Rahul Mukhi
Contracts – Prof. Ferrell
Office Hours: 2-4, Monday, Griswold 303
Section 1
Class Notes
9/3/02
Principles of Promissory Obligation
Grounds for Enforcing Promises
Formality
1st issue we will focus is the enforceability of promises, which ones are enforceable?
Legal Rule #1 -- Contracts is a state law subject. What is the source of law within state
law? Mostly derives from State common/case law. We will learn the typical contract
doctrine that all states follow.
Congregation Kadimah Toras-Moshe v. Deleo
Can’t sue dead people so Deleo is administrator of the estate.
Affirmation does not mean Supreme Court completely agrees with reasoning of lower
court, Judgment vs. Reasoning.
What is the precise issue(s) in the enforceability in this case?
 Lack of carrying through while alive (later in the course)
 Lacks consideration
Consideration (defined by this court) – legal benefit to promisor or detriment to
promisee
Legal benefit argument -- The fact that he made the promise 4 or 5 times (seriousness)
means he probably saw benefit to himself
Legal detriment argument – They incorporated into their budget
If no consideration, what is another way for the promise to be enforceable? Reliance.
Legal rule #2 – Promise to be enforceable must have either consideration or reliance.
The idea of reliance comes from case law.
Reliance – promisee takes action (or inaction) based on promise.
Court decides that simply writing down a promise does not create sufficient reliance.
Public Policy – The Statute of Frauds (whether a promise needs to written or not), oral
promise should not compete against a will or estate, but court does not rely on this policy
because it is not directly violated. If we start enforcing oral promises of deceased to
compete against will, a Pandora’s box is opened.
Where are judges coming up with the law?
9/4/02
Bargain
Hamer v. Sidway
Consideration is the issue again.
Hamer received promise from nephew, assignment of claim. Assignment of claim does
not effect the law. Defendant is the executor of the estate.
Legal issue: Is there consideration for the promise?
Executor’s argument: The promisee’s good behavior actually benefited him, not a
detriment thus no consideration.
Court does not address the benefit to uncle because detriment is established.
Holding vs. Dictum – Holding is the reasoning necessary to the decision, dictum is
unnecessary to support the judgment, thus is not binding, though perhaps persuasive.
How was it detriment? Nephew gave up legal rights in hopes of getting $500. A waiver
of a legal right. Also must be a request or inducement to do so.
Do not consider the value of the legal right, simply if it is given up.
Restatement of Contracts – an attempt by academics and practitioners to summarize the
common law
1st (1920’s & 30’s) and 2nd (70’s & 80’s) Restatements of Contracts.
Is the 2nd to some extent reforming as well as restating the law?
“Cross the street to get your $1,000” -- Condition to a promise vs. Inducement for the
promise. Cross the street is a condition, not an inducement, thus contract is not
enforceable. Condition is not sought.
When is the contract formed? “Acceptance” and “Assent”
Is it possible for consideration be just an exchange of promises or does something need to
happen in the real world? A promise for a promise (a bilateral contract). Is there
consideration (detriment) at the point where the nephew promises to give up smoking or
does he need to actually give up that right first? Yes, because one promise could be
inducement for the other. Promise is a detriment is because he is promising to give away
a legal right.
9/09/02
Consideration: Legal detriment to promisee or benefit to promisor (from Deleo).
(1) Legal detriment must be induced
(2) Bilateral Contract, promise for a promise
2nd Restatement
§71
Promise for Promise in section 2
Inducement – “sought by”
§81
How is this clarifying section 71?
71: “bargain”/consideration, requirement of inducement (“sought by promisor”)
81: Clarification of inducement, not the only requirement but has to be one of the
reasons. You promise to build me an extension and I promise to give $500,000. I also
know you need the money, you’re my friend, I have another motivation for the contract.
Still need inducement but can be additional reason.
Hamer v. Sidway – When did contractually liability attach?
At the party, when nephew assented.
If nephew swore at 20 he could be sued by uncle.
But is it promise for performance and not a promise for a promise? No bilateral contract.
Did not ask for the “promise” for $5000, asked for the “performance.” Nephew could
have said “no” (no promise) and then performed.
Promise for a performance – unilateral Contract
According to this interpretation the contract was enforceable at the moment the nephew
completed the performance?
What if the nephew performs for a year? No consideration, what induced the promise was
full performance. Does this mean the uncle can renege the day before he turns 21?
Have to always look at intentions and motivations because that affects the legal doctrine
of bilateral vs. unilateral contracts.
Most contracts as an empirical matter are promise for promise (bilateral).
Word “agreement,” implies promise.
Legal realism – 20s and 30s, look behind the doctrine towards the real interests of the
courts
Economic Analysis of Law – look at contract doctrine through economic effects
Posner: main purpose of contract law is economic efficiency
Philosophical Approach – Fried – Contract law is to maximize exercise of individual
economies
Critical Legal Studies – Social Justice instead of Economic Efficiency, distributional
effect of legal doctrines (who gets affected)
9/10/02
(1) When does the promise become legally enforceable? Bilateral v unilateral
(completion of promise vs. completion of performance); consideration (whenever
the promisor receives what he or she is seeking)
(2) Duncan— Demonstrates that courts have additional concern other than
consideration (baseless claims); public policy
(3) From Deleo to Restatement §71 (detriment/benefit to new statement which
includes inducement)
Benefit
Mills v. Wyman
Would be consideration according to Deleo (benefit to the Father?)
But no consideration under §71 because there is no inducement or not “sought by”, the
performance already occurred.
Court says that moral obligation is not sufficient except in special cases
(1) Bankrupt
(2) Debt of minor
(3) Debt barred by Statute of Limitations
All these are bound by prior consideration or pre-existing obligation, reviving an old
promise.
What separates Mills v. Wyman is that there is no exchange/bargain and thus no “preexisting obligation” or “pre-existing obligation.” It was gratuitous promise but not made
with direct bargain for promise or performance. It is bad public policy to enforce implied
promises or moral obligations.
General point: Can we think of alternatives to bargain/exchange?
§86
says the benefit must be received by the promisor
Webb v. McGowin
Bull v. Boy (taking care of a bull is valuable but not for boy)
Benefit must e to something with pecuniary value. McGowin’s future wages give him
pecuniary value of not being crushed by a stone. What if Wyman was a minor? If there is
a legal relations
What does it mean to be a “promise?” Prediction vs. promise, i.e. “I will always
remember you…” a prediction vs. promise.
Implied promises vs. express promises – implied promises in fact, implied promises in
natural law
Using Mills v. Wyman no recovery for Webb, no previous legal obligation and not prior
bargain.
Court says a subsequent promise creates a legal fiction that there was an express bargain
for services, promisor wanted the performance and the promisee for the charge. Doesn’t
work for Mills v. Wyman because father doesn’t have dominion over his son but does
have it over his own value.
9/11/02
(1) Doctrinally consistent – Mills v. Wyman was looking for pre-existing bargain,
Webb v. McGowin also looks for bargain (legal fiction of bargain)
(2) Why a bargain requirement?
a. Natural justice (Mills v. Wyman)
b. Limiting principle – don’t want to enforce all promises
(3) Applied §86 to the two cases
(4) Implied in-fact promises v. Express promises
In Re Crisian
Legal fiction that there existed a promise, not an implied in-fact promise. It is implied-atlaw promise. How can we justify contractually liability in implied-at-law promise? What
is the theory of liability? Restatement of Restitution §116. Also covered under unjust
enrichment.
What if Mills used §116 to sue? Questions: 1) Was he able to consent 2) “Intent to
charge” Hospitals obviously intend to charge but private individuals don’t.
Muir v. Kane
S.O.F. said the oral agreement was not enforceable, enforced because there was
preexisting bargain
Reliance
Kirksey v. Kirksey
No liability, judge disagrees with the court decision. Thinks reliance constitutes
consideration. No quid pro quo.
Contract Liability:
1) Traditional K liability
-Consideration
2) Restitution – aka unjust enrichment and quasi – Contract
3) Promissory estoppel/reliance/equitable estoppel
Ricketts
No bargain so it was a gift promise can’t use traditional consideration liability.
Must be change in her position “for the worse” in order for reliance. So there is an
argument that she was not harmed because she in the same place she was before the
promise.
Does promissory estoppel undermines the freedom to contract, individual autonomy
(fried) served by contract law.
Promissory Estoppel erodes the line between voluntary (contracts) and involuntary
obligation (torts).
9/16/02
Review
(1) Development of P/E
a. Kirksey  Ricketts
b. Rest. §90, First  Rest. 90 §, Second
(2) Detrimental Reliance (Ricketts Q.)
(3) Freedom of K: Inconsistent with P/E and Hillman Stats
Allegheny College
uses consideration as the liability theory and talks about promissory estoppel in dictum
(basis for law of charitable subscription).
Explicitly specifies that she wants “Christian education,” her name on the fund, “others
subscribing.”


