol evidence rule.
ambiguity w/ a word like “chicken” does not mean that all language is
ambiguous. core of subtle meaning even with ambiguous terms, derived from
common practice and context. there will be grey areas beyond this core where
there are problems of interpretation, where our own practices are unsettled.
Integration process:
o Is the contract integrated? Court can look outside(209(3), 214(a))
o If it’s integrated, is it partially or fully integrated. Can look outside
(210(c), 214(b), 210, 216)
o If it is partially integrated, can look outside to interpret and supplement
terms of the contract (213, 214, 216)
o If fully integrated, NO except for interpreting the writing, meaning of
a writing, illegality, fraud, duress, mistake, etc. (214(c,d,e))
Statute of Frauds
1. Does the contract fall
within the statute?
Y
N
o
Oral K unenforceable
Is K reflected in a writing
that satisfies the statute?
N
Y
Does the case fall w/in
one of the exceptions to
statute, permitting
enforcement despite
noncompliance?
Contract is
enforceable
Y
Enforceable
-
N
Unenforceable
Basic rule of statute of frauds: a contract within its scope may not be enforced
unless a memorandum of it is written and signed by the party to be charged.
o How much of the contract must be written? not entire contract, only a
memorandum.
o What constitutes a signature?
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-
-
-
-
-
-
o Noncompliance  unenforceability, no invalidity.
1. What’s covered by the statute of frauds?
o Restatement § 110 (520) – contracts that are subject to the Statute of
Frauds. Contract for the sale of land is a classic
o Contracts that cannot be performed within a year
o UCC 2-201- Contracts for sale of goods > $500
o Etc.
2. If statute of Frauds applies, does writing satisfy requirements?
o Written memorandum, need not be formal.
o Must contain enough info to show that contract has been made. Under
common law: ID parties, nature of exchange, material terms.
o UCC 2-201 – less strict – requires quantity of goods sold, “some writing
sufficient to indicate that a contract for sale has been made between the
parties.”
o Signed by the charged party
3. Exceptions?
o Partial performance  reliable evidence that a contract has been made
o Other evidence – 2-201(3) – “pleading, testimony, otherwise in court.”
o Equitable Estoppel - protects reliance on false factual assertions.
o Quantum meruit
o Dead person and personal service contract. Estate still has to pay.
o promissory estoppel - §90 – promise reasonable expected to induce
reliance. Enforcement to prevent injustice.
Restatement § 125
Boone v. Coe: family packs up their life and shows up in Texas to work a farm
they have been promised. Promise is oral. Holding: contract cannot be enforced
b/c it fails requirements under Statute of Frauds.
Contract would have been enforced under Restatement § 129 – which supports
specific performance when there has been reliance on a contract with the assent of
the party.
Statute of frauds is an evidentiary requirement – 129 says that a change in position
in reliance meets the evidentiary requirement of the Statute of Frauds
What if Boone v. Coe was about the sale of goods? UCC 2-201(3)(a)
Schwedes v. Romain: CA couple trying to purchase land in MT. Sellers lawyer
tells them not to pay in advance, seller enters into sale with someone else. Holding:
no consideration, therefore no contract.
o Problem: Statute of Frauds frustrated enforcement of a genuine contract.
Inflexible  inefficiency. Prevents beautiful idea from being realized.
o Court says cannot use estoppel here to prevent D from claiming no
consideration b/c of Statute of Frauds.
o Role of the lawyer in this  P should have been able to claim equitable
estoppel.
Parma Tile, Mosaic and Marble Co. v. Estate of Fred Short: Holding: This is
enforceable – name at the top of the fax was enough to meet the signature
requirements of the Statute of Frauds. reasoning: D is not denying he made the
promise. trying to use the statute to get out of the contract.
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Where there is sufficient evidence of a contract, is the Statute of Frauds really nec.?
Balancing between over and under enforcement of contracts (519)
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Theoretical Approaches to Enforceability
o Deontological Approach
 Moral obligation approach
 Fairness in results approach
o Utilitarian Approach - Should enforce those contracts that improve/max
society’s welfare overall. should enforce contract even where’s there’s
been a change of heart. Contracts will only be broken where efficient
breach.
o Contractarian Approach - So behind a veil of ignorance, you are likely to
come up with fair and even rules for enforceability.
Consideration
- Courts do not enforce all apparent contracts.
- One reason not to enforce an apparent contract is lack of consideration – bargained
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for exchange.
Doctrine of consideration – the traditional approach to identifying an enforceable
contract. Motive vs. bargained for exchange
Example of an agreement with no bargained for exchange – a gift
Restatement 17(1) – formation of a contract requires…
Restatement’s approach to enforceability:
o A contract is an enforceable promise (§ 1 and 2)
o With some exceptions (§ 17(2)), to be enforceable a promise must be
supported by consideration (§ 17(1))
o A promise is supported by consideration if it is bargained for (§ 71(1))
o A promise is bargained for if it is sought by the promisor in exchange for
his promise and is given by the promise in exchange for that promise §
71(2)
o To figure out whether a promise is enforceable on the grounds that it is
supported by consideration, one must determine whether it was bargained
for.
Bargained for Exchange vs. Gratuitous Promise
o Johnson v. Otterbein University – was a conditional gift, no consideration.
Not an enforceable contract.
o does the idea of a gratuitous promise makes any sense at all.
o Hamer v. Sidway – there was an enforceable contract here. Consideration
may consist of forbearance of a legal right.
 This is a unilateral contract – money is not owed until there has
been performance. No unilateral contract in Johnson v. Otterbein.
 Uncle is trying to induce nephew’s performance
 Fact that performance happened first in Hamer makes a difference
in determining whether there is consideration.
o Restatement 71 – must have bargained for consideration.
o Restatement agrees with Hamer: performance by nephew was sought by
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uncle in exchange for promise to pay. Performance by nephew is
forbearance.
o Law makes distinction between pure gifts and conditional gifts on one
hand, and bargained for exchange, on the other.
 Enforceable contract where the court infers that what the party
wanted was performance.
 Not enforceable where the court infers that what the party wanted
was to give a gift and there were conditions to receive the gift.
o Restatement 81 - Consideration as a Motive or Inducing Cause—promisor
may have more than 1 motive, and the person furnishing the consideration
need not inquire into the promisor’s motives.
o Conditional gift vs. bargained for exchange
Doctrine of past consideration: Moore v. Elmer – clairvoyant, predicted D’s death.
No enforceable contract here – cannot enforce a contract where there is past
consideration. This was a conditional gift. Not consideration.
