Contracts Outline – Madison 2010 – Michael Niu (modified)
A FEW NOTES:
Types of Rules
 Immutable: Unchangeable. Example: parties must act in good faith (UCC); no criminal conduct.
 Default: Can be contracted around.
■ Majoritarian default: Rule that the majority of contracting parties would want.
■ Penalty Default: Rule that at least one party would not want; encourages parties to contract around.
■ Liquidated Damages (enforceable): amount that is reasonable in light of actual or anticipated loss and
reflects difficulty in proving loss (duty to mitigate does not apply).
■ Penalty Damages (unenforceable): term stipulating unreasonable liquidated damages is unenforceable on
public policy grounds as a penalty.
 Special Contract: Explicit contract; clearly defines and settles reciprocal rights/obligations of parties. (Shaheen –
failed sterilization).
Selected principles of enforceability:
 Will principle: enforce commitment by which promisor chosen to be bound
 Reliance principle: protect a promisee's reliance on the promises of others
 Restitution principle: prevent unjust enrichment of someone who breaks promise
 Fairness principle: Enforce contracts that are “fair”
 Bargain principle: Enforce contracts that reflect bargain theory of consideration
LET THE OUTLINE BEGIN . . .
1) Was there a legally enforceable contract?
A) Rest. 1: contract is promise or set of promises; law gives remedy for breach or law recognizes duty of perf.
B) Rest. 2: promise is a manifestation of intention to act / refrain from acting in a specified way, so as to justify a
promisee understanding that a commitment has been made.
C) Rest. 4: promise may be made orally, written, or inferred from conduct.
D) Mutual Assent:
i. Rest. 17: Formation of K requires a bargain in which there is a manifestation of mutual assent as to the
exchange and consideration.
ii. Rest. 3: Bargain is (1) agreement to exchange promises; (2) exchange promise for performance; or (3)
exchange performances. Agreement is manifestation of mutual assent.
iii. Rest. 18: Manifestation of mutual assent is a “meeting of the minds”; each party must make promise or
begin/render performance (bilateral vs. unilateral K)
iv. Rest. 22: Mode of assent usually takes the form of an offer by one party followed by acceptance by another.
(a) Manifestation of mutual assent may be made even though offer and acceptance cannot be identified and
moment of formation cannot be determined.
v. Objective/Reasonable Person Standard
(a) Embry v. McKittrick (“go ahead...get your men out”) If reasonable person would interpret what McKittrick
said as renewal of contract (objective) and that is way what Embry did interpret it (+ subjective), then
there is a contract.
(b) Lucy v. Zehmer (contract on dinner check) "If his words and acts, judged by a reasonable standard,
manifest an intention to agree, it is immaterial what may be the real but unexpressed state of his mind."
vi. Meeting of the Minds—Ambiguous Terms
(a) There must be a meeting of the minds. This usually applies to ambiguous or vague terms in contracts.
See “Interpretation of Terms” on page 5 (Ex Peerless and Coin Collection)
E) Required Elements
i. Offer
(a) What is an offer?
1. Rest. 24: A manifestation of willingness to enter into a bargain, so as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.
2. Rest. 26: A manifestation of willingness to enter into a bargain is not an offer if the person to whom it
is addressed knows or has reason to know that the person making it does not intend to conclude a
bargain until he has made a further manifestation of intent.
(b) When can you accept offer?
1. Power to accept is terminated through rejection, counter-offer, or
A) Lapse of time
B) Offeror revokes
C) Offeror dies (doesn’t apply to option contracts)
2. Condition for offer is not fulfilled under terms of offer
(c) Ads as Offers
1. Nebraska Seed Co. v. Harsh (seed sample) Letter cannot be fairly construed as an offer. Invitation to
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negotiate. (1) Ad language—trade usage (2) Lacked specificity re: quantity, delivery time, etc.
2. Leonard v. PepsiCo (Pepsi Points) An objective, reasonable person would not have considered the
commercial an offer. The placement of the jet in the ad was clearly intended to make the commercial
more humorous, and not to constitute an offer. Only where the advertisement is clear, definite, and
explicit, and leaves nothing open for negotiation will it constitutes an offer, acceptance of which will
complete the contract.
3. Contrast: Ads enforceable as offers → Coat sale and Carbolic Smoke Ball cases.
4. Rest. 29, 311, 312: Advertisements are not ordinarily intended or understood as offers to sell. For an
ad to be construable as an offer, there must be some language of commitment or some invitation to
take action without further communication. An advertisement is not transformed into an enforceable
offer merely by a potential offeree's expression of willingness to accept the offer through, among other
means, completion of an order form.
A) Advertisements must be clear, definite and explicit (e.g., “first come first serve” in coat sale)
5. Donovan v. RRL Corp (Jaguar ad): Per CA Vehicle Code, ad constituted an offer. However, rescission
warranted because defendant’s unilateral mistake was in good faith and enforcement of the contract
with the erroneous price would be unconscionable.
(d) Preliminary Negotiations and Letters of Intent
1. The Role of Certainty
A) Rest. 33: [An offer] cannot be accepted so as to form a contract unless the terms of the contract
are reasonably certain [which means that they] provide a basis for determining the existence of a
breach and for giving an appropriate remedy."
B) UCC 2-204: "…a contract for sale does not fail for indefiniteness if the parties have intended to
make a contract and there is a reasonably certain basis for giving an appropriate remedy."
C) UCC 2-305: "The parties if they so intend can conclude a contract for sale even though the price is
not settled. In such a case the price is a reasonable price at the time for delivery."
D) Prevailing Trend: Litigation over letters of intent tend to go two ways:
1. No, not a letter binding contract: “subject to” language indicates intent not to be bound until
formal, definitive agreement executed.
2. Yes, it's a binding contract: a) agreement already reached, and parties are merely awaiting
memorialization of contract in writing. b) binding agreement to continue good faith
negotiations.
2. Empro v. Ball-Co: Not a contract. Letter of intent with “subject to” language favoring one party's
flexibility not intended to be one-sided in its non-commitment. Would be binding if the contract was
only a needed formality after the letter (like in Texaco)
3. Texaco v. Pennzoil: Contract exists. Four point analysis. No single factor alone is determinative.
A) Did party expressly reserve the right to be bound only when a written agreement is signed?