Christian Education is not consideration because §71 it is not clear what the
college has to do, no bargain for requirements on the promisee
Others subscribing, its not a requirement, it’s a hope
View this as a “bilateral contract” and not as a conditional gift because there is a benefit
to the promisor. If the college failed to comply they would have to return the money, it
would be failure consideration (breach of contract) which therefore shows there was a
contract in the first place. Also could be liable for unjust enrichment/restitution. The
inducement by the implied promise of the college (promise to meet the conditions) is the
full $5000. The obligations run to the full $5,000 thus it is hard to argue that the contract
only entitles them $1000.
Dictum about P/E: Detrimental reliance? Yes, they gave themselves a duty to perform the
obligations. Changing their legal status was the detriment. If they would have spent the
$1000 on a party it would have been unjust enrichment.
Dissent says we should view it as a gift and if not, than it is only a unilateral contract,
enforceable upon full performance.
Arguments for viewing situation as a bilateral K
a. Benefit to promisor (inducement for the promise)
b. Return the money
P/e Argument
a. Detrimental reliance (legal status)
b. Reliance on promise for the full $5000
East Providence
Holding of the court based on consideration bargain theory, promissory estoppel
argument in the dictum.
Consideration
“Promise” to pay premium
Benefit is that the bank would have charged interest
Argument is that there is no consideration – pre-existing legal duty rule, if you get into an
agreement that you already had a legal obligation to do there is no consideration. They
already had the right to charge interest so acquiring it cannot be the inducement.
Promissory Estoppel
Detrimental reliance is the expectation that the insurance would be taken care of. They
wouldn’t have used the car (hence gotten into the accident) if they knew they didn’t have
insurance. Or driven the car in a safer manner. But court never clearly identifies what the
detrimental reliance is making it a weak argument.
Feinberg
Is there consideration?
Working till 1949 make up consideration? No, there is no inducement or requirement. Is
there consideration of “past services?” No, because there was no inducement on past acts.
Most obvious reliance argument is that she would not have retired in 1949 if not for the
promise, detrimental because she could have made more money working. Was the
“reasonable expectations” requirement? Yes. Mentions cancer because she might not be
able to get a new job because of it.
§90 “The remedy granted for breach may be limited as justice requires.”
Remedies, just because there is reliance doesn’t mean reliance damages.
Goodman
Court uses promissory estoppel, the hole in consideration is that there is no bargain
because there is no return promise that Emerson gets from the potential franchise.
Reliance (Status quo ante) damages, puts the party in the position it was prior to promise
– court uses this to award damages perhaps because the distributor could have ended the
agreement at any point.
Expectation damages, puts the party in the position it would be in if the promise was
honored – if we used this they could recover for lost profits. This is the norm, but not
used in this court.
Equitable Estoppel – Recovery based on Misstatement of fact, difference between
breaching the promise and lying. The misstatement of fact here was that Emerson had
approved the distributor’s grant of license to the franchise.
The complaint only used breach of an enforceable promise as its theory of liability,
equitable estoppel argument is not used, plaintiff never brought this cause of action to the
court.
Limits on Enforceability of Promises
Inadequate Consideration and Unconscionability
Batasakis v. Demotsis
“adequacy of consideration”
“want of consideration”
“Failure of consideration”
9/17/02
Review -- Remedies
(1) Expectation damages – party in as good a position as they would have been if the
promise was honored (default)
(2) Reliance Damages – status quo ante, back to the position as they were
Williams v. Walker-Thomas
Judicial Activism -- policy considerations as well as common law.
Apply U.C.C. code for sale of goods, Case law for sale of land, employment contract,
construction code, etc. Keep in mind
Judge or jury can decide if a contract is unconscionable.
§ 2-302 UCC “Matter of Law” and §208 specify that a judge will decide
unconscionability. Perhaps they think that juries would be too inclined to kindness
allocation.
What court factors in determining unconscionability
(1) Full understanding  “assent” (non-substantive)
(2) Finances --$218/month, knowledge of store (non-substantive)
(3) Substantive unconscionability – the terms there is a gross lack of equity –
draconian terms
(4) Printed form – with a long maze of provisions
(5) Presence of meaningful choice – how do we treat contracts when there is
monopoly/market power
(6) Risk allocation
97% of the time need both substantive and non-substantive unconscionability.
Schwartz excerpt – monopoly/market, any reason to believe that a monopoly going to
offer worse contract terms? Standard argument is “no.” Contract terms as quality of
product (longer warranty, return policy, etc.) Do they have an incentive to offer lower
quality terms than a competitive firm?
$100 – without K term
$110 – without K term
Monopolists are going to have correct incentive to offer the term if it costs them less $10
for the term. So they will provide terms which work with cost-benefit analysis.
9/18/02
Review
1) Competing arguments in Williams v. Walker-Thomas
2) Review of Market Power and K terms
K Modifications
Alaska Packers
’s argue that there is no new consideration and superintendent was not empowered to
modify the agreement (lack of agency).
Court rules that there is a lack of consideration in terms of pre-existing of legal duty.
Fisherman had a pre-existing legal duty to work.
Fisherman make an argument that the nets are defective and thus a new agreement was
necessary. $.02 based on fish caught, so they would be hurt by the terms. Court defers to
lower courts on factual judgment on fish net quality.
U.C.C. §2-209
is a test of good faith. Extortion test? Compulsion, taking advantage of someone
unjustifiably.
Was it rescission and new K?
What is the key difference between this case and Schwartzreich?
“Opportunity Cost” – increased cost of employment? Lack of change circumstances
(ignore net) in this case as opposed to Schwartzreich (increase in opportunity cost).
Other arguments: No because it is a modification not a new K and superintendent had no
power to rescind the original agreement.
Goebel v. Linn
Argument by  of Duress. The court says it is not a duress because the brewery could sue
for breach of K but there is a lack of remedy because the ice company would go
bankrupt. It is in both parties interests to come to agreement, so there is a lack of duress
because there is a lack of remedy for the brewers. But there is also a lack of remedy in
Alaska packers (no way the fisherman could compensate the company for all their capital
losses of a lost season)? Change in circumstances.
(1) Judgment Proof problem
(2) Don’t necessarily get expectation damages
Schwartzreich
Rescission and new contract (occur at the same moment in time)
Increased opportunity cost.
9/24/02
Dr. Martin Luther King Hypo
(1) Bilateral K, Promise for the Papers for the Implied Promise in Fact to Publicize
the papers (How plausible it is that there is an implied promise in fact)
(2) Detrimental Reliance
Actual case, BU won on the reliance theory.
Review:
Contract Modifications
(1) Surface Doctrinal Level
(2) Underlying Policy concerns (opportunitism/bad faith, an attempt to justify
different decisions for similar fact patterns)
Illusory Promise/Mutuality
Wickman
Expectation Damages – look at what their open market purchases were compare to what
they would have paid under the K.
Reliance damages -- does that include opportunity cost? In this case without opportunity
cost the reliance damages are 0.
The doctrine is “mutuality” – No mutuality when saying I will buy as much as I want to.
“Requirements K” I will purchase all the coal I will need the course of my business – is
there mutuality? Argument that there is consideration because they will likely need more
than 0, argument that there is no consideration because they could switch businesses.
Enforceable under (a) because if buy coal consideration (b) if don’t buy coal give up the
legal right to buy coal from anyone.
§77
alternative performance
(a) hypothetical bargains – focus on one of the promises, an attempt to make sure
“Requirements” contracts are enforceable
Gurfein
§77
(b) two options – ship or not ship, good possibility that they will ship and there is
consideration because buyer can no longer cancel
U.C.C. 2-309
“Reasonable notification” – using this means termination clause does not make promises
unenforceable – this is enough to establish consideration and mutuality
Wood
Implied promise “in fact” Cardoza claims it protects Lady Duff.
Lady Duff doesn’t need it though
--compensation scheme
1-203: Does an obligation of good faith change the analysis of this case?
2-306 (2): How this compares to Cardoza’s analysis?
9/25/02
Issues in K Hypo
(A) Is it enforceable?
(1) Legal Holiday Statute
- “entered into”, to write up the agreement was only to help the oral promise
- doesn’t need to be written
- Not contract of necessities
(2) Illusory Promise
- “If I see an opening” seems to be open whatever the agent
- Counter-argument is Wood Lady Duff Gordon – Implied promise in fact
to make reasonable faith efforts (exclusive agency, compensation scheme)
- U.C.C. 2-306 (Default Rule)
- Courts don’t look into adequacy of consideration
- Conduct after the contract
(3) Unconscionability
- Need both substantive and procedural unconscionability
(4) Promissory Estoppel
- 32 hours, $1100 establish reliance?
- §90 could she “reasonably expect” the reliance to occur?
- Injustice avoided?
(B) Was it breached?
- No breach because he is still the agent and she did not hire another agent
- Argument on the other side is that we know what the intent of the parties
were
(C) If enforceable and breached what is the remedy/damages?
- expectation vs. reliance damages
- Reliance damages $1100 + 35 hours (plus lawyer fees)
- Expectation damages –the position of the non-breaching party, $2500 for
the advance, but how many books would they have sold? Griswold & Co.
had clever marketing…what should be the proxy. (implicit assumption is
that she would have accepted the Holmes contract)
9/30/02
Review
(1) Mutuality – a component of consideration, aka is there illusory promise? Don’t
need a whole lot for mutuality, don’t look adequacy of consideration, notice is
enough.
(2) Default Regime – Implied promises, i.e. reasonable and best efforts to fulfill
contract in exclusive agency agreement, what should be the default rule in
contract law…usually one can opt-out of this default regime.
(3) Ways of Dealing with mutuality issues – (a) implied promise in fact (what is the
remedy for an implied promise to make best efforts?) (b) promise of good faith
(U.C.C) and common law.
Omni Group Inc v. Seattle-First National Bank
Does the satisfactory clause make it an illusory promise or mean there is not mutuality?
The satisfactory clause is a conditional of promised performance (as opposed to a
condition of promise enforcement). Conditional performance brings up issues of
mutuality, because there is only return requirement of performance if the party is
satisfied. What is the argument that it is not illusory promise? “Reasonable” and
“Objective” factors. The key fact is that the land is going to be used for development and
we can judge what conditions would be satisfactory to an objective person (as opposed to
painting satisfaction is not enforceable). Just because there is a state of mind clause does
not render it unenforceable.
Smith v. Price Creameries
Termination clause brings up mutuality concerns, but 30 day notice requirement fulfills
return promise needed to fulfill mutuality/illusory promise. The two issues discussed then
are (1) unconscionability (2) good faith. Good faith is an interpretive tool of performance
requirements but it is not its own independent performance obligation. Pre-K reliance
(spent money before the contract was even signed) does not make promise enforceable.
Justice?
Baby M
The court relies on statute on public policy of the state to justify it’s conclusion. Where
does public policy come from? The legislative history, goals/purposes behind enacting
the elaborate statutory scheme.
What are the public policy debates?
(1)Disregard for “best interests” of the child, more interested in highest bidder
(2) Degradation of women – commodification of something that shouldn’t be, it should
be outside of the market
(3) Poor v. Rich argument –
(4) Counseling – issue of assent
(5) Irrevocability
(6) Middle men – a profit motive, rather than an altruistic motive
(7) Tug-of-war
(8) Equal Rights – undermine the quality of rights between the natural parents
10/1/02
Remedies
Damages
Expectation Damages
Monetary sum which would put the plaintiff in as good a position as he would have been
if the contract was not breached, this is the normal award
Hawkins v. McGee
Theories of liability are breach of contract and negligence. What is the standard of
making contract? Subjective or Objective.
Tort v. K claim
In a contract there is no inclusion of culpable state of mind, where as you do you need it
in negligence. In contracts there is a stricter liability. Lower court wants to calculate
damages based on pain and suffering and worsening (this is a reliance damages). Put the
patient in the position he would have been if he never entered the contract.
Supreme Court orders new trial based on expectation damages:
Value of 100% hand - Value of hand now
Pain and suffering not compensable under expectation damages because it was part of the
consideration.
Reliance is not only less than expectation damages.
Incidental Damages
Literature implies that botched medicine is usually tort liability no K liability.
Groves
Lease from 1927-34 must return land in “uniform grade.”
Consideration is $105,000 given by , uniform grade, and digging of mineral.
The issue is between cost of performance and difference in market value. The value of
the land drops to zero because of Great Depression, at the time of K this could not be
anticipated.
Cost v. Value of performance, both are expectation damages. The argument is over what
expectation damages entail.
Court decides that they are cost of performance.
Why not more/less than 60k?
1) unjust enrichment
2) Freedom of K, no breaching party should be able to get what it wanted from the
contract from another party
3) Bad faith/deliberate breach (but should this matter in K law), no punitive damages
in K law
How can you argue that there is no unjust enrichment?
Value of the promise to Groves in 1927 is what we get in resale which would be $12K,
buttressed by the fact that it is a commercial enterprise (he was going to sell it).
“efficient breach”
Coase theorem – no matter what the decision of damages is, doesn’t matter if it is
efficient because parties will negotiate until it is efficient, but does affect distributional
consequences.
At time of K they probably assumed that value would be greater than cost. If there is no
assumption of sale than more justified in getting 60K.
Incomplete K’s – virtually all contracts are incomplete, they can state their obligations for
every state in the world. The law has to step in and fill in holes in the incomplete contract
when necessary.
10/2/02
(1) Strict Liability – K liability; remedy (expectation damages); no reference to
intent/malice
(2) Cost v. Value (examples) – Oil well (value), fountain (cost of completion),
idiosyncratic valuation requires cost of completion otherwise can use market
value
(3) Arguments in Groves – Commercial transaction, the land is left in original state,
purposes of entering into the contract (resale of land) not idiosyncratic value of
uniform grade land
(4) Unjust enrichment – argument that John Wunder paying only 12k would be unjust
enrichment; what did the parties think there obligations/purpose at the time of
contract was made, would Groves be willing to pay for uniform grade in a world
where land is worthless. Job of the law is to fill in incomplete contracts when
certain unforeseeable events occur
Unjust Enrichment --> Parties original understanding --> incomplete K’s.
(5) Wunder as the insurer of Groves (60k could be a insurance for his land losses
because of Great Depression), but was this original understanding of the contract?
PeevyHouse
Cost of value and cost of performance? Idiosyncratic value to have their home look nice?
The assumption cannot be that there is an intent to sale because it is their home. If we
award cost for value we may force sale.
Plaintiffs admitted that the Defendants would not have entered the contract until they
agreed to fix up their land. There is no real “economic waste” not really ripping anything
down. 2nd restatement drops language of “economic waste” because we’re not requiring
anything to be ripped down, we’re just ordering payment.
It was foreseeable that there are going to be gaping holes if you invite a strip mine.
Argues strongly for cost of performance.
Bad decision.
Jacobs & Young v. Kent
“Substantial performance” doctrine
Conditions & Promises – Cardoza argues that something can be promise that is not a
condition, and a condition that is not a promise, and can be both a promise and a
condition. But a promise is not necessarily a condition.
Installing a pipe is not a condition, if its an independent promise. It was not a condition to
full performance and a promise. Must look at intentions and justice to determine whether
it is a condition or a promise. If you conclude it is a promise and not a condition can sue
for breach of contract but in this case the damages is 0 because the difference of value of
performance is 0. Reading represented a standard of pipe, can we really argue for
idiosyncratic value?
Also relies heavily on unjust forfeiture and intentions of parties. Trying to block
opportunistic behavior by the owner not to complete the payment.
Dissent argues for cost of performance.
10/7/02
Policy Justifications for Expectation Damages
The 3 arguments are:
1) Efficient Breach
2) Efficient Insurance
3) Efficient Precautions
Can use all 3 to argue for expectation damages.
Efficient Breach
1st argument for expectation argument that emerged.
Hypo:
Buyer Perspective
 K concerning the delivery of a widget
 K price $100
 Promisee values at $300
 K Price is paid in advance
 Expectation damages are $300
Seller Perspective
 Production cost $70
 Profit = $30
Profits from
Performance
Damages
Production Cost
K Price (paid in
advance by b1)
Valuation
Price willing to be
paid by B2 in order
for efficient breach
L=1000
L=100
0
70
100
L=300
(expectation
damages)
-300
-70
100
-1000
-70
100
-100
-70
100
+30
-270
-970
-70
b2 ≥ 300 (just
enough breach)
b2 ≥ 1000 (too
little breach, B2
may value
anywhere
between 300
and 1000)
b2 ≥ 100 (too
much breach,
B2 may only
value at $200)
Ex-post negotiation – after the contract has been entered into, and renegotiate a new
price. Or seller can negotiate with to get out the contract with b1 (pay him $400 to get
out). Negotiation must be considered in efficient breach scenarios. in ex-post negotiation
– profits distribution changes
Can courts measure expectation damages accurately?
Litigation Costs – Must be considered
Friedman’s critique – what is the point of the contract? There is a moral commitment to
perform. The widget is stolen from the original promisee.
Less influential now because
1) Can courts really approximate it
2) Litigation Costs
3) Expost negotiation
Efficiency Insurance