Doctrine of moral consideration
o Mills v. Wyman – son got sick, P nursed him to health. No contract here –
b/c no consideration. Expenses had already been incurred before father
offered to pay. No suggestion of exchange.
o Prior moral duty alone does not create contractual obligation. Promise
alone does not create contractual obligation. Do we get contractual duty
when we couple the two? This is a question how much morality should
inform the law – should we take a deontological approach?
o Would utilitarian approach enforce gratuitous promises?
Unjust enrichment: Webb v. McGowin – material benefit to McGowin from P
from saving him. Moral obligation is sufficient consideration to support subsequent
promise to pay where promisor has received a material benefit, even though there
was no original duty. Court here accepts the prior moral duty theory that Mills
court rejected – promise made for benefit that’s already been received.
o This is Cotnam v. Wisdom + promise – moves from quasi-contract to real
consideration. What’s the difference between this case and Cotnam?
o Restatement 86: Promise for Benefit Received.
 (1) A promise made in recognition of a benefit previously received
by the promisor from the promisee is binding to the extent
necessary to prevent injustice.
 (2) A promisee is not binding under (1)
 (a) if the promisee conferred the benefit as a gift or for
other reasons the promisor has not be unjustly enriched OR
(b) to the extent that its value is disproportionate to the
benefit.
o Apply to Webb v. McGowin – what does unjust enrichment mean?
Contract Modification and the Preexisting Duty Rule
o Is a promise that modifies a preexisting contractual relationship
enforceable?
o Stilk v. Myrick: No contract b/c no new consideration for extra pay
promised
o Alaska Packers’ v. Domenico: No consideration. Old contract holds.
o Stilk v. Alaska Packers: Stilk makes a stronger case for change of
circumstance than Alaska Packers. Fishermen in Alaska Packers could
have argued that even though they breached, Alaska Packers waived the
breach by entering into new negotiations. So the new negotiations should
stand.
o Brian Construction and Development v. Brighenti – excavation case:
holding: consideration here so this new contract is enforceable.
Consideration: unforeseen, burdensome condition was discovered during
performance. Promise of additional compensation in return for promise to
do additional work.
o Restatement 89
 Applying 89 to Alaska Packeres – agrees with court’s decision
 Applying 89 to Stilk – disagrees with court’s decision – should
have been a new contract here – change of circumstances.

 Applying 89 to Brian Construction – agrees with court- unforeseen
circumstances  new contract
o UCC § 2-209 – takes a more liberal attitude to modifying pre-existing
-
contracts than the Restatement. No new consideration needed for
modification of existing contracts. Does this make sense? Why have
consideration for first contracts?
o U.S. v Stump: Nominal consideration is ok, so doctrine of consideration
does not prevent extortion. No need for consideration in contract
modicifications.
o Why have consideration at all? If we did not require consideration in the
first contract, we would have to enforce donative promises.Beautiful idea
supports consideration requirement
o Older view of consideration (based on prior moral duty) vs. newer view of
consideration.
o Are they reconcilable? Yes – older view is based on moral duty. New
view is based on legal duty.
o Preexisting duty rule requires that in order for a contract modification
to be enforceable, there must be NEW consideration.
Pre-textual consideration
o Newman and Snells State Bank v. Hunter: No consideration, no
enforceable contract. Court sees this as a gratuitous promise on the part of
Mrs. Hunter. Bank winds up with exactly what it had before, and Mrs.
Hunter has an additional obligation.
o Restatement 79 vs. 71 – how do we figure out whether there was
consideration
 79 says that once 71 is met, we don’t have to look at the level of
-
the value of what is being exchanged or even whether there is
mutuality of obligation
 Applying 79 to Newman and Snells – Yes bargained for exchange
under 71. So under 79, don’t need to look at whether things
exchanged had value. We would find a contract under 79.
 BUT – comment says that sham or nominal consideration
does not fulfill requirements under 71
o Dyer v. National By-products – Court adopts Restatement § 74 approach - forbearance is sufficient consideration where parties believe that claim
may be valid.
 As long as employee thought that he had given something of value,
there was consideration – must consider what the parties
ACTUALLY knew. Not what they should have known.
 Court also requires good faith: potentially invalid claim asserted in
good faith, with honest belief in its potential validity can serve as
consideration.
o Dyer v. Snells
 Must parties intend to be legally bound for contract to be legally
binding? If all other conditions of contract are satisfied, should
legal enforceability turn on whether there was intent?
 First Restatement § 20 – if the parties don’t intend to be legally
bound, when they enter into a contract, but everything else is there,
there’s still a contract
 Restatement § 21 – Intention isn’t necessary to render an
agreement enforceable, but lack of intent manifested may be
sufficient to prevent enforceability.
 If there is consideration, presume an intention to be legally
bound (prima facie); UNLESS there is a manifestation of intent
(specific evidence) from parties not to be legally bound – then
may not be legally binding.
Formalities:
o Seal – can be thought of like consideration. Doctrine of consideration
comes to substitute for seal.
o It’s possible to use the doctrine of consideration itself as a formality,
nominal consideration. Is consideration formality or substantive?
o Nominal Consideration
 Schell v. Nell: Ritualistic exchange of $600 for a penny indicates
intention to be bound. D intended to be bound. Kind of like
placing a seal. P argues that this was real bargained for exchange –
that court should not peer into the substance of the exchange, as
long as there is exchange.
 This probably fails under the comment to 79’s discussion
of 71.

Could argue that there was forbearance here – enforceable
under 71 – would depend on how court treats worthless
claims.
 P could also argue that there is a promise under moral
obligation – this does not hold up under 71.
o In the case of nominal consideration, shouldn’t courts enforce the intent of
the parties?
o Isn’t rule to not enforce contracts where there is nominal consideration
inconsistent with Restatement 204 (missing terms, court will be bound by
parties’ intentions and will supply reasonable term)?
o Also Restatement 87 – nomination consideration is binding in the case of
option contracts. Options make it easier to enter into contracts. So we
allow nominal consideration here. Couldn’t we apply the same incentive
to real contracts as to option contracts?
 Smith v. Wheeler – one-year option to buy property. Option
contract was still valid – implied promise to pay nominal
consideration is sufficient consideration. This decision agrees with
Comment to Restatement 87 (734) – giving and receiving of
nominal consideration performs a formal function only.
 Joles v. Wittenberg – also agrees with Smith and Restatement 87 –
compares $1 with contract under seal. Prima facie presumption of
consideration. Nominal consideration would do the same thing.
Promissory Estoppel – eases the harshness of the doctrine of consideration.
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Restatement § 90 – promise reasonably inducing action or forbearance: when
promisor makes a (1) promise that he can (2) reasonably expect promisee to rely on
(3) and when this reliance does happen, the promise is binding (4) if enforcement is
required to avoid injustice.