B) Was partial performance accepted by party disclaiming the contract?
C) Were all essential terms of the alleged contract agreed upon?
D) Was the complexity and magnitude of transaction such that a formal, executed writing would
normally be expected?
(e) Options/Firm Offers: Held open to you, and only you, for x period of time. Take it if you want.
1. Rest. 25: An option contract is a promise which meets the requirements for the formation of a contract
and limits the promisor's power to revoke an offer.
2. UCC: “Firm offers” provision in response to consideration problems: “An offer by a merchant...in a
signed writing...is not revocable, for lack of consideration...”
(f) Revocation of Offers
1. Dickinson v. Dodds (offer open until 9am): Not an offer, but an invitation to enter into negotiations.
Revoked before acceptance through third party information.
2. Rest. 43-43: Revocation may occur through a “manifestation of an intention not to enter into proposed
contract” or when the “offeror takes definite action inconsistent with an intention to enter into the
proposed contract and the offeree acquires reliable information to that effect.”
ii. Acceptance
(a) What is an acceptance?
1. A manifestation of assent to the terms thereof made by the offeree in a manner invited or required by
the offeror. Possible manners of acceptance include:
A) Promise (bilateral contract)
B) Performance (unilateral contract)
C) Silence, if appropriate
(b) By Mail → Mailbox rule: Acceptance is effective when placed in the mail by the offeree, whether the
contract reaches the offeror or not. Rule can be contracted around. Offers and revocations, on the other
hand, are effective upon receipt. Exception: In an option contract, acceptance is effective upon receipt.
(c) Mirror Image Rule/Counter Offer
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1. Acceptance must mirror the offer. Failure to mirror is a counteroffer (e.g., addt’l terms)
2. Ardente v. Horan (furniture condition): Furniture stipulation is essential part of acceptance (conditional
acceptance), therefore it is a counter-offer. (Violates mirror image rule)
(d) By Performance
1. Carlill v. Carbolic Smoke Ball: Sufficiently serious (specific terms, money put aside) to constitute a
unilateral contract inviting performance as acceptance. Don’t need to notify of acceptance.
2. Is notification of acceptance through performance necessary?
A) UCC 2-206: Unless otherwise unambiguously indicated by the language or circumstances, an offer
to make a contract shall be construed as inviting acceptance in any manner and by any medium
reasonable in the circumstances. But...UCC 2-206: Where performance is a reasonable mode of
acceptance, an offeror who is not notified of acceptance within a reasonable time may treat the
offer as having lapsed before acceptance.
B) Rest. 30: Unless otherwise indicated...an offer invites acceptance in any manner or by any medium
reasonable in the circumstances. BUT...Rest. 54:... if offeree has reason to know that prompt
notification [of offeror] through action is unlikely, offeree generally must try to notify offeror.
(e) By Silence
1. Hobbs v. Massasoit Whip Co. (rejected eelskin delivery): Seller justification in assume silence =
acceptance in light of previous transactions and standing offer.
(f) E-Commerce
1. Specht v. Netscape Communications: (“browse-wrapped” download) Not a valid acceptance of terms.
No indication parties had notice that contract was being formed (“free neighborhood newspaper”), link
to User Agreement obscurely located, did not have to read agreement before using software  no
assent.
iii. Consideration
(a) Rule: With some exceptions, to be enforceable, a promise must be supported by “bargained for”
consideration: sought by the promisor in exchange for his promise and is given by the promisee in
exchange for promisor's promise. Functions: (1) Evidentiary (2) Cautionary (3) Channeling (commonality
of meaning → commonality of intention)
(b) Past Consideration
1. Rest. 86: Promise induced by a past benefit binding only to prevent injustice. Promise not binding if no
unjust enrichment, was a gift, or if disproportionate to benefit.
2. Mills v. Wyman: (Sick adult son cared for) Unenforceable: Past consideration. (Moral obligation
unenforceable here → Moral duty exists but legal duty does not.
3. [Also see Schnell v. Nell (f) (3)]
(c) Moral Obligation
1. Enforceable when:
A) Consideration (Pre-existing legal duty + moral obligation) + promise
B) Consideration (Moral obligation + material benefit, both important and physical) + promise
2. Webb v. McGowen: Moral obligation +material benefit = consideration. McGowin received a huge
benefit (his life)  sufficient consideration to enforce a promise to care for Webb. Also, had promisee
had ability to contract before the fact, he would have.
(d) Detriment Incurred as Consideration (Forbearance (abandoning some legal right), regardless of how
easy, constitutes consideration)
1. Hamer v. Sidway (vice-free nephew) Consideration can be benefit accrued by promisor, OR detriment
endured by promisee. Nephew limited his legal right to act as he wished, thus suffered harm.
A) Note: this was an option contract so the nephew’s reliance means uncle cannot repudiate
(e) Nominal Consideration/Adequacy
1. Rule: Courts decline to determine whether monetary consideration/valuation is appropriate since all
valuation is subjective. However, nominal consideration can constitute no consideration and usually
indicates a gift rather than a bargain.
2. Rest. 71: Nominal (sham) consideration (pretense of a bargain) is not enough to provide basis for
enforceability – large disparity in value, consideration only in name.
A) Exception Rest. 87 (Option K)– nominal consideration short-term step in bargaining process
indicating option to exchange on fair terms later
3. Note: the seal no longer constitutes sufficient consideration in most states.
4. Schnell v. Nell (promised wife's inheritance) Unenforceable due to insufficient consideration: “One cent”
= nominal; “wife's love and affection” = past consideration, thus invalid.
(f) Contract Modification and Preexisting Duty Rule (No new consideration beyond pre-existing duties
under contract = no new contract/no enforceable promise)
1. Stilk v. Myrick (sailors want more $) Unenforceable. No new consideration = no new contract. Sailors
continued to do their job as promised, which includes picking up slack of deserters.
A) Note that if captain was discharging people, then he is actively changing their duties and
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agreement to take on add’l work would be consideration.
2. Alaska Packers v. Domenico (fishermen want more $) Fishermen waited until company was unable to
hire replacements (“Hold Up Problem”) = Coercive. Unenforceable. Also, no new duties.