K is paid in advance
Promisee’s Valuation : $300
Seller Perspective:
Measure of
Damages
Probability
of Breach
Average
Liability
Production
costs
1000
300
78
10%
10%
10%
100
30
8
70
70
70
Lowest
Possible
Price
170
100
78
This shows ex-post factors (damages) effects on Contract Price
Buyer perspective:
Measure of
Damages
1000
300
78
Price
170
100
78
Profits from
Performance
130
200
222
Profits from
Breach
830
200
0
Average Profits
200
200
200
For $1000 damages, buyer is hoping for breach (make $830 instead of $200). If
Damages is $78, really don’t want there to be breach.
Risk-neutral, only thing you care about is average profits, don’t care about damages size
or probability of breach. If you are risk averse, you prefer that no matter what you know
that you will get a certain amount of money, a guaranteed payments. You will prefer
expectation damages because you know you will be getting $200 no matter what (breach
or no breach). The other two damages are like lottery tickets, you could win or lose big.
We should ignore risk-neutral people because they don’t care so we should look at the
risk-averse people. Argument for expectation damages using insurance.
Should pain and suffering be compensated when there is breach of contract? Are parties
willing to pay for insurance for this through K price. If people don’t want that type of
insurance (death of child) should they have to pay for it in the K price? Cannot recover
for pain in suffering in contract breach, goes back to this idea of insurance.
Expectation Precautions
 K price paid in advance
 $300 valuation by promisee
 $300 expectation damages
 $70 production cost
 $30 profit if no breach
 no money spent
Don’t spend money to decrease probability of breach: .1
Spend money to decrease probability to breach: .02
Damages
Probability of
breakdown
1000
300
100
Average Liability
10%
2%
10%
2%
10%
2%
$100
$20
$30
$6
$10
$2
Savings to seller
from higher
maintenance
$80
$24
$8
Which spending is social desirable?
“Learned Hand formula”
B (socially desirable of caution spending) = P (reduction in probability of harm/breach)
(Liability/Expectation Damages)
B = (.08) ($300) = $24 (which is given by expectation damages)
This is the efficient precaution argument.
10/8/02
Incomplete K’s, torts theory come into to play.
Fried/Barnett—contract by consent, just look at the consent exemplified by the contract
Limitations on Expectation Damages
Avoidable Damages/Duty to Mitigate
Luten Bridge
K price
Court awards reliance damages and expected profits but did not fully compensate them
for building the socially useless bridge.
North Carolina common law to see who had authority and whether the resignation
effective. This means Luten had a duty to research NC common law to see whether the
repudiation was legit.
What if Luten had guessed wrong? There was not repudiation, but they stopped working.
They would be sued for breach. What would be the damages? Cost of performance,
minus any cost avoided (including unpaid payments). Plus incidental damages of finding
a new contractor.
What is the argument that expenditure plus profits is too high? Luten could have gone out
and look for another job. Subtract profits they could have made from these damages.
Luten can come back with lost volume argument (from Restatement) it wasn’t an
either/or situation, they could have done as many jobs as they wanted.
Leingang
Whether expectation damages should include fixed costs – costs invariant to production.
No, just variable costs included when calculating expectation damages.
Parker
Strongest legal argument that there is a duty to mitigate? There was a summary judgment
without an exploration into the facts whether the 2 movies were substantially different.
There are disputed facts so there should be no summary judgment.
Argument against is that there is no dispute of the difference in contracts (director and
screenplay review).
Footnote 1, contracting out the duty to mitigate.
Consequential Damages
Hadley v. Baxendale
Rule of Hadley v. Baxendale
(1) Naturally arising, or reasonably foreseeable, damages are recoverable (consequential
damages)
(2) Special Communication of loss, is compensable as well
Why did they come up with this rule? Historical argument, industrialization, etc.
What are the ambiguities in this rule?
1) “on the cards”/chance of loss occurring, what is the probability needed for it to be
foreseeable
2) Level of Description needed to communicate the special circumstances or the
potential loss
3) §351(3) – foreseeable losses can be limited by terms of “justice,”
If there is a lot of ambiguities in the rule it because all the more important to think about
the policy justifications for the standard.
How does this relate to efficient precaution? What is the argument to justify Hadley v.
Baxendale?
1) Breaching party can take better precautions if there is a special communication of
increased liability. Comment: Does this really matter in mass markets? I.E. Fedex, if I tell
them if you don’t deliver this tomorrow I will lose $1MM, will they change their standard
policy even though they have a mass market.
2) Non-breacher can also take efficient precautions – exclusion of non-foreseeable
consequential damage gives them liability incentive to buy an extra shaft, which is
socially desirable.
How about if there are two different types of businesses (one that would incure heavy
losses from delay and one that will not) that the carrier cannot distinguish. What happens
with Hadley rule? Carrier charges a higher price to everyone, this is called crossedsubsidization.
Do we want high-loss parties communicating (Hadley) or via low-loss parties
communicating to carrier to avoid cross-subsidization.
If both parties can do something about the damages, they should share liability (similar to
tort theories of liability).
Court talks about price, want to have special communications so parties can adjust price.
10/9/02
When does it make sense to have less than expectation damages? Consequential damages
because it may optimize efficient precautions.
Hadley/Liability Shifting
(1) Non-breacher could take precautions
-- Also liability shift to non-breacher in duty to mitigate (post-breach vs. prebreach)
(2) Information exchange
a. Occur anyway under full expectation damages? If low-risk buyers do not
communicate they will subsidizing high-risk buyers. Low-risk buyers
communication is inefficient anyways.
b. Impossible in Mass Markets?
c. Doctrinally True (is it set up to really address situations where there is
asymmetrical information situation), the restatement only talks about the
breaching party’s knowledge, which does not match up to Hadely.
Procedure
Standard Burden Proof in Contract Claims as to the size of the damages? The
plaintiff/non-breaching party has the burden of proof. Normally, the non-breaching party
is trying to obtain expectation damages. If they don’t meet the burden of proof they might
get 0.
Uncertain Damages
Fera
The recovery in Fera is 200K, looks like the court did not discount the profits by
interest/inflation the amount would be a lot less than 200K. Possible duty to mitigate
overt the 10 years?
Valentine
Refusal to give Mental Distress (non-pecuniary) & Punitive Damages for breach of
contract. Should pain and suffering/punitive damages be compensable under efficient
breach, efficient insurance, or efficient precaution? From insurance perspective would we
want recovery of punitive damages looking at the interests of both parties?
Alternate Damages
Security Stove
What could expectation damages be? Contracts he would have received from impressing
at the show (very hard to calculate).
Court awards reliance damages including the pre-contractual costs of rental of booth.
Justification of pre-contractual reliance:
(1) Common law duty on the part of the carrier to enter into the contract (relianceinterest argument)
(2) Expectation measure of damages (expectation interest).
(3) – Expected return should be at least enough to cover your costs, the floor for
expectation damages is reliance. The party certainly expected ex-ante that they
would cover their costs. Only subject to showing that expectation would have
been less than reliance (no one was going to show up at the convention). Here the
burden is easier on the non-breaching party to show that the reliance.
10/15/02
Review
(1) Liability Shifting
a. Non-breaching party gets less than expectation damages, they bear some
of the damages. Creates incentives for the non-breaching party to take
precautions (have an extra shaft)
b. Encouraging information exchange through liability shifting
(2) Burden of proof
a. Shift in Security Stove from burden of proof on nonbreaching party to
show expectation damages to breaching party to show that expectation
damages would be less than reliance
b. Pre-contract reliance – should they by recoverable?
i. Protecting the “Reliance Interest,” Atiyah
Problem 3
 Anticipation resell for $200
 Actual resale value = $140
 K price = $100
 Expectation damages = $40 (think of “lost profits”)
Problem 9
“Cover” – an alternative substitute transaction
 Resell value = $150
 Cover at $120
 Buy cover resell at 150
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K price = 100
Expectation damages = $50 - $30 = $20
Problem 10
No “cover” transaction
Lost profits: $50
Duty to mitigate
Expectation damages = $20, will act like you mitigated
Algernon Blair
Restitution is a quasi-K action.
What is the cause of action? Quantum Merit, Restitution, and Quasi-K mean pretty the
same thing but QM and quasi-K looking for a monetary award. Restitution refers to all
unjust enrichment claims.
Expectation damages would have $0 or something negative if they would have completed
the contract, this is why they are pursuing q.m. claim instead of expectation damages.
What role does the contract price play in arriving in quantum merit claim? In Algernon
Blair the contract has been rescinded by the non-breaching party and therefore the
contract plays only an evidentiary role in restitution damages, but primarily looking at
market value. In Britton K price is a cap on restitution but in Algernon Blair the K serves
only an evidentiary function. How is this consistent?
Britton
Why can’t  sue on the contract? No, because the contract is for 1 year, must sue on
restitution.
The difference between breaching and non-breaching party? In Britton it is plaintiff who
breached the contract in Blair the plaintiff is the non-breaching party.
Prior to Britton, breaching parties got $0 in restitution. Policy concern of not wanting to
encourage employers to drive employee right before they vest, so they have to pay “0.”
How do you get to this result of different K prices in Blair and Britton doctrinally?
Learned Hand did it by saying non-breaching party has the right to be returned to where
he was, where as the breaching party does not have this right.
Non-breaching party has a right unilaterally rescind the K once it has been breached.
Breaching party has no right to rescind the K.
Thus in Britton the K is still valid, where is Blair the K has been doctrinally rescinded.
Keep in mind who is suing (non-breaching v. breaching) to determine restitution
damages.
In Jacobs & Young why doesn’t non-breaching  rescind the contract?
Because there was substantial performance, cannot rescind the contract once there has
been substantial performance. In Britton there was not substantial performance.
Substantial breach vs. Non-material breach. Only have the right to rescind if there is
material breach.
What incentives do we create for breach when we have different scenarios for different
amounts of restitution damages?
Policy arguments
Trying to discourage opportunistic behavior
Justice requires
Intent of parties
Unjust forfeitures (loss by one party if they lose the case). In Jacob & Young it is a
$3500, in Britton v. turner it is 9 ½ months of labor. Tie the forfeiture to expectation
damages. In Britton v. Turner expectation damages would be 2 ½ of labor but they would
be $0 (likely to find substitute) while the forfeiture would $95, so there is an interest in
protecting forfeiture.
Must express more explicitly that no damages if you don’t perform for the whole year
(Same arguments as Cardoza in Jacobs & Young)
Idea of a divisible contract – each day a different contract, so he should be able to sue on
the contract.
With a stipulation you avoid having to prove what your damages are.
10/16/2002
Review
(1) Breaching versus non-breaching plaintiff (Doctrinal effect)
(2) Material v. non-material breach (how is this decided)?
a. Forfeiture concerns (Britton as well)
(3) Policy – opportunistic behavior, intent, K. language, “Justice”
Kehoe
Suing both off an on the contract
It is losing Contract
Restitution is calculated by a formula different §373:
3000/5000 x Kprice – Kpaid = $0
Consider the incidence of breach if this was the standard of restitution damages instead of
§373.
Discontinuity – under §373 contractor would just complete the socially non-useful
project.
No way to reconcile with Algernon, it is a way out decision.
Liquidated Damages
Penalty (unenforceable) v. Liquidated Damages (enforceable)
Enforceable if is it reasonable at time of K (ex-ante) or is it reasonable after-contract (expost, actual damages).
Some states use just ex-ante some use ex-post.
Lake River
Right to invoice 22,500 tons of product.
Promise to ship 22,500, if there is a breach,  gets the right to invoice for the difference.
Posner says that the invariance of the damages based on degree of breach makes it a
penalty.
Illinois law says damages must be reasonable ex-ante.
Fixed cost is the bag machine ($89,000).
Variable costs – labor, bags, etc.
Because the liquidated damages clause does not account for “cost avoided” or variable
costs. The more variable costs, costs avoided the smaller the expectation damages.
Take or Pay clauses in various energy industries because there is high fixed costs as
opposed to this situation which the variable costs are higher.
Steel marker goes way down after K formation and they could not have expected this, the
provision was likely put in there to prevent them from using another distributor not in
case of market crash. Posner just ignores this argument that this could be the expectation
ex-ante as required by Illinois law.
10/21/02
(1) Restitution – Monetary Damages
a. Specific Performance Rest end of course
(2) Liquidated Damages vs. Penalty
a. Presumption
b. Ex ante (at the time of contract formation)
c. Identify these clauses
d. Public policy motivation
Specific Performance
What is the analytical relationship between the enforceability of liquidated damages and
specific performance?
Schwartz points out that specific performance is not efficient because the parties will
renegotiate around the specific performance order for a sum of money.
Information, how much faith will we put in courts for getting it right.
Non-pecuniary harms – expectation damages are undercompensatory once you throw in
other non-pecuniary harms.
Answer: If you support enforceability of liquidated damages you will likely support
specific performance.
Specific performance or liquidated damages are often supracompensatory.
Why has the specific performance lost steam?
Insurance arguments were developed, if damages are supracompensatory then there is a
lottery scheme.
Van Wagner
For 7 year billboard lease, is specific performance or monetary damages appropriate.
“at law” versus “at equity”
What is the argument that there was not a breach of K?
Evidence outside the K for the intent of the parties in creating the termination clause,
called parol evidence. We will study when parol evidence is admissible.
Does the fact it is lease matter at all whether sp will be awarded?
SP is often awarded in ownership contracts, but this is a lease.

Uniqueness as a factor for the granting of specific performance, does one have the
information to determine the market value.

