Contracts
Intro
Contracts generally
R1: Contract is a promise or set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.
R2: A promise is a manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promisee in understanding that a commitment has been
made. The person manifesting the intention is the promisor. The person to whom the
manifestation is addressed is the promisee. Where performance will benefit a person
other than the promisee, that person is a beneficiary.
Shaheen v. Knight: Failed vasectomy. Court recognizes a contract for a particular
outcome but refuses to award damages (healthy child not considered harm).
“The beautiful idea of contracts”: Each party gives something up in exchange for
something they value more. Assumes that people know what they want. Why
enforcement, then? If no simultaneous performance, you need some way to ensure that
the benefit both parties expect is actually coming. In a very small community,
reputational effects could help enforce.
3 ques.: (1) What is injury? (2) What remedy is most effective? (3) Do any policies limit
D’s liability?
Damage Interests
R347 (p.78): Subject to limitations, injured party has a right to damages based on his
expectation interest as measured by the loss in value to him of the other party’s
performance caused by its failure or deficiency, plus any other loss, including incidental
or consequential loss caused by the breach, less any cost or other loss avoided by not
having to perform.
1. Expectation: Benefit to P of what was promised less costs avoided (R347).
2. Reliance: Amount P is set back bc entered into the contract.
3. Restitution: Party in breach has to disgorge benefits received.
Expectation damages are the rule.
Hawkins v. McGee (p.69): Hairy hand. Expectation damages: court fixes; jury instruction
had awarded only reliance, but award should be for difference between hand after the
operation and hand as it was expected to be after operation. Note that value of hand is
determined by reference to the plaintiff (R347).
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Nurse v. Barnes (p.79): Expectation dmgs inc. reliance.
J.O. Hooker & Sons v. Roberts Cabinet Co. (p.81): Cabinets. P can’t recover costs not
actually incurred bc contract—rental of warehouse space would have happened anyway.
UCC doesn’t apply bc even though sale of goods—the cabinets—is involved, main
purpose of contract is services.
Tongish v. Thomas (p.90): Sale of seeds. Disagreement between which provision of UCC
(applicable here bc sale of goods) is applicable: 1-106 says damages should put injured
party in position they would have been in (expectation damages), but 2-713 says
difference between K price and market price; court goes with latter because it’s the more
specific statute. Result probably actually better serves policy ends, anyway—just doing
1-106 damages would essentially have awarded breaching seller a windfall for having
breached.
UCC 1-106 (p.97): Remedies provided by UCC shall 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 but neither consequential nor special nor penal damages may be had except as
specifically provided in the UCC or by other rule of law.
UCC 2-711: Buyer may cover or recover damages under 2-713 at its election.
UCC 2-712 (p.97): Buyer may “cover” (“by making in good faith and without
unreasonable delay any reasonable purchase of or contract to purchase goods in
substitution for those due from the seller”), and may recover as damages difference
between cost of cover and K price plus other damages, but less expenses saved as
consequence of breach. Failure of buyer to cover doesn’t bar from any other remedy.
UCC 2-713 (p.97): Measure of damages for non-delivery or repudiation by seller is
difference between market price at time when buyer learned of breach and contract price,
etc., but less expenses saved bc breach.

Efficient breach: If a party is better off by breaching, and the other party isn’t
made worse off, what’s the incentive to keep people from breaching?
Limitations on Damages
1. Remoteness: party in breach must have been able to foresee damages in question.
General rule (from Hadley) is that there are two types of “foreseeable” damages: general
damages, which “arise naturally,” and “special damages”: the breaching party has been
notified of the possibility of such damages.
R351 (p.120): (1) Damages not recoverable for loss that party in breach did not have
reason to foresee as a probable result of breach when contract was made. (2) Loss may
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be foreseeable because it follows from breach (a) in the ordinary course of events, or (b)
as a result of special circumstances, beyond the ordinary course of events, that the party
in breach had reason to know. (3) A court may limit damages for foreseeable loss of
profit by allowing recovery only for loss incurred in reliance, or otherwise if it concludes
that in the circumstances justice so requires in order to avoid disproportionate
compensation.
Hadley v. Baxendale (p.102): Shaft for mill. Rule is that damages are foreseeable when
they “arise naturally”—in the “normal course of events” (general damages), or when
breaching party has been notified of the possibility of such damages (special damages).
Hector Martinez and Co. v. Southern Pacific Transportation Co. (p.116): Dragline. “ …
it was obvious that the dragline is a machine which of itself has a use value.” “The
general rule does not require the plaintiff to show that the actual harm suffered was the
most foreseeable of possible harms. He need only demonstrate that his harm was not so
remote as to make it unforeseeable to a reasonable man at the time of contracting.”
Morrow v. First National Bank of Hot Springs (p.121): Coin collection, bank vault.
Stricter (Arkansas) test applied; under Hadley/Martinez test, notice given to bank would
have been enough to hold it liable. Stricter test: they would have had to (tacitly) agree to
be held liable. Almost no one ever passes “tacit agreement” test.
2. Certainty: how certain parties are from moment of making K that those damages
could eventuate
R346 (p.139): Injured party has right to damages … if there’s no loss or amount of loss is
not proved, a small sum fixed without regard to amount of loss will be awarded as
nominal damages.
R349 (p.139): Reliance damages = expenditures made in preparation for performance or
in performance, less any avoided costs/losses. No word on opportunity costs.
R352 (p.140): Damages are not recoverable for loss beyond an amount that the evidence
permits to be established with reasonable certainty.
Chicago Coliseum Club v. Dempsey (p.125): Court awards reliance damages because lost
profits are too uncertain as a basis for damages (“The profits from a boxing contest of
this character, open to the public, is dependent on so many different circumstances that
they are not susceptible of definite legal determination.”) Expenses incurred prior to the
execution of the agreement not recoverable.
Winston Cigarette Machine Co. v. Wells-Whitehead Tobacco Co. (p.137): “It is clear that
whenever profits are rejected as an item in the calculation of damages, it is because they
are subject to too many contingencies and are too dependent upon the fluctuations of
markets and the chances of business to constitute a safe criterion for an estimate of
damages.”
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Anglia Television Ltd. v. Reed (p.140): Court awards lost opportunity costs as part of
reliance damages. In general courts don’t do this. Argument also to be made that court
was actually awarding expectation damages: court decided that show would have broken
even, and in order to put them in a break-even position—expectation damages—reliance
damages are the appropriate award.
Mistletoe Express Service v. Locke (p.143): If no breach, net loss. P should get reliance
damages less any lost profit that would have happened had K not been breached, idea
being to put the woman in the position she would have been in had K been performed
(though here no losses deducted because other party didn’t prove what they would have
been).
3. Avoidability: damages avoidable?
R350 (p.163): (1) Except as in (2), damages are not recoverable for loss that injured party
could have avoided without undue risk, burden or humiliation. (2) The injured party is
not precluded from recovery by the rule stated in (1) to the extent that he has made
reasonable but unsuccessful efforts to avoid loss.
Rockingham County v. Luten Bridge Co. (p. 147): Luten kept building bridge after told
not to, and then sued for whole amount of K. No luck, bc duty to mitigate damages. In
any case, Luten isn’t even made better off by completing construction: the profit is the
same, they just incur and get reimbursed more costs. Deadweight loss, from an economic
point of view.
Shirley Maclaine Parker v. Twentieth Century-Fox Film Corp. (p. 152): Facts analogous
to bridge case, but court finds no duty for Maclaine to accept substitute employment,
even for same money: argument is that there was value to her in making first movie over
and above $, and so waste if she’s forced to take another role. Employer would have had
to show that the other employment offered was comparable or substantially similar to the
original employment; court finds second film offer to be different and inferior.
Cooter and Ulen article: (a) An efficient contract will not cover every contingency,
meaning that a lot of remedies situations get left up to courts; (b) efficient breach is
where a breach of contract is more efficient than the performance of a contract. If no
transaction costs, party who values a good most will end up with it, no matter where
entitlements are allocated. If no doctrine of avoidability, Luten has right to build bridge,
and county has to pay … however, they’d negotiate so that the county would pay Luten a
little over their profit—in fact, up to $69—and the net cost savings work out to
everyone’s benefit. Different distribution, but end result is the same. Problem 1:
Transaction costs do exist. 2: goals besides efficiency—fairness, etc.
Friedmann article: Why not make rules about theft and conversion via efficient breach
model, too?
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UCC 2-718 (3)(a) (p.170): Buyer’s right to restitution offset if seller establishes right to
recover damages under other provisions.
UCC 2-708: (1) Measure of damages for non-acceptance or repudiation by buyer is
difference between contract price and market price plus incidental damages, but less
expenses saved because of breach. (2) If measure of damages in (1) is inadequate, then
the measure of damages is profit which the seller would have made from full
performance by the buyer.
Neri v. Retail Marine Corp. (p.163): Boat sales. Avoidability doesn’t work for volume
situations. If seller can find a second buyer for a good, that means he would have had
two sales instead of one. Important to note that this only works for completely identical
goods—cars, boats, etc.—sold at high volumes. Doesn’t work for unique goods.
A. Contracting Around Default Rules
1. Express limitations
2. Liquidated damages v. penalty clauses: General rule on penalty clauses is that if
contracting parties attempt to deal with problems associated with damages by
articulating their own penalties, they cannot do so by meting out punishment to
the party in breach – any clause they adopt must be a way of estimating what the
party’s actual damages would have been – it must be a liquidated damages clause
and not a penalty clause. This rule cannot be contracted around.
R355 (p.185): Punitive damages are not recoverable for a breach of contract unless the
conduct constituting the breach is also a tort for which punitive damages are recoverable.