Enforcement based on reliance allows courts to rely on observable behavior
(objective standard in 90)
Promissory estoppel = reliance = equitable estoppel: completely new way to
enforce contracts. Courts enforce promise b/c the promisee has relied on promise to
his detriment. This doctrine may apply where there is no consideration, and courts
are still willing to enforce a promise.
Promissory estoppel in the context of contracts:
o Rickets v. Scothorn: grandfather promised granddaughter money so that
she would not have to work anymore. She left job, but later took another
job. Grandfather never paid full amount and died. Never repudiated the
promise. Holding: grandfather’s estate must pay. Estopped from arguing
no consideration b/c D’s promise had induced P to rely to her detriment.
Reasoning: there was no consideration and therefore no contract.
Grandfather did not ask her to leave her job, nor did he place it as a
requirement for the note. She left work voluntarily. This was just a gift.
But in donative promise situations where money has been spent, in faith of
the promise, lack of consideration is not a defense. Court believes that the
reason for this principle is NOT that reliance = consideration but that:
grandfather’s estate is estopped from arguing that there is lack of
consideration. Simpson College v. Tuttle: after allowing donee to incur
obligations on the faith that note would be paid, donor would be estopped
from pleading want of consideration. Equitable estoppel precludes D from
alleging that the instrument here lacks the key elements of an enforceable
contract. Since Ricketts intentionally influenced P to change her position
for the worse in reliance on the note, it would be inequitable to permit D to
resist payment on the grounds that the promise was given without
consideration.
 Rule: a note given in expectation of the payee performing
certain services, but without any contract binding him to
serve, will not support an action. But when a payee
changes his position to his disadvantage, in reliance on the
promise, a right of action does arise. This school of
promissory estoppel is closest to actual contract doctrine.
 Equitable estoppel: court refuses to consider evidence presented
to prove a fact b/c party previously denied the fact to induce
another to rely.
 Promissory estoppel: extends equitable estoppel – rests on the
making of a promise, not on a statement of fact. Voluntary conduct
of party precludes him from asserting rights that he might
otherwise have been able to claim against a person who in good
faith relied on the voluntary conduct of that party and has been led
to change his position for the worse and as a result acquires some
right of property, contract or remedy.
 There was no contract in the traditional sense here – no
consideration.
 Why enforce this promise? The reason that we didn’t enforce
gratuitous promises is that doing so didn’t benefit society. Could
argue that where there’s reliance, enforcing promise makes society
better off. Moral hazard problem with reliance - creates incentive
to take steps in reliance on promise to create a basis for enforcing
the promise.
 Here the court is not saying that there is consideration, it is saying
that the promisor cannot avail himself of the argument that there is
no consideration b/c promisee has already relied.
 What does this case say about the Otterbein decision?
 promissory estoppel is a reliance theory of enforcement that yields
an expectation measure of damages.
o Promises to convey land:
 Greiner v. Greiner: Mother had planned to convey land to one of
her sons. He moved to the land, quit his job, and started to work
the land. Another son objects, and she changed her mind. She
sues to get her son off the land, and he countersues to get the deed.
No consideration here. Holding: there was reliance, so this
promise is enforceable under promissory estoppel.
o Allegheny College v. National Chatauqua Bank of Jamestown: wants a
fund named after her. Gives Allegheny $1000, before her death. When
she gives them the $1000, they set the money aside, meeting the
conditions of the grant. 7 months later, she repudiates on the promise to
give more money. Then she dies, and the college sues for the balance of
the money. Holding: enforces the contract. Reasoning: Cardozo says that
there is consideration here (conditions put on the gift were real
consideration. They complied, and she paid $1000) and there is no need
to use promissory estoppel.
 Is this different from Otterbein (traditional contract doctrine)?
Court says that she was paying to get something in her own name,
not just paying down the school’s debt.
 Cardozo is stretching traditional contract doctrine.
 Dissent: not a contract  no offer and acceptance (b/c no complete
performance.) This was a unilateral contract, and since money was
not given, there could be no performance and therefore no
acceptance.
 Problem: college did receive $1000. Dissent sees each
chunk of money as a distinct and separate offer.
 Notes:
 Theories/frameworks:
o standard bilateral contract - promise to set up fund
in exchange for promise to pay money (cardozo)
o promissory estoppel: dissent accepts promissory
estoppel in principle, but does not think that it
applies here.
o Unilateral contract – dissent.
o Gratuitious promise: Otterbein redux – can revoke
at any time.
 Proximity of promissory estoppel and unilateral contract
theory: partial performance (reliance) = acceptance 
same outcome as majority
o Promises of Pension
 Feinberg b. Pfeiffer: offered pension. She worked for an additional
year and then retired. Received the pension for many years and
then it was cut off, on the argument that it was just a gift. Holding:
enforce promise. Reasoning: no consideration here b/c of doctrine
of past consideration  pension was reward for past work induced
reliance based on promise – gave up her good job.
 Notes:
o Company argues that she did not rely to her
detriment – could have entered another job.
o But she would have taken another job at great cost
to herself and it would not have been the same as
her old job.
o Restatement § 90 is designed to deal with this exact
situation (783).
o Reliance vs. detrimental reliance
o Construction: Gc takes offers from subs on the basis of which he
constructs his bid. Cannot make binding contracts with subs b/c does not
know whether he will get contract. Period of time when GC is bound by
accepted bid before he can accept subs’ offers.
 James Baird v. Gimbel Brothers: Sub made an offer to GC, made a
mistake in calculations in offer. GC used that offer in calculating
bid, got the contract, and turned around to accept the sub’s offer.
But, the sub, realizing his error, had revoked the offer. Is there a
contract: no contract b/c there was no acceptance. Acceptance
came after revocation. Promissory estoppel: No promissory
estoppel here. Reasoning: Court understands the use of
promissory estoppel in the case of charity, but here the intent was
to enter into a contract. Court refuses to use promissory estoppel
in commercial cases.
 Notes: P argues theory of option contract  binding
contract  offeror cannot revoke. There’s NO option
contract here b/c no consideration. This was just an offer.
GC could have (1) written something in that would have
created consideration: if gc included sub’s offer in bid, then
if there is acceptance of the bid, gc would use that sub’s
offer OR (2) written this as a unilateral contract. Failed to.
 Drennan v. Star Paving: subs were calling GC to make bids for
contract to build a school. GC used D’s paving bid. D made a
mistake. After GD was awarded contract, discovers that D is
revoking. P covers and sues for price difference. Holding:
Enforce this promise. Reasoning: : when D submitted offer, had
reason to know that P would rely on it. D induced P’s reliance.
Looks to unilateral contract (§ 45) for analogy: offer cannot be
revoked after partial performance – partial performance =
acceptance. D invited acceptance by performance, and by
relying partial performance  So section 90 ought to apply.
