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Forming a Contract
Assumpsit: assumption of duty or something being done
Warranty of cure: SHAHEEN/KNIGHT (PA, 1957) F: P sues D for breach of contract after a failed vasectomy
after P’s wife has 5th child. Sues for damages, cost of raising child. H: No, damages because a child is a blessing.
No “special contract” so there was a warranty of cure (unless explicitly stated, there is no
warranty/guarantee of cure); a contract to sterilize a man is not against public policy;
Warranty of Cure: HAWKINS/MCGEE: Hairy hand (skin grafting). P sues for damages. Verdict for P, but
damages were excessive. D expressly gave warrantee of cure and it should be taken at face value. Remedy:
expectation damages. Suffering if part of willing collateral damage (cannot be counted—would have been the
same if surgery succeeded or failed.) D didn’t have to take on the responsibility of the operation, but once he
did, he had to see it through.
Contracting for babies: IN THE MATTER OF BABY “M,” (NJ 1987) Sterns (P) pay for surrogate services of
Whitehead (D). Whitehead refuses to surrender parental rights afterwards. H: K invalid. Surrogacy contracts
are inherently invalid because it directly conflicts with existing statues and conflicts against PP. It amounts to
baby selling. Adoption deal with mothers that are already pregnant whereas surrogacy creates a pregnancy in
exchange for money. (The contract stipulates that D only gets a small fee if the baby is miscarried or
stillborn.) Calling all profits as service and service fees is a farce. Surrogate mother cannot consent to giving
up her parental rights before the child is born (contract asks unlawful term.) Her consent is irrelevant
DAMAGES
Expectation Damages (General damages for breach)
(loss in value) + (expenditures paid in carrying out obligation under K) – (cost/loss avoided)
“the benefit of the bargain”: putting non breaching party in as good a position as he could have been if the K
had been completed (value of goods – value of mitigation/market value) The value of market value is the date
agreed upon for K completion (subsequent events do not matter.
Reliance interest: cost + harm
If the promisee had changed its position to its detriment in reliance on the promiseattempt to put the
promisee back in the position in which the promisee would have been had the promise had never been made.
(ordinary less generous than expectation interest)
Restitution interest:
If the promisee had conferred a benefit on the promisor in the course of the transaction put the promisor
back in the position he would have been had the promise not been made.
Example: Jack and Jill (p.72)
Jack agrees to sell Jill a copy of the Restatement in return for her agreement to pay him $10 and give him a
photocopy of her class notes. Restatement has market value of $15; notes have a market value of $1, and it
costs Jill $3 to photocopy her notes. She pays Jack the $10 and gives him the notes. He refuses to deliver or
return the money or the notes.
Restitution interest (put Jack back): $10 + $1
Reliance interest (put Jill back): $3 + $10
Expectation interest: $15
$3 cannot count in these equations since it was to be paid no matter what.
Damages for breach of contract: reasoning
 breach involves some kind of psychological harm (disappointment)
 enforcing will of the parties
 eliminate distinction between present and future goods so breach has stolen total wealth (circular
reasoning: goods have value because of enforceability, but you cannot use the fact that it’s enforceable
to say it has value)
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contracts encourage exchanges and flow of goods/services to improve social good
We impose liability because parties assumed liability at time of K, for the amount agreed upon if
the costs end up to be greater, we do not want to impose that greater fee
“Reason to know” : encourages parties to communicate and have a “meeting of the minds”  parties
can limit/refine scope of liability, but when they remain silent it becomes difficult to assess
Calculating Damages : Foreseeability:
1. Default Rules
a. Majority default rule: what the majority would want (ie upon death, all assets go to family)
easier to enforce, economically efficient
b. Penalty default rule: achieves results that the majority would not want (ie upon death, all
assets go to mortal enemy) gives strong incentive to act (ie to make will)
i. In Hadley, it would encourage parties to set strict contracts (mere notice rule seems
punitive to D and we encourage them to explicate their liability, thereby forcing them to
reveal information which may economically benefit the customers.)
c. When default rule is not popular, but advantageous to repeat players
i. Under these circumstances, default rule should be penalty rule and burden to K around
the rule should be on repeat players, requiring them to notify other party
2.
Foreseeability
a. Damages are not recoverable for loss if the party in breach did not have reason to foresee as a
probable result of the breach when K was made. Loss may be foreseeable when it follows from
the breach
i. In the ordinary course of events OR
ii. As a result of special circumstances beyond the ordinary course of events, that the party
in breach had reason to know:
b. TONGLISH/THOMAS (KA, 1992) Tonglish sells seeds to Coop and Coop sells seeds to Bambino
at cost plus handling fee. Tonglish reneges and sells to Thomas instead. Thomas reneges and
pays damages to Tonglish. Coop sues and court awards it the handling fee. I; Whether the buyer
is entitled to its actual loss of profit or the difference between the market price and the contract
price. H: Expectation Damages : (market price) – (contract price measure) Coop protected itself
against market price fluctuations with the Bambino contract. UCC1-106 & 2-713
c. Limited scope of responsibility when parties remain silent: HADLEY/BAXENDALE (Eng,
1854) P’s crank shaft breaks down and pays D 2pounds to deliver it to manufacturer for
replacement, informing clerk that it was a rush. Slow delivery, P wants to sue for all loss (300
pounds)H: An injured party may recover those damages reasonably considered to arise naturally
from a breach of contract, or those damages within the reasonable contemplation of the parties
at the time of contracting. D could not foresee the consequences. No Special K was made when P
informed D’s agent about the rush (clerk did not have agency to speak on behalf of the owners)
d. Intention to assume responsibility: MARTINEZ/SOUTHERN PACIFIC: P’s dragline is delayed
and damaged en route. Sues for 1. Repair cost 2. Initial storage cost and 3. Deprivation of use
profit during period of delay and repair. 1 and 2 are settled outside of court. H: P denied
damages. P cannot claim for profit lost during delay during repair because parties have already
settled on the repair cost of the dragline. D claims that rental value is not a foreseeable result
(they could have just as easily foreseen a sale or a rent), though court says that it doesn’t have to
be the most foreseeable but rather just a generally foreseeable cost
i. Compared with Hadley: Dragline has value in and of itself (P is asking for only the rental
value of the dragline lost while Hadley was claiming profits of entire mill.) Perhaps if
Hadley had only asked for the rental value of the shaft, they might have settled.