Another factor is disproportionality of harm to the defendant.
Assent
Making of Agreements
There has to be an offer and acceptance to form a contract.
Objective v. Subjective Theories of K
Embry
Offer is renewal of contract
Acceptance is continuing to work. (through his conduct).
The case is looking closely whether the offer exists. What specifically gives rise to the
offer? When Embry says my contract is up and I will leave if you don’t renew me and he
says “Go ahead.”
This case creates an objective test for assent. A reasonable person interpretation of the
statements made. Subjective intent of both parties is not necessary. Only evidence
allowed is that supporting objective standard.
What if employer argues that a reasonable person would have thought that employee did
not accept.
Not relevant, reasonable person standard is from the promisee perspective.
Why is the court getting into this scenario when the facts are in dispute?
Because they are addressing the issue of what instructions are given to the jury.
In the lower court, the judge told the jury to take intent into consideration and this court is
saying that actual intent is not necessary.
Intent to be legally bound.
Maybe it is a divisible contract.
10/22/02
Review
(1) Undercompensatory damages, why would it be preferable – Hadley v. Baxendale
(2) Compensatory/Expectation damages – 3 handouts
(3) Supracompensatory – Specific Performance, Liquidated Damages
UCLA Exam Hypo:
Jason – grandfather
Rebecca – 14
Jason, well-know and lawyer, tells granddaughter when she is 14 that he will pay her
tuition if she gets into Stanford Law in 1993. She said “Ok, I’ll do it.” In fall 2000, she
got into both UCLA and Standford, chose Stanford and mailed a deposit and asked for
the tuition. Jason said he was just joking but would help her out. She said she turned
down cheaper UCLA for Stanford. Is Jason’s promise enforceable?
Issue:
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Do minors have the ability to enter legally binding contracts?
Conditional Gift: Could say it was a conditional gift as opposed to legally
enforceable bargain, but she forebeared and the condition seems like it is pretty
clear that the condition was the inducement for the promise. (Versus the walk
across the street to get your money, the walking across the street is not an
inducement).
Promissory Estoppel: She relied on the promise, her detriment is what she paid at
UCLA versus Stanford, Counterargument, could she transfer at this point? Still go
to UCLA, just lose her deposit, how much worse off is she? Also was the reliance
reasonable? She could have confirmed over the next 7 years.
Unilateral or Bilateral K: Promise for performance, became enforceable when she
completed performance. Does not matter if she promised at that point because the
actual inducement was the performance.
Offer/Acceptance, Intent to be bound: Bilateral -- What if we applied the Embry
test? Reasonable person, what are the individual facts we will include for the
reasonable person (Minow). Subjective, not in dispute (she wrote it in her diary).
Is she as a reasonable person accepted an offer then there is a bilateral K, her
return promise was a good faith try to get in to Stanford and an obligation to go if
she gets in. Even if establish bilateral K via Embry is there consideration or is it
an illusory promise (wickman)?
Consideration: Is there consideration? Yes.
Content/Breach: Was there actual breach? A loan could cover “I promise to pay.”
Damages: What would the damages be if breach is established? Deposit, Tuition,
Starting Salary, etc.
Expectation Damages: Ex-Ante or Ex-Post? The tuition doubled over 7 years.
Conditions to performance vs. Condition to agreement
Intention not to be bound
Moulton v. Kershaw
“Shall be pleased to receive your offer your order”
Why is the potential for unlimited liability unenforceable because of doctrinal reasons?
 No intent to be legally bound
But if the offer said “sell” there would be an intent to be legally bound.
Court specifies that if there is an implied term of reasonable limit to the offer, vineyard
case.
Aside: Lack of specificity means lack of remedy.
Empro
Letters of Intent
Business snag over security interest, land vs. assets. May affect the ability to sell the
assets (if they want to resell) if they are the security interest.
What are the issues of enforceability given the disagreement?
 Intent to be bound— Still in the middle of negotiating.
 Illusory Promise/Mutuality – Embro could get out subject to shareholder
agreement, option one-side is bound
 Ability to craft remedy – It would be difficult
 Subject to – conditions to performance or conditions vs. condition to an existence
of an agreement
10/23/02
Review:
(1) “Reasonable Person” – how particularized
(2) Moulton:
a. Exacting wording, “sell”
b. Implied Terms
Indefiniteness
UCC has liberalized the issue of indefiniteness, creating contractual obligations where the
common law would not have. (2-204 (3))
But there is still an intent to be bound., which is separate from the issue of indefinite.
Martin – lack of specificity, but there is intent to be bound
Lafayette – enforceable because there was enough specificity and an intention to be
bound
Conditions vs. Promise
“Subject to” provisions
Promissory Condition (both promise and condition).
In Jacobs v. Young can use either broken promise for Redding pipes, or unfulfilled
condition to argue for the owner.
How do you tell the difference between promises, conditions, and promissory conditions?
(1) Intent of parties (wording)
(2) Justice/Forfeitures
What are we dealing with Empro?
Condition to the very existence of the agreement
Conditional performance (there could still be a bilateral contract, even if it is unfulfilled
unlike condition to agreement) If the redding pipe was just a condition to performance
than there can be no breach of promise.
If something is both a promise and a condition can sue for breach of K.
Majority: Argues that Redding pipe is promise, not a condition. There is a breach of K
but damages is 0.
Dissent: Promissory Condition
Empro: Condition to Agreement (distinct for mutuality), subject to approval by board of
directors
Mutuality there is an offer and acceptance, Condition to agreement there is no agreement
Wheeler v. White
Suit on the K, what’s the defense of on the K dispute is that the interest rate is not
specified over 15 year term. In ability of court to craft a remedy. The court gets around
this by using Promissory Estoppel liability theory using §90. Up till now we have used it
only when there is no consideration. That’s why it was doctrinally developed. Use it
against other contractual defenses (1 is lack of consideration and now we’re using lack of
definiteness, Hoffman we will use it defeat another contract defense).
Default Regime
Consent Theory - Barnett/Freid
Why should any promises be enforceable?
Assuming K already in existence, how do we go about picking a default regime. How do
you reconcile consent theory? What a majority would have wanted, what most people
Craswell – Default, consent has run out, we are the point of incompleteness so we have to
use some other social value other than consent (economics, philosophy, sociology)
Ayrer – Penalty Default Regime, may want to deviate from what most people want and
why a penalty regime might make sense.
Hadley v. Baxendale
10/28/02
Review:
(1) Conditions v. Promises – based on intention, unjust forfeitures
(2) Types of Conditions – conditions to performance vs. conditions to agreements
(3) Indefiniteness – intent to be legally bound and whether the court can crack a
remedy
Question on Default Rules:
--mix general policy concerns with legal doctrines
Argument for default rules based on efficiency
 What about default penalties, they are inefficient but they compel knowledge
sharing (which discourages strategic behavior and influences distributional
consequences)
 If default rules are too efficient, contracts will be vague, and costs will be shifted
on to courts to make this determination
 Unconscionability and Liquidated damages are mandatory based on justice rather
than efficiency
 Transactions costs effects whether parties contract around a term
 It is not “inevitable”, you can choose between majoritarian or Rawls social justice
basis
Hoffman v. Red Owl
Measure of damages is reliance damages, not going to include lost profits or opportunity
costs because there is no K. For the fixtures, he can get the difference in the market
values but not the lost profits, one argument to get Hoffman the $16,300 is that lost
profits are built into market value.
No traditional K liability because they are just in negotiation, there was indefiniteness in
intent to legally bound, i.e. there is no offer.
Rest, First § 90
A promise which the promisor should reasonably expect to induce a action or forbearance
of a definite and substantial character on the part of the promisee that does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of the
promise. Changed in Restatement, Second p. 282
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Under Restatement first court could not find for reliance because we don’t
have all the characteristics of a binding K, save for consideration
first refers to an action or forbearance “Of a definite and substantial character”
Also, under restatement, second, the remedy is as justice requires. Ie: can be
reliance, expectation, restitution, etc. The language in restatement first seems
to imply that since the promise is binding, the damages should be expectation
damages. In Restatement, First, promissory estoppel was a substitute for
Consideration.
However, since restatement second has lower remedies “as justice requires”
(reliance usually lower than expectation), it makes sense that the burden is
lower (ie: not of substantial and definite character). Sliding Scale.
Also, Restatement Second adds actions or forbearances by third parties. In
Red Owl Case, one of the stores was held in joint deed with Mrs. Hoffman.
Red Owl made an argument that since she was not a party with the
negotiation, half the reliance loss should not be awarded.
Under Restatement, first however, since promissory estoppel was a perfectly
good substitute for consideration, third party beneficiaries would have been
able to sue on promissory estoppel. Is she a Contract beneficiary? No. (there
is not even a contract here. If we hypothesized a contract, it would still only
be under Mr. Hoffman and Red Owl)
Under Restatement, Second, promissory estoppel is extended to third parties
who are not the contract beneficiary. In Red Owl case, you need Restatement
Second to get Mrs. Hoffman’s reliance damages back.
Third Parties and Contract beneficiaries: Fayad and Ferrel contract to build a
house for Ms. Lynch. Ferrel breaches. Ms. Lynch can sue. Contract
beneficiaries will often have the ability to bring suit themselves. However
this is different that Mrs. Hoffman’s situation.
Restatement, Second is more flexible than First. Under Second, for the most
part, reliance damages are generally awarded. Under First, it was generally
expectation. The burden is lower, and the trend between the two is
exemplified by Red Owl Case.
Could still argue against P/E because it requires an actual “promise.” Are
reassurances the same as “promises”
Promissory estoppel is becoming a very broad and flexible theory of liability
Misunderstanding
Raffles
Millward (), Mellish (), and the Court
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Is Millward’s ( ’s) argument based on the meeting of the minds? No. He is
saying you have to take the words of the contract at face value, and the intention
of the defendant is not of importance. That is why he joins the facts statement of
the defendant. The plaintiff agrees that there was no subjective meeting of the
minds, but clearly he feels that there should still be liability. Defendant’s
argument is because there was no meeting of the minds, there can be no contract.
It doesn’t matter which ship the defendant was referring to however, because he
was saying the clause about the Peerless was inserted only as risk allocation,
saying if the Peerless had sunk, the contract was ended. The contract is not about
which ship is carrying the cotton. Only reason it is mentioned is to allocate the
risk of sinking. So it was a condition to agreement.
Judges bring about examples of wine estates. Saying, isn’t this just like you
contract to get wine from France, and instead you get wine from Spain. Is this a
proper response to Millward’s argument? Millward’s argument is that the ship
was irrelevant and the contract was for Surat cotton.
Parol evidence, evidence outside of the K, (oral or written)
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A proper response would be to say the word Peerless was meant to specify which
ship the cotton was meant to be carried on, because the price of cotton was
fluctuating wildly, it would make sense to specify the name of the ship, because it
mattered when the ship arrived.
Mellish argues that because there is ambiguity about which ship the contract
referred to, there can be no valid contract here.
Objective vs. Subjective Intent – court here rules that there is no subjective intent,
does the law now take this position? Look at Restatement §20.
What role does trade custom play? ie: to specify a ship in the shipping contract
was solely to allocate the risk that ship sank. So here is the hypothetical. Parties
have a different subjective understanding of which ship. However, there is also a
trade usage that when the ship is specified, it is solely a risk allocation for sinking
ship.
10/29/02
Review
(1) Expansion of P/E., creation of a new cause of action, not just plugging a gap in
traditional contract liability
a. Was there even a promise in the first place? (is reassurances the same
thing?)
b. 3rd Party interests (comes up very often)
c. size of remedy (sliding scale)
(2) Tort interpretation of Hoffman (fraud/intentional misrepresentations), the harm
the court is trying to address is that the Red Owl agents should have known the
Hoffmans were going to think the assurances were more liable than they really
were
(3) Does raffles create Subjective meeting of the minds standard for contract
liability?, Rest. 20, “Proper name” ambiguity
“Chickens”
Contract for chickens, one party thought it was boiler chicken, the other stewing chicken,
questions for this fact pattern, is the contract void for missunderstanding:
 Contract price might be evidence of what the intentions were
 Trade custom, should know or expect to know (§20), UCC places enormous
emphasis on trade custom (new entrant/Flower City though courts come out
differently on this)
 Course of dealing & trading (previous contracts between these 2 parties)
 Who has the burden of proof for misunderstanding? The plaintiff or nonbreaching party
Pg. 360
(1) Like the wine estate hypo because price fluctuates, but the Oct vs. Dec is date that
it will leave Bombay, it could arrive in Liverpool at the same time, so it may not
be a futures contract.
(2) What if they knew there were 2 ships? Missunderstanding? Yes, so no K.
(3) What if they knew it was attached to same ship there is contract.
Subjective meeting of the minds is sufficient but necessary condition. What are some
situations where there is no subjective meeting of the minds but there is no K (look at
restatement)?
Termination of Offers
How long is an offer open to be accepted?
Death or incapacity
Davis
First question over acceptance is whether the offer is bilateral K or unilateral K?
Evidence for bilateral K (protects everybody):
 Some of the performance was after he was dead, so he wanted a promise
Seems like it is construed to support but Davis, but had he not gone to Cal after all he
would have been liable. This does not some reasonable, so it doesn’t seem there was
intention to be bound.
Under §36 offers can be revoked by death, so there could be no full performance.
What if we view as an option K? The offeree is given an option to enter the contract.
How could we say that it was a unilateral K but there is still liability because it was an
option K? Death would not revoke the offer if it was an option K. So there was full
performance to exercise the option, so there is liability.
§25 option K, as a way to keep the offer open even though there is death. What are the
elements needed for §25 K? Must be a promise (implied or express) that meets the
traditional standards for a K and a promise that the promisor will not revoke the offer.
We need separate consideration to keep this offer open (or possibly PE).
Is there a plausible §25 argument for this case? There is no express promise to keep it
open but there might be an implied promise? Not really enough to support this. Even if
there is this implied promise, there needs to be consideration according §25.
There is also §87 and §45, there does not be consideration.
Move away from default rule of bilateral contract because possible to protect everybody
through option unilateral K’s.
Revocation
Dickinson
Talks in subjective meeting of minds.
Explicit language keeping it open till Friday, no consideration for option portion (so no
option K according §25). Court says no K liability because there is not a subjective
meeting of minds. What if the  accepted before he found out the  had retracted,
therefore then there would be a K without a subjective meeting of the minds.
Mailbox rule:
When are revocations and acceptances effective?
Peterson
An offer to enter a unilateral K. Dissent does not disagree. The difference between
majority and dissent is what full performance was and what the point of revocation.
According to majority when he says I have sold the mortgage he has revoked the offer,
dissent said there was already performance when he brings the cash to the door.
Decide unilateral vs. bilateral based on what the inducement is.
10/30/02
(1) implied-in fact promises
a. protect all parties interests with bi-lateral K
b. alt regime to do this? Unilateral option K’s
(2) §25 option K’s – need consideration for the promise to keep the offer open (no
consideration in Dickinson v. Dodd)
Option K’s come up most frequently in construction cases
Baird
Learned Hand:
Subcontractors sends offer to 20-30 general contractors, “absolutely guarantees” the
price, but then does not want to fulfill when 1 general contractor accepts the price
because there was a unilateral “mistake” in the price.
Contractor sues general contractor for breach of bilateral K – promises by subcontractor
to provide lineolum at the bid submission the implied promise by the contractor to use the
subcontractor when he submitted the bid to the city (the contractor is locked in at that
point).
Just because there is a condition (only get the subcontract if I get the main contract) does
not create a mutuality problem because the decision for performance is outside the
contractor’s hands.
Hand says there cannot be a bilateral K because the subcontractor could not sue if general
contractor did not use him.
Another argument is §90 liability but Hand says traditionally (1st Restatement) we can’t
have promissory estoppel if the contract is seeking consideration (only as a substitute for
consideration).
Drennnan
Judge Trainer doesn’t use §90 or §45 liability directly (option K’s only for unilateral
because don’t need a protect interests of bilateral K because they can lock each other in
with a simple return promise). Uses §45 to imply a “subsidiary promise” to keep the
promise open.  relies on this subsidiary promise implied at law (§45) and thus there is
§90 liability. Trainer says that we can use this same analysis to say there was reliance on
the bilateral K. Trainer says it is a default rule that there is a subsidiary promise to keep
the promise open for the bilateral K, only if there is an explicit contractual term saying
the K is revocable. Court decides reasonable reliance resulting in a foreseeable
prejudicial change in position affords a compelling basis for implying the promise not to
revoke an offer for a bilateral contract now it is §87.
Trainer uses tort like notions to say that justice requires liability (foreseeability,
intentionality, causation)
Doctrinally consistent because Hand says in the first case there is no implied promise to
keep the offer open and Trainer says there is.
11/4/02
Review:
(1) option K: When will the offer be held open even if the offeror wants to withdraw
it? Traditionally for a unilateral contract you can withdraw right before they finish
performance. You can either have consideration to keep the offer open or reliance
on the offer to keep the offer open (§87).
(2) P. 398 – Baird decision -- It is consistent with Drennan because in Baird there
was no implied in law subsidiary promise to keep the promise open which was
relied on.
Valid Means of Acceptance
General Concepts
Livingston v. Evans
Common law rule of “counter-offer/rejection” rule
Offer & Acceptance, what constitutes them in this case?
Counteroffer: $1600
Offer: “Cannot do reduce price”
Acceptance: Return wire
If the counteroffer had been an inquiry instead (Can you reduce your price?) the original
offer for $1800 would have been valid.
The major issue in common law cases is whether it is a counteroffer or an inquiry.
Common situation:
 Purchase order form → confirmation form with conflicting terms → shipment &
retention (conduct acceptance).

Under common law, the terms of this contract would be the confirmation form:
“last-shot” rule → terms of K, this doctrinal framework favors the seller (they can
deliver new terms with the goods)

What if there was price quotation phase prior to the purchase order form, would
this change who is favored? Price quotation would not be considered an offer (no
quantity, etc.) so it does not change the analysis at all, the seller is still favored by
the common law.

In 2-207(3) we have basis of conduct acceptance

The threshold to get to 2-207(2) there must be an offer and acceptance to see
whether the additional terms should be included

Under subsection (1) acceptance can be oral or written, “def& seasonable”
acceptances/written confirmation/unless provision (to additional terms)

Under section 2-207 (3) arbitration clause in purchase order but not in
confirmation arbitration is out, only what the two writings agree on, the rest is
filled in by the court by the default rules of the UCC

If arbitration is in the confirmation saying that no K unless acceptance of
arbitration it is K when there is conduct acceptance without objection to term, a
conditional acceptance and arbitration is in the K
The Battle of Forms
Idaho Power
Inquiry→ price quotation + terms (original offer) → purchase order by Idaho power →
shipment









The term in dispute is a liability limitation.
Purchase order form says it supersedes anything that comes before.
Idaho Power’s argument are that
(a) the purchase order was not def & seasonable acceptance of the offer 2-207(1),
Idaho Power is trying to use common law acceptance as way of determining def
& seasonable acceptance offer, but the whole purpose of 2-207 is to change the
common law
(b) that the Idaho Power purchase order was a conditional acceptance and the
liability limitation is in through conduct acceptance of the conditional acceptance
with shipment, the court construes the “unless” provision narrowly, must be very
explicit because then you are just going back to the common law
(c) The last argument is the knockout rule, the conflicting terms cancel each other
out – Westinghouse said limited liability and Idaho did not mention this and said
their purchase order superseded it. So look to the default rule which says there is
not limitation of liability. The court says that the conflict was not strong enough
to invoke the knockout rule. Also, the knockout rule supposedly comes from
subsection 2, decides when additional terms by offerree are put into the K, it is
not a specific knockout rule (comment 6 is inconsistent).
Also comment 6 refers to confirming forms, which is defined by comment 1 as
forms that are not part of the exchange of offer and acceptance, in this case the
purchase form is not a confirming form, so even if comment 6 creates a knockout
rule it does not apply to this case
But subsection 1, confirmation forms can be viewed as acceptance, so maybe
knockout rule
Subsection 1 refers to additional or different terms, subsection 2 just refers
additional terms. How can use this to say there is no knockout rule? If section 2
only refers to additional terms, it is not referring to conflicting, different terms,
but comment 3 refers to additional and different terms as the same thing.
Roto-Lith
Makes a very broad interpretation of the unless clause, the touchstone is if there is a
material alteration to the disadvantage of the offeror. Why is this wrong? Because in 2207 (2) (b) there must have been a def&seasonable acceptance, with Roto-Lith never get
there so it will be superfluous. You don’t interpret statutes to make them superfluous.
11/5/02
(1) Interaction between common law and statutory interpretation
(2) Knock-out rule and statutory interpretation
 Scope of “definite & seasonable” clause, use common law as baseline?
But the whole purpose is to change the mirror image/last shot rule