R356 (p.185): (1) Damages for breach by either party may be liquidated in the agreement
but only at an amount that is reasonable in the light of the anticipated or actual loss
caused by the breach and the difficulties of proof of loss. A term fixing unreasonably
large liquidated damages is unenforceable on grounds of public policy as a penalty. (2)
(deals with bonds).
UCC 2-718 (p.169): (1) Damages for breach may be liquidated but only at an amount
reasonable in the light of the anticipated or actual harm caused by the breach, the
difficulties of proof of loss, and the inconvenience or nonfeasibility of otherwise
obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is
void as a penalty.
Kemble v. Farren (p.174): Liquidated damages clauses usually only work where damages
are unclear. Here, the problem is that the clause applies to any breach, and there could be
a huge disconnect between amount of actual damages and amount of damages under the
clause—if P breached by not paying D 4 pounds one day, D would suddenly owe 1000
pounds. Damages for not paying would have been clear—4 pounds—so it’s odd to do a
damages clause. Courts will consider all the circumstances in which the clause might be
imposed.
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Lake River Corp. v. Carborundum Co. (p.186): Posner: Penalty clauses discourage
efficient breach. However, (1) Parties wouldn’t have entered into certain contracts in the
first place if they couldn’t have the penalty clause – and not having these contracts in the
first place involves a loss; (2) Rational economic actors will only include a penalty clause
if the benefits of the clause exceed the costs (including those of having efficient breach
discouraged). So if the contract wouldn’t be made without the penalty clause, and we
assume that the actors are able to assess the damages in advance, why not let people
contract for what they will and enforce penalty clauses?
Ways to get around penalty clause issue: Offer a “reward” for, say, on-time completion
and artificially lower the price.
Wassenaar v. Towne Hotel (p.176): Court looks at three factors in determining whether
clause is reasonable (i) intention: did parties intend to provide for damages or a penalty?;
(ii) is injury caused by the breach one that is difficult or incapable of accurate estimation
at the time of contract; (iii) are the stipulated damages a reasonable forecast of the harm
caused by the breach? Court holds that a valid liquidated damages clause makes duty to
mitigate damages go away.
Non-economic reasons for disallowing penalty clauses: penalty clauses could basically
cause people to act under threat: theoretically a power reserved to the state. A court
wouldn’t uphold a contract with a clause stipulating that if completion didn’t happen on
time contractor gets imprisoned.
3. Punitive damages/arbitration
Generally speaking, judicial hostility toward punitive/exemplary damages for simple
breach of contract.
Garrity v. Lyle Stuart, Inc. (p.188): Arbitrator shouldn’t have power to award punitive
damages bc that kind of coercive power should be wielded by the state.
Willoughby Roofing & Supply Co. v. Kajima International, Inc. (p.197): Federal
Arbitration Act does not prohibit punitive damages by arbitrators. States shouldn’t be
striking down arbitral awards.
B. Other Remedies
1. Specific performance: general rule is that damages are preferable.
a. Land: general rule = specific performance for land.
Loveless v. Diehl (p.217): Rental of land with option to buy. Court initially just awards
damages because buyer was just going to resell anyway, but on rehearing court reverses
and says that for land, specific performance is a matter of course. Doesn’t matter what
sellers were going to do afterwards.
b. Goods
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UCC 2-716 (p.233): (1) Specific performance may be ordered where the goods are
unique or in other proper circumstances. (2) Judgment for specific performance may
include such terms and conditions as to payment of price, damages, or other relief as
court may deem just. (3) Buyer has a right of replevin for goods identified to the contract
if after reasonable effort he is unable to effect cover or if circumstances reasonably
indicate that such effort will be unavailing or if the goods have been shipped under
reservation and satisfaction of the security interest in them has been made or tendered.
Scholl v. Hartzell (p.226): A 1962 Corvette, while a collector’s item, is not a unique good
to the point where it can be replevied.
Sedmak v. Charlie’s Chevrolet, Inc. (p. 229): A new car ‘could not be obtained elsewhere
except at considerable expense, trouble or loss, which cannot be estimated in advance and
under such circumstances [plaintiff] did not have an adequate remedy at law.’” Car in
question was a specially modified Corvette “pace car.”
Generally: With a market good, we have several reasons to transform the value of that
good into $: the market gives us an average, kind of, as to what people across society
value the item at, and the person being willing to pay that market price tells us something
about how much they value it. Second, a disappointed buyer can always cover, and
therefore recreate the position she would have been in under the contract. In case of
unique goods, or where circumstances make it hard to cover, specific performance is the
only way to make sure disappointed buyer gets same utility she would have under
contract.
c. Personal service
Even if damages are not an adequate remedy, the constitutional bar on involuntary
servitude precludes a court from ordering specific performance of a contract for personal
services. (E&E, p.623)
Lumley v. Wagner (p.240): General rule against compelling specific performance, but
here court indirectly does—by enforcing a negative covenant against performing in
theaters besides P’s—what it can’t directly do.
Ford v. Jermon (p.245): They won’t grant specific performance on either half: “ … a
contract for personal services thus enforced would be but a mitigated form of slavery, in
which the party would have lost the right to dispose of himself as a free agent, and be, for
a greater or less length of time, subject to the control of another …” Also, serious
monitoring problem: you’d have to send a court agent down to the performance; how
would you know if the performer is actually living up to the spirit of the contract and so
on? That said, it’s not hard to monitor an order not to sing at another theater.
Duff v. Russell (p.247): Court actually implies a negative covenant to get same result as
Lumley.
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Bailey v. State of Alabama (p.265): AL had set up law that made breach of labor contract
a crime. Violation of 13th Amendment: state statute sets up involuntary servitude. Court
doesn’t like end-run that law allows Alabama to do: state doesn’t have power to force
him to work if he doesn’t want to, because that’s clearly involuntary servitude, but since
the state made it a crime to breach a personal services contract, they can essentially force
him to work … basically they’re trying to do indirectly what they can’t do directly.
Holmes dissent here emphasizes freedom of contract: why shouldn’t state “throw its
weight on the side of performance” as long as the contract is fair and proper?
Lochner v. New York (p.272): state of NY attempted to address lamentable labor
conditions for bakers who were working long days … set up a statute whereby bakers
couldn’t work more than 60 hours a week. Constitutionality challenged on the grounds
because it interferes with the parties’ freedom of contract and so violates the 14th amdmt.:
surely they could enter into a contract for anything they wanted to contract for; court
thought this statute unduly burdened freedom of contract/property under 14th. Holmes
dissent: states regulate lots of things under the heading of police powers – they’re
allowed to decide health conditions and things left and right, so to wave freedom of
contract around and say that imposes an undue restriction on people is disingenuous.
This (Holmes dissent) is the modern position: modern regulatory state is all about …
well, regulation. Holmes: just taking a broad view of state police powers? In Bailey, he
thought state was within its rights to enforce contracts; here, he thinks state can regulate
bakers’ hours. A constant tension; background principle under 14th A. – freedom of
contract – that we want to promote (beautiful idea of contract law, etc.; general freedom
of movement – we want people to be able to do what they want unless they’re harming
third parties).
2. Restitution: where party in breach is the one who has been enriched – has gotten
some benefit from the victim – and victim is suing to get that benefit back. Or,
where victim of breach is enriched, and party in breach is the one who is suing to
get the benefit back.
a. To party in breach
R371 (p.287): Measure of restitution interest: If a sum of money is awarded to protect a
party’s restitution interest, it may as justice requires be measured by either (a) the
reasonable value to the other party of what he received in terms of what it would have
cost him to obtain it from a person in the claimant’s position, or (b) the extent to which
the other party’s property has been increased in value or his other interests advanced.
R373 (p.287): Restitution when other party is in breach: (1) Subject to (2), on a breach by
nonperformance that gives rise to a claim for damages for total breach or on a
repudiation, the injured party is entitled to restitution for any benefit that he has conferred
on the other party by way of part performance or reliance. (2) The injured party has no
right to restitution if he has performed all of his duties under the contract and no
performance by the other party remains due other than payment of a definite sum of
money for that performance.
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R374 (p.298): Restitution in favor of party in breach: Subject to (2), if a party justifiably
refuses to perform on the ground that his remaining duties have been discharged by other
party’s breach, party in breach is entitled to restitution for any benefit conferred by way
of part performance or reliance in excess of the loss that he has caused by his own breach.
(2) To the extent that, under the manifested assent of the parties, a party’s performance is
to be retained in the case of breach, that party is not entitled to restitution if the value of
the performance as liquidated damages is reasonable in the light of the anticipated or
actual loss caused by the breach and the difficulties of proof of loss.
Britton v. Turner (p.288): NH. No recovery under K bc breach, but can recover sum for
the service actually performed, because it was accepted (“where the contract is to labor
from day to day, for certain period, the party for whom the labor is done in truth
stipulates to receive it from day to day, as it is performed, and although the other may not
eventually do all he has contracted to do, there has been necessarily, an acceptance of
what has been done in pursuance of the contract, and the party must have understood
when he made the contract that there was to be such acceptance.”)
b. Restitution and “quasi-contract”
When a benefit has been conferred on a recipient under circumstances in which it is
unfair to permit him to retain it without payment, the cause of action of unjust enrichment
is available to the person who conferred the benefit. Using this cause of action, the
conferrer can claim the remedy of restitution, under which the court will restore the
benefit or its value to her. In order to fit this newly recognized cause of action into
existing legal forms, earlier common law courts used various fictions. (E&E, p.217)
Cotnam v. Wisdom (p.298): We do impute consent to a person who needs medical care,
because otherwise emergency medical personnel could be sued for battery. Custom
might, in fact, be for both parties to contemplate financial condition of the patient when
services were rendered and accepted, but even if this is so, evidence of this custom would
only be admitted if there were, in fact, contemplation; court says that an unconscious
patient could not, in fact or in law, be held to have contemplated the charges a physician
might bring. Again: this would be different if this were a real contract, but given that this
is merely a fiction of law, all that is required is a reasonable compensation for the
services rendered.