ii. Desire to protect D: policy argument (do not want to paralyze commerce)
iii. Special circumstances (result was not reasonably foreseeable)There was no intention to
assume liability (proof of reason to know). For example. If Fed-Ex charges more after
you tell them explicitly that they will be liable, they tacitly assume liability when they
accept your increased fee.
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e.
3.
4.
Tacit Agreement: MORROW V. 1ST NATIONAL BANK: P puts down deposit to rent safety
deposit boxes when available. D fails to notify P when they are ready and P’s coin collection is
stolen in the lost time. Verdict for D. At time of K, D did not assume liability to insure coins
against theft.
Certainty: Court may limit damages for foreseeable loss by excluding recovery for loss of profits, by
allowing recovery only for loss incurred in reliance (reliance damages), or otherwise if it concludes that
in the circumstances justice so requires in order to avoid disproportionate compensation
a. No certainty of lost profits: CHICAGO COLISEUM CLUB/DEMPSEY: Dempsey ducks out of a
fight and P sues for expectation damages, including preparation fees spent before K, preparation
for the fight, and expected profit ($1.6m) H: P awarded reliance damages. Club can only claim
down payment to Dempsey ($10), architect fee for plans in the event stadium was to be used for
performance ($300), fees spent trying to get Dempsey to get his physical exam, and salaries of
assistant secretaries. P cannot claim for $ spent prior to K would have been the same whether or
not K was successful. P tried to claim the costs incurred by their publicity planner, Weisburg, but
that was a separate K and was inadmissible.Court maintained that profits were unforeseeable
and so could not be awarded as damages
b. Certainty: ANGLIA TV V. REED: D was scheduled to star in TV movie, but breached at last
moment. Movie feel through. D sues for damages H: D is liable for reliance damage for costs
before K performance: A plaintiff is not limited only to expenditures incurred after the formation
of the contract in a claim for wasted expenditure from a breach of contract. P is claiming they had
to get together a crew and cast before they signed on P. In comparison with Dempsey (where the
fight was all about Dempsey), D could have found another actor to play the part the movie and
costs could have been salvaged if Reed never took the K. As
Avoidability: Breaching party clearly states that they no longer require performance, so to keep on
working is unproductive as a society, we want to discourage this net utility loss (Hypo: widget factory
making parts for a specific machine that is no longer on the market)
a. Hypo: Hadley case: as soon as mill discovered the delay, they rented a replacement. They could
sue Baxindale for rent money.
b. ROCKINGHAM COUNTY/LUTEN BRIDGE: Avoidability: City council repudiates K, but P keeps
on building then sues for expenses. H: P could claim for expenses before the first notice of
repudiation, but no more after. By ignoring repudiation, P increases the damages and should not
be compensated for losses not caused by the breach. They proceeded at their own risk. D should
not be able to increase damages after K is breached.
c. Mitigating Damages: SHIRLEY MACLAINE PARKER/20TH CENTURY FOX: Avoidability,
Mitigation Duty: P signs on to star in Bloomer Girl, which falls through. D offers female lead in
Big Country, Big Man. P refuses and sues for expectation damages. D claims that she failed to
mitigate the damages because they offered her an alternative (same employment.) H: Verdict for
P, expectation damages. P is not obligated to take different and/or inferior offer under
avoidability. The two contracts are not equal Big Country Big Man is a western and is filmed in
Australia (versus musical in LA.) P also loses director and screenplay approval. Forcing P to take
any job touches on personal freedom and autonomy elements
i. How to calculate the expectation damages (Valuation and Certainty problems)
1. Damages = $750k – time/effort spent
2. D will argue that P is overcompensated since no time nor effort was used (even
given the fact she does not find alternative work. If she did sign another K, it’s
cost will be subtracted from damages.)
3. P could claim that she expected accolades for which she should be compensated.
ii. Regular employment rule: Damages = K – rsnble salary for similar employment
d. Lost volume sellers: NERI/RETAIL MARINE CORPS: P orders custom boat and pays
downpayment. P repudiates and sues for return of payment. H: P has to pay for expectation
damages minus his deposit. (total damages earned = deposit – lost profit – storage fees –
incidental damages) Court goes through UCC 2-718(2) and 2-708(2) (because subsection 1 does
not give Marine Coprs any $) they end up with expectation damages
i. Lost Volume Issue: P argues that D already sold the boat, but had they not breached, D
would have sold 2. D has the duty to sell the boat as mitigation because when they sell
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the boat, they don’t waste production cost of making and obtaining the boat. They can
claim the profit loss from P (which is all they really lost since they made up the
production cost upon sale to second customer, though if they hadn’t sold the boat, they
would have claimed it in damages from P. Either way, they get paid for production
costs)If D cannot sell the boat, it no longer becomes a “Lost Volume” issue.