 Doctrine of promissory estoppel was used to convert a
revocable offer  option contract.
 This decision undermines doctrine of revocation – can only
revoke offer 1) prior to acceptance 2) and if makes no
difference to offeree. small reliance  large liability
 Also, as in Baird, GC has options available to bind subs.
 Once GC found out about mistake, he could have amended
his bid. He knew that bid would be lower than others and
used it.
 Analogy to Luten Bridge – mitigating damages – Is there a
duty to mitigate degree of reliance to one’s detriment? It’s
hard to know if, in fact, he has relied to his detriment.
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Don’t know, if he had submitted higher bid, thereby
mitigating damages, whether he would have gotten
contract. Had he been able to know that he would still have
gotten contract after submitting revised bid, does he have a
duty to do so?
 Drennan has to pay another contractor an add’l $3000,but
perhaps he would not have gotten the contract w/out the
mistaken bid. Can recover for this.
 Restatement 87(2) would consider the subs’ offer an option
contract  sub would be bound and unable to revoke. No
consideration needed for an option contract. Where there’s
reliance, can have option contract without consideration.
 Under Gimbel rule  GCs would add a premium to their bids to
reflect the real risk that some subcontractor would revoke before
acceptance. Law would have increased overall cost of contruction
without adding any positive value  inefficient.
Promissory estoppel as a completely different doctrine:
o Goodman v. Dicker: radio franchise. Middleman said that it would go
through, and then it didn’t. Holding: award reliance damages not
expectation damages. Notes: Reliance theory of enforcement and
damages. this is a torts, rather than contracts.
o Hoffman v. Red Owl: P wanted to open a store a Red Owl Store. Entered
negotiations with Red Owl. Conditions and money kept escalating. P
kept adhering to the conditions. Kept ratcheting up the amount of money
that Hoffman had to supply. Red Owl decided not to award the franchise.
Holding: Decides in favor of P on promissory estoppel theory. Notes:
promissory estoppel is not about substituting for consideration here. The
other elements of a contract are not here either – no offer and acceptance.
It’s not clear that there is even an intention to be bound, where the court
would simply be filling gaps. Whether promissory estoppel is seen as a
substitute for consideration or not determines what else is needed to
enforce a promise on the basis of it. Shift from the 1st Restatement  2d
restatement = expansion of doctrine. More like a tort. Damages: uses
reliance damages and awards 3rd party damages (to Mrs. Hoffman) 
never done in contracts.
o Tort of negligent promissory misrepresentation – feels like Red Owl was
fraudulent, but they were not fraudulent b/c were not lying from the
beginning. But no such tort is available.
o Policy consideration: Why does it matter whether you stretch contract
doctrine to encompass these cases or whether you establish a tort?
 Disadvantage of contract- with no clear contract, can use a little bit
of reliance to get a lot of expectation damages.
 Is it a problem for the law to announce that it has a certain rule or
doctrine and to actually be doing another under the heading of that
doctrine? Dissonance. Doctrine is used as an excuse to get what
court thinks is right result – doctrine is used in name only. Does
o
o
o
o
o
system suffer where there is dissonance between results and formal
legal structure?
Gilmore – The Death of Contract
 Thought that contract law was being reabsorbed into tort b/c of
promissory estoppel
 In response to Gilmore:
 Red Owl’s refusal to grant expec. damages protects
contract law. If you want real contract damages, you have
to have a real contract. Separates this decision from the
ordinary contract case.
 Hillman (820) - Ps are not actually winning contract cases
on promissory estoppel theory very often.
 Why are people not talking about death of tort law – there is no tort
of promissory negligent misrepresentation, but it is being used as a
theory for recovery.
Promise
Blatt v. University of Southern California: Order of the Coif said that P
would be eligible for admission if grad in top 10%. Was not selected for
Order of Coif. Now they are saying that he was not eligible b/c he didn’t
participate in law review. They never told him that law review was a
requirement. Holding: denied P’s claim for specific performance.
Reasoning: no contract b/c no consideration – high grades were not sought
by promisor in exchange for promisee’s promise. No recovery under
Section 90 of 1st restatement b/c promise as not of sufficiently “definite
and substantial character” to warrant recovery. Would probably reach
same result under 2d restatement. Treating promissory estoppel as a
substitute for consideration here, rather than as a separate basis for
enforcement.
Spooner v. Reserve Life Co.: P were agents of D life insurance co. D sent
out a bulletin to agents that there were going to give voluntary incentive
bonuses. . May be withheld, increased, decreased and discontinued with
or without notice. In addition, agent has to sign a form and send back. [
seems clear that there is no contract] “In return, I ask that you only give
me your best efforts.”[unilateral contract/consideration?] holding: no
recovery reasoning: no contract here no offer (signature), no
consideration. No promissory estoppel: there must be a real promise for
promissory estoppel this is just an illusory promise. Illusory promise:
(1) so indefinite it cannot be enforced (Blatt and this case)(2) promise
makes performance optional or discretionary (this case.)
Ypsilanti v. General Motors(1): GM applied for tax abatements under state
statute, passed with intent to keep companies, and jobs, in MI. got tax
abatement from Ypsilanti. In 1984 application for abatement, GM said:
particular project would create 200 and retain 4300 jobs. In 1988 apply
for another abatement – retain almost 4900 jobs. GM is specific about
impact on local economy in its applications. Now GM wants to leave and
close the plant in the middle of their 12-year tax abatement. Town claims
that it relied on the fact that GM would stay there in granting tax
abatement. Is seeking injunctive relief to order the plant to stay open.
Reasoning: is there a contract? Legislature did not intend to create
contractual relationship every time there was a tax abatement application.
Is there a claim for promissory estoppel? YES. Standard: promissory
estoppel requires 3 elements: promise, reliance on promise and
reasonable expectation of reliance, justice requires enforcement – from
Restatement 90. There was a promise – expression of intention. Other 2
conditions are met also. Holding: injunction granted.
 Notes:
 complicated case for an injunction – a little like the
personal servitude cases. BUT GM does have incentive to
max profits, so there is not the monitoring problem that we
saw in the opera singer cases.
 Is court enforcing inefficiency? GM is acting as a rational
economic actor by closing the plant. Preventing efficient
breach.
 To justify injunction  unique goods/land cases. a unique
service  GM’s role in economy is irreplaceable. GM
would counter than any company would replace it.
 Was there a contract? Why does court to look intent of
legislature to determine whether there was a contract, rather
than to the intent of the parties? Not clear that court should
have been so dismissive of real contract claim.
 Definition of promise: Is “expression of intention” a good
definition? There’s nothing in this about intending the
other party to rely on that expression.