II. Mutual Assent
A. Offer and acceptance
R17 (p.331): (1) Except as in 2, the formation of a contract requires a bargain in which
there is a manifestation of mutual assent to the exchange and a consideration. (2) Might
be a contract without a bargain under special rules applicable to formal contracts.
R18 (p.331): Manifestation of mutual assent to an exchange requires that each party
either make a promise or begin or render a performance.
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R22 (p.331): (1) Manifestation of mutual assent to an exchange ordinarily takes the form
of an offer or proposal by one party followed by an acceptance by the other party or
parties. (2) A manifestation of mutual assent may be made even though neither offer nor
acceptance can be identified and even though the moment of formation cannot be
determined.
R24 (p.331): An offer is the manifestation of willingness to enter into a bargain, so made
as to justify another person in understanding that his assent to that bargain is invited and
will conclude it.
R25 (p.331): Option contracts: 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.
R35 (p.332): (1) An offer gives to the offeree a continuing power to complete the
manifestation of mutual assent by acceptance of the offer. (2) A contract cannot be
created by acceptance of an offer after the power of acceptance has been terminated in
one of the ways listed in R36.
R36 (p.332): (1) An offeree’s power of acceptance may be terminated by (a) rejection or
counter-offer; (b) lapse of time; (c) revocation by offeror; (d) death or incapacity of
either. (2) In addition, power of acceptance terminated by non-occurrence of any
condition of acceptance under the terms of the offer.
R37 (p.332): Power of acceptance under an option contract not terminated by any of that
except lapse of time unless requirements are met for discharge of a contractual duty.
R42 (p.332): Revocation by communication: An offeree’s power of acceptance is
terminated when the offeree receives from the offeror a manifestation of an intention not
to enter into the proposed contract.
R43 (p.332): Indirect communication of revocation: An offeree’s power of acceptance is
terminated 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.
UCC 2-206 (p.333): Unless otherwise specified, an offer shall be construed as inviting
acceptance in any manner and by any medium reasonable to the circumstances; (2)
Where the beginning of a requested performance is a reasonable mode of acceptance an
offeror who is not notified of acceptance within a reasonable time may treat the offer as
having lapsed before acceptance.
Standard method for forming a contract:
(1)
One party makes an offer to another party; and
(2)
That offer is subsequently accepted.
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You might think of an offer as creating a power in another person to accept it. A makes
an offer to B; B then has a power which A has conferred on him to create a binding
contract between A and B by accepting the offer.
Dickinson v. Dodds (p.325): P tried to accept offer knowing full well land had been sold
to someone else; court thinks it doesn’t matter how the offeree found out about other
transaction. This is actually the conventional wisdom: offeree need not have been
informed by offeror; he just needs to hear about it. It does have to be reliable word of
revocation, though. Court compares this to a case in which offeror dies. [“meeting of the
minds”]
B. Objective theory of assent
R17 (comment on p.351): Comment c: clear that a mental reservation of a party to a
bargain does not impair the obligation he purports to undertake.
R19 (p.351): Conduct as manifestation of assent: (1) Manifestation of assent may be
made wholly or partly by written or spoken words or by other acts or by failure to act.
(2) Conduct of a party is not effective as a manifestation of assent unless he intends to
engage in the conduct and knows or has reason to know that the other party may infer
from his conduct that he assents. (3) The conduct of a party may manifest assent even
though he does not in fact assent. In such cases a resulting contract may be voidable
because of fraud, duress, mistake, or other invalidating cause.
Embry v. Hargadine, McKittrick Dry Goods Co. (p.334): Embry thinks he had a valid
contract. The offer was “Hire me now or I quit”; response, he thinks, was “don’t worry
about quitting, we’ll proceed.” He understood he had a valid renewal of his contract of
employment. What matters was outward manifestation, not what boss was thinking.
Texaco v. Pennzoil (p.341): Only manifestations matter. Intention manifested towards
each other, not third parties, necessarily.
Lucy v. Zehmer (p.342): (“high as a Georgia pine”) objective manifestations were
sufficiently serious to indicate to a reasonable person that a contract was being made.
“Mirror image” rule: a response is not an acceptance if the offeree imposes conditions on
the acceptance or seeks to change or qualify the terms of the offer. Contemporary
approach is to tolerate minor discrepancies and apply only where response makes
material changes. (E&E, p.64)
US v. Braunstein (p.352): Raisins. Acceptance must be unequivocal, unambiguous, and
must comply with requirements of the offer.
C. Offer?
1. Negotiations
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R26 (p.359): Preliminary negotiations: Manifestation of willingness to enter into a
bargain is not an offer if the person to whom it is addressed knows or has reason to know
that the person making it does not intend to conclude a bargain until he has made a
further manifestation of assent.
R29 (p.359): To whom an offer is addressed: (1) Manifested intention of offeror
determines person or persons in whom is created a power of acceptance. (2) An offer
may create a power of acceptance in a specified person or in one of more of a specified
group or class, acting separately or together, or in anyone or everyone who makes a
specified promise or renders a specified performance.
R33 (p.359): Certainty: (1) Even though a manifestation of intention is intended to be
understood as an offer, it cannot be accepted so as to form a contract unless the terms of
the contract are reasonably certain. (2) Terms of a contract are reasonably certain if they
provide a basis for determining existence of breach and for giving appropriate remedy.
(3) Fact that one or more terms of a proposed bargain are left open or uncertain may
show that a manifestation of intention is not intended to be understood as an offer or as
an acceptance.
UCC 2-204 (p.360): (1) Contract for sale of goods may be made in any way sufficient to
show agreement, including conduct that recognizes the existence of such a contract. (2)
Agreement may constitute a contract even if moment of making is undetermined. (3)
Even though one or more terms are left open, contract for sale doesn’t fail for
indefiniteness if the parties have intended to make a contract and there’s a reasonably
certain basis for giving an appropriate remedy.
UCC 2-305 (p.360): Open price term: (1) Parties can conclude a sale contract even if
price isn’t settled. Price in that case is a reasonable price at time of delivery if (a) nothing
is said re: price; (b) price is left to be agreed and there’s failure to agree; (c) price is to be
fixed in terms of some agreed market or other standard as set or recorded by third party
and it’s not. (2) Price to be fixed by seller or buyer means a price to be fixed in good
faith. (3) When price left to be fixed otherwise than by agreement of parties fails to be
fixed through the fault of one party, the other may treat the contract as cancelled or fix a
reasonable price.
UCC 2-308 (p.361): Fixes place for delivery in absence of one set by agreement—place
of business or residence, or if parties know that goods are in some other place, that place.
UCC 3-309 (p.361): Absence of specific time provisions; notice of termination: (1) Time
if not agreed upon shall be reasonable time. (2) If contract is indefinite in duration it is
valid for a reasonable time but may be terminated at any time by either party. (2)
Termination by one party except on happening of an agreed event requires that
reasonable notification be received by other party and an agreement dispensing with
notification is invalid if its operation would be unconscionable.
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Nebraska Seed Co. v. Harsh (p.356): Sending out sample seeds and indicating
approximate number you have doesn’t constitute an offer to be accepted, but an invitation
for offers.
2. Written memorial contemplated
R27 (p.365): Manifestations of intent that are in themselves sufficient to conclude a
contract will not be prevented from so operating by the fact that the parties also manifest
an intention to prepare and adopt a written memorial thereof; but the circumstances may
show that the agreements are preliminary negotiations.
Empro (p.362): Letter of intent not binding because Empro left itself so many outs;
language used is very non-binding.
Texaco (p.366): Similar facts to Empro, but court finds other way. Why? Intent to
formalize an agreement is some evidence of an intent not to be bound before signing a
writing, it’s not conclusive: the issue of when the parties intended to be bound is a fact
question to be decided from acts and communications. If there is no understanding that a
signed writing is necessary, and all substantial terms are agreed upon, an informal
agreement can be binding, even if parties contemplate later putting things into a formal
doc.
D. Acceptance?
1. Mailbox rule
R63 (p.381): Unless offer provides otherwise, (a) an acceptance made in the right way is
operative and completes manifestation of mutual assent as soon as put out of offeree’s
possession; (b) an acceptance under an option contract is not operative until received by
the offeror. (why the latter? Offeror has given offeree an option that binds the offeror,
making it impossible for the offeror to re-offer to someone else; since the offeror is
bound, slightly more stringent rule on acceptance.)
Problems? If offeror never receives letter, still counts; mailbox rule doesn’t apply to
revocation: you have to actually communicate; under an option K, not formed until
acceptance actually received by offeror.
R65 (p.381): Medium of acceptance: a medium of acceptance is reasonable if it is the one
used by the offeror or one customary in similar transactions at the time and place the
offer is received. That is, if there’s a customary way, and the offeree accepts in that
manner, that’s valid even though different from what offeror has provided, or if offeror
hasn’t provided a manner of acceptance, you use the customary way. Custom can
override terms of an offer.
2. Silence
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R69 (p.383): Acceptance by silence or exercise of dominion: (1)(a): If you take the
benefit of offered services, assuming you had a chance to reject them and knew that there
was the expectation that you would pay for them, your silence could operate as
acceptance. (b): If offeror has said or given offeree reason to understand that silence
might mean assent, and the offeree intends, by remaining silent and inactive, to assent,
silence could mean acceptance. (c): If it’s reasonable for offeree to notify offeror that he
doesn’t intend to accept, then silence could mean acceptance.
Hobbs v. Massasoit Whip Co. (p.382): (eelskins) Silence can’t be generally construed as
an acceptance unless a given course of dealing established a pattern which gave buyer
reason to believe seller would see silence as acceptance.