Scope of “unless” clause
Scope of Subsection 2
Scope of Knockout (comment 6)
Mailbox Rule
§63
Mailbox rule – a default rule
 Must be in a manner which is consistent with the offer
 By a medium approved by the offeror
 What the rules for revoking an offer? Only when the offerree finds about it before
accepting, not meeting of the minds
 meeting of the minds/will theory – not a touchstone for contract liability anymore
Question on 437
 Is it in a medium and a manner required by offer? Telegram v. Letter, “I need to
know” might be interpreted as acceptance must be actually receiving the
acceptance.
 Received notice of revocation after he sent the telegram
 When is a telegram of your possession
 Is there a legally-enforceable promise to keep it open? No evidence of that to
prove option-K and acceptance not valid until received by offeror.
Trade Custom vs. Course of Dealing (between 2 parties) in how to go about interpreting a
contract. Also can use these ideas to decide whether there is a contract at all.
Under the UCC one of the ideas is that course of dealing should be controlling in both
interpretation and whether there is K.
Monroe Policy Arguments against implied promise to divide assets between unmarried
couples (based on NYS legislation outlawing common law marriages):
 Accuracy
 Presumption
 Fraud
From what extent is it legitimate for court to look at Statutory purpose rather than just
interpreting the words.
Written Contracts & Parole Evidence
If parties have put a K into writing than certain other promises become unenforceable.
Specifically, any oral agreement made at the same time may become unenforceable. Any
prior agreement whether its written or oral, may become unenforceable.
Statute of Frauds
It has to be writing:
Interest in land
Contracts not performable in one year
Above $500
3rd debts
wills
Do not need to have the contract in writing, just need a note or memo in writing that there
was a K. Common law need essential elements of K in note, UCC just need to indicate
there was a K and quantity amounts. It has to be signed (interpreted very broadly).
Rules v. Standard – Purpose of Statute of Frauds to create a rule that if you don’t put it in
writing it is unenforceable, two ways to look at PER, rule or standard.
Doctrine of Past benefit, can get around Statute of Frauds. The Categories can be used
standard – e.g. one year rule, it theoretically could have been done over 1 year. What is
an “interest” in land? Resources? Reliance is a way to get out of Statute of Frauds. So it
is has essentially become a standard.
Is it even possible to have a rule? Or will judicial gloss always change it into a standard
because our common law tradition. What about incentive we wanted to provide parties to
put certain types of agreements?
Incentive for parties
Knowledge of the law
Justice, to what extent should courts craft the legal doctrine to meet the needs of the party
before them?
Integration and Additional or Inconsistent Terms
Mitchell v. Lath
Does it make any difference that the prior promise to remove the icehouse was oral vs.
written? Would it change the majority or dissent’s analysis? NOOO!!! Because PER says
that oral or written agreement prior to the agreements may become unenforceable.
So why did the majority and dissent come out differently? One the issue whether the
prior agreement was contradicting or too closely related to the subsequent written
agreement. To what extent do we look at the terms of the K to determine how PER, how
integrated is the K.
What doe s this court look at to see whether they are closely related?
 The have the same consideration
 Subsequent K has complete specification of terms & law (the dissents resists this by
saying we can look at the evidence of the other oral agreement to whether the K is
complete or not, the majority will not even look at the oral agreement); this is a
threshold issue, what do we look at to decide whether PER is applicable or not, do we
look at parole evidence (contemporaneous oral agreements) in applying the PER
Rule?
11/6/02
2 Q’s:
(1) Types of agreements rendered unenforceable
(2) Evidence in figuring out (1)
Two conditions needed for when you need to think about PER:
(1) A “Side” agreement
(2) A Subsequent Writing
Is the PER a rule of evidence? No, it is whether the side agreement is legally
enforceability, it does not prohibit side agreements from being used as evidence.
Ferrel is buying a crate a steaks, and the seller says its Grade A steak, signs the K, which
does not specify the quality and turns out they are not Grade A. He wants to introduce
evidence of the prior representation, the strongest argument that the evidence should not
be inadmissible is that the subsequent writing is broad enough to supersede prior
agreements, arguments for admissibility use the evidence of interpretation tool, also the
written agreement is not complete and the side agreement would not be a natural
collateral promise.
Contractor says to sub I will use you if I win the bid and then it is captured in writing that
I will use services without the condition. Can the contractor introduce evidence of the
prior agreement for the condition? What are your arguments: 1) Written agreement is not
complete 2) Use Judge Cardozo’s move from Lady Duff of creating a new promise in
K interpretation 3) Condition to the existence of K, condition was not met so there is
no written K, another example of this is that we only have a deal until we put it in
writing, even though we’ve bargained for promises orally
Lease-Bet
Two writings –
1) I have a lease agreement with a tenant (side agreement)
2) A bet on a football game (subsequent agreement)
Is the first agreement enforceable? No, it is not related. Using the Restatement if the
subsequent agreement is partially integrated then inconsistent terms within the scope of
the subsequent agreement are unenforceable.
The way to think about Integration and whether the side agreement will be enforceable –
what are the range of terms of the subsequent agreement.
According to § 213 all parole evidence can be let in to determine how complete the
written K is, so how much work is being done by the Parole Evidence Rule.
Willinston: Mitchell majority school – Just look at the written K and decide whether
reasonable people would have had side agreements outside of the written agreement. (Is
this even a rule? No, you can bring it in for conditions, interpretation reasons etc.)
Corbin: Mitchell dissent – lets look at the intent of the parties and look at all the relevant
evidence (including parole evidence) to see whether the parties wanted to have side
agreements outside the written agreement §213
What we have been talking about enforcing side agreement we have an analogous debate
on interpretation of K terms, the argument is if we are going to let in side agreements as
interpretative tools then the parole evidence rule is not really doing anything.
“Four Corners” rule – just look at the K itself and some general knowledge about how the
world works.
Corbin responds that in order to know what a K term means we have to look at all the
relevant evidence.
U.C.C. defers to trade custom and prior dealings.
11/10/02
Parole Evidence Rule Review (Part I)
(1) evidence that goes to enforceability (prior or contemporaneous in time to the
writing)
(2) even if you are showing evidence of enforceability, o.k. if it passes complete
integrated/scope; partial/inconsistent (Doctrinal)
(3) Corbin v. Williston -- How do we go about deciding whether any particular
concept is relevant? What type of evidence can be shown? Should we show all
evidence? If so, how much of Parole Evidence rule is left? The decision is the
majoritarian rule, a penalty default to put all their understandings in writing.
(4) Even if Corbin → Role of the judge
Ambiguity
Why type of parole evidence can we look at in trying to interpret the writing? The exact
same issues will come up as the parole evidence rule for side agreements.
What is the test? Only use parole evidence if the clause is ambiguous, but what
evidence can we use to determine ambiguity?
Bethlehem Steel
Court only looks within the four corners of the K to determine whether the clause is
ambiguous or not. Just based on looking at the writing if the clause looks reasonably clear
we won’t let in extrinsic evidence.
Pacific Gas
 Ambiguity is over whether the  is liable to damage to ’s property, focusing on
the word “indemnify” as covering only a class of 3rd party claims and requirement
of  to get insurance. Under Willinstonian type of interpretation you just look at
the K: argument is indemnification clearly only means 3rd party claims vs. the
insurance clause indicates the  has liability for damage to 
 One argument for  is that the insurance has value against 3rd Party tort claims
even if it doesn’t cover damage against 
 This Court takes the Corbin position, saying they will look at relevant evidence to
determine whether the clause is ambiguous, the Trainer rule is:
o 1) Evidence is admissible if it is relevant to prove a meaning that is “fairly
susceptible” to the language
o 2) Evidence not admissible for interpretation if it adds or varies the K
Assent to Standardized Forms
The Market for Lemons
(aka Competitive Pathology):
The Market for Lemons looks at structural market issue, specifically the distribution of
the information. While the cases we read focus on individual circumstances when
deciding enforceability. In the background of all these cases there is the argument over
the overall structure of the market.
Assumptions for the argument (a lot of debate over whether they are true, but we will
assume so):
 Consumers can’t observe quality
 Consumers know they don’t have an ability to observe quality
 Consumer’s can observe price
 The Seller does know quality
Assume, that everyone who is interested in selling their used car puts it on the market to
fetch a price and there is a uniform distribution in the quality of cars available.
Low
Quality
Lemons
Price for Average Car
High
Quality
Perfect Shape

What would determine price in this market if they have no info on quality? The
price will be the price for the average quality car, sometimes will win and
sometimes will lose. Probabilistically you will get an average quality of car, so
that is the max a consumer is willing to pay.

Will a seller who knows he has a high quality willing to sell in the market? NO,
so the market unravels!

Once the top quality sellers pull their cars off the market, the average price drops
a little bit. Now, the sellers who have the highest quality cars in the new
distribution decide they don’t want to sell, and so on and so on, until all you have
left is the lemons!
Two groups of consumers:
(1) Consumers that just want to buy a used car – they will buy the lemons, knowing
they are getting a perfect price
(2) Consumers who want to buy a high-quality car, they are harmed by this model,
because market does not provide them the product they demand
What does this have to do with contracts? Think of the market for lemons like the market
for contract terms. Contract terms as quality. I.E. Warranty terms: High Quality →
Extensive Warranty, Low Quality → Disclaimer of all liability. If you assume that
consumers don’t read contracts (another way of saying they don’t observe quality)
producers are not going to provide warranties.
Say there is a producer that maintains higher warranty, their cost of business is higher,
the have to have a higher price, which puts them out of business.
Ways to get around this model:
1) Advertise your quality
2) Reputation, impounds information for consumers, works for repeated transactions
over time
11/11/02
Review Market for Lemons
 Consumers know they don’t know (rational expectation model)
 Competition aggravates the problem –incentive to reduce your quality and price
 Structural Issue: Asymmetrical information, much broader inquiry than looking at
individual circumstances, judges have a problem with the way the market is
structured but they justify their decisions by individual circumstances. Its difficult
to move from “Assent” to market mechanisms while deciding contracts of
adhesion cases. Are courts are really well prepared to make these inquiries?
Market Mechanism for getting around the asymmetric information: Reputation,
Advertisement, Consumer investments to find out information, third party evaluations
Regulatory Mechanism: mandated minimum quality, mandated information production

Information is a public good, benefits a lot of different individuals and
organizations.

I.e. Futures markets, the information produced by the trading of futures contracts
is valuable to the farmers who can plan accordingly.
(3) Take it or leave it Contracts
a. Not necessarily an information problem, you know the terms but its take it
or leave it offer
b. Does this mean consumers don’t have actually have a choice? There could
be alt. Producers.
c. Does this really tell if it is a good or bad K?
i. Situation 1 – Car company offering a poor warranty TIOLI
ii. Situation 2 – No warranty, and then you bargain for the warranty
(same outcome without a TIOLI, bargain doesn’t necessarily come
out better than a TIOLI K, could even be worse because of
bargaining costs)
Take it or leave it form cannot by itself make a K unenforceable because most K’s in life
are TIOLI.
(4) Monopoly (courts suspicious of K terms offered by monopolies)
a. Not necessarily an info problem
b. Schwartz article – Monopolies are not incentivized to give bad K terms
but rather to charge high prices (consumers can observe price so it is not
an info problem)
Fundamental Transformation Model
(Oliver Williamson)
A model of K law which can address:
- Why do we have firms? What is the optimal size these firms should be?
- Why do we have business cycles?
Thinking about whether to enter into a K with you to build an automobile plant.
One Question I will ask is how much I will earn by engaging in an alternative
engagement, value is in box 1 ($10). In box 2 we put the amount of money that labor
could earn in an alternative engagement ($10). From a social welfare perspective, when
should production occur? I.E. When should K and L enter a K to open the plant? When
the value of production is greater than to $20.
K (capital)
Ex Ante
(O.C.)
Ex Post
L (labor)
$10
$10
$10
$0
$10
K invests all his money in specialized equipment, what would happen if the K broke
down, if Labor decided to walk. The equipment has no value( ($0). Assume that Labor
can always walk away and get the same wage somewhere else (still gets $10).
Model:
Assume that the value of production is $25. Would Capital enter into the K, knowing the
ex-ante and ex-post values? No, and this is the essence of the fundamental transformation
model.
L: (25-10)/2 + 10 = 17.5
K: (25-10)/2 = 7.5
Ex-post, L’s bargaining position is very strong, K’s bargaining power is very weak.
Labor is going to ask to be paid off to stay. Automatically L will get his $10. Then we
assume that Labor and Capital split whatever is left ($15).L will get $17.5 and K will get
$7.5. So, K will not enter the contract because they can make $10 somewhere else so and
this is undesirable. The reason why this occurs is the specialized equipment which is
worthless outside the K. Specialized investments which are useless outside the K
relationship will cause problems for K law.
How do you get around this problem? Have production go through firm instead of K,
which employs both Capital and Labor (i.e. GM). So you don’t have this problem, since
it is all internalized in the firm. One theory we have a corporations to remedy the
problem created by specialized contracts. When do we see production in a firm, the more
specialized investments the greater the likelihood that the production will be done by a
firm.
If courts could enforce the K’s in the original scenario wouldn’t need firms, but this
won’t happen because of high litigation costs, etc. Thus one of the reasons we have firms
is incomplete Ks.
It incentivizes new production, which varies over time which correlates with the business
cycle.
11/13/02
(1) Rakoff’s Article:
 There is no meaningful assent or bargain with respect to a lot terms in the
adhesion K’s, thus it is appropriate for the court to step and define what those
terms are.
 To what extent is Rakoff creating a default or mandatory regime as we’ve
seen in the example of UCC?
- Well, doesn’t seem like you can opt-out of these terms so this looks like a
mandatory regime.
- What if a sales representative read off all the terms to you? Still might not
be enough to opt-out.
- Even if you have perfect information, but this does not solve the take or
leave it nature of adhesion K’s. These are two distinct issues:
TIOLI/choice and conveying information, Rakoff only address the info
nature of K’s of adhesion

Comparative institutional analysis, will courts do a better job than the market
creating K terms. But is the market really completely private? Market is
obviously shaped by public perceptions/element, etc (Dalton’s article).
(2) Implied Warranties
 Warranty = promise that it will work, if not you get expectation damages
 Example: Should the court imply a warranty onto cigarette companies that
their products are safe?
 What are the arguments for each side?
o For plaintiffs there is information assymetry, if there was massive
liability the cigarette companies will provide the information through
increased price (if it $6.00/pack you know there is a high cost)
o Smokers are irrational, we have to jack up the price massively to
change their behavior. Maybe they have no choice, it is K of adhesion.
o Maybe smokers can take better Precautions (smoking companies have
already done a lot but smokers still smoke).
o Externality – cost to society from smoking, but can argue that people
dieing early leads to savings
o Slippery slope? Cigarettes are not supposed to be healthy, so why
imply a warranty for healthiness on them? McDonald’s, Guns, etc.
o What about insurance? Implied Warranty is basically providing
medical insurance by buying a cigarette. Cross-subsidization, casual
smokers subsidizing insurance for heavy smokers. Also non-smokers
cross subsidize outside health insurance for smokers because they lie
about whether they smoke or not.
 However if we are creating insurance through liability, isn’t
there an inefficiency because of litigation costs? So, wouldn’t it
be more efficient to buy insurance somewhere else?
 Conclusion of litigation: there is no implied warranty.
(3)
Policing the Bargain
Duress
Duress: Process issue, not a textual/substantive issue.
Competency: insanity, age
Information: Misrepresentation, nondisclosure, mistake are all process
Substance issues include: illegal, public policy, liquidated damages

If Duress is proven → K void

Traditional common law there had to be a threat of illegal action, Selsbie the
threatened action was not illegal yet there was a successful threat of duress.