3. Brian Construction (“all excavation necessary”) Second agreement enforceable → additional unforeseen
work surpasses pre-existing duty, and additional work = additional consideration.
4. So when is the modified contract enforceable?
A) Rest. 89: Promise to modify K not fully performed binding if fair and equitable in light of
unanticipated circumstances
B) UCC 2-209: Modifying an agreement does not need consideration to be binding, but modifications
(g) Promissory Estoppel
1. Note that win rates for PE very low. Why? usaully lack of reliance or promise
2. Rest. 90: A promise which the promisor should reasonably expect to induce action or forebearance and
which does induce such action or forebearance is binding if injustice can be avoided only by
enforcement of the promise... remedy limited as justice requires.
3. Ricketts v. Scothorn (2k to quit job): Enforceable: Detrimental reliance. Grandfather's estate is
estopped from invoking lack of consideration (“just a gift”) defense.
4. Feineberg v. Pfeiffer: (early retirement based on promise of pension) Detrimental reliance. Employer
estopped from invoking lack of consideration (“just a gift”) defense.
5. Hoffman v. Red Owl Stores (franchise ultimately unaffordable) “When damages are awarded in
promissory estoppel, they should be only such as in the opinion of the court are necessary to prevent
injustice.” Thus, reliance only. Not expectation (profits)
A) Charitable Subscriptions ?
1. Allegheny College Argument of consideration not p/e: she gave $ b/c she wanted them to
publicize her name/make a fund in her name, thus there is exchange/consideration →
enforceable.
1. No reliance by school, so PE may not really work anyway
B) Reliance on Construction Bids (two approaches)
1. James Baird v. Gimbel Bros. Promissory estoppel inapplicable. Contractor's reliance in bidding
does not make offer irrevocable. Offer withdrawn before acceptance: “defendant offered to
deliver linoleum in exchange for plaintiff's acceptance, not for its bid.” When offer's on the
table, accept or reject...but don't rely!
2. Drennan v. Star Paving Co. Promissory Estoppel applicable. Contractor's reliance makes
contract irrevocable. In this case, promissory estoppel does not replace consideration such that
it replaces Drennan's responsibility to pay. Rather, applied to enforce a limit of revocation for
the sake of avoiding injustice → under Rest. 45's reasoning (replacing “part performance” with
“reliance”), offer comes with implied subsidiary promise not to revoke, thus promissory
estoppel is applicable for just enforcement. (Majority Rule)
iv. Writing: Statute of Frauds
(a) About the SoF
1. When does SoF apply?
A) For sale of goods for $500 or more (UCC only)
B) Executor to answer for decedent’s duty or answer for duty of another
C) Consideration of marriage
D) For sale of an interest in land
E) Performance not to be performed within one year from contracting.
2. “Within” the statute of frauds → must satisfy statute in order to be enforceable
3. “Satisfies” statute of frauds → is evidenced by writing
4. Not satisfying SoF renders contract unenforceable, but not necessarily inadmissable.
(b) Boone v. Coe (KY → TX) Within statue of frauds since performance to begin one year after contracting. No
writing, no contract, no damages (not even reliance) because D received no benefit.
(c) Exceptions to Statute of Frauds
1. Rest. 129: Change of position caused by reasonable reliance on land contract and continuing assent of
other party  specific performance
2. Contracts not to be performed within one year.
3. Rest. 139: A promise which promisor should reasonably expect to induce action on part of promisee is
enforceable notwithstanding SoF if injustice can be avoided only by enforcement. Remedy granted is to
be limited as justice requires (performance satisfied evidenciary purpose of statute)
4. UCC 2-201: Contract enforceable (1) if the goods are to be specially manufactured for the buyer and
the seller has begun performance (2) if a party admits in court that contract was made (3) “with
respect to goods for which payment has been made and accepted or which have been received and
accepted.”
(d) What is needed to enforce?
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1. UCC 1-201: Memoranda evidencing contract: A writing “sufficient to indicate that a contract for sale
has been made between the parties and signed by the party against whom enforcement is sought.”
Contract still requires offer and acceptance.
2. Rest. 131: Writing to indicate that contract has been made or offered by the signer to the other party.
2) What were its terms?
A) Interpretation of terms
i. General UCC
(a) UCC: Types of Evidence Used
 Express terms of contract and contract goals
 Course of Negotiations: correspondences, conversations that demonstrate intent
 Course of Performance: Where contract involves repeated performance, any performance
acquiesced to without objection shall be relevant
 Course of Dealing: Previous conduct fairly regarded as establishing a common basis of
understanding for interpreting later expressions and conduct.
 Trade usage: expectation within vocation
 HIERARCHY: express terms → course of performance → course of dealing → trade usage
(b) Rest. 201: Whose Meaning Prevails – No binding contract when impossible to tell which party’s
interpretation was correct. If you had reason to know the other party thought of a different meaning, that
meaning will prevail.
1. Raffles v. Wichelhaus (“ex peerless”) No consensus over essential term. No meeting of minds = no K.
A) If custom and both parties know or should have known, then contract
B) If there’s agreement over core terms, then court applies reasonableness standard to other
ambiguous terms (objective standard)
2. Oswald v. Allen (coin collections) Buyer thinks he's getting both collections, seller thinks he's getting
one collection. Either interpretation reasonable. No meeting of the minds, thus no contract.
(c) Interpretation construed against the drafter
1. White City Shopping Center v. PR Restaurants (What is a sandwich?) Not a sandwich: (1) dictionary
definitions (2) common sense (3) ambiguity construed against drafter.
ii. Trade Usage
(a) Weinberg v. Edelstein (What is a dress?) Blouse + skirt does not equal dress. Based on common usage and
manufacturing and retail trends.
(b) Frigaliment Importing v. BNS (What is a chicken?) Stewing chicken is a chicken: (1) trade usage (2) USDA
definition (3) price discrepancy (4) objective reasonableness
(c) Rest. 202: Technical terms given their technical meaning when used w/in that field.
iii. Parol Evidence (Modifications AFTER final agreement = admissible, but writings or oral agreements PRIOR to
or contemporaneous with to final agreement are superseded by memorialized contract)
(a) Rest. 209 & 213: Parol Evidence Rule: Integrated agreement = a final expression of one or more of the
terms of an agreement. Extrinsic evidence will be admissible if consistent with the written agreement.