E. Acceptance by performance/Unilateral contracts
R30 (p.405): (1) An offer may invite or require acceptance to be made by an affirmative
answer in words, or by performing or refraining from performing a specified act, or may
empower the offeree to make a selection of terms in his acceptance. (2) Unless otherwise
indicated by the language or the circumstances, an offer invites acceptance in any manner
and by any medium reasonable in the circumstances.
R37 (see above)
R45 (p.422): (1) Where acceptance by performance is invited and not promissory
acceptance, an option contract is created when the offeree tenders or begins the invited
performance or tenders a beginning of it. (2) The offeror’s duty of performance under
any option contract so created is conditional on completion or tender of the invited
performance in accordance with the terms of the offer.
R50 (p.422): Acceptance: (1) Acceptance or an offer is a manifestation of assent to the
terms thereof made by the offeree in a manner invited or required by the offer. (2)
Acceptance by performance requires that at least part of what the offer requests be
performed or tendered and includes acceptance by a performance which operates as a
return promise. [In a situation, then, in which offeree can accept by either performance
or promise, performance operates as a return promise, and thus in that situation and that
situation only the offeree is bound to complete performance; otherwise, offeree is not
bound.] (3) Acceptance by a promise requires that the offeree complete every act
essential to the making of the promise.
Bilateral contract: where acceptance is via promise. Promise is exchanged for promise.
Unilateral contract: where acceptance is via performance. Promise is exchanged for
performance. Offeror controls.
Carlill v. Carbolic Smoke Ball Co. (p.385): It’s a unilateral contract: offeror set terms,
and in this case acceptance was not intended to be a promise from the user of the product,
but just performance: using the thing as offer set out. P did that, so performance itself
constitutes acceptance. Concurrence compares this to cases in which you post signs
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offering a reward to whoever finds your lost dog: if you hang up a sign offering a reward,
no one’s going to call you and accept and then go find the dog; the manner of acceptance
is understood to be finding the dog and bringing it to you.
Petterson v. Pattberg (p.412): Debt on land in Brooklyn. Court finds that this is a
unilateral contract: promise made; mode of acceptance was to be performance – condition
was to pay the money. Why didn’t Petterson do just that? Pattberg revoked before he
could: Petterson tried to tender money after Pattberg told him the mortgage had been
sold.
Petersen v. Ray-Hof Agencies, Inc. (p.418): Court holds that contract is formed when the
offer is accepted. Thus our need to know where the offer was accepted, exactly.
Employee wants rule that acceptance takes place when performance is initiated (not rule
that acceptance takes place when performance is completed). If we consider the entire
performance in Petterson case to be showing up and offering payment and turning money
over, then rule would be that offer is not accepted until performance is complete.
Anyway, Petersen court says that K was formed as soon as the guy left Miami: i.e., offer
was accepted when performance was initiated. Overruled by SC of FL (because, one
would assume, while an offeror is bound not to revoke an offer once acceptance by
performance has begun—an option contract is created—since the offeree is not bound to
complete performance, and the offeror is not actually bound to perform, the contract is
not actually created in this situation until performance is completed).
III. Interpreting Assent
A. Filling gaps
1. Agreements to agree
Courts generally do not enforce agreements to agree. That said, as indicated by R204,
courts are willing to supply terms to an agreement that is sufficiently defined so as to be
considered a contract.
R34 (p.433): (1) Terms of a contract may be reasonably certain even though it empowers
one or more parties to make a selection of terms in the course of performance. (2) Part
performance may remove uncertainty and establish that a contract enforceable as a
bargain has been formed. (3) Action in reliance on an agreement may make a contractual
remedy appropriate even though uncertainty is not removed.
R204 (p.434): When parties to a bargain sufficiently defined to be a contract have not
agreed with respect to a term which is essential to a determination of their rights and
duties, a term which is reasonable in the circumstances is supplied by the court.
UCC 2-204, 2-305, 2-309, above
Sun Printing & Publishing Assn. v. Remington Paper & Power Co. (p.427): No valid
contract bc of terms left open. Price and time left open; there was at least a provision as
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to price, but no specification of how long that provision would apply for. Provision as to
price was that max. price would be Canadian price if no other price agreed on.
“beautiful idea”: parties might intend to be bound, but if there’s a huge gap in what they
intend to be bound to and the court ends up supplying the terms, the court is binding the
parties to an agreement: if we’re interested in defending freedom of contract we wouldn’t
make up terms but require parties to be clearer about what they’re agreeing to.
Ultimately the Cardozo dec’n does support contractual rights.
Something to be said for idea of making off-the-rack terms that parties universally hate:
encourages them to come up with their own.
Texaco v. Pennzoil (2) (p.434): Court suggested that there was a contract bc terms were
sufficiently definite to identify a breach and the damages that resulted from the breach.
2. Illusory promises
When consideration consists of the exchange of mutual promises, the undertakings on
both sides must be real and meaningful. If the promise of one party has qualifications or
limitations so strong that they negate it, it is really no commitment at all. Because it does
not bind that party, this lack of consideration voids the apparent contract, so neither party
is bound. Such a promise is said to be illusory. In situations where one party can prevent
fulfillment of a condition simply by failing to try to fulfill, courts tend to imply
conditions—like obligations to use best efforts—to validate contracts.
Wood v. Lucy (p.441): Cardozo supplies “good faith” obligation to perform to an
otherwise complete contract which D had tried to get out of because of lack of express
requirement on P to actually place D’s endorsements and market her designs.
B. Interpreting assent: subjective v. objective
R200 (p.465): Interpretation of a promise or agreement or a term thereof is the
ascertainment of its meaning.
R201 (p.465): Whose meaning prevails? Where parties have attached same meaning to
term, that meaning prevails. Where parties have attached different meanings, interpreted
according to meaning attached by one of them if (a) that party didn’t know the other party
meant something else, and the second party knew what the first party understood; or (b)
that party had no reason to know of any different meaning attached by the other, and the
other had reason to know the meaning attached by the first party. If none of that applies
(Peerless), neither party is bound, even if that means mutual assent fails.
UCC 1-205 (p.467): (4) Express terms of an agreement and an applicable course of
dealing or usage of trade shall be construed wherever reasonable as consistent with each
other; but when such construction is unreasonable express terms control both course of
dealing and usage of trade and course of dealing controls usage of trade.
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UCC 2-208 (p.467): (1) Where contract involves repeated occasions for performance by
either party with knowledge of the nature of the performance and opportunity for
objection to it by the other, any course of performance accepted or acquiesced in without
objection shall be relevant to determine the meaning of the agreement.
Raffles v. Wichelhaus (p.451): not enough basis for deciding objectively between ship 1
and ship 2, so no contract: neither person is more reasonable than the other
Party whose beliefs are most reasonable should govern result. Party who is aware is in
best position to avoid costs of relying on other party’s behavior. If disagreement on a
term, if one party was aware or should have been aware of the other’s understanding of
that term, the contract should be on the terms of the other party.
Oswald v. Allen (p.463): Peerless, only about Swiss coin collections. Neither party knew
nor had reason to know what the other meant, and so failure.
Weinberg v. Edelstein (p.469): Question as to what constitutes a dress. There was no
agreement on the term—just didn’t come up—so court goes to industry practice to figure
out whose interpretation more reasonable. Why industry standard? Both to figure out
what they meant and what they reasonably should have had in mind. Burden of proof is
on party seeking enforcement.
Frigaliment (p.473): Disagreement as to meaning of “chicken.” No agreement, and trade
usage unclear. Comes down to burden of proof on buyer—initiated dispute, after all—to
prove that chicken had narrow meaning, and they haven’t met that burden.
IV. Written manifestations
A. Interpreting parol evidence
R209 (p.487): (1) Integrated agreement = writing or writings constituting final expression
of one or more terms of an agreement. (2) Whether there is an integrated agreement is to
be determined by court prior to question of interpretation or application of parol evidence
rule. (3) Where parties reduce an agreement to a writing which in view of its
completeness and specificity reasonably appears to be a complete agreement, it is taken
to be integrated unless it is established by other evidence that the writing did not
constitute a final expression.
R210 (p.487): (1) A completely integrated agreement is an integrated agreement adopted
as a complete and exclusive statement of terms. (2) Partially integrated is integrated, but
not completely. (3) Integration to be determined by court prior to interpretation/parol
evidence rule.
R213 (p.487): (1) A binding integrated (completely or partially) agreement discharges
prior agreements to the extent that it’s inconsistent with them. (2) A binding completely
integrated agreement discharges prior agreements to the extent they’re in its scope. (3)
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An integrated agreement that isn’t binding or is voidable and avoided does not discharge
a prior agreement. Even so, it might be enough to render inoperative a term which would
have been part of the agreement had it not been integrated.
R214 (p.488): Agreements and negotiations prior to the adoption of a writing are
admissible to show (a) that a writing is integrated or not; (b) complete or partial
integration; (c) meaning of the writing, integrated or not; (d) illegality, fraud, duress,
mistake, lack of consideration, or other invalidating cause; (e) ground for granting or
denying rescission, reformation, specific performance, or other remedy.
R216 (p.488): (1) Evidence of a consistent additional term is admissible to supplement an
integrated agreement unless the court finds that the agreement was completely integrated.
(2) An agreement isn’t completely integrated if the writing omits a consistent additional
term which is (a) agreed to for separate consideration, or (b) such a term as in the
circumstances might naturally be omitted from the writing.
UCC 2-202 (p.488): Final agreement can’t be contradicted by evidence of a prior
agreement, but may be explained or supplemented (a) by course of dealing or usage of
trade or course of performance, or (b) by evidence of consistent additional terms unless
court finds writing to have been intended as a complete and exclusive statement of the
terms of the agreement.
Parol evidence rule says, basically: if everything the parties intended to contract for is
covered by the written contract, you may not turn to extrinsic evidence to supplement our
understanding of the written contract.