Restatement 2-710: Seller’s incidental damages: Incidental damages to an aggrieved seller include any
commercially reasonable charges, expenses or commissions incurred in stopped delivery, in the
transportation, care, and custody of goods after the buyer’s breach, in connection with return or resale of the
goods or otherwise resulting from the breach.
 UCC also talks about the reasonableness of damages sought
[WASSENAAR v. TOWNE HOTEL] (Wisconsin, 1983) (p165)
F: P sues employer for breach of employment contract (he was let go 21 months ahead of schedule.) P sues for
liquidation damages, the remaining amount that would have been paid to him if he had stayed employed at
hotel.
D argues that P found another job and his new salary should be deducted as part of mitigation damages
H: Verdict for P (enforced liquidated damages stipulated in K)
-With a liquidation clause, there is no duty to mitigate and so subsequent salary cannot be subtracted
from total damages awarded (Also, the evidence of how much his new salary came out to be was not entered
into evidence in lowers courts so appellate decision cannot take it into account in response to D’s claim that P
is overcompensated)
I.
Reasonable Test
a. Subjective intent: was the clause intended to be a liquidation clause or a penalty clause?:
i. Court does not care about this as much: what the parties label as “liquidation” or
“penalty” are irrelevant to what they actually are
b. Difficulty of Ascertainment Test: is the injury caused by breach something that is easy to
estimate?
i. Court agrees with P: damages are difficult to predict and the liquidation clause
reflects this. Uncertain factors include the value of job stability, employment
reputation, and etc.
ii. D claims that it should be treated like a regular employment contract damages
(salary – mitigating profit/new salary)
iii. Mitigation duty: not applicable here because there was no evidence on record about
P’s earnings. Also, if liquidated damages clause is deemed reasonable, there is no
mitigating duty.
c. Reasonableness forecast: judge of how well the parties were planning when they made the K
(difficult because this can often be swayed by hindsight bias)
i. “Totality of circumstances” = no certain outcome
II. [KEMBLE] in light of [WASSENAAR]
a. Passes Difficulty of Ascertainment test, but the court knows for a fact that actual damages
was only $750 so their assessment of the Reasonableness Forecast depends on their view of
how reasonable $1000 liquidation damages is in light of this $250 difference. It seems that
there is a trend towards freedom of K and deference to parties’ right to K so there is a strong
inclination to think they would have awarded the theater the $1000 if the case took place
today.
[09.22.2010]
Restatement 356(1): Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in light of the anticipated or actual loss caused by the breach AND the difficulties of
proof of loss.
I.
Penalty Damages
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a.
Foreseeability of loss: the more foreseeable the actually loss is, the less latitude the courts
give to set damages higher than expected cost (ex: if K is for $5, a $20 LD clause is not
considered reasonable.)
b. Unforeseeable losses get more latitude for setting price of LD clauses
II. Liquidation Damages Pros
a. Fewer transaction costs (litigation, time/energy)
b. Certainty (insurance, resolution)
c. Freedom of K
d. Pricing facilitates the free exchange of information and transparency
e. Increases earnestness of K
f. Works around limitation on certainty
g. Allows parties to accurately target their needs/desires (idiosyncratic valuation)
h. Greater likelihood of settlement outside of court
III. Liquidation Damages Cons
a. Exploitative (uneven bargaining power between parties)
b. Not flexible to changes in the market
c. Contracts of adhesion (take it or leave it K’s; K of no negotiation)
d. Private performance of judicial functions
e. Deters efficient breaches
f. Poor planning on parties’ side
IV. Hypo:
a. If there is an addition of this clause to K: “If J breaches, he pays $5k in expectation damages.”
Does the existence of this clause affect their decision?
i. Certainty of what penalty is
ii. Lower transactions costs
iii. However, does that decrease the apparent earnestness of the K? (J seems to hint that
he may breach. Versus if he set LD clause at $10K, it would hint that he was less
likely to breach.)
Specific Performance: Contracts for Land and Contracts for Goods
Money damages are insufficient for K’s about land or personal property that is sentimental and/or not easily
replaceable or non-competition contracts (cannot set money amount for what can’t be determined.)
[LOVELESS v. DIEHL] (Supreme Court of AK, 1963)
F: D rent from P with option to buy for $21K. They already owe P $1,440.95 for some milk equipment. P
organizes a sale to Dr. Hart for $2k (making $1k in profit). P revoke the option. D sue for specific performance.
PH: Chancery court awarded D specific performance and damages, awarded P judgment on the note (for
milking equipment)
1st opinion of supreme court: P pays $1k in damages – (rent + $1,440.95 + interest)
H: specific performance ordered
-Default rule: presumption of specific performance on land cases: court reluctant to set precedent
where land can be taken at decision of court. There is a view of land as unique (unique geography and
features) In this case, it’s less of an issue because it’s about an option to buy that the D are going to sell to a
third party (can’t have too much of a personal attachment to the land.)