Completely integrated agreement = complete and exclusive statement of all terms of the contract. Extrinsic
evidence within the scope of the agreement inadmissible.
(b) UCC 2-202: Terms intended by the parties as final expression of their agreement may not be contradicted
by evidence of any prior agreement or of a contemporaneous oral agreement but may be explained or
supplemented...(a) by course of dealing or usage of trade or by course of performance (b) or by evidence
of consistent additional terms, unless the agreement is completely integrated.
A) Under UCC: Integrated → (a) + (b) admissible. Completely integrated: only (a) admissible.
Contrast with Restatement 209 above which excludes everything from completely integrated Ks.
(c) How can you tell if a contract is completely integrated?
1. “Merger” or “Integration” clauses: written terms may not be varied by prior or oral agreements
because all such agreement have been merged into the written document. Not accepted by all courts.
2. Four Corners Rule: if a contract looks complete, it is complete
A) Thompson v. Libby (oral log warranty?) Contract fully integrated. Parol evidence inadmissible. Four
corners rule: “imports on its face to be a complete expression of the whole agreement”. Judge
fears circularity of allowing parol evidence to ascertain whether parol evidence should be admitted
to support purported terms
3. Accept extrinsic evidence only to show whether contract is completely integrated or not:
A) Rest. 209, comment (c): Ordinarily the issue of whether there is an integrated agreement is
determined by the trial judge in the first instance as a question preliminary to an interpretive ruling
or to the application of the parol evidence rule.
B) Brown v. Oliver (hotel furniture) Rejects four corners rule. Agreement itself won’t tell us if it
embodies everything. Two step approach 1) judge evaluates intent of the parties to include terms
outside the agreement (consideration of surrounding circumstances); 2) if judge permits parol
evidence, then jury determines its meaning and applicability. (Per Rest 209 above).
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(d) Plain Meaning Rule
1. Rule: meaning of language in context so clear that prior negotiations inadmissible in its interpretation.
2. Pacific Gas and Electric Co. (interpreting indemnification clause) Refutes plain meaning rule: Test is
relevance of all credible evidence, not plain meaning of terms. Even words that do not seem ambiguous
may give K meaning that was never intended.
3. Trident Center v. Connecticut General Life Insurance Co. Admits parol evidence despite clearness of
meaning. Believes that precedential PGE (above) rule is so broad that extrinsic evidence to contradict
contract must be admitted in all situations.
4. Reconcile PGE & Trident? Practical application is somewhere the two: accept extrinsic evidence only for
those terms that really seem ambiguous. Extrinsic evidence that will always be introduced (see R.
§214): Fraud, Bad Faith, Mistakes in Integration.
B) Gap Filling (Not just an ambiguous term, but a gap in the terms)
i. Sun Printing & Publishing Assn. v. Remington Paper (parties will agree later) Not a breach. Rather, Cardozo
cancels K: uncertainty in terms of price and time = too many gaps to fill. Too much to interpolate.
(a) Cardozo sees Ct’s role as interpreter not as reviser – case is a warning to make contracts more explicit
ii. UCC 3-205: Contract where price is not settles can be based on reasonable standard upon point of delivery.
Unless parties did not intend to be bound upon failure to agree.
iii. Implied duty of good faith
(a) What does “good faith” mean? You cannot try to claim a privilege already relinquished.
(b) New York Central Iron Works v. United States Radiator Co. (provide “all radiator needs”) Buyer's request of
twice as many parts is enforceable. Court will not fix a quantity. Parties need only act in good faith
according to their business needs.
(c) UCC 2-306: Output & Requirements Contracts: A term which measures the quantity by the requirements of
the buyer means such actual requirements as may occur in good faith...except that no quantity
unreasonably disproportionate to any stated estimate, or in the absence of a stated estimate, to any
normal or otherwise comparable prior requirements, may be demanded...Zero Demand: A shut-down for
lack of orders might be permissible, but a shut-down merely to curtail losses might not. The essential test
is good faith.
(d) UCC 2-306: An exclusive agreement imposes an obligation on the seller to use best efforts to supply the
goods, and on the buyer to use best efforts to promote their sale.
1. Wood v. Lucy, Lady Duff-Gordon: Cardozo found an implied mutual obligation. Wood has implied
obligation of good faith to make reasonable efforts to sell her products, so there is a contract giving
him exclusive right to sell her designs. Exclusive K only to deal with P – must use reasonable efforts
even if no express terms saying so.
(e) Goldberg v. Levy (% Sales clause) Clause in lease says that if tenant's gross sales do not equal 101,000,
tenant can walk away. By diverting business for the purpose of canceling the lease, good faith violated.
(f) Stop & Shop v. Ganem (% Sales clause) Location shuts down operations, open store down the street and
pays minimum rent on premises. High base rent gives Stop & Shop discretion to make decisions that
reflect good business sense made in good faith, and protects Ganem from those decisions. No breach.
C) Which terms apply?
i. Battle of the Forms
(a) “Last shot” principle: last form sent and accepted before performance is the “offer.” Typically the seller's
acknowledgment, so seller wins.
(b) UCC 2-207: (1) A definite and seasonable expression of acceptance...operates as an acceptance even
though it states terms additional to or different from those offered or agreed upon...(2) The additional
terms are to be construed as proposals for addition to the contract. Between merchants, such terms
become part of the contract unless...(a) the offer expressly limits acceptance to the terms of the offer (b)
terms materially alter contract (c) notification of objection terms has already been given or is given within
a reasonable time. (3) Conduct by both parties...is sufficient to establish a contract for sale although the
writings of the parties do not otherwise establish a contract
1. Non merchants → terms are proposals for addition. Merchants: incorporated unless (a), (b), or ( c).
2. Result if a, b, or c violated: Additional terms disregarded. Differing terms “knock-out” each other →
3. Knockout rule: the two terms cancel each other out and the rest of the contract endures.
(c) Union Carbide v. Oscar Mayer (“Buyer shall pay seller the amount of all governmental taxes”) Does not
include back taxes. An alteration is material if consent to it cannot be presumed. Union Carbide made a
material alteration to contract, therefore new terms are just proposals for addition to contract.