 Court does not agree with the approaches taken by either
Blatt(voluntary) or Spooner(indefinite) in determining
whether there was a promise.
o Ypsilanti v. General Motors (2): holding: there was no promise  no
promissory estoppel. Overturns lower court. Court finds here that this
was saleman puffery. Not a promise. Assurances of jobs and retention
were statutory requirements.
 Notes: unclear what the definition of a promise is. Courts are
going from their gut about whether there has been an injustice and
then finding the other elements to justify their determination.
o Reliance: Alden v. Vernon Presley: p is the mother of the girlfriend of
D’s dead son. Son made a promise to pay off girlfriend’s mortgage. She
enters divorce proceedings and seeks the house. Elvis dies. She refiles for
divorce and does not tell the court that Elvis’ estate won’t pay the
mortgage, still seeks the property settlement. She sues alleging that she
relied on Elvis’ promise to assume the mortgage. Holding: no
enforceable promise. Reasoning: she had notice, wasn’t reasonable in
relying, therefore no reliance. Also b/c the net result of her relationship
didn’t result in economic harm. Notes: like Drennan, Luten. Is there a
duty to mitigate damages? Once you find out that the other party intends
to break the promise  cannot rack up damages and put yourself in a
worse position with the idea that this will lead to the enforcement of the
promise.
o Cohen v. Cowles Media Co (1).: journalists promised to anonymity to P, a
source. The newpapers overrode promise and published his name. He got
fired. He sued under fraudulent misrepresentation and breach of contract.
Holding: no enforceable promise. Reasoning: no contract b/c parties did
not intend to be bound  no consideration – like a donation with
conditions. Cohen losing his job does not constitute and injustice (really?)
so does not meet requirements of promissory estoppel. Enforcement of
promise runs counter to First Amendment Rights of D – would interfere
with papers’ rights to publish freely, would chill public debate. Standard:
to determine whether first amendment right would be violated: balancing
test – constitional rights of a free press against state’s interest in enforcing
private contracts. Supreme Court of MN says that this favors First
amendment.
o Cohen v. Cowles Media Co (2) (U.S. Supreme Court).: first amendment
does not prevent P from recovering damages under promissory estoppel
laws. First amendment does not give the press the right to disregard
promises that would otherwise have been enforced under state law. Makes
distinction between (1) laws that directly target first amendment rights,
which are almost necessarily impermissible, (2) and those whose
incidental effects are to burden speech in some way, but have a legitimate
purpose. Use balancing test in this situation. Holding: this promise is
theoretically enforceable. It’s up to MN Supreme Court to decide whether
to enforce. Notes: this is a very vague standard and its implementation is
unclear.
o Policy Issues Associated With Promissory Estoppel.
 could expand the use of formalities. Make them like promissory
estoppel – a substitution for consideration.
 Could consider switching from an objective approach on the issue
of induced reliance – Promisor must actually know of induced
reliance – “definite and substantial” from first Restatement.
 Could also require that promisee must expect promise to be
enforceable (solves problem of Presley.) AND is aware that
promisor knows of promisee’s reliance.
 Could also require that promisor must remain silent as to
promisee’s reliance in order to make promise binding – prevents
negligent misrepresentation.
 Barnett believes that these suggestion would (1) restrict scope of
promissory estoppel and (2) lead to better enforcement of parties’
intent.
Performance and breach
- Restatement § 205 - duty of good faith and fair dealing - Every contract imposes
upon each party a duty of good faith and fair dealing in its performance and its
enforcement
- UCC §2-103: Good faith means: good faith towards the contract and fair business
dealing. Shaped by custom – observance of reasonable standards of fair dealing in the
trade.
- This is an immutable rule, cannot contract around it.
- Does the implied covenant of good faith and fair dealing = a restriction or an expansion
of freedom to contract?
- Are Courts reading in the covenant because it should be there or because it is
implied in the actual contract? Is a covenant of good faith specific to a contract or
general in every contract?
- Kirke La Shelle Co. v. Paul Armstrong – Every contract contains an implied
covenant of good faith and fair dealing- neither party has the right to destroys the
right of the other party to receive the fruits of the contract
- Lucy, Lady Duff Gordon: Court agreed with agent that he had an obligation to use
“best efforts” to sell product, even though it was not stated in the contract - implied
covenant to use best efforts to make the Contract work.
- Goldberg 168-05 v. Levy (D): lease stated that tenant would pay a fixed amount for
the year plus 10% of gross receipts above $101K to LL. T/defendant agreed to
operate a men’s clothing store on the property. If gross receipts < $101K, T could
cancel lease. T/D channeled business to another of his stores nearby and gave
notice to terminate the lease, refused to pay rent. Holding: D/T has to pay rent.
Reasoning: channeling business to another store violates the implied covenant/duty
to perform in good faith (Kirke). Notes: without implied covenant, contract is
unenforceable. Could read covenant into the 10% term: without covenant, such a
term is meaningless. The counter-argument is that P negotiated badly and should
have taken this possibility into account and contracted for it – tough luck.
- Mutual Life Insurance v. Tailored Woman: D = T in bottom 3 floors of P’s bldg.
Had a % lease. Signed non-% lease for 5th floor also, contingent upon not affecting
main lease. D moved fur salon to 5th floor from main lease. Holding: For D:
covenant was not violated. Dissent: If we look at the intent, then we see the
covenant was violated. Implicit in every % lease, T has obligation to conduct its
business with regard for LL’s interest in gross receipts. Notes: Goldberg court
would probably had the opposite holding in this case. A court would be more
justified in enforcing this covenant if it believes that it is implied in the terms of the
lease (rather than believing that courts should read this in even where parties did not
intend it.)
- Texaco v. Pennzoil: issue: is good faith performance the same as good faith
negotiation. Holding: good faith in performance includes good faith in
negotiation. Pre- and Post- contractual conduct are connected. Reasoning: duty
of good faith arises from agreement.
Implied and express warranties
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Implied warranties of merchantability and fitness: goods have been paid for and
delivered. No explicit warranty. When will courts read such a warranty in?
o UCC §2-314- Implied warranty of Merchantability:
 implied in every contract for the sale of goods when seller is a
merchant.
 Goods must be good for general purpose.
 Minimum standards: Pass trade description, are of fair quality
within the description, fit for ordinary purposes, run about the
same, adequately packaged, conform to promises on the label
o UCC 2-315 - Implied warranty of Fitness: (deals w/ situations where
there is asymmetry of info – where seller knows more than buyer.) goods
must be fit for the particular purpose for which the buyer intends to use
them.
 (1) The seller must have reason to know buyer’s particular
purpose.
 (2) The seller must have reason to know the buyer is relying on
seller’s skill or judgment.
 (3) The buyer must actually rely on the seller’s skill or judgment.