-However, to consider the fact that they are going to sell immediately can set a dangerous precedent
because, then, how will courts decide on cases when the party plans to sell after 6 months? After a year? Are
these people any more speculators than others? Should that bar them from entitlement to specific
performance? In this case, the expected benefit was monetary and not personal (land for a home.)
[09.23.2010]
[CUMBEST v. HARRIS] (Supreme Ct of MI, 1978)
F: P gives stereo equipment to D as collateral for a loan that he meant to pay back using an option to buy with
an expiration date. P tries to pay it back but D avoids P until the option has expired. P sues for specific
performance.
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H: Verdict for P. Stereo set is seen as unique so specific performance is ordered.
-Generally, goods are seen as replaceable where land is considered unique. The default damages is
usually monetary. In this case, the goods are of a personal and sentimental value, and are unique.
-UCC 2-716(1): Specific Performance may be decreed where the goods are unique or in other proper
circumstances (when good is scarce and very difficult to replace.)
[SCHOLL v. HARTZELL] (Court of common pleas, PA, 1981) (p.206)
F: P places deposit for Corvette being sold by D. P pays $100 for a $4000 1961 Corvette. D breaches. P files for
specific performance under replevin (return of one’s goods.)
H: verdict for D
-Court refuses to recognize P’s claim to replevin b/c a deposit does not transfer ownership
becomes breach of K for failure to deliver goods (default rule is money damages unless P can claim specific
performance right.)
-SP is a buyer’s remedy (buyer does not need to claim specific performance because they are just in it
for the money.)
-Court says goods are not unique and irreplaceable and that P had not alleged he is unable to cover
(buy it somewhere else.)
[SEDMAK v. CHARLIE’S CHEVY] (Missouri Court of Appeals, 1981)
F: P orders custom limited edition Corvette (only 6,000 made) and orders specs made on it. P bays $500
deposit. D breaches and tells P that they have to bid for it.
H: verdict for P (relatively unique and substantially difficult to obtain.)
-Is SP bad for utility? (There are other parties out there willing to pay more than the Sedmak’s)
[Sedmack} in light of [Scholl]
-difference on whether or not there was ability to cover
-difference in owners Scholl was going to keep the car, Chevy was going to sell it anyway
III. Specific Performance on Employment Contracts
a. Mary Clark (p212): former slave that enters into K for indentured servitude (Indiana, 1821)
Indiana court releases Clark, saying involuntary servitude is illegal
b. Voluntariness: measured at time of K and at present (these two measures produce 2
different outcomes.)
i. In most breach of K cases, we do not compel action/performance (question of
freedom.)
ii. However, we do want to respect freedom to K, which may suggest ordering SP
c. Court takes time/place where specific performance is ordered (apprentices, soldiers,
sailors) a personal service K is different because we care about people’s freedom to K, as
well as their freedom to change their mind
d. Court is concerned about not making human life seem like a commodity
[LUMLEY v. WAGNER] (England, 1852) (p216)
F: D ignored non-competition clause tacked onto K. P asks for SP in form of injunction on D to prevent her
from singing at competitor’s theater. (Common est. norm says you cannot demand a positive SP—can’t
compel someone to do something)
H: Verdict for P (negative injunction)
1. Compulsion on negative injunction
a. Problem: compelling the injunction may in effect force Wagner to sing (doing indirectly
what you cannot do directly)
2. Justification
a. Distrust of jury (fear that they may be vindictive in awarding damages to P) like
[Winston Cigarettes], where judge doesn’t trust jury to be fair
b. Court operates as moral voice to “bind men’s consciences to a true and literal
performance of their arguments”
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[FORD v. JERMON] (District court of PA, 1865) (p222)
F: P sues for injunction to prevent D from playing for a competing theater company.
H: verdict for D (no injunction)
1. Negative injunctions
a. Economically inefficient
b. “mitigated form of slavery”
c. the prospect of imprisonment for breach of K seems unfair (D faces jailtime if she
ignores the injunction—for contempt of court)
d. command of inaction bars D from making a living
[DUFF v. RUSSELL] (Sup. Court of NY, 1891) (p224)
F: D, a very famous actress, breaches (doesn’t want to wear tights.) P sues for injunction.
H: Verdict for P, injunction granted despite no negative stipulation in K.
-K had liquidated damages clause—parties had bargained around breach of K
[09.28.2010]
[BAILEY v. STATE OF ALABAMA] (US 219, 1911) (p238)
F: P breaches labor K and convicted of fraud in addition to breach. Sentenced to hard labor to repay damages.
H: Verdict for P, statute of Alabama inadvertently led to slavery (breached 13 th Amendment) Decision
was unconstitutional because it attached criminal penalties to contract damages (threat of criminal offense to
force performance.)
-Imprisonment
o Alabama is not allowed to used the power of criminal law to do what they expressly cannot
do (under 13th amendment)
o P is liable to debt, but he cannot be sentenced to hard labor in order to pay it (to punish
breachers with the threat of fraud and forced labor belies the good intentions of the 13 th
amendment, which is to protect free labor.)
o Cannot contract around laws
-Holding protects against exploitation of vulnerable
-Court sidesteps the question of race (otherwise, they risk setting a very narrow precedent that is
harder to apply in the future)
D: Holes says labor contracts are still valid and both fines and damages are appropriate as incentives to
perform. If imprisonment is justified for the failure to pay a fine, then there is no reason for the state not to
throw it’s weight behind performance in the same way. (Traditionally, in contract law, the court does not
uphold penalty clauses, which suggests that they may have objections to criminal punishment for contract
breaches.)