1. Material alterations: cannot be presumed and would cause “unreasonable surprise”
2. Material alterations can be added to contract if agreed to by other party expressly or implicitly
ii. Terms that Accompany a Product
(a) ProCD v. Zeidenberg: Notice on outside saying terms inside and “software splashed the license agreement
on the screen and would not let him proceed without indicating acceptance.” Contract acceptance occurs
when customer then fails to return product.
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1. Shrinkwrap licenses are binding unless offensive on general contract principles.
(b) Two different approaches to “boxed terms” in two different jurisdictions. Majority follows Klocek.
1. Klocek v. Gateway Purchaser offers to buy computer, Gateway accepts. “[Gateway] provides no
evidence that it informed plaintiff of the 5-day review-and-return period as a condition of the sales
transaction, or that the parties contemplated additional terms to the agreement.” Thus, per 2-207,
additional term was an unaccepted proposal for addition, and not part of contract.
2. Hill v. Gateway 2000: Gateway is offeror. Purchase w/terms in box + failure to return within 30 days
(per terms) = acceptance. “Competent adults are bound by such documents, read or unread.”
3) Was there a breach such that one party will be held liable for all damages?
A) Constructive Conditions
i. Neither expressed nor implied by the words of the contract. Imposed by law to meet the ends of justice.
ii. Rest. 237: If you have constructive condition, then substantial performance is enough.
B) Avoiding forfeiture (of performance due) for part performance of a constructive condition:
(a) Divisibility: if contract can be divided into series of corresponding pairs of performances, recovery will be
available for performance rendered. (Rest. 240)
(b) Restitution: party in breach may be able to recover for benefit conferred, less damages.
(c) Substantial performance: full recovery, less damages.
(d) UCC: you have a right to reject goods that are imperfect, seller has opportunity to cure, but if they do not,
you can sue for breach.
C) Substantial Performance
i. Jacob and Youngs v. Kent (Reading Pipe) Substantial performance creates duty to pay. Damages can be
deducted—but damages, per Cardozo, are nominal (“trivial defect”). Evaluation of the enforceability of a
constructive condition requires “Consideration partly of justice and partly of presumable intention”. When
determining damages:
(a) What are the parties contracting for?
(b) Possibility of economic waste
(c) Concern about over/under compensation. Concern about penalizing party who breached
(d) Was the breach willful or intentional? Concerns about justice/cruelty of enforcement.
D) Material Breach
i. Significant breach (as opposed to a breach of a constructive condition, which requires only substantial
performance). Breacher has opportunity to cure. If cured, he's entitled to recovery, minus damages (for delay
etc.) If not cured, other party relieved of contract duties and may sue for damages.
E) Cost of Completion v. Diminution in Value (choice of expectation damages)
i. Groves v. John Wunder Co.: (Cost of restoring land exceeds value of land post-restoration) Restoration
required since breach (failure to restore) was willful.
ii. Peevyhouse v. Garland Coal Mining Co. (above) Cost of restoration not awarded. Rather, difference in value of
land pre and post-restoration. Cost of completion would be economically wasteful.
F) Public Policy
(a) Shaheen v. Knight (failed sterilization): “To allow damages for the normal birth...is against public
sentiment.”
4) Defenses
i. Overview
(a) Three categories: Behavior of the parties, Knowledge of the parties, and Status of the Parties
(b) Rest. 376: Restitution when Contract is Voidable: A party who has avoided a contract on the ground of
lack of capacity, mistake, misrepresentation, duress, undue influence, or abuse of a fiduciary relation is
entitled to restitution for any benefit that he has conferred.
(c) Voidable Contracts: not inherently invalid, but rather voidable by incapable/victimized party.
1. Rest. 7 on Voidable Contracts: one or more parties have the power, by a manifestation of election to do
so, to avoid (cancel) the legal relations created by the contract, or by ratification of the contract, to
extinguish the power of avoidance.
ii. Incapacity: Infancy, Mental Illness, and Intoxication
(a) Rest. 12. Incapacity → can’t be bound. Capacity can depend on nature of K. Capacity to contract
presumable unless party is a) Under guardianship (not an adult), b) an infant, c) Mentally ill, d) Intoxicated
(b) Minority - Rest. 14. Ks made by people under 18 voidable unless for necessaries.
1. Webster St. Partnership v. Sheridan (teenagers' apartment) Landlord cannot collect lost rent from
minors. In fact, court reimburses boys all monies paid. Unilaterally voidable. Adult entitled to receive
back what child has contracted for, if it is a good, child must return it no matter condition. Child will
not be responsible for its condition b/c they are a minor.
A) Necessaries: Contracts for necessaries enforceable because necessaries are inherently in a person's
best interest.
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(c) Mental Illness/Incompetence - Rest. 15. Not held to K if you are mentally ill, such that a) can’t
understand what you’re doing, OR b) can’t act in a reasonable manner in relation to transaction, and other
party knows you can’t. If other party doesn’t know of your mental illness and there has been substantial
performance/reliance, court may grant relief as justice requires.
(d) Intoxication - Rest. 16. If other party has reason to know that you’re drunk, K voidable. If other party
does not know you’re intoxicated, K not voidable, intoxicated person bears risk.
iii. Failure of Basic Assumption
(a) Mutual Mistake
1. Sherwood v. Walker (barren cow): Mutual substantive error + significant $ loss = K voidable.
2. Wood v. Boynton (rough diamond) substance v. quality (Sherwood) approach overruled in favor of
Rest. 154 approach. Mistake in quality, not in what's being bought (substance), and seller assumed
risk by relying on her own partial knowledge.
3. Rest. 152: Where mistake of both parties at time K was made as to a basic/fundamental assumption
on which K was made, has a material effect on the agreed exchange of performances, K voidable by
adversely affected party unless he bears risk of mistake
4. Rest. 154: a party bears the risk of mistake when (a) the risk is allocated to him by agreement of the
parties, or (b) he is aware at the time of contract is made, that he has only limited knowledge with
respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, (c) the
risk is allocated to him by the court in the ground that it is reasonable in the circumstances to do so.