 Often put specific purpose in Contract to ensure that (1) is met.
o Step-Saver Data Systems, Inc. v. Wyse Technology: Installed systems.
Used Wyse’s hardware. S-S claimed that W breached implied warranty of
merchantability. Reasoning: P is actually talking about a warranty of
fitness- has terms confused – There is no allegation that terminals are
generally defective, just that they are unfit for P’s software. Holding:
there is no warranty of fitness here.
- Express warranties
o Royal Business Machines v. Lorraine: P bought copy machines from D.
D made a lot of promises to P. Rule: express warranties can only arise
from statements of fact (vs. opinion) and has to be basis of bargain.
Holding: Trial Court must reconsider what P knew and what is fact in
order to show an express warranty. Same rule as 2-313.
o Express Warranty UCC §2-313. arises ONLY from a statement of fact.
Express warranties are created by:
(1) Any affirmation of fact or promise made by the seller to the
buyer which relates to the goods and becomes part of the
basis of the bargain creates an express warranty that the
goods shall conform to the description.
(2) Any description of the goods creates an express warranty that
the goods shall conform to the description
(3) Any sample or model which is the basis creates an express
warranty for the whole shipment
(4) There is no need for words such as “warranty” etc to create
warranty.
When Can Party End a Contract? What Damages?
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anticipatory breach: should a party be able to sue for breach before it has actually
occurred? If one party knows the other will breach, suing now may mitigate
damages. But you never know if a party will breach until it actually has.
o UCC 2-610 Anticipatory Repudiation - anticipatory repudiation = before
performance is due. Aggrieved party can:
 For a reasonable time await performance
 Resort to any remedy for breach, even though he has notified other
party of his intent to wait. (2-703 or 2-711)
 Suspend his own performance (2-704)
o UCC 2-611 Retraction of Anticipatory Repudiation – party in breach can
retract its repudiation until its performance is due, UNTIL the point where
the aggrieved party has changed position in reliance on repudiation
o Harrell v. Sea Colony: UCC does not govern here b/c these are not goods,
but the concepts are applicable to the case. H(P) entered into contract to
buy a condo. Later asked SC if he could get out of it. SC took that as
unilateral cancellation, sold condo to another buyer, and kept H’s deposit.
H sued to get deposit back. Holding: H did not anticipatorily breach.
Reasoning: was raising the possibility of mutual rescission, not
unilaterally canceling.
 Notes: if H did not anti.breach, then did SC anti.breach or was it
mutual cancellation. Damages: mutual cancellation: H gets
deposit back. More likely was anti.breach. Damages for that:
expectation = deposit (reliance) + difference between market and
contract price. To determine market price, want to know what it
would cost H to get similar condo. Why no specific performance
since this is land? Would be an argument for specific performance
if SC had not sold to 3rd party.
o duty to mitigate damages in the face of anticipatory breach. Party has
told you in advance that they are not going to perform. Just means that
repudiation comes even earlier here than a normal breach
constructive conditions:
o Restatement § 224- Condition defined – condition is an event, not certain
to occur which must occur unless non-occurrence is excused before
performance under a contract becomes due. If a condition has not been
satisfied, then do not have to perform.
o Condition = one of the things that need to be accomplished before other
party’s performance is due.
o Condition can be natural occurrence: e.g. insurance co. does not have to
pay for any damages unless there has been a fire. Fire is condition for
insurance company to perform.
o material breach: If other party has failed to live up to contract in some
way, and failure constitutes a material breach, do not have to perform your
end of the contract. Opposite of material breach is substantial
performance. If failure to live up to contract is so minor, court may find
that failure did not constitute a material breach, that party substantially
performed under terms of the contract. If there is substantial performance,
then other party cannot breach.
 Jacob and Youngs v. Kent: K refused to make final payment on
house. Had contracted for Reading piping, but not all of the piping
put into the house was Reading. J&Y didn’t want to replace piping
b/c it was behind walls by this point. Mistake was oversight by
subcon. Only diff between Reading and piping in house was name
stamped on pipe. J&Y tried to introduce evidence of quality of
pipe used, not allowed. Trial court found for K. holding: Found
for J&Y. reasoning: On large projects, small mistakes are to be
expected. This is a small error- insignificant relative to the whole
contract  J&Y substantially performed :. K must make final
payment. Reading pipe is an independent condition.
 Independent vs. dependent promises:
 Independent = if promise of party 1 is independent, then
there is no condition. The promise of party 2 is not
dependent on party 1’s performance of their promise. E.g.
if promise to use Reading pipe is indy, then Kent’s promise
to pay is not dependent on whether J&Y used Reading or
not.
 Dependent = if promise of party 1 is dependent, then
promise of party 2 is conditional on performance of party
1’s performance.
 Independent/dependent ~ substantial performance/material
breach  If promise to use Reading is independent  J&Y
substantially performed in this situation. If promise to pay is
dependent on Reading pipe condition  J&Y materially breached.
 Damages: Even though court finds the J&Y substantially
performed, still must pay damages to K = difference in value
between actual pipe and Reading pipe.
 Policy: The idea of material breach/substantial performance is
essentially utilitarian  If difference in value between what you
got and what you contracted for is very small, then “fixing” the
problem would cost more than it benefits. Counter argument:
freedom of contract – parties should be able to contract for
whatever they want and they should get it  anything written in
contract is a dependent condition.
 Limitations: Doctrine of substantial performance ONLY applies
if mistake was unintentional, was not willful. Courts differ on
what willful means – gross negligence, bad faith?
o Perfect Tender Rule: Cure and Rescission. Contrast w/ substantial
performance
 UCC 2-106: (2) conforming = in accord with terms of contract
 UCC 2-601: where failure to conform buyer has choices,
including the option to reject the whole.

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UCC 2-508: (1) seller of goods who has goods rejected may still
try to meet the terms of the contract, as long as he does so within
contract time. (2) if seller furnishes goods and it’s reasonable for
him to believe that goods will be accepted, seller has a little extra
time to meet terms of contract. But if buyer needs to protect
himself, then seller loses right.
 Softens perfect tender rule a little.
 Ramirez v. Autosport: P agreed to sell old camper to D and buyer
an new one. Left old one before new one was ready. Came to pick
up new van. Was in bad shape. Kept going back, continuous
problems. D sold old van to 3rd party. P sued to rescission for
value of their old car and deposit. Trial court awarded said that P
had rightly rejected and fair market value of new van. D contends
that it substantially performed – was close enough to being perfect.
If D substantially performed, then P had no right to reject. Issue 1:
Does doctrine of substantial performance apply Holding 1: NO,
substantial performance does not apply b/c this a contract for
goods: PERFECT TENDER RULE – goods must be in perfect
condition, not in approximate condition.