Two different ways in which parties would intend for everything to be covered by K.
(1) Parties could intend that everything they agreed to is in the K, but that not every
part of the agreement is explained in that contract. “Partial integration.” No part
of the agreement not represented in K, but expectation that you might look to
outside evidence to explain parts of K.
(2) Complete integration: parties intend that everything needed to understand their
agreement is contained in the agreement itself.
(3) (Also possible that a K isn’t integrated at all—parties might enter into a written
agreement but have side agreements that aren’t represented in any form in the
written agreement).
Thompson v. Libbey (p.482): No implied warranty of quality of logs. Lower court erred
in admitting extrinsic evidence: initial agreement was complete enough that no add’l
evidence should be allowed. Their statement of the rule: “where the parties have
deliberately put their engagements into writing in such terms as to import a legal
obligation, without any uncertainty as to the object or extent of such engagement, it is
conclusively presumed that the whole engagement of the parties, and the manner and
extent of their undertaking, was reduced to writing.” Two separate inquiries: (1)
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Integration. If contract not completely integrated, was there an agreement on the side that
would lead us to conclude something besides what contract says on its face? (2)
Interpretation.
Brown v. Oliver (p.484): Contract is silent on issue of furniture. Why isn’t that enough?
P says there was another agreement—an oral one—re: sale of furniture. Fact that we
didn’t say anything doesn’t mean that wasn’t our understanding. Seller wants question to
be limited by four corners; buyer argues that you have to look outside contract to
determine if it’s completely integrated and if not then you can introduce oral evidence.
Court: contract is partially integrated re: transaction—“did not by itself conclusively
establish whether the parties intended it should exclude every subject of sale except real
estate.” Wigmore: (1) Whether a particular subject is embodied by writing is determined
by intent of parties; (2) intent must be sought in conduct and language of parties and
surrounding circumstances … document itself will not suffice. Must compare writing
and negotiations before we can determine whether they were in fact covered.
Pacific Gas and Electric Co. v. G.W. Thomas Drayage & Rigging Co. (p.489): Traynor
agrees with Wigmore: you need to consider extrinsic evidence. Words do not have
absolute and constant referents. The meaning of words varies; a word has no meaning
apart from context. “[R]ational interpretation requires at least a preliminary
consideration of all credible evidence offered to prove the intention of the parties.” If
court decides, after looking at this evidence, that language is susceptible to either of the
interpretations being offered, extrinsic evidence is admissible.
Trident Center v. Connecticut General Life Insurance Co. (p.493): Thinks PacGas is
patently ridiculous—“Under Pacific Gas, it matters not how clearly a contract is written,
nor how completely it is integrated, nor how carefully it is negotiated … the contract
cannot be rendered impervious to attack by parol evidence.”
B. Statute of Frauds:
R110 (p.520): (1) Classes of contract subject to statute of frauds, which forbids
enforcement unless a written memorandum or applicable exception:
(a) contract of an executor or administrator to answer for duty of
deceased (“executor-administrator”);
(b) contract to answer for duty of another (“suretyship”);
(c) contract made on consideration of marriage (“marriage”);
(d) contract for land sale (“land contract”);
(e) contract not to be performed within a year of making (“one year”).
Certain contracts which used to be subject to the Statute of Frauds are now governed by
Statute of Frauds provisions of the UCC: contract for sale of goods, contract for sale of
securities, contract for sale of personal property somehow worth more than $5000.
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UCC also requires writing signed by debtor for an agreement which creates or provides
for a security interest in personal property or fixtures not in the possession of the secured
party.
In most states, statutes provide that no acknowledgment or promise is enough evidence of
a new or continuing contract to take a case out of the operation of a statute of limitations
unless made in a writing by the party to be charged, but that statute doesn’t alter the
effect of any payment of principal or interest.
States might make other classes of contract subject to a writing requirement.
1. And its exceptions
R125 (p.524): Land contracts in writing, except in most states short-term leases and
contracts to lease of less than one year.
R129 (p.524): Action in reliance: A contract for land transfer may be specifically
enforced even if failure under statute of frauds if established that the party seeking
enforcement, in reasonable reliance on the contract, has so changed position that injustice
can be avoided only by specific performance.
R130 (p.525): Where any promise can’t be fully performed in a year, statute of frauds
applies.
UCC 2-201 (p.531): (1) Contract for sale of goods for more than $500 not enforceable
unless in writing sufficient to indicate a contract signed by party against whom
enforcement is brought. (3) However, that said, a contract is enforceable (a) if the goods
are to be specially manufactured for the buyer and are not suitable for sale to others in the
ordinary course of the seller’s business and the seller, before notice of repudiation is
received and under circumstances which reasonably indicate that the goods are for the
buyer, has made either a substantial beginning of their manufacture or commitments for
their procurement; (b) if the part against whom enforcement is sought admits in court that
there’s a contract; (c) with respect to goods for which payment has been made or
accepted or which have been received or accepted.
Boone v. Coe (p.521): LAND CONTRACTS IN WRITING. Might have been decided
differently under R129.
2. Satisfying its requirements
R131 (p.538): A contract within statute of frauds is enforceable if it’s evidenced by a
writing signed by party to be charged; that writing has to identify the subject matter of the
contract, indicate that there’s a contract, and state the essential terms of promises left to
be performed.
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R133 (p.539): writing doesn’t have to particularly be a memorandum of the K so long as
it’s signed.
Schwedes (p.533): Contract for sale of land not in writing. Good consideration, the
whole bit, but no writing. Ps try to argue that there should be a contract based on their
part performance—they lined up financing—but court finds that there’s a distinction
between preparation for performance and part performance.
Parma Tile (p.540): Court finds that letterhead on fax is enough to satisfy signature
requirement. [Some discussion of how what you end up seeing in statute of frauds cases
are contracts, essentially, that someone is trying to wriggle out of—there’s nothing
lacking except compliance with this statute of frauds.]
V. Enforceability
1. Deontological approach: An approach based on moral principles. Court
would ask itself what the morally required/fair thing to do was. Might be
different versions of this kind of approach.
i. When you exchange promises, you’re morally bound to make good
on that promise, bc promise is a morally binding commitment you
make. Moral obligation for parties themselves to stick to their
agreements. Court ought to enforce all or nearly all agreements
because it’s forcing the parties to behave morally.
ii. Fairness: what is the fair result in this case, regardless of whether
or not there’s a general moral obligation to stick to agreements?
“Fairness in results” approach. [Note that this would give a
different answer from (i) in Baby M.]
2. Utilitarian: [Market in babies.] Idea might be that the court should adopt
that rule which would maximize society’s utility (court should pick rules
that maximizes total utility of everyone in a society). In Baby M, say
Sterns get 100 units of utility out of the baby; if they don’t get it, they get
20 … if surrogate gets baby taken away, she’s at 0 utility; otherwise she
gets 200. So the argument would be that max. utility would be on side of
surrogate keeping baby. A caricature, but you get the idea. Also note that
there’s no actual way to quantify any of this. No such thing as measuring
interpersonal utility … can’t really compare on some kind of absolute
scale how much utility people get from something. We should, argument
is, come up with rules, though … what kind of rule would legal
economists suggest to come up with a maximization of utility here?
i. Beautiful Idea: in general, a utilitarian would be in favor of the
enforcement of contracts: people know what they’re doing, and
will bargain for agreements that make both of them better off.
3. Contractarian: if parties were to agree to rules behind a (partial) veil of
ignorance, they’d come up with legal rules that you’d imagine would
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satisfy their preferences but not knowing what their preferences would be
under the circumstances.
VI. Consideration
Bargained-for exchange.
A. History
“Considerations” were factors which promisor considered when he promised and which
moved or motivated his promising. “Motive” is about the best you’re going to get as far
as a synonym. What’s the “motive” for an agreement? Reason for entering into an
agreement … Simpson says that consideration is the thing the person was trying to get by
entering into the agreement. Makes sense: a bargained-for exchange—the thing you’re
bargaining over—is the reason you have for entering into the contract in the first place.
B. Bargain theory
Restatement approach: A contract is an enforceable promise (R1 and 2). With some
exceptions (17(2)), to be enforceable a promise must be supported by consideration
(17(1)). A promise is supported by consideration if it is bargained for (71(1)). A promise
is bargained for “if it is sought by the promisor in exchange for his promise and is given
by the promisee in exchange for that promise.” (71(2)).
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect
our dinner, but from their regard to their own interest.”
R17 (p.331): the formation of a contract requires a bargain in which there is a
manifestation of mutual assent to the exchange and a consideration.
1. Bargain v. gratuitous promise
R71 (p.666): (1) To constitute consideration, a performance or a return promise must be
bargained for [read: for something to be consideration, it must be a bargained-for
performance or a return promise]; (2) a performance or returned promise is “bargained
for” if it is sought by the promisor in exchange for his promise and is given by the
promisee in exchange for that promise. (3): Performance may consist of an act,
forbearance, or the creation, modification or destruction of a legal relation. Comment B:
“ … the consideration induces the making of the promise and the promise induces the
furnishing of the consideration.”
Johnson v. Otterbein University (p.655): Conditional gift (to university), rather than
bargained-for exchange; no consideration.
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Hamer v. Sidway (p.658): Nephew restricted his actions per uncle’s request, and therefore
a binding K—nephew giving up drinking, smoking, etc. counts as forbearance and thus is
consideration. Argument against: just another conditional promise.
2. Past consideration
If the promisee suffered the detriment before the promise was made, it cannot be said that
the detriment was exchanged for the promise. If a person makes a promise to compensate
another for some prior performance, that prior detriment cannot be consideration for the
promise. The promise is seen as gratuitous and non-binding. (E&E, pp.161-162)
Moore (p.669): Psychic predicts death. The past consideration was the reading … the
original bargain wasn’t the reading for the mortgage. Could have been set up that way,
but there was no evidence that that was the case. No contract if past consideration.