Holmes argues that if the state enforces these contracts to the utmost, they will be more valuable and
actually good for the laborer in the long run.
Restitution Damages
I. Hypothetical: A agrees to buy land for $5000, paying $4000 as deposit to B, the seller. The next day, B
decides not to sell. In the meantime, the market has received a serious shock and the value of the
land drops to $2000.
a. Expectation damages: $2000 - $1000 (avoided cost) = $1000
b. Reliance damages: $4000 (cost) - $3000 (avoided market loss) = $1000
c. Restitution damages: breacher’s gain: $4000 (deposit money)
d. In this case, restitution damages is the most equitable option to the buyer. Otherwise, the
seller experiences unjust enrichment.
II. Reliance Damages: Section 349 As an alternative to the measure of damages stated in Section 347, the
injured party has a right to damages based on his reliance interest, including expenditures made in
preparation for performance or in performance, less any loss that the party in breach can prove
with reasonable certainty the injured party would have suffered had the K been performed.
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a.
Courts may reduce reliance damages in order to deter reliance on bad/weak contracts
(sticking with a contract even though it is inefficient and “bad” just to get reliance damages.
III. Restitution damages Section 373: (1) Subject to the rule stated in Subsection (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.
a. In contracts where the non-breaching party has conferred a gain upon the reaching party
(deposit, partial performance, etc.), restitution damages are usually seen as benefits flowing
from the injured (non-breaching party.)
b. Right to restitution is restricted to claims for damages under total breach or repudiation
(rescinding the K), meaning cases in which no K exists anymore. For example, one cannot
apply to repudiate a contract two days before construction on a house is completed.
c. We see more of this with losing K’s (K’s that are worth very little)
[BRITTON v. TURNER] (N.H., 1834) (p257) Partial Performance- labor
F: Breach of labor K. P works under D’s employ, but leaves before K for a year is up. P sues for value of partial
labor rendered. (D does not claim damages for P’s departure, so court only deals with amount owed to P)
H: Verdict for P (due salary minus any damages to D)
-Labor rendered (“goods rendered”)
-D accepts labor on a day to day basis, so P should deserve payment for labor rendered. D
manifests his acceptance through continuous employment of P.
-Court says parties could have put an “express term” in the K to address partial performance
in order to avoid this situation.
-Default rule: In labor contracts, partial performance is accepted unless contracted out of K
-Damages to D:
-D does not have to pay more than he received (more than was contracted for originally)
-If value of labor rendered < damages to D, P cannot recover
-If value of labor rendered is > damages to D, P can recover.
-“damages to D” = cost to procure completion of the performance contracted
-K is important because it gives us a way to estimate damages.
[09.29.2010]
I.
Quasi-Contracts
a. COTNAM v. WISDOM (Sup. Ct. Arkansas, 1907) (p265) D, doctors, give emergency relief to
deceased. D sues estate of deceased for payment of services rendered. PH: verdict for D, P
appeals, also taking objection to the jury instructions that allowed jury to take the value of the
deceased’ estate into account when determining “reasonable remedy” for the D. H: Verdict for D
affirmed, but jury instructions were wrong.
i. quasi-contracts (fictions created by court to award remedies in the interest of justice)
Suggests that P would have made this contract at the time if he could have
1. “quasi contract”  Court does not go as far as to create an actual K, which
would call into consideration the size of P’s estate (how much he would have
been willing to pay for emergency aid.) Rather, the court uses a Reasonable
standard (reasonable price of surgery.)
2. Courts do not want to give doctors a disincentive to rush to provide aid
ii. D’s claim unjust enrichment to P (meaning P “breached” which makes D more
sympathetic to jury). Success of surgery in the end is immaterial (no warranty of cure,
one pays for the expertise rather than an guaranteed result.)
iii. Jury instructions—taking into account the financial state of the parties
i. Court says there is no reason to determine value of P’s estate because there was no
actual contract and only a quasi-K determined under reasonable price standard.
This information could bias juries in their determination of damages owed to D
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Martin v. Little Brown and Co. (Pa., 1981, p269) P voluntarily tells D that they are being
plagerized and sues for a remedy from D for his help. PH D demures and is accepted. H affirmed.
i. No quasi-K: volunteers do not deserve remedies. Not a good example of K implied in fact
ii. “Implied in Fact”: when parties are in circumstances where there usually is a
contractual relationship, for example bringing a car to the mechanic. (P was not
engaging in activity that is commonly understood as being paid.)
iii. Unjust enrichment: P claims D was unjustly enriched. However, UI only applies when D
secures or receives a benefit that it would be unconscionable to keep or retain.
iv. Compared to Wisdom: unclear as to whether doctors in D could be assumed to be
volunteers (they may have been called to the scene). In Martin, both parties had option
to K, but failed to do so (implies that at least one party did not intend to enter into K)
v. In Wisdom and Martin, there is no contract breach.
I.