A) Lenawee County v. Messerly (insufficient septic system) Risk allocated to buyer through “as is”
clause within the contract (154a).
(b) Unilateral Mistake
1. Rest. 153: Where a mistake of one party as to a basic assumption upon which the contract was formed
has a material effect on the agreed exchange of performance that is adverse to him, the contract is
voidable by him if he does not bear the risk of the mistake under the rule stated in 154, and the effect
of the mistake is such that the enforcement of the contract would be unconscionable or the other party
had reason to know of the mistake or his fault caused the mistake.
A) Only difference between §152 (Mutual) and §153 (Unilateral): Unilateral → voidable if 1) other
party has reason to know of/bears fault for mistaken assumption OR 2) effect unconscionable.
2. Tyra v. Cheney Written estimate substantially below previous oral estimate due to a mistake.
Subcontractor may rescind written contract because contractor knew of mistake. No meeting of the
minds → no mutual assent → no contract → restitution damages.
3. Donovan v. RRL (jaguar ad) Contract avoidable. Enforcement would be unconscionable. Substantive/
procedural unconscionability test not invoked: Rest. 153 only requires substantive unconscionability.
But even so, procedural aspect can be satisfied with dealership's surprise.
4. Laidlaw v. Organ (price of tobacco) Unilateral ignorance of end of war did not warrant avoidance. No
responsibility to tell an arms length bargainer everything you know.
A) Duty to disclose: (1) No duty to disclose public information. However, (2) preventing someone
from learning a fact is like asserting that a fact does not exist (misrepresentation). Good faith and
faith dealing considerations.
(c) Misrepresentation
1. Rest. 164: Misrepresentation: If a party's manifestation of assent is induced by either a fraudulent or a
material misrepresentation by the other party upon which the recipient is justified in relying, the
contract is voidable by the victim.
A) A misrepresentation is material if a) Likely to induce reasonable person to assent, or b) Maker
knows likely to induce recipient’s assent.
B) Misrepresentation induces assent if substantially contributes to decision
2. Halpert v. Rosenthal (house is termite-free) Material misrepresentation, even though done in good
faith, grounds for avoiding contract (majority rule). One who misrepresents should bear loss.
3. Vokes v. Arthur Murray, Inc. (dance lessons) Vokes was justified in relying on dance instructor's
misrepresentation of her dance ability, thus contracted avoidable. While reliance on an opinion is not
typically justifiable, opinions from those with superior expertise may be relied on.
(d) Change in Circumstances
1. Impracticability
A) Rest. 261: Impracticability. Where, after a contract is made, a party's performance is made
impracticable, without his fault, by the occurrence of an event, the non-occurrence of which was a
basic assumption on which the contract was made, his duty to render that performance is
discharged unless the language or the circumstances indicate the contrary. [Does not apply to
market fluctuations, which are the basis for most parties' desire to “lock in” a price through K.]
B) Taylor v. Caldwell (Theater burns down) Unenforceable. Implied condition that the theater exist.
2. Frustration of Purpose
A) Rest. 265: Frustration Where, after a contract is made, a party's principle purpose is substantially
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frustrated, without his fault, by the occurrence of an event, the non-occurrence of which was a
basic assumption on which the contract was made, his duty to render that performance is
discharged unless the language or the circumstances indicate the contrary.
B) Krell v. Henry (room rented for coronation) Implied condition that coronation occur.
C) Lloyd v. Murphy (car dealership lease) Restriction on car sales due to war insufficient grounds for
frustration. Lease is enforceable. Frustration requires that value of counter-performance [lease] is
totally or nearly totally destroyed. Plus, war restrictions were foreseeable.
D) Northern Indiana Public Service Co. v. Carbon County Coal Co. (long term coal contract) NIPSCO
took risk of price fluctuation by entering into long-term contract. No frustration defense. Liable for
damages. Note: Spec performance impractical here → economically inefficient.
iv. Duress
(a) Rest. 175: Grounds for duress: If a party's manifestation of assent is induced by an improper threat by
the other party that leaves the victim no reasonable alternative, the contract is voidable by the victim.
1. Improper threat (bad faith/extortive) + no reasonable alternative → both required to void contract.
2. Reasonable alternatives + but improper threat = Enforceable! Party made a conscious decision.
3. Proper “threat” (terms/modifications created in good faith) + no reasonable alternatives = enforceable
(b) Cases involve bad behavior by one party, and unfortunate circumstances for the other.
(c) Hackley v. Headley (Seller cuts and delivers logs valued over $6,000. Buyer says I'll give you $4,000, and
if you want more, you can sue me. Settles for $4,000 because he couldn't afford to not sell the logs.) P’s
econ circumstances were his own making, no duress b/c no unlawful threat. (Old rule).
(d) Austin Instrument v. Loral Corp: (Austin refuses to deliver goods already contracted for if Loral will not
enter into second contract for higher price) No reasonable alternative + wrongful threat to withhold
necessary goods, precluding exercise of free will (not necessarily unlawful) = contract voidable for
economic duress duress.
(e) UCC 2-209: Good Faith Modifications: An agreement modifying a contract within this article needs no
consideration to be binding. However, modifications made thereunder must meet the test of good faith
imposed by this Act...the extortion of a modification without legitimate commercial reason is ineffective as
a violation of the duty of good faith.
v. Undue Influence
(a) Odorizzi v. Bloomfield School District (teacher jailed) Resignation obtained through undue influence. No
duress b/c no improper threat b/c not illegal to expose his homosexuality. Persuasion overcomes the will
w/o convincing the judgment. Servient person has undue susceptibility and dominating person exerts
excessive pressure. Will of servient person is in fact will of the dominant. Negotiations take place:
1. At an unusual time/place
2. With a compressed schedule for decision making →
3. And an extreme emphasis on ruin implied in delay
4. Usually multiple persuaders on dominant side
5. Absence of 3rd-party advisors, no time to consult advisors
vi. Unconscionability
(a) UCC 2-302: If court finds contract or any clause is unconscionable at the time it was made, court may
refuse to enforce the contract.