3. Moral consideration
Taken together, Webb and Mills obviously suggest that moral obligation may support a
promise in the absence of traditional consideration, but only if the promisor has been
personally benefited or enriched by the promisee’s sacrifice and there is, as a
consequence, a just and reasonable claim for compensation. (Chirelstein, p.31)
R86 (p.686): (1) A promise made in recognition of a benefit previously received by the
promisor from the promisee is binding to the extent necessary to prevent injustice: unjust
enrichment idea. (2) Promise not binding if the benefit was conferred as a gift or
promisor was generally not unjustly enriched, or if the value of the promise was
disproportionate to the value of the benefit.
Mills v. Wyman (p.671): Even though person did take care of the son, by the time the
father wrote letter, expenses had been incurred, and there was no suggestion that Mills
ought to care for son in exchange for promised money. Fact that father had a moral duty
to pay for medical service for his sick son doesn’t make a legal duty. So moral duty not
good enough to be consideration. “What a man ought to do, generally he ought to be
made to do, whether he promise or refuse. But the law of society has left most of such
obligations to the interior forum, as the tribunal of conscience has been aptly called.”
Webb v. McGowin (p.681): Consideration? Which theory? Moral duty: unjust
enrichment theory. Promise to pay is an enforceable contract only because of the prior
moral duty. Court goes with this. Difference between this and Cotnam, incidentally: not
just a quasi-contract, but a real K, says court, because there was an actual promise.
Supreme court opinion: really important thing was the massive material benefit: they
stress the unjust-enrichment side of it.
C. Contract modifications/pre-existing duty rule
The performance or, or promise to perform, a pre-existing duty is not consideration.
(E&E, p.156)
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R89 (p.697): Promise modifying a contract is binding if fair and equitable in view of new,
unforeseen circumstances; or if ok bc statute or bc justice requires enforcement in view of
material change in position in reliance [someone, say, makes a commitment to buy
something they otherwise wouldn’t have bc they think they have the money bc modified
contract].
UCC 2-209 (p. 697): Modifications don’t need consideration to be binding. Doesn’t
really agree with R89. Only applies for sales of goods.
Stilk v. Myrick (p.687): Is modified contract made at sea enforceable? No. No
consideration: P was already under contract, and he wasn’t doing anything extra
(arguably), so how could there be consideration for a new agreement? Captain’s promise
was gratuitous. Point: if captain had fired them capriciously, it would have been
different, but two sailors leaving is like two sailors dying; original contract was enough to
cover contingencies like this.
Alaska Packers’ Assn. v. Domenico (p.689): Sailors under contract to fish for salmon;
they demanded a hike in the K price, company wouldn’t pay when they got back, court
said no new K: no consideration. They were already under obligation. [Note: nets found
not to be defective.] No consideration here; even more of a pure holdup than Stilk, where
at least there was a change in circumstances (i.e., increase in work). There is an
argument to be made that the old contract was breached and a new one was negotiated,
but it wasn’t made and wouldn’t fly anyway because those in the company with authority
to do that kind of thing weren’t aware of goings-on.
Brian Construction and Development Co. v. Brighenti (p.692): D subcontractor wants
extra money—over and above initial agreement—to excavate, given that they found extra
crap down there. [A fact pattern to keep one’s eye on.] General contractor agreed to pay
costs plus 10%, D started work again, but then stopped. Contractor sues subcontractor
for breach. General contractor is suing on modified contract. Subcontractor, in defense,
is saying that the modification isn’t binding: that there was no new consideration, that
that was stuff he was supposed to be doing anyway. If court had tried to decide case
entirely on first contract? Per original contract, there had to be written authorization for
additional work. Sub still has an argument. They met with unforeseen condition;
couldn’t proceed without authorization; never got authorization; therefore contractor in
breach and they had the right to walk off the job.
US v. Stump Home (p.698): Function of requiring consideration in modification of a
contract: preventing coercive modifications. Idea is to head off duress-type situations.
Argument: law doesn’t require adequate consideration. Consideration can be as small as
you want it to be; seems like a funny way to get at the concern about exploitation. You
can have these nominal consideration recitals; surely that’s not doing much work against
Alaska Packers style issues. Prefers to entirely rely on duress or something like it: go at
the issue we’re worried about directly.
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D. Adequacy
R79 (p.704): If requirement of consideration met, no add’l reqs of gain, advantage,
benefit, equivalence, mutuality, etc. That said, “Disparity in value … sometimes
indicates that the purported consideration was not in fact bargained for but was a mere
formality or pretense. Such a sham or “nominal” consideration does not satisfy the
requirement of 71.”
R364 (p.705): Specific performance or an injunction will be refused if such relief would
be unfair because (c) the exchange is grossly inadequate or the terms of the contract are
otherwise unfair.
Newman & Snell’s State Bank v. Hunter (p.702): Transfer of worthless paper isn’t
consideration. Note is worthless; bank’s transfer is sham consideration and thus no
binding contract.
Dyer v. National By-Products, Inc. (p.705): Dyer injured on job; goes back to work, but
eventually is laid off. He sues: says K for lifetime employment with his forbearance from
suing about injury as consideration. Workman in Dyer actually believed his claim was
worth something; very unlikely that bank believed that its note from dead husband was
worth something—can be squared by saying that there is real consideration if party
tendering thinks they’re giving up something of value.
VII. Intention to be bound
R21 (p.712): “ … but a manifestation of intention that a promise shall not affect legal
relations may prevent the formation of a contract.” Thus, if there’s some objective
manifestation of intent not to be bound, no contract.
Formalities: formality was the seal … to make a binding K, you’d seal an agreement with
wax. Rule was that no K was binding unless under seal. Notion of a seal on a document
took the place of and predated the notion of consideration. Only agreements that were
made under seal would be legally binding. Purpose of requirement of seal? Given that
it’s a weird, difficult ritual, you’re not going to slip into legal relations accidentally: it
ensures that parties really intended to make a binding agreement … advantage of seal is
that other people can later see. You can use it to provide evidence of intention on part of
both parties to be legally bound. Function of seal is served pretty well by signature.
Why not just always use signatures? Most people couldn’t write. So same function.
Seal has been deprived of effectiveness by statute.
A. Nominal consideration
Pretense of a bargain does not satisfy the exchange element, so that a false consideration
which does not in fact induce the return promise (or, at least, cannot reasonably be
conceived as doing so), should not be treated as sufficient. (E&E p.162)
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Schnell v. Nell (p.726): Wife dies … husband agrees to pay $600 to ppl in consideration
of one cent bc wife had no property to will to these ppl (and will had said that each
person would get $200). Almost certainly intent to be bound—otherwise unlikely you’d
go through the ritual of providing one cent’s worth of consideration. Court says no
consideration, though: obvious disparity in value.
Option Contracts: Purported consideration (i.e., nominal consideration) ok. Why is this
different from substantive contracts? “The fact that the option is an appropriate
preliminary step in the conclusion of a socially useful transaction provides a sufficient
substantive basis for enforcement …” That is, options facilitate transactions; transactions
are good bc increase utility. Options make it easier to enter into real contracts (all of this,
then, supports “beautiful idea.”)
R87 (p.730): Option contracts just require purported consideration (and signed writing).
B. Recitals
For option contracts, even recited consideration is ok. (R87)
Smith v. Wheeler (p.731): Option contract to buy land; recital of $1 consideration, but $1
never actually paid. Wheeler revokes option before consideration actually paid. Court
reverses lower court decision in favor of seller … even if dollar wasn’t paid, contract not
voided: there was an implied promise to pay which can be enforced by the other party.
Wheeler, in theory, could have sued for $1.
Jolles v. Wittenberg (p.732): Nominal consideration recited in a sealed instrument
sufficient as a matter of law.
VIII. Promissory Estoppel
R90 (p.811): (1) A promise which the promisor should reasonably expect to induce action
or forbearance on the part of the promisee or a third person and which does induce such
action or forbearance is binding if injustice can be avoided only by enforcement of the
promise. The remedy granted for breach may be limited as justice requires. (1) A
charitable subscription … is binding under (1) without proof that the promise induced
action or forbearance.
[Changes from the previous R90 expanded the reach of the doctrine, bringing it even
closer to being a tort action.]
A. As substitute for consideration
1. Family Promises
Ricketts v. Scothorn (p.760): No contract: money was given as a gift, not in exchange for
girl quitting her job. They’re not saying there is consideration, but again, that you can’t
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use the argument that there’s no consideration because promisee relied. Important to be
clear on this: reliance theory of enforcement, but generates expectation measure of
damages. That’s a way of making the point that if this is really a contractual animal, then
it’s not necessary for her to have suffered some kind of detriment in order to recover.
We’re just taking the fact that she relied on this promise as a basis for finding an
enforceable promise here. Tip-off: business about estoppel. Grandfather is estopped
from claiming lack of consideration because reliance suggests that what’s going on here
is that the court is treating this as a contract.
2. Land
Greiner v. Greiner (p.766): No consideration; guy moving back near his mother is like
person crossing the street to get money. No exchange, etc. However, reliance, and
reasonably expected reliance, too, therefore PE.
3. Charitable Subscriptions
Allegheny (p.770): Virtually same facts as Johnson v. Otterbein University. Cardozo
makes up consideration here because he hates PE.
4. Pensions
Feinberg (p.777): Poster child for R90. Court held PE bc company had induced reliance:
she gave up a good job in reliance on promised pension. Wouldn’t work if she had been
otherwise employable, or had gotten a better job, etc.: she really relied to her detriment.
5. Construction bids
Baird (p.784): No contract because offer was withdrawn before accepted; L. Hand
declines to apply PE because this is a business transaction. No option contract bc no
consideration; no conditional offer; no evidence of a unilateral contract.