If we can Recharacterize the second case as K modification how would that
change the result? (Alaska Packers)
11/18/02
(1) Two points about Duress
a. Holmes move to get around common law rule that threat must be illegal to
qualify as duress—the only reason it is legal to drive the father mad
because the law is not a perfect instrument. We would want this
conversation to be illegal if we could, but from a public policy perspective
we want to discourage this sort of behavior.
b. K modification argument in Headley – strong argument that the contract
modification would not be enforceable because there is lack of
consideration, not a good faith change due to change in circumstances.
(2) Hypo
(a) Offer/Acceptance (is there an offer and acceptance, is there a K at all?):
- Organization → Good initial issue is to look to the offer to
decide whether it is bilateral or unilateral contract, because of the
doctrine of consideration, we need to look at what is the
inducement for the offer/promise. What is the offeror trying to
induce? Return promise or return performance.
- What is the offer? One possibility is the offer is the presentation
by Mr. Pickles, the other possibility is that the offer is the
resolution. How do we go about deciding which one is the offer?
We have to look if there is K before the resolution.
- The problem looking at the resolution as a common law
acceptance is that they propose additional terms → requirement
of raising the $2MM, so it looks like the resolution is really a
rejection and a counter-offer. This is new provision is a
materially new term.
-
-
-
Another new term is that it is going to be kept open for a certain
period of time, buttresses our argument that it is indeed a
counteroffer.
- Could make a counterargument that these new terms are just
clarifications, not a new term.
- What about the initial unanimous vote? Why can’t that be the
acceptance? The committee just recommends that the City
Council accepts, there is no intent to be legally bound by this
initial vote.
- Ok, now that we have established that the last offer is the
counteroffer, we look whether the offer is unilateral or bilateral
K.
- Look at specific wording to help look at this question → the
language talks about actual deposit which looks like it is
specifying specific performance.
- What would be the result if we say this is a unilateral K?
1. Argument #1 – no full performance so no K
2. Argument #2 – Cannot revoke if partial performance has
begun, §45
3. Counter Argument #3 – preparation for performance does
not count, starting fundraising process was not the
inducement so does nit bring in §45
4. Counter Argument to that is that it is not completely clear
cut that putting together a list of donors, hiring staff etc.
- §87 (2) reliance on the offer, giving up the other option K
1. Counterargument -- was it foreseeable, did the city even
know about the option K? Plus we don’t even know when
that K expired.
2. Preparations also indicate reliance
3. Notions of justice – doesn’t seem fair to the church
Can replicate all these arguments using §90 if you say there was no
implied return promise, discuss whether it was foreseeable, and what
justice requires → § 45 and §87 (2) addresses whether city can breach,
§90 is whether there is reliance on the actual damages
Can we make an argument that it is an offer for a bilateral K?
A presumption at common law that you can bind someone to a bilateral K
with a return promise.
Acceptance is conduct plus silence is the acceptance of the bilateral K.
Silence can be acceptance, also offerree is performing the conduct that
offeror sought
Implications of finding for a bilateral K → if church did not raise the
$2MM they could be sued for breach of K
What are some defense for city council?
 Illusory promise → church did have not guarantee to raise 2MM,
the counterargument is the Lady Duff argument of good faith effort
to raise $2mm