Damages: Cost of Completion vs. Diminution in Value
o Groves v. John Wunder Co.: Wunder Co did sand and gravel removal on
G’s land. Agreed that WC would leave land at even grade. Did not – took
best sand and gravel and left a mess. Would have cost $60K to complete
contract. Value of land in expected condition = $12K. There is no
question here that WC did NOT substantially perform – this is clearly
material breach. Issue: How should damages to G be measured: cost of
completion or diminution of value? This is the same question of damages
that comes up under J&Y v K.
 What’s the expectation measure of damages?
 Cost of completion: put party in position he would have
been in had contract been performed. Should receive
damages so that he can pay someone to put land at level
grade. Problems: gets a windfall. Land only worth $12K
 Diminution measure: Actual value of land << cost of
completion. Had contract been performed, would have had
land worth $12K. So should give him $12K to bring
financial position to that level.
 Cost of completion = monetary value of specific
performance.
 Applying doctrine of substantial performance  diminution
measure of damages.
 Holding: Doctrine does NOT apply b/c breach was willful  right
to specific performance or monetary equivalent = cost of
completion measure of damages.
o Policy considerations: If only concern is economic efficiency, then right
measure is diminution. Here D is forced to shell out $60K for a gain of
$12K. Inefficient to perform whole contract. BUT, value is subjective.
This holding is justified by the Beautiful Idea  P would not have
contracted for this if value of level land were not > $60K.
 Reverse situation: it would cost $5K for contractor to make
improvement to house. Successful repairs will increase value of
house by +$100K. Contractor fails to repair, not willful. Should
damages be $5K or $100K?
 Can find someone else to do work with $5K, so should give
$5K. Will still get +$100K on house’s value.
 Can justify damages either way.
Groves
Hypothetical
cost of completion
$60,000
$5,000
diminution in value
$12,000
$100,000
o Restatement 346, Comment (pg. 1014) – tearing down walls in J&Y and
requiring leveling of land in WC  economic waste. Supports the
diminution in value measure of damages. But Restatement has overlooked
differing utility curves  there may not be any waste here at all.
o Peevyhouse v. Garland Coal Co.: P had farm w/ coal deposits. Leased
land to D for 5 years. Lease specified that at the end of the term D would
restore/remediate the land. D did not. Work would cost $29K.
Difference in value of land = $5K. holding: court awarded diminution
measure = $5K. rule/reasoning: Based on doctrine of economic waste.
While ordinary remedy = cost of performance. Award diminution of
value when: (1) there was substantial performance. This was an
independent condition, secondary to main condition. AND (2) where
economic benefit is grossly disproportionate to cost of performance.
Notes: This may be the right rule, but the application was WRONG.
Outrageous to call the condition to fix the land incidental. This was
clearly a case of willful and therefore material breach  no benefit of
doctrine of substantial performance, dependent promises, diminution of
value.
Defenses
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Prima facie case in contract:
o Mutual assent – offer and acceptance
o Enforceability/consideration
o Breach
Even if P can show these things, still may not be able to recover  party in breach
may allege facts and circumstances that deprive the prima facie case of its normal
moral significance, allowing the party in breach to avoid the obligation that would
normally be incurred.
Defense = plea in avoidance. Would not be raised until it was clear that there was a
prima facie contract action, until all aspects of contract case have been satisfied.
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Treat defenses separately, rather than treating absence of defense as an implied term
in contract (ie. Not signed under duress = implicit term in contract.)
3 categories of contracts defenses: incompetence/infancy; improper means; failure
of basic assumptions underlying contract.
Unconscionability - moral objection
o Restatement § 208 Unconscionable Contract or Term: leaves courts up
to own devices, gives broad discretion, in determining what to do with
contracts and doctrine of unconscionability.
o Comment to 208(d) (pg 1139)  formal view of unconscionability – gross inequality of bargaining
power, together with terms unreasonably favorable to the stronger
party, may confirm indications that transaction involved elements
of deception or compulsion, or may show that weaker party had no
meaningful choice.
 Factors to consider: knowledge on the part of the stronger party
that weaker party (1)will not perform, (2) will not receive
substantial benefits, (3) is unable reasonably to protect his interests
o UCC 2-302 Unconscionable Term or Contract – gives courts same
discretion as Restatement.
o Williams v. Walker-Thomas Furniture: Small claims class action. Ps
bought several items on line of credit from D. Contract stipulated that if
buyer defaulted, seller could repossess ALL items, not just that item.
Apply each payment in part to every item you owe on  takes much
longer to pay off any single item. Ps defaulted and D tried to replevy the
items. Reasoning: no meaningful choice (bargaining power skewed.)
Unreasonably favored other party. Holding: contract is unconscionable
and is therefore void.
o Policy:
 Is court here motivated by substantive concerns (content/terms of
contract) or procedural/formal concerns (what Ps knew, bargaining
power)
 Substantive approach feels paternalistic, impinges on freedom of
contract.
 Formal approach consistent w/ beautiful idea. Substantive is not.
 Problem w/ formal approach  voiding of all contracts where
party did not know what she was signing.
Mistake – sometimes void a contract where there has been a mistake in the items
that the parties were contracting about.
o Restatement 151 Mistake Defined: mistake = belief not in accord w/ facts
o In order to use 151, there has to be some matter of fact about which both
parties are making mistake. 151 would not apply to case like Peerless 
no clear facts.
o Restatement 152 When Mistake of Both Parties makes Contract
Voidable: mutual mistake on basic assumption that has material effect on
agreed exchange of performance  contract is voidable by adversely
affected party UNLESS he bears risk of mistake under 154.
o Restatement 154 When Party Bears Risk of Mistake: party bears risk of
mistake where (1) contract allocates the risk OR (2) aware at time of
contract that he has only limited information on facts to which mistake
relates, but treats limited knowledge as sufficient OR (3) court allocates
risk where it is reasonable to do so.
o 154(1) shows us that 152 is a default rule.
o Sherwood v. Walker: P buys cow from D. Both parties believed that cow
was barren. D learned that cow was pregnant and refused to turn her over.
Issue: Did P have right to rescind contract, given that both parties made a
mistake about term in contract? Can court void contract? Reasoning:
Mistake was over a material fact. They essentially contracted for a
different cow. Know that this was a material fact b/c would not have
signed contract had they known. Other examples of material fact: subject
of agreement, price, collateral fact materially inducing the agreement.
Distinction between material mistake and mistake over quality. Figure
this distinction out based on value.
 Dissent: not the duty of courts to destroy contracts when called
upon to enforce them. There was no mistake of material fact here.
Dissent believes that buyer had hopes that cow was not barren. 
Only mutual mistakes should void contracts.