Drennan (p.788): Same scenario, more or less, but court implies a subsidiary promise …
business practice: acceptance via inclusion in main bid.
B. As alternative to breach
Goodman (p.798): P wanted an Emerson Radio franchise; D assured them they had it,
even though that decision wasn’t in their power. No actual K. P incurred costs,
ultimately didn’t get the franchise, and sued. Promissory estoppel used as a consideration
alternative here, but only reliance damages awarded; ultimately, this seems like a torts
opinion.
Hoffman v. Red Owl (p.800): P wanted to open a franchise; D, for some time, led him to
believe that that would happen, causing P to incur significant costs, only to ultimately
cause P to abandon the deal by hiking amount of capital necessary to get in. P sues, but
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no contract—not even anything that looks like a contract. Court awards damages on
promissory estoppel basis, but this comes out looking like a tort case: PE not used as a
consideration substitute, only reliance damages granted, damages even granted to
Hoffman’s wife, which clearly wouldn’t have happened in a contracts action, but fits in a
torts framework: damage to her was foreseeable.
Death of Contracts? Barnett suggests that what Red Owl and cases like it have created is
a new tort of negligent promissory misrepresentation: wouldn’t work under existing torts
bc D wasn’t actually lying at the time. Grant Gilmore suggested that contract law, via
promissory estoppel and quasi-contract, was being reabsorbed into the “mainstream” of
tort law. In a sense, though, Red Owl actually protects contract law: no contract damages
granted when no contract. Hillman study seems to indicate, in any case, that plaintiffs
aren’t actually winning on promissory estoppel claims very often.
C. Some Modern Applications and Limits of Promissory Estoppel
1. Promise
Blatt v. USC (p.822): PE as consideration substitute. No Order of the Coif. Not an actual
Hamer-style contract, bc performance (working hard and getting good grades) not sought
by promisor (school) in exchange for its promise (eligibility for honor). Decided under
Old R90, which required action of a definite and substantial character on part of
promisee; that language not in new R90, but likely that case would go the same way
under sentence allowing limitation of remedy as justice requires.
Spooner (p.826): Insurance salesmen sue for bonus despite clause in letter stating that
bonus may be withheld pretty much at will. PE theory would be that letter induced
reliance, but letter wasn’t really to be relied upon: promise was optional by its own terms.
Ypsilanti (p.830): Township seeks an injunction to keep GM from moving operations
elsewhere. GM had, they claim, promised to stay in Ypsilanti in exchange for tax
abatements. Lower court grants injunction, says fundamental element of a promise is “an
expression of intention by the promisor that his future conduct shall be in accordance
with his present expression, irrespective of what his will may be when the time for
performance arrives.” Problematic: that definition of promise does not include an intent
by the promisor to be bound by his promise. Township clearly relied, and lower court, at
least, thinks that not enforcing this “promise” would cause terrible injustice. On appeal,
reversal: GM didn’t make a promise. Things GM said were a statutory prerequisite, were
just hyperbole and puffery, etc.: GM hoped that these things were true, and intended to
stay, but wasn’t promising anything. Court of Appeals analysis might have been
motivated by a sense that there wasn’t so much injustice here.
2. Reasonable Reliance
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Presley (p.846): When P filed for divorce the second time, she had notice that the estate
wasn’t going to pay; her reliance, therefore, wasn’t justified (she could have changed the
settlement agreement). Analogous to mitigation of damages, in a sense: once you know
other party intends to withdraw promise, you shouldn’t go ahead and rack up damages.
Fictional third-Restatement 90: Loosens consideration and broadens scope of contractual
liability, but shrinks promissory estoppel. Suggestion that (1) formalities should make a
contract enforceable; (2) in the absence of consideration a contract is binding if with
knowledge of promisor, promise induces reliance by the promisee that is so substantial
that it would be unlikely in the absence of a manifested intention by the promisor to be
legally bound; (3) a promisor should be able to avoid liability by announcing lack of
intent to be bound—i.e., calling a halt to reliance.
3. Injustice of Nonenforcement
Cohen v. Cowles: No contract between “confidential” source and reporters to keep
source’s identity confidential. MN court declines to apply promissory estoppel, largely
because they’re not clear that what happened (publication of source’s name) was unjust,
and in any case justice concerns are swamped by First Amt. worries: “The court must
balance the constitutional rights of a free press against the common law interest in
protecting a promise of anonymity.” USSC makes a distinction between two kinds of
laws for First Amt. purposes: generally applicable laws and laws that target the press
specifically. The press shouldn’t be any less subject to the former than anyone else just
because they might have an incidental impact on press’s operation. Blackmun dissent
thinks that if the operation of any law has a direct impact on speech (as, arguably,
promissory estoppel does here), you can’t just say that’s an incidental impact and ignore.
On remand, MN court finishes its promissory estoppel analysis (they’d not done the
injustice part) by weighing need of paper to publish news against source’s need for
confidentiality (similar analysis to First Amt. one above) and decides that justice would
be best served by using promissory estoppel here.
Performance
A. Implied duty of good faith performance
Contracts generally contain an implied duty to perform in good faith (Wood v. Lucy, Lady
Duff-Gordon). Acting in bad faith has nothing to do with bad motives.
Possibly a problematic concept: are courts reading in this covenant bc they think parties
meant it to be there, or are courts reading it in because they think it should be there?
Should courts be reading in these clauses, or should they let agreements be illusory and
make parties draw up better agreement? Position depends on whether you think these
clauses are somehow inherent in the Ks, or you think the courts are just making things up
where parties didn’t intend to include best efforts. Possibly an issue to imply that one
party should have the interests of the other in mind.
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UCC 1-203: Every contract or duty within [the UCC] imposes an obligation of good faith
in its performance or enforcement.
R205: Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and enforcement.
Goldberg v. Levy (p.877): Receipts fell below $101K and D wants out; P alleges that D
was diverting business so that he could break the lease. Claim is that D brought his gross
receipts down that low on purpose. Court found for plaintiff. Court appears to be saying
it’s finding this implied covenant of good faith in the promise to pay percentage rent (as
in Wood v. Lucy). You might argue that in order to find real consideration here and
make sure this isn’t an illusory promise, you have to read in such a provision.
Mutual Life Insurance Co. of NY v. Tailored Woman (p.879): Court finds that it was ok
for D to move furs to portion of store with flat-rent lease (lower section involved
percentage rent), thus avoiding a significant chunk of percentage rent: no bad faith there.
Goldberg court would likely have found bad faith here.
B. Warranties
1. Implied
UCC 2-314 (p.899): Implied warranty of merchantability in contracts for sales of goods.
(1) Warranty implied; (2) Goods to be merchantable must (a) pass without objection in
the trade; (b) if fungible goods, be of fair average quality; (c) be fit for ordinary purposes
for which such goods are used; (d) run of even kind, quality and quantity; (e) be
adequately contained/packaged; (f) conform to promises or affirmations of fact made on
label (if any).
UCC 2-315 (p.899): Implied warranty of fitness: If seller at time of contracting has
reason to know any particular purpose for which goods are required and that buyer is
relying on seller’s skill or judgment to select/furnish suitable goods, there’s an implied
warranty of fitness for a particular purpose.
Step-Saver Data Systems, Inc. v. Wyse Technology (p.896): Step-Saver rented computer
systems to professionals; they used Wyse terminals. Problems develop and consumers
sue Step-Saver, Step-Saver sues Wyse for problems with terminals, claiming breach of an
implied warranty of merchantability. Here, buyer failed to show that seller knew or had
reason to know the precise purpose for which buyer was purchasing goods.
2. Express Warranties
UCC 2-313 (p.906): (1) Express warranties created: (a) any affirmation of fact or promise
made by seller which relates to goods and becomes a basis of the bargain creates an
express warranty that goods shall conform to the description; (b) any description of goods
which is made part of basis of bargain creates express warranty that goods shall conform
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to description; (c) any sample or model made part of basis of bargain creates express
warranty that goods shall conform to sample or model; (2) Not necessary that seller use
formal words such as “warrant” or “guarantee” or even intend to make a warranty, but an
affirmation of the value of the goods or a statement of opinion or commendation doesn’t
create a warranty.
Royal Business Machines, Inc. v. Lorraine Corp. (p.900): Seller said that (1) copiers were
of high quality; (2) copiers didn’t break down often; (3) replacement parts were readily
available; (4) cost of maintenance and cost of supplies would remain low, no more than
½ cent/copy; (5) copiers had been tested and were ready to be marketed; (6) experience
and projections showed that purchase and leasing of these copiers would lead to
substantial profits; (7) machines were safe and wouldn’t cause fires; and (8) service calls
would be required on average of every 7K copies or so. Court found (in accordance with
UCC 2-313) that 1, 2, 3, 6 and the cost-of-supplies portion of 4 weren’t warranties: 1 is
pure opinion, 2 lacks specificity (opinion), 3 doesn’t relate to the good being sold, 4 re:
supplies doesn’t relate to good being sold, 6 is vague and opinion; the rest are fact. Case
is remanded on fact ones, though: if buyer knows that an affirmation of fact is untrue (bc
more experience, as possibly here: deal took place over long period), that affirmation
can’t form a basis of the bargain.
Breach
A. Anticipatory Repudiation
Distinction between breach and repudiation (E&E p.542): repudiation = party makes it
clear by words or actions that it will breach when performance falls due. Basic approach:
a clear, unequivocal and voluntary repudiation is recognized as the equivalent of a
material and total breach if the threatened action or failure to act would be a material and
total breach if it happened at the time due for performance. A mere request for a chance
in the terms or a request for cancellation of a contract is not in itself enough to constitute
a repudiation (Corbin via Harrell, p.961).