Condition to agreement, so no implied promise
How about statute of frauds? K’s for sale of land needs to be in
writing. Counterargument is that there is only possible conveyance
of land, this is an option K. So the conveyance of land is only
optional so statute of frauds might not be invoked. S.O.F.: an
interest in land, courts are split on the issue of whether an option K
for land need to be in writing. Another counterargument is that
there was a writing, a note or memo, and because it is an official
resolution on official stationary, so party to be charged has signed
it so S.O.F. is covered
(b) Damages:
o Because it is land, specific performance can be invoked, this more
complicated than a usual specific performance issue because there is a 3rd
party, need injunctions, etc.
o Also what is the specific performance we want to be enforced? Specific
performance to keep the option K open, or the sale of land
o Monetary damages → Expectations damages issue is that we don’t know
if they would be able to raise the $2MM, so this is an unknowable
question
o What about reliance as a substitute → the money spent on fundraising, the
option K which was lost, how do you measure this
Good to point to start is offer and acceptance.
(3) Doctrine of Mistake
11/19/02
Mistake
Doctrine of Mutual Mistake
Restatement:
(1) Basic assumption
(2) Material effect
(3) No assumption of risk
Sherwood v. Walker
- Majority claims mutual mistake, an assumption shared by both parties as opposed
to misunderstanding where parties have different assumptions.
- Normally talking about situation where the sales contract is silent on the mistaken
assumption.
- So the doctrine of mistake is making a default regime of what to do when a
contract is silent.
- The Default Regime creates a condition to enforceability, in this case the
condition is the cow being barren. (an implied condition to agreement.)
- Functional analysis → it relieves the would-be breacher of the contractual
obligations
- What other doctrine gets would-be breacher off the hook? Consequential damages
doctrine in Hadley v. Baxendale.
- How do we apply the same policy arguments from Hadley v. Baxendale to this
doctrine? We want information disclosure
- According to the majority the basic assumption also has to be a material effect.
- One way to figure out whether there is a basic assumption is look at the price…if
they are paying a premium it probably indicates that the buyer is taking a risk.
- What if the cow got pregnant after the sale? Doctrine of mutual mistake refers to
basic assumption at the time of contract information so in this case yes, because
the assumption at contract information was that the cow was barren.
Lenawee County
- Why doesn’t mutual mistake get the breacher get the would-be breacher off the hook?
There was an explicit contractual provision which addressed an assumption of risk.
- Do you have to always have a contract provision to indicate an assumption of risk?
Beachcomber, idea of conscious ignorance, coin dealer knows there is a possibility
that there is a risk that the coin might be fake. Thus an assumption of risk clause is
the way to get out of default rule of mistake (implied condition to agreement).
- How do you go about deciding whether there is conscious ignorance? Very hazy,
subject.
- A lot of fuzziness in the mutual mistake doctrine is under the assumption of risk, so
must remember the functional reasoning behind the doctrine (relieve the
nonbreaching party)
Analogous Policy Arguments for Hadley
- Efficient Precautions
-
-
-
-
Default rules, when should have default rules when the contract is silent?
Suppose it was a high probability event that the mill would lose profits
and the carrier knew this, the carrier is liable because the damages are
foreseeable. Thus Hadley only applies in low probability events.
Mutual mistake, also, is only applied in low probability events. There is a
basic assumption of both parties because there is a very low probability
that it is false.
Can get out of both default rules – Hadely with special communication,
Mistake through and assumption of risk through a contractual clause or
through conscious ignorance.
In Sherwood there is an upside risk, in Lenawee county there is a
downside risk (who will own useless property).
Doctrine of mutual mistake is allocating risk, who is going to profit or
lose?
Hinson v. Jefferson
- Alternate to mistake doctrine to allocate risk by creating an implied
warranty/promise
- Here we shift the risk back to the seller with the implied warranty
- Is there a remedial effect difference between these two solutions? Yes, in
mutual mistake there is no contract when the implied condition is not met
so the natural remedy is restitution
- In implied warranty, there is still a contract, we just have a breach of
contract claim which normally leads to expectation damages
Doctrine of Unilateral Mistake (not the law that most courts follow)
(1) Material
(2) Wasn’t negligent
(3) Unconscionable
(4) Other party hasn’t changed their position
Elsinore
-
Classic case of unilateral mistake, and court concludes that the doctrine
applies here and there is no contract
Could make an argument that this was a mutual mistake, the city also
assumed that the calculations were correct
The distinction between mutual mistake is related to the idea of causation,
the bidder caused the mistake so we are going to let him off the hook (no
causation in mutual mistake)
Hypo#1
What if the building is built and the board knew? Under the restatement, unilateral
mistake does not apply because the other party changed its position but courts will often
come out the other way because of efficient precautions arguments.
-
-
Under the precautions argument who should bear the loss? Who is the
party who has the lowest cost to avoid the harm? The school, since they
knew of the mistake it is cheaper for them to avoid the harm.
Similar to the tort idea that the liability should be on the lowest cost
avoider.
An efficiency argument is that we have the bidder who didn’t have the
lowest bid on the job, across the economy this bad for biddeVrs and
inefficient
Hypo #2
Contractor was negligent, Board knew, Reliance by the board
Under the restatement, no unilateral mistake because there is negligence.
Under efficient precautions, both parties are doing things they shouldn’t do, so we want
to punish both. Tie this to the tort law doctrine of last clear chance. In this case the school
board had the last clear chance to avoid the harm, so make them liable.
Hypo #3
Contractor negligent, Board did not knew and should not have known, board reliance.
Here we will make the contractor liable, he had the lowest cost avoided and there was not
last clear chance.
Hypo #4
Contractor negligent, Board knows, no Reliance . No contract, there is no social harm
(ignore transaction costs). But could say they are worse off if look at expectation measure
of damages. When we say “worse-off” no reason to hold the bidder liable for his bid. A
counterargument is that if measure this through expectation damages instead of reliance
damages, it is worse off.
The restatement measures worse off through reliance and not expectation interest.
Hypo #5
Contractor negligent, Board knows, nominal reliance ($500) with intent to make K
enforceable. Some courts will say there is reliance so no unilateral mistake, and award
reliance damages. Court will be more inclined to enforce it here because the award is
smaller (unilateral mistake is a equitable doctrine (i.e. do whatever you want).
Summary:
Court only really consider these two questions:
1. who was the lowest cost avoider (last clear chance)
2. whether the other party is actual worse off
Hypo #6
I buy a Ferrari to increase my social standing (dealer thought this too), but it doesn’t
happen. I want to return it on the doctrine of unilateral mistake, will the court let me off?
No, this is the traditional difference between a mistake in judgment and a clerical
mistake. Cannot get off the hook for mistakes in judgment.
11/20/02
Mistake Review
1. At the time of K formation
2. Assumption of risk
a. Explicit K Provision
b. Implicit/Conscious Ignorance
c. As justice require (Rest)
3. functionally
a. breacher (would-be) off the hook
b. low probability events – Default
c. Policy Concerns – Precautions (e.g. Unilateral Mistake)
d. Risk-allocation device – others include implied warranty
4. Unilateral mistake
a. Draws the line at reliance interest not expectation interest
b. Also draws the line at clerical mistake versus judgment mistake
Mcrae
Sale of a non-existent oil tanker, a great deal of reliance expenditures as a result of the
promise. The commission’s defense to the breach of contract claim is that there was a
mutual mistake, a basic material assumption that the oil tanker was at that location.
English Common law case where A sells B corn, corn turns out to be heated and
fermented (inedible), A sues B for the price because B refuses to pay. Court concluded
that B did not have to pay. Could use mistake doctrine or say there was a material breach
by A of the promise to deliver edible corn. Under the doctrine of substantial performance,
B does not have to pay (Jacob v. Young). What if B sued A for breach of K, and
awarded damages, the doctrine of mistake is not used because they are assuming the
existence of a K.
The Court says that mistake will not get them off the hook. The defense says the same
logic should apply as the corn case, which seems logical. How does the court distinguish
this case? Court makes the material breach move here. There was a material breach of the
promise that the ship would be there (substantial performance) and therefore damages can
be awarded to the .
To determine the expectation damages they make the same move as Security Stove,
prima facie they assume that reliance damages are a floor to their expectation damages,
the other party can come back and say that expectation damages would be less. Shifting
the burden of proof.
To other claims are 1) negligence and 2) fraud. Next topic is when you can sue for 1)
negligent misrepresentation 2) misrepresentation 3) non-disclosure
Non-Disclosure
Laidlaw
Sale of Tobacco, buyer knew the war was going to end and the price of tobacco was
about to go way up. Is his non-disclosure an actionable defense? Common law says that
there is no general duty to disclose to material fact. In this case it probably wasn’t very
likely that the seller would find out this information about the war, but the court still rules
that non-disclosure was necessary.
The reversal is based on the fact that the lower court did not tell the jury to determine
whether there was an imposition on the seller. The discussion about non-disclosure is all
dicta. So there was no general obligation of disclosure but we could get the buyer on the
hook by saying his silence was a negligent or intentional implicit misrepresentation. This
would qualify as an imposition.
The doctrinal effect of the 19th common law rule that there is no general duty for
disclosure is that it put enormous pressure to prove implicit misrepresentation.
The Current Rule you can use implicit representation and some situations where there is a
duty to disclose which have developed throughout the years.
Some examples when there is a duty to disclose
- Fiduciary relationship (shareholder-management)
- Specific State Statutes requiring disclosure
One thing we should think about is the causes of action being filed in Hill v. Jones, and
think of the remedies for the various misrepresentation/non-disclosure actions, and
compare that to what the remedies would be if there was a contract?
11/25/02
Review
1. McRae’s distinguishing Courtierer (substantial performance case not a mistake
case) → relieved of duty to pay because there is a substantial breach
2. Tort notions/Precaution notions in McRae, motivating factor for imposing
contractual liability, the commission was in the best position to avoid the harm
3. Laidlaw pressure the dicta had on the common law, if there is no general duty to
disclose then there is enormous pressure to find misrepresentation for liability
Misrepresentation requires:
1. representation (not necessarily spoken, this is where most of the argument takes
place, focus on this, standard way is to show concealment)
2. false
3. material (lower burden than “basic assumption” required in mistake and
nondisclosure)
Note: No Scienter, does not require that one party knows and the other doesn’t, could be
a completely innocent misrepresentation
Nondisclosure Restatement
1. fact not disclosed
2. known to one party but not the other
3. basic assumption (higher standard than materiality)
4. breach reasonable standards of fair dealings (this is where most of the argument
takes place, focus on this) (see Kronman theory on whether the acquisition of
information was casual or deliberate)
Kronman
- If you make investments in acquiring information law should not require a duty to
disclose but if you casually acquire it you should be required to disclose
How would this apply to Hill v. Jones?
Hill v. Jones
No special investments in acquiring the information, so they should disclose the
information to would-be buyers.
Q: How do we ensure there is a production of information, and the law of non-disclosure
does not undermine the incentives for the creation of socially-useful information. We
only worry about this you make a special investment to acquire. This argument has very
interesting implications in other areas of law (e.g. NYSE providing stock quotes).
Lets talk about misrepresentation suit now. The remedy for misrepresentation is a
rescission of contract, restitution damages.
Most obvious point of misrepresentation was when the buyer asked the seller about the
ripple and he said it was water damage.
Another possibility is to go the implied warranty route.
Another action was the concealment, putting boxes over the termite damage.
Purposefully creating a false presentation of the house.
Concealment is standard way of establishing a representation.
Another cause of action is the tort of misrepresentation, where we need scienter, which
means a culpable state of mind (recklessness, intention, negligent).
For misrepresentation need 3 factors, for the tort we need all 3 plus scienter. I.e. For K
action does not matter if seller did not know the ripple was from termites. He was truly
innocent, but can still sue for misrepresentation but no action for the tort.
Tort remedy is usually to put the victim they would have been if the harm or tort never
occurred (status quo ante) contrast this with expectation damages.
Suppose, you can prove the cause of action for tort what damages would the court find:
1. Difference in market value of termite-free house and termite-infested house, this
measure of damages would also be the expectation damages of breach of the
contract theory of implied warranty. Here we are saying that tort and contract
theory is functionally acting the same way.
2. Return the house, get all the money back (rescission of contract), they can claim
they never would have bought the house if the tort never occurred. This is the
same remedy as the contract theory of misrepresentation.
The remedy for non-disclosure is also rescission of contract.
Why wouldn’t the court say there is an implied warranty if it is functionally identical to
the tort outcome?
The fear is that there were would be a wave of new litigation, more expansive. Hinson v.
Jefferson creates a very specific implied warranty. K theories are all strict liability.
When looking at a fact pattern like Hill v. Jones you want to think about 4 theories of
liability: non-disclosure, contact theory of misrepresentation, tort theory of
misrepresentation, and implied warranty. Then think about damages implied by each one
and how the theories interact.
Performance and Nonperformance
Types of Conditions
Express Conditions
Gray v. Gardner
Note is for $5,200, and the condition is that if there is a greater quantity of a sperm oil
then the note is void. One thing we have to consider why parties put the condition in the
contract. In this case it was to protect the buyer from paying a high price if there is a glut
of oil. The more oil there is on the market, the less it is going to be worth.
The legal issues are
1. disputed facts
2. who has the burden proof, which will probably be dispositive
What determines which party has the burden proof?
Whether the condition is a precedent or subsequent.
If it condition subsequent defendant has the burden of proof, if it precedent the plaintiff
has the burden of proof.
The court determines the nature of condition by looking at the language in the contract,
the way it was put that there was an obligation first, and this obligation is discharged if a
certain event occurs and thus it was a condition subsequent.
How could this same exact contract be re-written to make the condition is precedent, if
the amount of oil delivered is less than x, then there is an obligation to pay $5200.
General point of the court is to look at the exact wording to determine precedent and
subsequent, but slight re-wording can come out with either outcome.
Langdell emphasized this idea of looking at the wording, a formalist approach.
Holmes said that this made no sense because you could get completely different outcome
by slight re-wording, so he opposed the formalistic/semantical approach. Holmes talks
about the importance of policy considerations which include who does it make sense to
bear the burden of proof → 1) who has access to the information to better meet the
burden of proof (general trend to look at functional approach of doctrine and then use
policy to determine what outcome you want)
Insurance Ks
Precedent v. Subsequent Condition argument has been important in this context of filing
requirements and who has the burden to prove that the requirement was fulfilled.
Contract of adhesion, insurance companies will always place the burden of proof on the
insured by making the clause to claim recovery a condition precedent.
The answer the law has created is the contract as a whole is construed against the
insurance company, the clause will almost always construed as condition subsequent to
put the burden of proof on the company. §211 on contract adhesion and the idea of
reasonable expectation developed around insurance Ks.
11/26/02
Review
1. Standards of fair dealing → this is the difficult issue in non-disclosure; if you’re
dealing with a contract in a certain industry you just look at the custom of
2. Representation → the difficult issue in the misrepresentation doctrine; figuring
out if there is a misrepresentation
3. Scienter (culpable state of mind) → required in tort, but not in non disclosure; but
built into the fact that one party has to know something the other one doesn’t
4. Measure of Damages → 1) tort put parties back in the position they would have
been in if they never entered the K, rescission of K same result as mistake 2)
Expectation damages → the difference in the value of the house. Important to ask
what the remedy would be for each potential liability/excuse doctrine (legal realist
approach).
Constructive Conditions (implied-at-law conditions)
1. order of performance → what order do parties have to perform their contractual
obligations
2. Default regime → “unless” language in Restatement 234; a quasi mandatory rule,
very difficult to opt-out the order of performance
Constructive Conditions
Kingston v. Preston
Pre-Kingston all promises are independent of each other. Someone can sue for the money
of the cow, even though the cow was not delivered yet.
A bilateral contract with executory obligations → obligations that have not been met yet.
The reason this was a good case to innovate constructive conditions is that the
apprentice’s net worth was 0, so “good & sufficient” credit becomes important.
In this case the first promise that needs to be performed is the security deposit, the second
one is handing over the business. How do we decide this? We look at the intent of the
party, and the surrounding circumstances of what the parties are trying to accomplish.
Lots of times we will look at the intent and wording of the parties to determine what the
constructive condition is. The same question when deciding whether a contract provision
is a condition v. a promise.
Conley
Obligation of exhaustion of administrative remedies and an obligation to notify employee
of appeal remedies.
Employer’s argument is that promise to exhaust is a condition for promise to provide
benefits.
The requirement of exhaustion is in the plan, this plays a crucial because it is promise.
ERISA obligation to exhaust as well, but can’t use promises here.
’s assertion is that promise to notify is a condition for promise to exhaust.
But there is an argument that an employer doesn’t actually have to notify employee, if he
knows then there has been substantial performance. He constructively knew because his
lawyer knew.
Constructive Conditions are satisfied if there has been substantial performance. The
most important point for constructive conditions.
Express conditions no use of the doctrine of substantial doctrine (has to be fulfilled
to the letter).
Fundamental difference between these 2 doctrines.
Stewart
Argument over when payments are due under this contract. The argument of the firm is
that the contract is silent, we’re in constructive conditions, and they that promise for
construction is a condition for the promise to pay.
Construction takes place over time, payment can happen immediately. When we have
these two types of promises, the promise takes longer to occur should happen first and the
promise that can take place immediately is conditional on the first one being completed.
A classic move to make when dealing with constructive contract and whether there has
been substantial performance is the divisible contract. The divisibility of K’s pioneered
by Cardozo.
Divisibility only used when the contract is silent on it.
Language has to be extremely clear to opt-out of constructive conditions.
This case was remanded because if he was not allowing him to work the obligation to pay
is going to differ.
Doctrine of anticipatory breach, no matter what you do I am not going to pay you. Might
think that there is only damages if there is substantially perform.
If one anticipatory breach by saying you would not pay, all the constructive conditions to
the obligation are eliminated. The promise to pay is immediately due once you say you
are going to breach. Remedy is expectation damages (including mitigation, etc.).
Similar to Luten bridge.
International-Rotterdam
Purchase of 95,000 pockets of rice in July, delivery are due in December. K price was
$8.25/pocket and the last provision is that purchaser had to provide delivery info by
December 17th. As it turns out there is actual delivery of 50,000 with no problem. With
respect to the remaining 45,000 information about where they should be sent was
provided by December 18th.
Is there an obligation on the seller to deliver the rest of the rice even though the seller was
late on notice.
The sellers argument is that there promise to deliver was conditional on the promise to
deliver information. . Also that the provision is a way of allocating risk in these provision
and is only for a certain period of time and once you start extending the time you are
fundamentally changing the K (this is the argument that won the day). Material because it
would backlog all the rest of my orders.
Dec 17 → K Damages
Dec 18 → If price goes up → he will notify, If price goes down → no notification
(expectation damages would be 0 for his breach, because the price went down); thus by
allowing late notification we are creating an option K for the purchaser, and it is
unreasonably to think that the parties intending to create this option, one-side deal.
Best argument for the purchaser is that the late delivery information might get the seller
off the hook from delivering it in December but there is still an overall obligation to
deliver. Maybe they already knew, so it was not a material breach.
11/27/02
Review:
1. Old constructive conditions → independent promises
2. Kingston → Old constructive conditions makes no sense
3. Doctrinal Issues: (a) divisibility of K’s (b) Specific Performance
4. Quasi-mandatory regime
Conditions/Promise
More question about whether something is a condition, promises are more clear.
How do we go about whether a provision is a condition
(1) If one party has complete control over whether the obligation is fulfilled, usually
viewed as a condition (farmer had 100% control over whether he destroyed his
crops). This is a way to create incentives. (distinguish from an arbitration
provision where no one party is control)
(2) Presumption is that contract provision is a promise over a condition because we
want to avoid forfeitures
(3) Forfeiture → ask what would be the forfeiture would be if I construe it as a
condition, and is that reasonable or not.
(4) Contracts of adhesion, especially insurance, the party who writes a contract of
adhesion we will construe the contract against them, when in doubt we rule
against them (this was the most important consideration in Howard)
(5) Wording, but just the use or non-use of the word condition is not going to be
dispositive
(6) K interpretation very important
Another way of attacking the problem is looking at the essence of the K, in International
Rotterdam the conclusion was that “time is of the essence.” Timing was very important
with relation to the overall risk allocated in the K, thus we don’t want the parties to break
those cut-off points. In Jacob v. Young could say that “quality is of the essence.” Wanted
to insure a certain quality pipe. If we had concluded it was a condition the owner would
not have to pay.
In Rotterdam if it was construed as a promise, the fact that it was a day late would not
make a difference. There is a cause of action for breach of the promise, but they still have
an obligation to purchase.
But say the expectation damages were going to be huge, and the purchaser is on the hook,
there would be a big forfeiture by . Then it might not make a difference between
condition and promise from a forfeiture perspective. Forfeiture test is about looking at the
justice of the situation.
A lot of what we are doing in this cases is what would serve the overall purpose of the
contract, construing as condition or promise. Obviously this requires speculation.
Other Justifications for Non-Performance
Impracticability/Impossibility
2nd implied excuse doctrine we are looking at, the first one is the implied excuse of
mistake.
(1) The remedial effect is just like that of mistake, which is rescission of K, or
rescission of performance obligations, so remedy is often restitution
damages
(2) How is it different from mistake? Mistake is at point of K formation and
impracticability is post-K formation. Always ask if it is a bad assumption
at the point of K formation.
(3) Implied Excuse effect is to create and implied condition to
performance/enforceability of contract (just like the doctrine of mistake)
(4) Was there a fault?
If there has been an allocation of risk in the K (we don’t know if the cow is barren or not
in the contract), mistake can’t be used. The law is not going to imply the condition in this
case, makes sense because we are dealing with default regime.
Tie this into the corn case:
How did the court argue that this case was not a mistake case?
- They argued that the risk had been allocated in the K itself, so the court was not
going to imply a condition to enforceability?
- The Seller promised the buyer that the corn was in good shape, through this
promise the seller was bearing the risk that this was not true
- If we have allocation of risk, the law is not going to imply implied excuses
So only if a K is silent on a particular issue should we think about
impracticability/impossibility, we have to do a lot of K interpretation.
Taylor
In Taylor v. Caldwell the implied excuse kicked in at the point when there was a fire, at
that point there is rescission of contract. Point is that the implied excuse attached after the
K formation, up to that point you have K. Mistake the K is invalid from the beginning.
K interpretation is essential here too
Say the provision says “I agree to rent a music hall”
Is it impossible to live up to the promise once the music hall burns down?
If you say yes, that is a function of a particular interpretation of the K
1) Assume that there is one music hall that party can rent
Look at the intent, wording, parole evidence, etc. Also necessary to determine whether
there has been an allocation of risk in the K.
Tompkins
Represents a different strain of the common law, part of old school thought that we don’t
want to let people out of their contractual obligations.
The court’s position is that the court is not going to step in and imply conditions if you
want to protect yourself from fire, put it in the K. A different approach as to what the role
of the court is. But to what extent do we think it is feasible for parties to anticipate all
sorts of possibilities?
12/02/02
Review: Issue Spotting
(1) Goods or services?
a. Goods → UCC
b. Services (employment, etc.) → Common Law
(2) Has there been a contract formation?
a. Was there an offer?
i. Is there an intent to be legally bound? (Empro)
ii. Would a “reasonable person” believe there was an offer? How
much do we contextualize the reasonable person standard?
iii. Are there definite terms? Can collapse this into intent to be legally
bound, indefiniteness as evidence that there was no intent, but it
can also defeat the K on its own.
- Background issue → Can the courts fill the gaps of the
indefiniteness? Reasonable quantity term to fill out the
definiteness.
iv. Restatement 20 → misunderstanding
- If neither party knows or has reason to know the other
party’s meaning of a material term, then we can have an
avoidable K
- TRADE CUSTOM; Raffles, if there is one we have
presume they meant the trade custom
b. Was the offer terminated?
(Is the offer still on the table when offerree attempts to accept)
i. Death or Incapacity?
ii. No specification of expiration date, the court will impose a
reasonable period under which it can be accepted.
iii. Revocation
- Can revoke at any point unless there is an option K, which
means offeror no longer has the right to revoke. Is there an
option K?
- When is the rejection effective?
a. When they receive notice; Davis v. Dickison, does
not need to hear it directly from the offeror
c. Has the offer been rejected by the offerree?
i. Common law rule of counteroffer/rejection
ii. UCC departs from common law (battle of forms), there can be an
acceptance of an offer even if new terms are proposed
- Subsection 2 → even if there is a K the question whether
the new terms being offered by the offerree are going to be
in the K or not
d. Has there been an effective acceptance?
i. Big issue is whether the offer is one to enter a unilateral K or
bilateral K. This will effect what type of acceptance will be
effective or not.
- Have to reconstruct what the intent of the offeror was?
Were they trying to induce a performance or a promise or
either, so we go back to the doctrine of consideration.
- One thing that will help us to determine whether the offeror
is one for bilateral or unilateral K is to look at a the course
of dealing.
- What is the exact wording of the offeror? Does it look like
it is an offer to enter bilateral or unilateral K?
ii. When can silence constitute acceptance?
- Maybe silence is acceptance because of course dealing
(Silence as acceptance)
- Can infer return promise even though there was no explicit
promise (Davis v. Whitehead) (Infer promises from
conduct to complete a bilateral K)
iii. Mailbox rule
- When does acceptance become effective? Mailbox rule:
point of dispatch; cannot terminate acceptance after
dispatch
- Can opt-out of the mailbox rule, it is only a default rule
e. Option K’s
i. How do we decide if an option K exists?
ii. Three different types of option K’s
- §25 → traditional; consideration for a promise to keep an
offer open
- §87 → Drennan v. Star Paving; creation of option K
through reliance; reliance on the irrevocability of an offer
- §45 → an offer to enter a unilateral K plus the beginning of
performance/partial performance. (One thing to think about
it is how did Judge trainer use §45 to make an argument for
§87)
(3) Is there consideration supporting the deal?
a. Traditional common law formulation of consideration (deleo); benefit to
promisor or detriment to promisee
b. Restatement recasts this doctrine into one of bargain → whether there is
inducement on both sides (mutual inducement)
c. Distinguish from gift promises → promisor is not looking to induce
anything; so unenforceable under bargain theory of consideration
d. Specific Issues
i. Preexisting legal duty rule → If you promise to do something that
you had a preexisting duty to anyways, then that does not
constitute consideration
ii. Mutuality/Illusory Promises → Wickman; if I promise to buy as
much coal as I want there is not promise; it is under my unilateral
discretion whether there is any benefit to the promisee; Lady
Duffy; imply a duty onto offeror to perform in good faith. This is
the way to get around illusory promises → imply a duty or
obligation that makes the promise not an illusory one
iii. “Past” consideration → §86; when can past consideration
constitute consideration (Webb v. McGowan); what constitutes
consideration? Argument that only pecuniary benefits can
constitute past consideration; consideration to take care of a bull
but not a boy
(4) Enforceability of K?
a. Mistake
i. Implied condition to the enforceability of the K
ii. Assumption of Risk; in order to say this doctrine applies must be
able to say that the 2 parties did not allocate the risk between them
iii. Default rule; but parties can explicitly allocate the risk and opt-out
iv. Unilateral v. Mutual Mistake
- Unilateral mistake → both parties can assume the mistake;
but only one party caused the error (usually a clerical
mistake
a. Precautions arguments
- Mutual → not caused by one of the parties (Sherwood v.
Walker)
a. Precautions (McRae)
b. State of Frauds
i. Statute of Frauds defense → it was a type of contract that should
have been in writing
ii. Does it meet the requirements of S.O.F.?
- Was there a note/memorandum?
c. Duty to disclose
i. Was there was duty to disclose and was that duty breached?
ii. Remedy is rescission of contract
d. Misrepresentation
i. No need for scienter for K theory; needed for Tort
ii. Look at damages under K versus under Tort
e. Competence
i. Age and Sanity
f. Duress
i. At the time of Contract Formation
- illegal threat
- It should be illegal if law was a perfect instrument
ii. At the time of K modification
- Are there are changed circumstances from the point of K
formation that would make it reasonable for this K
modification
- UCC rules → drops the requirement whether there is
consideration; just focuses on whether there is extortion or
not
g. Public Policy
i. Baby M; Duncan v. Black; public policy rendering the whole K
unenforceable or just certain provision unenforceable
h. Unconscionability
i. Entire K or just a K provision
ii. Need both procedural (market/monopoly power (?; Schwartz)) and
substantive unconscionability
i. Contract of Adhesion
i. Particularly suspicious of terms in K’s whether there was no
opportunity for bargain; market for lemons argument
ii. §211 → Reasonable Expectation Standard
(5) K interpretation
a. What are the exact performance obligations?
b. Always an obligation of good faith under Common Law and UCC; was
this fulfilled?
c. Parole Evidence Rule
i. Are you trying to enforce a “side” agreement made before or
contemporaneous with the writing?
- Was the side agreement within the scope,?
- Was the writing integrated?
- Do the terms contradict the writing?
ii. If the parole evidence is being used to interpret an ambiguity that is
ok, but how do we decide if there is an amibiguity? Corbin v.
Willistone arguments
d. Implied promises, are we going to imply promises that need to be
performed?
i. Implied Warranties; Hill v. Jones
e. Using trade custom and course of dealing as a tool for K interpretation
i. Important in UCC; also in common law
(6) Performance Excuses
a. Even if they had the obligation; has the performance been excused?
b. One way is an express condition to performance, if its not satisfied then
the obligation isn’t due
i. Express Conditions Precedent v. Subsequent; effects who has the
burden of proof/pleading; whether the condition has been satisified
c. Constructive Conditions
i. Deal with order or performance
ii. Certain performance obligations are only going to be due when the
other party has performed their obligation (substantial performance
standard); can excuse non-performance
iii. Constructive conditions are fulfilled by substantial performance
d. Material breach of the other party
i. Jacob v. Young; owner is saying he doesn’t have to pay because
the other party materially breached
e. Implied Excuses
i. If Performance becomes impossible or impracticable
ii. Frustration of Purpose
(7) Remedies
a. Expectation measure of damages is the norm in K law; as good position if
the breach had not occurred
i. Cost of performance or Value of Performance arguments for
expectation damages
ii. What are the policy arguments?
- Efficient precautions; insurance; and breach
b. Limitations on expectation damages
i. Uncertainty may push you to reliance as a proxy for
ii. Consequential damages not enforceable unless foreseeable and/or
special communication
iii. Emotional Damages
iv. Duty to Mitigate
v. What are the policy arguments for the limitations?
- Ability of non-breaching party to take precautions
- Information exchange which would be socially desirable
c. Reliance Measure
i. Must make an argument that “justice requires” requires §90
damages
ii. Or a as proxy for when expectation damages are too difficult to
calculate
d. Specific Performance
i. Real Estate
e. Liquidated Damages
i. Was it reasonable ex-ante?
ii. Was it reasonable ex-post?
(8) Miscellaneous →
a. Promissory Estoppel
i. If no consideration will it be enforceable because of promissory
estoppel §90
ii. Was the reliance reasonably foreseeable by offeror
iii. Hoffman case; expansion of promissory estoppel doctrine; used to
just be a substitute for consideration (replacement for uncertain
damages)
b. Restitution (end of the course)
i. Whether the breacher of the non-breacher is bringing the unjust
enrichment claim?
c. Implied at Law → In re Crisian
i. Based on public policy will create the legal fiction that there was a
K
12/03/02
Focus on Practice Examples when studying
Review
(1) Impossibility → Impracticability
- Think in terms of cost of performance → it goes so high that it can be
construed as an implied excuse
(2) Issues of K Int.
- Whether performance is possible depends on K interpretation (was it a
promise to provide that specific music hall or was it just a performance to
provide a music hall?) In order
American Trading
What is the interpretation issue?
The owner’s interpretation of the K is that performance due is moving the cargo through
the Suez Canal which becomes impossible due to the war in the Middle East.
The court’s interpretation is that Cape of Good Hope Route was a foreseeable alternative.
Expectation (through Suez canal) v. Performance Due (get the oil from Texas to
Bombay)
Hadley consideration → Relieve would be breachers of some liability
- Precautions incentive
- Insurance
- Cross-subsidization
Look at the precautions argument.
If the owner is a better insurer, that suggests that the owner should not be let off the hook
with impracticability/impossibility.
Cross-subsidization → if owner is liable, he will increase his price to all his clients. (but
could make this argument both ways, Shell will have to increase its costs).
Kull
Isn’t this way of assigning liability highly speculative? The uncertainty is extremely high,
precautions don’t make sense if you don’t know you need to take them. If ex-ante one is
unsure there is no incentive structure, however, if one knew for sure they would be liable
they would be able to take precautions. He says the way you get out of this is to just let
losses lie where they may. This certainty will create the proper incentives. Creating a
clear Penalty Default; which parties can contract around. This only applies in certain
circumstances, but it is not entirely clear because of issues of K interpretation of whether
performance is complete or you are in a loss/voided situation. So are we better off?
Example of “Penalty Default” which is very clear
- No implied excuses, if you want out adjust the risk in the K
 Two questions:
 Why do we want a doctrine of implied excuses
o Incomplete contracts; parties have limited time, resources, and
ability to see the future, thus the law can conserve resources
 Is it any clearer?
o Will we still have Implied Warranties? If so, looks like we are
just pushing these situations in different doctrinal box (same
arguments of precautions, insurance, cross-subsidization), so
perhaps there is an equal amount of uncertainty.
Frustration of Purpose
Krell v. Henry
Could make an argument that this is an impossibility case → Parade was supposed to be
provided, it was canceled, so performance impossible.
Generic point that you can easily turn frustration of purpose case into an impossibility
case.
Cab hypo → The cab has no special qualifications to get to you to the horse race, so K
with him cannot be voided if the horse race is canceled.
Hook this up with “basic assumption.” Basic assumption shared by both parties of the
contract has to be frustrated.
In Hotel room hypo, where none of Ferrel’s friends show up to his new year’s party, the
hotel could have rented the room to anyone, they did not share this basic assumption that
party is going to be a success with Ferrel.
Implied Excuses is a default regime, if parties K around it, implied excuses do not apply.
UCC 2-615
Unlike battle of forms, the UCC follows the common law. One area where we can use the
common law cases without any modification for sale of goods.
Alcoa
17 year contract with Essex where Alcoa would do some Al processing for Essex. The
initial K there was an “escalation clause,” whereby the price Alcoa would charge would
change over time based on other costs (including energy and inflation). The hig inflation
and energy increases in the 70’s made it so the escalation clause did not work and Alcoa
was going to lose $60MM. The court decided that they weren’t going to let Alcoa out of
the K, but instead they would re-write the escalation clause. The remedy was not
rescission but re-writing. Very, very controversial decision.
The Court used the doctrine of mistake to justify it’s re-writing the clause, which is
indefensible between there was no shared basic assumption at K formation. Would have
been better to use Impracticability/Impossibility.
Do we want Courts to step in (or any default rules) when we are dealing with extremely
sophisticated parties which have the resources to think about future variables.
Relational K’s, long-term deals.
12/09/02
Generic comments:
- Tie the legal analysis to the FACTS
- Spread time equal if there are 2 issues
Legal Issue involving lottery ticket
- Unilateral v. Bilateral → don’t spend a lot of time on this since it is a
simple cash transaction
- $20 for the promise to deliver the car if he wins
- The fact that the $20 was handed over means there was performance, so
not really necessary to spend a lot of determining whether it unilateral v.
bilateral, offer/acceptance
Big issue:
- Whether it was a gift promise
 Mutual inducement, the inducement is not of getting the car
 §81 “does not have to be the sole reason”
 Donative promise → Alex’s actions, post-K, give us evidence as to
his motivations for buying his ticket, motivated to get the car,
made a statement to the ferry owner “I might have to get back,”
paying the $1000, he didn’t have a “particular” good chance, but
doesn’t mean that he didn’t think he had any chance
Some other issues:
- Contract of adhesion
 §211→ Reasonable expectations of Alex, hard to argue that his
reasonable expectations did not include this deadline because he
actually knew about it
 Large letters
 Was it reasonable term? 8:00 is a reasonable term
- 8:00 deadline
 Express v. Constructive condition; no doctrine of substantial
performance for express conditions
 Constructive conditions go to what order performances have to go
 Express Condition v. Promise; promise by Alex to be there by
8:00; we could also apply substantial performance ala Jacob v.
Young, immaterial breach etc.
 How do we decide though? If it was a condition it would be
a substantial forfeiture (5 minutes late, I would lose a
Mercedes), justice, the big issue in deciding whether it was
a condition or promise
 Argument that it is a promise; use substantial performance;
immaterial breach
 Does imply that the church could sue him for being late, do
we think they thought this when they entered the K; this is
an argument against it, counterargument to that is that sure,
but we do it all the time
- Promissory Estopppel
 Say we say it was a gift promise
 We can still say it is enforceable through reliance, alex
relied on it