(b) Unconscionable: no regard for conscience; not in accordance with right or reasonableness. (OED)
(c) Factors a court will consider:
1. Education/experience of parties involved
2. Complexity/technicality of language
3. Relative bargaining power (eg. contracts of adhesions)
(d) Procedural + Substantial Unconscionability Required (sliding scale test)
1. Procedural: an absence of meaningful choice on the part of one of the parties + more?
2. Substantial: Unreasonably unfavorable contract terms (overly harsh and one-sided)
(e) Williams v. Walker-Thomas Furniture (all furniture repossessed for default on one item) Procedural and
substantial unconscionability demonstrated: contract of adhesion/uneducated buyer + unreasonable terms
(f) In re Real Networks: arbitration clause not unconscionable because purchaser had ample opportunity to
understand. Distance of forum and prohibition of class actions not inherently unconscionable.
(g) Gatton v. T-Mobile proced. and subst. → sliding scale invoked. Contracts of adhesion inherently (at least
slightly) procedurally unconscionable (though dissent disagrees). Prohibition of class action is quite
substantially unconscionable since it's counter to public policy. Slight proced. + great subst. = unconscion.
5) In what measure should damages be awarded?
A) Types of Damages
i. Expectation Damages:
(a) “Benefit of the bargain.” Puts promisee in position he'd be in if had contract been performed.
(b) UCC 1-305: “The remedies provided by the UCC must be liberally administered to the end that the
aggrieved party may be put in as good a position as if the other party had fully performed...”
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(c) Rest. 347: Measure of Damages in General: Damages include loss in value suffered, plus incidental or
consequential damages caused by breach, minus any cost or loss avoided by not having to perform.
(d) Hawkins v. Magee (hairy hand): “difference between the value to him of a perfect hand or a good hand,
such as the jury found the defendant promised him, and the value of his hand in its present condition,
including any incidental consequences.”
(e) Loss in value – what the aggrieved party expected to gain compared to where it began, inc. profits.
(f) Incidental damages:
1. Buyer’s breach - commercially reasonable charges, expenses or commissions incurred in stopping
delivery, in the transportation, care and custody of goods after the buyer's breach, in connection with
return or resale of the goods or otherwise resulting from the breach [UCC 2-710(1)]
2. Seller’s breach - expenses reasonably incurred in inspection, receipt, transportation and care and
custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in
connection with effecting cover and any other reasonable expense… [UCC 2-715(1)]
(g) Consequential damages – any consequential loss resulting from needs that buyer/seller had reason to
know would result and cannot reasonably be prevented by resale/cover. [UCC 2-710(2), 2-715(2)(a)]
1. Also, injury to person or property proximately resulting from any seller’s breach of warranty (b)
(h) Cost avoidance – money and effort no longer spent toward contract after breach vacated duty.
ii. Reliance Damages
(a) Puts promisee back in position he'd be in had promise never been made. Used when profits/benefits are of
uncertain value but expenses can be shown instead. Rolls back all expenditures toward contract.
(b) Rest. 349: injured party can choose to go for reliance damages instead of expectation damages;
(Expenditures made in preparation for/ in performance) minus (monies saved by non-performance)
(c) Sullivan v. O'Connor (nose job): Expectation deemed excessive (too harsh on doctors when no negligence
is present) and too difficult for jury to determine (hard to gauge value of success). Restitution would be too
small. Hybrid expectation and reliance: Cost of first two (planned) operations, cost of third (unplanned)
operation, pain and suffering for third operation, original nose v. current nose.
(d) Pre-contractual Reliance (not awarded in the US)
1. Anglia Television v. Reed: Damages awarded on the grounds of foreseeability. Not a US case.
iii. Restitution Damages
(a) Puts promisor back in position he'd be in had promise never been made. Avoids unjust enrichment. Returns
value of the partial performance of aggrieved party based on its worth to the enriched party.
(b) Rest. 371: Restitution damages may be…
1. Value of what other party received if they acquired it from someone like claimant; or
2. Extent to which other party’s property has increased in value or interests advanced.
(c) Rest. 373: Remedy for non-breaching party, measured by partial benefit conferred upon breaching party;
unless the breach is nonpayment of definite sum after complete performance (but see Cotnam).
(d) Rest. 374: Remedy for breaching party if breach vacates duties and non-breaching party refuses to
perform, measured by extent to which non-breaching party was enriched beyond their loss from breach.
(e) Cotnam v. Wisdom (Unconscious promisor) Quasi-contract (a contract with no formalities). Restitution
appropriate to avoid unjust enrichment of party that received services.
(f) Vines v. Orchard Hills, Inc (Real estate contract breach) Restitution damages awarded because deposit was
made and contract breached unwillfully (new job). No actual damages suffered by seller b/c seller
mitigated and seller still received deposit. Deposit amount was unjust enrichment.
B) Limitation on Damages
i. Unforeseeability
(a) Rest. 351: Damages are not recoverable for loss that the party in breach did not have reason to foresee as
a probable result of the breach when the contract was made.
1. May be ordinary course of events following such breach or spec. circum. party had reason to know
2. Courts may enforce by excluding recovery for loss of profit or forcing reliance damages, if exp. disprop.
(b) Hadley v. Baxendale (crankshaft): Expectation damages not awarded due to lack of foreseeability
(complications with agency). Defendant can foresee only those harms “arising naturally” from breach.
(c) Notes: Foreseeability is assessed at the time of contract formation and can be contracted around (FedEx).
ii. Uncertainty of Damage Amount
(a) Rest. 352: “Damages are not recoverable for loss beyond an amount that the evidence permits to be
established with reasonable certainty.”
(b) Chicago Coliseum v. Dempsey (boxing contract): “Compensation for damages...must be established by
evidence from which a court or jury are able to ascertain the extent of such damages...to a reasonable
degree of certainty.” Penalty default rule → determine damages in advance. No pre-contractual reliance.
iii. Duty to Mitigate
(a) Avoidability
1. Rest. 350: (1) Damages are not recoverable for loss that the injured party could have avoided without
undue risk, burden or humiliation. (2) Injured party not precluded from recovery if he has made
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reasonable but unsuccessful efforts to avoid loss.