Rationale: Allowing parties to sue for anticipatory breach helps them minimize damages;
if one party knows the other is going to breach, it may be able to minimize damages by
going for a quick remedy rather than waiting for performance that might never happen.
Problem is that you don’t know if a party is really going to breach until they do.
UCC 2-610 (p.963): Anticipatory repudiation: When either party repudiates contract with
respect to performance not yet due the loss of which will substantially impair the value of
the contract to the other, the aggrieved party may: (a) wait for performance by
repudiating party for a commercially reasonable time; or (b) resort to any remedy for
breach; and (c) in either case suspend its own performance.
UCC 2-611 (p.963): Retraction of anticipatory repudiation: (1) Until repudiating party’s
next performance is due it can retract its repudiation unless aggrieved party has, since the
repudiation, cancelled or materially changed its position or otherwise indicated that it
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considers the repudiation final. (2) Retraction may be by any method which clearly
indicates to the aggrieved party that the repudiating party intends to perform. (3)
Retraction reinstates repudiating party’s rights under the contract with due excuse and
allowance to aggrieved party for any delay occasioned by repudiation.
Harrell v. Sea Colony, Inc. (p.947): Harrell offers to mutually rescind contract; Sea
Colony (seller) possibly anticipatorily repudiates by selling condo to someone else.
Damages? If mutual rescission, Harrell would simply get deposit back; if seller
anticipatorily repudiated, Harrell would get expectation damages (here, difference
between market price and contract price).
B. Constructive Conditions and Material Breach
1. Constructive Conditions
A court will imply a condition as a matter of law if the circumstances and nature of the
contract compel the conclusion that the condition should exist as a matter of policy, or
that if the parties had addressed the issue, they reasonably would have intended it to be
part of their contract. (E&E p.473) In an exchange transaction, unless the language of
the contract or its surrounding circumstances clearly indicate a contrary intent, the parties
must almost always be taken to have expected that the principal promises exchanged
would be dependent on each other—that they would be what are known as constructive
conditions of exchange. If they were not, this would lead to the bizarre situation in which
a party could be forced to perform even when the other has failed or refused to do so.
R224 (in Selections for Contracts): Condition is an event, not certain to occur, which
must occur, unless non-occurrence is excused, before performance under a contract
becomes due. If a condition has not been satisfied (which conditions other party’s
performance), you don’t have to perform.
Jacob & Youngs v. Kent (p.974): Cardozo essentially finds that contractor substantially
performed on construction of mansion: they used the wrong brand of pipe, but he finds
that they did so by (good faith) mistake, and that the pipe is of equal quality and generally
the same as the requested pipe except for the name stamped on it. Distinction between
two kinds of promises: dependent and independent promises. Could rephrase in terms of
conditions: Independent promise: if promise to put Reading pipe in is independent, then
promise on part of other party is not dependent on it (promise on part of other party being
promise to pay). So if independent promise, no condition—promise to pay not
conditional on Reading pipe. If, however, dependent promise, creates a condition that
promise to pay is conditional upon satisfaction of that condition.
Could say here that J&Y substantially performed (i.e., did not materially breach), and
thus measure of damages is difference in value between house as it is and house as it
would have been with Reading pipe (here, zero) and not cost of replacement of pipe.
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Note that substantial performance doesn’t work where a party intentionally, say, uses the
wrong brand of pipe.
2. Material Breach
If the other party has failed to live up to the contract in some way, and that failure
constitutes a material breach, then you do not have to perform your part of the contract.
Note that not every failure on the other party’s part constitutes a material breach. The
opposite of material breach is known as substantial performance; if party to contract fails
to live up to condition of contract which is really minor, court may find that failure to live
up to contract did not constitute material breach bc substantial performance.
Parties are free to expressly empower the victim of any breach—however small—to
cancel the contract. But, in the absence of an expressed or constructive condition to the
contrary, only if a breach is material does it relieve the nonbreaching party of its duty of
performance under the contract. (Barnett, p.984)
A breach is material if the failure or deficiency in performance is so central to the
contract that is substantially impairs its value and deeply disappoints the reasonable
expectations of the promisee. (E&E, p.529).
Substantial performance: if party’s performance is short of that promised in the contract,
but sufficient to qualify as substantial performance, the other party is not entitled to
withhold return performance due but has the right to claim damages for the breach.
Usual measure of damages is amount to correct the shortfall in performance; however, if
that’s disproportionate, court may instead choose to use difference in value. (E&E,
pp.531-532)
3. Perfect Tender Rule: Cure and Rescission
Substantial performance not applicable to a sale of goods. Buyer is entitled to perfect
tender of the goods ordered and has the right to reject goods that fail to conform exactly
to what was called for by the contract.
UCC 2-106 (p.1006): Cancellation occurs when either party puts end to K for breach by
other; effect is same as that of termination. (2) Goods or conduct including any part of a
performance are “conforming” when in accordance with obligations under K.
UCC 2-601 (p.1007): … if goods or tender of delivery fail to conform to K, buyer may
reject whole, accept whole, or accept part (unit) and reject the rest.
UCC 2-508 (p.1006): Where any tender rejected because non-conforming, and time for
performance not yet expired, seller may seasonably notify of intention to cure and within
K time make conforming delivery. (2) Where buyer rejects nonconforming that seller
thought would be acceptable—say at the K time—seller gets reasonable time to substitute
a conforming tender.
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Ramirez (p.999): Autosport supplied a nonconforming van. They did supply it, but
substantial performance doesn’t apply to sales of goods.
4. Cost of completion v. diminution in value
If no substantial performance, or that that doesn’t apply, then higher measure of damages
is correct: then we see the promises in the contract as conditional on each other, meaning
that Ps can hold Ds to the contract, and thus Ps could hold D to specific performance or
the monetary equivalent thereof. So this court is with the Jacob & Youngs dissent: if
contractor acted in bad faith, doctrine of substantial performance doesn’t apply and P gets
(normal) damages.
Groves v. John Wunder Co. (p.1011): Contractor removes gravel and fails to restore land
to level grade. Aggrieved landowner sues and only gets difference in value at trial;
higher court remands, but strongly suggests that cost of completion be awarded: “ …
where the contractor willfully and fraudulently varies from the terms of a construction
contract, he cannot sue thereon and have the benefit of the equitable doctrine of
substantial performance.”
R346: (comments): “Sometimes defects in a completed structure cannot be physically
remedied without tearing down … The law does not require damages to be measured by a
method requiring such economic waste. If no such waste is involved, the cost of
remedying the defect is the amount awarded as compensation for failure to render the
promised performance.” Restatement is concerned with economic waste, but bear in
mind that economic waste is iffy: depends on value to contracting parties (i.e., might look
like waste to award $60K completion cost when diminution in value was only $12K, but
in theory contract might still be efficient because P might never have entered into it were
it not for the assurance that their land would be restored after gravel was taken out).
Peevyhouse (p.1017): Measure of damages ordinarily = reasonable cost of performance
of the work. But where K provision breached was incidental, and where econ. benefit of
full performance is grossly disproportionate to the cost of performance, damages are
limited to diminution in value bc nonperformance. Jury award here was less than cost of
completion but more than diminution in value; court says (as above) that that’s
inappropriate: that the main purpose of the lease was not the restoration of the land
afterwards. Damages reduced to diminution in value ($300).
Defenses to contracts
A. Unconscionability
UCC 2-302 (p.1137): If court finds a clause to be unconscionable, it may refuse to
enforce the contract, or refuse to enforce the clause, or limit the application of the clause
… when unconscionability is claimed, parties may present evidence to aid court in its
determination.
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R208 (p.1137): If a contract or term is unconscionable, court may refuse to enforce the
contract, may enforce the remainder of the contract without the bad term, or may limit the
application of the bad term as to avoid any unconscionable results.
Comments to UCC 2-302, echoed by those to R208, suggest a two-part test for
unconscionability: for relief to be granted, transaction must exhibit both bargaining
unfairness (“procedural unconscionability”) and resulting unfair or oppressive terms
(“substantive unconscionability”). In most cases both are present, at least to some
degree, but there is some balance, so that if one is strongly shown court is likely to be less
finicky in finding the other. There are cases in which relief has been granted when only
one of the elements has been established, but very rare: only happens when an element
(usually unfair terms) is so outrageous that the other can be assumed to have been present
as a matter of course. (E&E, p.367)
Williams v. Walker-Thomas Furniture Co.: Appellants purchased household items from
appellee under contract that kept a balance due on every item purchased until the balance
due on all items was liquidated; debt incurred at the time of purchase of each item was
secured by the right to repossess all the items previously purchased by the same
purchaser. Question of first impression for the court; they discuss both formal/procedural
unconscionability and substantive issues, citing UCC 2-302.
A. Failure of a basic assumption
1. Mistake
The doctrine of mistake applies when the contract is based on an erroneous belief at the
time of contracting that certain facts are true. Confined to errors of fact: i.e., errors about
some thing or event that actually occurred or existed and can be ascertained by objective
evidence. Doesn’t cover bad judgment, incorrect predictions of future events, or
mistaken understandings between parties (the third item is an interpretation question).
(E&E, pp. 424-426)
Sherwood v. Walker (p.1166): Both parties made a mistake; question is whether when
both parties make a mistake about a term in a contract, that’s a reason to void the
contract. Trial court found for P: mistake didn’t vitiate the contract. This court reverses
and says K is unenforceable because whether or not the cow was pregnant was a material
fact—the subject matter of the sale. Court says that a mistake as to a mere quality of the
thing being sold wouldn’t void.
R151 (p.1189): A mistake is a belief that is not in accord with the facts.
R152 (p.1190): Restatement’s requirements for avoidance on ground of mistake: (1)
mistake goes to a basic assumption on which K was made; (2) mistake has a material
effect on the agreed exchange of performances; and (3) the mistake is not one of which
that party bears the risk.
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