Counterargument is that reliance was not reasonably
foreseeable; did they really think he would go to potato
Ferry Owner
Big issue is impracticability:
- Breach of the first promise; remember Alex actually purchased the ticket
- The breach of not leaving at 6:00, was a promise and there was a breach of
promise
 Schedule and ticket both said 6:00, and Alex double checked
- Counterargument: Impossibility/Impracticability → condition to
agreement; no K
- Impracticability goes to cost of performance going up; shoal detector
being broken that increases his risk
- Counterargument is that he did it for $1000; so did the cost of
performance go up substantially (maybe yes, maybe not)
- Unforeseen event; basic assumption
- Precautions who should eat this cost based on precautions? Ferry, keep an
extra shoal detector; maybe Alex could have showed up earlier
- Look at fault in implied excuse case
The other big issue is K modification
- Alaska Packers; ferry owner is taking advantage, he had a pre-existing
legal duty (assuming doctrine of impracticability applies)
- He had market power (only one who could bring him over)
- Standard way a K modification is enforceable
 Changed circumstances, shoal detector broke, so there was a
legitimate modification; but Alex can counter argue that he raised
it too much (was the modification reasonable)
 Old common law you need new consideration
 Was the modification unconscionable?
- Procedural (market power of ferry owner)
- Substance
- Makes the K voidable
Hadley issue of consequential damages
- The actual statement is that he might need to get back, how foreseeable is
it that he is the winner given the statements
- Assumption of risk; no way he would want to be on the hook for $130,000
for $10; disproportional argument (farmer/light argument)
Say we conclude the K was enforceable:
- Promise that Alex would get there by 8, and there is a breach of this so
ferry owner should be on the hook
- Hadley Issue; did ferry owner actual make this promise; a little shaky
- Frustration of purpose
Remedies:
-
If church breaches
 Norm is expectation damages
 S.P.; idiosyncratic value that it is from Arthur Miller
12/10/02
1)Reductionism in the law
- Tort and K law → same issues/same analysis
2) Fields as Distinct
- K as a promise (Charles Fried) (voluntary)
- Tort as social obligations (involuntary)
3) Reductionism: Precautions & Insurance
- Expectation Damages (argument that it is efficient because of precautions),
this argument is really also one for strict liability (Hawkins v. McGee)
- Strict Liability in torts (product liability), maybe the same justification
(producer in best position to reduce the probability of the accident/i.e. take
precautions)
- Both arguments place all the liability/precautions on one party
- In both K’s and torts we have liability shifting (for instance Hadley (not
liable for consequential damages), same idea as negligence in torts (BPL
formula) and contributory negligence. Can translate this into precautions.
- Both BPL and Hadley are both arguments for liability shifting, the
breaching party/victim have to eat some of the cost. Cases where the
victim can take precautions which we want to create incentives for.
- Implied warranties (cigarettes), maybe not the best because do we really
want medical insurance dolled out this way
- Same concerns in tort law, even if we want victims to be compensated, is
this best way for victims to purchase insurance, are there better ways to do
this than tort cases (self-insurance, etc.)
4) Reductionism:
- Incomplete K → At some point consent runs out, at this point have to use
other values (Craswell)
- We do the same thing in Tort Law, to decide what sorts of social values
we want to protect; we use these same “other values” (i.e. distributional
concerns)
- One way of addressing when consent runs out is hypothetical consent
(Taylor v. Caldwell) what would have they done if they thought about it.
We saw this in majoritarian default rules (what would most have the
parties thought)
- What would have happened if they bargained, put the burden on the party
better to bear the risk/cost (Posner)?
- Do the same thing in tort law; producer and consumer: Would the user be
willing to pay the producer more in exchange for the producer incurring
the liability of harm (would the user be willing to buy
insurance/precautions). Same move as K law.
-
Can we actually mimic the market? (Hall critique of Posner article) How
well can courts actually do this? Will it just be arbitrary?
5) Anti-reductionism
- Price mechanism of K (what you do ex-post effects price ex-ante) [contra
Friedman, critique of efficient breach is that it also justifies efficient theft,
counter argument is that he is ignoring the price mechanism, there is no
privity of K in theft situation, if it is a good measure of damages from the
breach (buying precautions, etc.) everyone will benefit ex-ante] (hurting
the people you want to help)
- But distribution via tort way to go because of ex-post does not effet
prices ex-ante price (in situations where there is not privity of K between
parties)
- But Ferrell says it is possible in K law if you look at how supply and
demand, etc.
- Is tort law the right way to buy insurance? An argument that you should
do it through the taxes.
Most time spent discussing precautions/insurance
Unjustified Nonperformance and Forfeiture
The Perfect Tender Rule/Substantial Performance
-
Perfect Tender Rule
- Often hear that the perfect tender in the UCC, but this is not really the case
- If goods are not non-conforming, seller has an opportunity to conform to
the order
-
Common Law of Substantial Performance
- Doctrine of substantial performance no doctrine of perfect tender (but
stricter in the 19th century pre-UCC)
- Even if you don’t perform perfectly can receive 100% payment
- Question in Plant v. Jacobs, why did the court conclude that there was
substantial performance; and this goes to the point of going backwards
from the remedy, the court uses the value (vs. cost) of performance as the
measure of damages(as in Jacob v. Young), the damages is in this case is
0 so logically we can conclude there has been substantial performance
(point is to look at remedy and then decide if there is substantial
performance) Dissent emphasizes cost of performance, idiosyncratic
value
- Also think about sale of goods (end of the day you have to conform, but
must give seller time to conform) v. services (more sympathetic to
forfeiture)
Restitution
1) Must look whether it is the breach or non-breaching (not bound by K) or
breaching (bound by K price) party bringing the suit
2) Role of intentional breach
a. Groves case (outlier case); Restitution suits (both these contrast to
Hawkins v. McGee where we said K law is just strict liability) but
restitution suits more consistent since this is a quasi-K suit (a lot of states
don’t allow remedy if it is willful breach)
3) Burden of proof; when breaching party brings a suit what do they have to show?
Unjust enrichment; has to show the value given to the non-breaching is greater
than the damages given by virtue of the breach; there has been a forfeiture
4) Restitution is a non-K or quasi-K remedy; “equitable” relief; so courts will throw
lots of things in the pot (fairness, fault, etc.)
Review
Policy Use normative framework to answer the question and apply to various
contractual doctrines
Must discuss contractual doctrines not just policy
Promissory Condition: I promise to pay $100 if it rains, in exchange for the promise
you give me $10
I did not promise it will rain; so rain is a condition to the promise
I promise to pay $100 and I promise it will rain → promissory condition
Dissent in Jacob v. Young → I promise to install redding pipe and it is condition to
performance (to the owner’s obligation to pay)
Cardozo → Promise not a condition
How do we decide? Forfeiture, Justice, Intent
Condition to Agreement v. Condition to Performance
Condition to Performance: I will only pay if it rains (there is a K)
Condition to Agreement: Must be fulfilled before there is even a K (doctrine of
mistake)
As soon as they exchange of promises there is a K, conditions after that are conditions
to agreement
Short question: 1 or 2 issues, don’t just do yes/no; argue both sides
Supracompensatory damages are often not enforced, we assume something must be
wrong if there are Supracompensatory damages
Scwartz article; the efficient breach argument assume that going to court is cheaper
than performance and renegoitiation (Posner assumes this and that is where the
efficient breach argument is vulnerable)
Most important area where common law differs from UCC is battle of the forms
Some other areas Lady v. Duff (exclusive agent has duty of good faith effort) both
common law and UCC come to the same conclusion through different methods
(implied in fact v. default rule) (In UCC ability to opt-out)
The other area is K modification; in UCC whether it is extortion no need for new
consideration, traditional common law need new consideration (but it has evolved to
closer to UCC whether there is opportunistic behavior)
Trade Custom and course of dealing important in UCC and common law, but UCC
places more importance on these two ideas
Predominance test, predominant service or sale of good (usually very clear on the test
(or it doesn’t matter), don’t need to spend a lot of time on this)