2. Rockingham County v. Luten Bridge Co: Expectation damages, but no post-breach damages. Contractor
should have avoided increasing damages after the breach.
3. Shirley McLaine Parker v. Twentieth Century Fox (Bloomer Girl): Alternative employment must be
substantially similar to mitigate. Not a sufficiently similar role to claim that loss was avoidable “without
undue risk, burden or humiliation.”
(b) “Cover” or Resale of Goods
1. Seller’s breach:
A) UCC 2-712: “After breach...a buyer may “cover” by making in good faith and without unreasonable
delay any reasonable purchase...of goods in substitution for those due...” Buyer can recover for
(cost of cover) minus (contract price) plus (I&C damages) minus (costs avoided).
B) UCC 2-713: If non-delivery or repudiation, buyer can recover for (market price at time buyer
learned of breach) minus (contract price) plus (I&C damages) minus (costs avoided).
2. Buyer’s breach:
A) UCC 2-706: Seller may resell undelivered goods in good faith and in a commercially reasonable
manner. May recover for (contract price) minus (resale price) plus (I&C damages) minus (costs
avoided).
1. Buyer may not recover from seller even if seller makes a profit from resale.
B) UCC 2-708: If non-acceptance or repudiation, seller can recover for (contract price) minus (market
price at time and place for tender) plus (I&C damages) minus (costs avoided).
1. If resale is inadequate (“lost volume seller”), seller can recover for profit they would have
gotten (accounting for reasonable overhead and expenses) from performance plus I&C.
C) Neri v. Retail Marine (boat contract) A “lost volume seller” needn't/can't mitigate. Will be awarded
loss of profit and I&C damages. Restitution to buyer is deposit minus seller’s award.
D) Note: Lost volume seller idea may also extend to service contracts (can’t avoid loss despite effort)
iv. Causation (was the damage sought actually caused by the breach? covered by other 3 to most extent, not
given own categorization) [NOT IN BOOK]
v. Unfair Forfeiture (after substantial performance, cost of rectifying non-material, non-willful breach is
disproportionately large compared to value gained to non-breaching party. Diminution of overall value of
performance is preferable. See Jacob & Youngs v. Kent) [NOT IN BOOK]
C) Liquidated Damages Clauses v. Penalty Clauses (Default Rules)
i. UCC 2-718: liquidated damages guidelines. Can be contracted around, however provisions that greatly depart
from UCC are viewed warily. Unreasonable damages void and unenforceable (viewed as penalty clauses).
ii. Rest. 355: Punitive damages are not recoverable,
iii. Rest. 356: Liquidated damages must be reasonable at the time of contract and time of breach; no
unreasonable large liquidated damages.
iv. Kemble v. Farren (comedian breached) Provision that awards $1,000 no matter when or by whom the breach
occurs is unreasonable and unenforceable → liquidated damages that apply equally to all breaches look like
penalty clause. Also, liquidated damages provisions more appropriate when damages are uncertain. Here,
damages can be easily calculated. (Old rule).
v. Wassener v. Towne Hotel (employment contract) Employer pays remainder of contract post-breach, according
to contract. Reasonable and not punitive. Test for determining whether a liquidated damages clause is actually
a penalty clause is whether clause was reasonable both at time of K formation and time of breach:
(a) Did parties intend to provide for damages or penalty?
(b) Difficulty of ascertainment test (eg. cost of loss of prestige is difficult to ascertain)
(c) Are damages reasonable in terms of harm caused
1. Note: no duty to mitigate, but evidence of mitigated damages is admissible.
D) Equitable Remedies
i. Specific Performance:
(a) Rest. 359: Specific performance or an injunction will not be ordered if damages would be adequate to
protect the expectation interest of the injured party.
(b) Rest. 360: Adequacy of damages considers these circumstances:
1. difficulty of proving damages with reasonable certainty;
2. difficulty of procuring a suitable substitute performance in the form of money; and
3. likelihood that an award of damages could not be collected.
(c) Injunction
(d) Unique good
1. UCC 2-716: Specific performance may be ordered when the goods are unique or in “other proper
circumstance”...the buyer has a right of replevin...if after reasonable effort he is unable to cover.
A) Inability to cover is strong evidence of “other proper circumstance”. (Sedmak v. Charlie’s)
2. Scholl v. Hartzell (Corvette and parts): Corvette not unique enough to require specific performance
without an attempt to cover.
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3. Sedmark v. Charlie's Chevrolet (limited edition Corvette): Specific performance ordered. Sedmarks
“have no adequate remedy at law...they cannot go upon the open market and purchase an automobile
of this kind with the same mileage, condition, ownership and appearance as the automobile involved in
this case, except, if at all, with considerable expense, trouble, loss, great delay, and inconvenience.”
The good is not unique, but may be impossible to cover and money is inadequate remedy. [see 2-716]
(e) Land
1. Loveless v. Diehl (farm option) P improved D’s land and had option K to buy the land. D interfered and
P sued for perf. of K. specific performance ordered as matter of course, perfect relief. Willing to enforce
in land deals as a matter of equity (improvements).
(f) Personal Service
1. The Case of Mary Clark (indentured servitude) Specific enforcement inappropriate. Would create
involuntary servitude that is akin to slavery, forbidden by the Constitution.
2. Lumley v. Wagner (opera singer) Cannot get SP for personal services, so court order injunction which
would prevent D from breaching K by not allowing her to perform elsewhere: (1) Should not defend
bad behavior (2) contract “clearly intended that [she] was to exert her vocal abilities...to aid the
theater...” (3) Damages difficult to ascertain.
3. Ford v. Jermon (actress; Lumley challenged) OVERRIDES LUMLEY. Will not do indirectly (through
enforcement of injunctions) what can't be done directly (through SP).
4. Duff v. Russell (opera in tights): FOLLOWS LUMLEY. Tights were excuse for breach. Injunction to
enforce non-competitive performance ordered: (1) irreplaceable services, (2) incalculable damages
and, (3) implied stipulation (w/ LD provision) in number of performances contracted for.
A) Note: Actress pays $2000 liquidated damages to be able to breach. (follows Coase)
ii. Restitution (see above but remember that Restitution is an equitable remedy)
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