ASSENT
a. Objective Test of Assent (need both objective test and promisee’s subj. understanding)
i. If a reasonable person would have understood that a K had been made
1. Embry v. Hargadine, Mckittrick Dry Goods Co. (Mo., 1907) (p290) P, a
sample manager, works for D and his employment contract is coming to an
end. With fear for the future of his job, he goes to D’s office and says that he
needs affirmation of a contract extension or he will quit on the spot (needs
to look for a new job within a certain time frame if otherwise.) D says, “Go
ahead, you’re all right; get your men out and don’t let that worry you.” P
takes this as verbal agreement for extension, and sues when he is let go a
couple months later. PH verdict for D (formation of K requires both parties’
intention to make K.) H reversed for P (P had reasonable understanding of
D’s words and actions as assent to K. (If D did not mean to K, he probably
would not have let P go back to work)
ii. Promisee understood it as a K
1. subjective belief of promisor does not matter in this test.: Lucy v. Zehmer
(Va., 1954, p296) D gives P a K to sell his farm, alleging it was a joke and
that he may have been drunk. P relies on this K and starts assembling
money to buy this farm that he has never been able to get D to sell to him
before. P sues for specific performance when D breaches. PH verdict for D
(no specific damages awarded.) H reversed and specific performance
granted
a. Zehmer wrote out a deed with technical language and had his wife
sign it along with him (specificity of terms.) However, deed is
written on the back of a restaurant receipt and contains many
cross-outs. Ct. says that a K had been made. Perhaps a policy to
prevent cold-feet promisors from breaching without consequences
and to protect buyers from losing investments in reliance of sales.
b. There does not seem to be a meeting of the minds, however, there
is objective actions that establish a K.
II. Offers
a. Preliminary Negotiations
i. Nebraska Seed Co. v. Harsh (Neb., 1915, p305) D, a farmer, sends out letter stating
his price and P, a middle man buying selling seed, construes this as an offers. P
accepts and sues D upon failure to deliver. H verdict for D (no K)
1. Not an offer, rather, it was a request for bids (No conditional language,
uncertain if P was the only receiver of the letter.)
a. This might be different if P and D were repeat players
ii. Leonard v. Pepsico (NY, 1999, p309) P, a teenager, sees D’s commercial on TV and
thinks that D meant to offer a Harrier Jet as a prize for 7million Pepsi points. P relies
on this and collects $700,000 in order to purchase enough Pepsi points to obtain the
jet. P finds that the jet is not on the catalogue, but fills it into a blank space and sends
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a check nonetheless. P sues for specific performance and D moves for summary
judgment. H for D.
1. Advertisements are not offers unless it is open and explicit, leaving nothing
to negotiation (ex: “Saturday 9AM Sharp, 3 Brand New Fur Coats, First
Come First Served $1 Each”)
2. Objective standard: No reasonable person would have constitute an ad to
mean an offer.
a. Humor of the commercial (obviously meant to be an ad)
b. Missing terms: no specification of delivery details
c. The ad directed the viewers to the catalogue, which was the real
offer (and the jet was no in the catalogue)
d. Pricing of a real Harrier Jet ($23m) should have imputed
knowledge to P that this was not an offer.
iii. Empro Manufacturing v. Ball-Co Manufacturing (7th circuit, 1989, p319) Both
parties signed letter of intent for P to purchase floated assets of D. D starts
negotiating with other parties and P sues for temporary restraining order. PH
verdict for D (no K formed.) H affirmed verdict for D.
1. Letters of intent mark the start of negotiations
2. P’s manifestation of intent not to be bound: P instilled many back out
insurance clauses into the letter of intent for themselves should they
change their mind about buying (subject to board approval, and a
requirement that the $5000 “earnest money”/deposit be returned in case K
does not happen (contrary to regular K’s in which seller gets to keep
deposit if buyer changes mind)
Revoking an Offer
i. Dickinson v. Dodds (Eng., 1876) D gives P an offer to sell land, to “be left over until
Friday, 9am.” P decides on Thursday that he wants to accept and tries varies ways to
do it (including leaving a note with D’s mother that D never actually receives.)
Before the expiration deadline, P has his agent to catch D at the train station, at
which place D tells the agent that the land has already been sold. P then tries to go
up to D himself to accept the offer, but D returns the same answer. H verdict for P. H
reversed on appeal.
1. No meeting of the minds during acceptance
2. P cannot make a K binding through acceptance if he knows that the
contracted thing has been sold already (is no longer available)
3. P did not pay for an option K
ACCEPTANCE
I.
Rules
a.
b.
Mailbox Rule: default rule: assent is manifested when acceptance drops it in the mailbox.
i. Protection for the offeree, who can begin to rely the second the acceptance is out of
their hands.
ii. Offeror is mater of the agreement: can specify manner and medium acceptance; the
medium used is usually the way the offeror used or the customary medium in
similar transactions (custom); if no specs, then Mailbox Rule kicks in
iii. Bi-lateral K (acceptance by promise): acceptance kicks in when sent by offeree.
iv. Option K’s: acceptance kicks in upon receipt (offeree has already paid for the right
to have the opton to stay open for her and thus offeror cannot offer to anyone else:
offeree doesn’t need protection in this case.)
Mirror Image Rule: the acceptance has to mirror the offer
i. A counteroffer is not an acceptance (does not mirror the offer.)