 This seems backwards: if there was a mutual mistake,
there still was a meeting of the minds  seems like this
should be enforced. Unilateral mistake would be like
Peerless  no meeting of the minds  don’t enforce.
 Sherwood court would find the exact opposite.
Unilateral Mistake
o Restatement 153 When Mistake of One Party Makes Contract Voidable:
when there is a unilateral mistake, 2 circumstances where it will void
contract, if he does not bear risk under 154 AND if (a) enforcing it would
be unconscionable OR (b) other party had reason to know of mistake or
his fault caused the mistake.
 Not much difference between this and 208. breadth of 208
probably encompasses 153.
o General rule: mutual mistake is grounds for voiding a contract.
Unilateral mistake are usually not grounds for voiding. This rule
prevents parties from building mistake into contract as an “out.”
o Tyra v. Cheney: subcon bid for sheet metal work under general contract.
Oral bid. Was told to put it in writing. Did so, but forgot to add in $900
by mistake. Was awarded subcon. GC denies ever getting oral bid, only
wants to have to pay the amount in the written bid. Holding: For Sub: GC
knowingly took advantage of Sub. Rule: if aware of other party’s
mistake  no meeting of the minds  no contract. Squares with 153(b)
 damages: restitution damages awarded . court has voided contract
and has awarded damages based on fair value of work done
-
(britton v. turner). Could not have awarded expectation or
reliance damages b/c the contract has been voided. Just trying to
allocate losses fairly.
o Drennan v. Star Paving: Should subcon be held to mistaken bid?
Holding: enforce contract against sub con. Reasoning: fact that sub con
make a mistake gives extra reason to enforce b/c had duty to exercise
reasonable care in supplying bid.
 Defense of Mistake does not apply where there is a promissory
estoppel claim. Mistake is not a defense here.
 Consistent with 153(b)
o Policy: where should loss fall? (1) causation  party who caused the loss
by making the mistake should pay. (2) least cost avoider approach (3)
analogy to duty to mitigate damages: each party has loss prevention duty.
Misrepresentation
o Restatement 160 When Action = Assertion (concealment) action
intended or known to be likely to prevent another from learning a fact is
equivalent to an assertion that the fact does not exist.
o Restatement 161 When non-disclosure = Assertion several situations
when non-disclosure = assertion.
o Laidlaw v. Organ: L bought tobacco from O. L had just seen news that
war had ended and that price was going to jump dramatically. O had not
yet seen news. O argues that L had duty to inform him of info that would
affect price  remained silent in the fact of a question from seller. Issue:
Did buyer have duty to say that there had been a peace treaty?
Impossibility/Impracticability
o Paradine v. Jane: T sought to be excused from lease b/c he had been
ousted from land by Price Rupert’s army. LL wants rent. Holding: court
finds for LL/enforces contract. T is forced to pay rent on land he cannot
occupy b/c of unforeseen circumstances. Reasoning: court distinguishes
between 2 kinds of duties: (1) where law creates duty  if disabled from
performing: law will excuse him. (2) contractual/voluntary duty  law
will not excuse him. Not the modern approach.
Modern Approach to Unforeseen Circumstances:
o Restatement 261 Discharge by Supervening Impracticability: If nonoccurrence of an event was a basic assumption of contract and occurrence
is without fault of either party  contract is voided.
o Taylor v. Caldwell: P rented concert hall from D. Hall burned down. P
suing for lost profits from not being able to hold concert and for what
they’ve already paid to concert hall. Holding: Contract is void.
Damages: D is not responsible for expectation damages to P. Court
awards reliance damages – take parties to where they were before contract
was formed. Issue: whether loss which P sustained should fall on D?
o Policy: 3 ways to distribute loss: (1) deontological (fairness); (2)
contractual – what would parties have bargained for had they thought
about this in advance?; (3) welfare max –

Fairness: court is saying that concert hall problem is like painter
who goes blind before finishing painting (personal service
contracts.) Court is extrapolating rule against specific performance
for personal service to more commercial settings, where money
could have been substituted for the thing in the contract.
 Contractual: court’s finding is based on contractual principle: no
reason to think that if parties had addressed issue in contract they
would have let loss fall where it lies. (paradine court would let
loss fall where it lies.)
 Welfare max: what solution  highest aggregate welfare.
 Paradine: beautiful idea. If not in contract, then can
assume that enforcing contract is welfare maxing.
 Taylor: this was an implied contract  voiding is welfare
maxing.
 Key is whether you believe that there was an implied term.
o Restatement 263(1213): If existence of specific thing is necessary for
performance  basic assumption of contract. (what does necessary for
performance mean?)
o Applying 261 and 263 to Taylor  void
o Krell v. Henry: King Edward’s coronation proceeding. K owns flat along
procession route, wants to rent it out. Procession is cancelled. H had paid
deposit. K wants balance. Holding: K cannot get balance of money.
Reasoning: coronation was basic purpose of renting the flat. That
purpose was frustrated.
 Policy: doesn’t this lead to excusing the contract in all kinds of
situations? Comes down to how specific the contract is in stating
its purpose.
Policy questions:
- Freedom of contract/beautiful vs. other societal values:
o 1st Amendment: Cohen
o 13th Amendment/involuntary servitude: Bailey, personal service contracts
o doctrine of unconscionability/bargaining power (Williams v. WalkerThomas)  fairness
o 10th (Lochner)
o Fairness: promissory estoppel  Red Owl
o The beautiful idea falls short where there is asymmetry of
information/bargaining power. Beautiful idea only works in a Coasian
ideal world – where there is perfect information.
 Use doctrines like avoidability to address these market failures and
fix them to ensure efficiency (Luten Bridge Co.)
o Diminishing marginal utility of money.
o There are other ways to distribute losses  perhaps losses should fall on
the least cost avoider, rather than on the party who made the mistake.
o What happens when contract actually reflects beautiful idea, but it goes
against other societal values?  inefficiency
-
Gap-Filling:
o how far should a court go in filling gaps?
 Impossible to fill every gap in advance.
 Difference in bargaining power
 Who should pay? Parties or public?
o Default vs. penalty defaults?
o Tailored vs. untailored defaults?
-
efficient breach:
o foreseeability, certainty and avoidability  prevent inefficient outcomes
o Cooter and Ulen: specific performance is a less efficient kind of remedy
than damages b/c specific performance stifles efficient breach.
o Friedman: efficient breach = stealing stuff  unfair, keeping your word.
(Would decrease the amount of contracts  unefficiency.) so maybe
efficient breach isn’t actually efficient. Could be efficient for the
breaching party, but there may be external costs of this breach that they
never incorporate.
-
different approaches to enforceability.
o Pros and cons
o Apply these ideas to evaluate everything