1. Ardente v. Horan: P’s want to buy a home from D and in reply to D’s last
offer, accepts but puts conditional language into their acceptance (“I would
appreciate your confirming that [certain furniture and fixings] are a part of
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the transaction, as they would be difficult to replace.”) D takes this as a
counteroffer and withdraws the sale. P sues for specific performance. PH
summary judgment for D. H affirmed.
II. Acceptance by Performance/Unilateral Contracts
a. bilateral K’s (acceptance by promise); Unilateral K’s (acceptance by performance)
b. Ads imply no notice of acceptance necessary (acceptance is through action unless otherwise
specified in ad.)
i. Carlil v. Carbolic Smoke Ball Co. (Eng., 1893, p343): D puts in miracle cure of cold ad
in newspaper, offering 100 pounds to any customer who uses it for two weeks and
still gets sick. D says that they have placed 1000 pounds in a holding bank to show
good faith. P sees add and dutifully buys a carbolic smoke ball, using it for two
weeks, and then notifies the D, who refuses to pay (saying that they were not
notified of her acceptance of her offer.) P sues. PH verdict for P. H affirmed.
1. This is same as the fur coat advertisement, but not the same as Leonard v.
Pepsico in which the ad was just an offer to negotiate and the real offer was
in the catalogue.
c. Acceptance by Silence
i. Restatement 69: ACCEPTANCE BY SILENCE OR EXERCISE OF DOMINION
1. Where an offeree fails to reply to an offer, his silence and inaction operate as
an acceptance in the following cases only:
a. Where an offeree takes the benefit of offered services with
reasonable opportunity to reject them and reason to know that they
were offered with the expectation of compensation.
b. Where the offeror has stated or given the offeree reason to
understand that assent may be manifested by silence or inaction, and
the offeree in remaining silent and inactive intends to accept the
offer.
c. Where because of previous dealings or otherwise, it is reasonable
that the offeree should notify the offeror if he does not intend to
accept.
2. An offeree who does any act inconsistent with the offeror's ownership of
offered property is bound in accordance with the offered terms unless they are
manifestly unreasonable. But if the act is wrongful as against the offeror it is
an acceptance only if ratified by him.
ii. Hobbs v. Massasoit Whip Co. P sends eelskins to D (both are repeating players.) D
gves no notice of acceptance and allows eelskins to rot. P sues for payment, D says
he never accepted. PH verdict for P. H affirmed.
1. Silence manifested intent (D had duty to respond either way.)
2. Hypothetical: Book clubs and CD clubs
a. Optimism bias: people think they are more organized than they are
so they think they will be able to take advantage of this system
b. Endowment effect: those who have value their things more than
those who do not have (experiment with Cornell mugs)
d. Assent to licenses (downloading, web technology)
i. Assent to a license requires that assentee knows of the K (knowledgeable assent)
1. Specht v. Netscape (N.Y., 2001, p370): P downloads freeware from D’s site ,
hidden within freeware is a spyware sending user info back to D. P, in class
action suit, sues, but D claims that act of downloading bound P’s to
arbitration clause in license. H: no assent and thus no K.
a. K law is applied: act of downloading does not manifest assent if
there was no meeting of the minds. Also, the terms and conditions
were purposely hid on lower frames, with the knowledge that most
people do not read the fine print. There was no knowledgeable
assent.
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b.
2.
Download was to get the product, not to manifest assent. Unlike
Mckittrick in Embry, P do not even know that there is a K (no
reason to know that anything they do could manifest assent.)
Register.com v. Verio (2nd circuit, 2004, p379) D uses P’s website to obtain
information and spam customers. P is in the business of building a database
open to the public for lawful purposes. P also offers it’s own web
development services and D is a competitor in this business. Every day, P
uses D’s automatic program to search the WHOIS database and telemarket
consumers. Before using the query, they are put on notice that using the
query program to telemarket is against the licenses agreement (this
agreement arrives after the data is received for each query.) D claims they
are not bound. PH injunction granted to P to stop D. H affirmed.
a. D claims that they are not bound by agreement because they
receive the license agreements after each query and thus are not
put on notice before they use the program. Ct disagrees, saying that
D sends many queries each day and that their argument only works
for the first time they do it. Assent is manifested the second time
the query system is used (the taking manifests intent to agree.)
i. Ex: a person eats an apple, thinking they are free, only to
realize afterwards that they are $1 each. While he may be
excused the first time for not noticing, he cannot come
back each day and use the same excuse to eat free apples.
b. Different from Specht because Verio is fully aware of terms.
c. Dissent: D may have wanted to reject terms, but had no method to
bargain around it.
III. Evidence of Assent
a. Do both parties attach the same meaning? Looks to the workds of the K, the way the parties
worked out the K (conduct, for example, silence = assent for some K’s.) If there is an
agreement, then Court assumes agreement in fact and that K is enforced accordingly.
i. 201: Whose Meaning Prevails:
1. Where the parties have attached the same meaning to a promise or
agreement or a term thereof, it is interpreted in accordance with that
meaning.
2. Where the parties have attached different meanings to a promise or
agreement or a term thereof, it is interpreted in accordance with the meaning
attached by one of them if at the time the agreement was made
a. that party did not know of any different meaning attached by the
other, and the other knew the meaning attached by the first party; 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.
3. Except as stated in this Section, neither party is bound by the meaning
attached by the other, even though the result may be a failure of mutual
assent.
ii. Raffles v. Wichelhaus (Eng., 1864, p396) “Ex-Peerless”: P and D enter into K for P to
sell D cotton to arrive from Bombay to Newclastle “to arrive ex Peerless,” a term
placed into K to mean that the K was void if Peerless was lost at sea. There turns out
to be two Peerless ships on same route (October and December.) P meant October
and D meant December. P sues for payment for the cotton that arrived on October
Peerless, which D never accepted. Verdict for D (no K, no meeting of the minds.)
1. Subjective test: there is no subjective intent: as opposed to objective test
which provide clear terms on which parties can rely. However, when both
parties have same understanding of terms, there is no problem even if the
words are ambiguous.
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2.
b.
Hypo: Seller thinks it’s December and Buyer means October. Buyer speaks
with seller and realizes that seller meant December. Under Restatement
207, Buyer is bound (Rest. 201(2))
3. Embry does not apply because in Embry both parties had different
meanings of the incident
Misunderstanding of terms:
i. Restatement §20. Effect of Misunderstanding
1. There is no manifestation of mutual assent to an exchange if the parties
attach materially different meanings to their manifestations and
a. neither party knows or has reason to know the meaning attached by
the other; or
b. each party knows or each party has reason to know the meaning
attached by the other.
2. The manifestations of the parties are operative in accordance with the
meaning attached to them by one of the parties if
a. that party does not know of any different meaning attached by the
other, and the other knows the meaning attached by the first party;
or
b. that party has no reason to know of any different meaning attached
by the other, and the other has reason to know the meaning attached
by the first party.
ii. 202: Rules in Aid of Interpretation
1. Words and other conduct are interpreted in the light of all the circumstances,
and if the principal purpose of the parties is ascertainable it is given great
weight.
2. A writing is interpreted as a whole, and all writings that are part of the same
transaction are interpreted together.
3. Unless a different intention is manifested,
a. where language has a generally prevailing meaning, it is interpreted
in accordance with that meaning;
b. technical terms and words of art are given their technical meaning
when used in a transaction within their technical field.
4. Where an agreement 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 is given great weight in the interpretation of the
agreement.
5. Wherever reasonable, the manifestations of intention of the parties to a
promise or agreement are interpreted as consistent with each other and with
any relevant course of performance, course of dealing, or usage of trade.
iii. Presence of objective definition: go with subjectively reasonable and objectively
determinable term by looking at K
iv. Objectively ambiguous: no manifested assent no K
v. Frigaliment v. BNS (NY, 1960, p415) P, a German company, orders “chickens” from
D in various shipments of 1.5-2lb and 2.5-3lb bird sizes. P thinks that this means
broiler chickens and fowls (all types of chicken.) P meant only broiler chickens. H
verdict for D (P had burden to show that definition should have been construed
narrowly.
1. Debate
a. P claims that K itself and behavior by saying that they specifically
meant young chickens , D counters by saying that they specifically
asked if P meant “huhns” (all type of chickens) and that P relied
affirmatively.
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b.
c.
P claims assumption is inherent because only young chickens come
in 1.5-2lbs, but court is not persuaded (says that one order can be
filled with two different kinds of chicken without problem)
c. P should have been put on notice by abnormally low price
d. P allowed 2nd shipment to go through (no clear manif. rejection)
2. Trade custom: Dept of Agriculture definition gives broad definition
3. D subjectively believed in a reasonable and objective meaning and P did not
meet burden of proof to sow that D knew or should have known otherwise
(Rest. 201(1)(2))
vi. Oswald v. Allen (2nd circuit, 1969, p407) “Modern Peerless Case”: P, a Swiss doctor,
wants to buy D’s collection of Swiss coins. There is a misunderstanding over which
coins are actually for sale (P thinks he is buying all Swiss coins, D thinks she’s selling
only her Swiss Collection of coins.) D seems to realize the mistake and refuses to
sell. PH verdict for P, no K (no meeting of the minds.) H affirmed. Peerless verdict
applied.
vii. Weinberg b. Edelstein (NY, 1952, p411) P has exclusive convenant to sell dresses, D
tries to sell skirt/blouse ensembles saying that they do not fall under the term
“dress.” P sues for injunction. H verdict for D.
1. Court rejects dictionary definition. Instead, looks at:
a. How the clothing is meant to be worn
b. Industry custom
c. Manufacturers (the two are made in different factories)
d. How they are sold (together or separate)
e. Different unions (for dressmakers and women’s sportswear)
2. Court says that P, as creator of the covenant, should have been more precise
in his K
Interpretation f Vague Terms: Filling the Gaps
i. Having court fill in the gaps
1. Parties might prefer to let Court do it rather than hiring to expensive
lawyers do it.
2. Court can make default terms and parties always have power to K around
them
ii. Courts do not fill in gaps
1. Encourages parties to make explicit K’s
2. Anti-paternalistic (freedom to K)
3. Increased litigation (no clear rules)
4. Sun Printing v. Remington (NY, 1923, p423) P contracts paper form D for a K
over 1yr+, setting definite price for November-December, and then
directing future prices to be set by agreement (with clause that this price
does not exceed Canadian market price for paper—a term to protect P) D
breaches in January, claiming that there was no K. H verdict for D: P has not
cause of action because there was no K.
a. Parties had agreed on sale o a certain amount of paper for a 16
months. The missing term is the price for the months after
December, which Cardozo says means there is no K.
b. Dissent: there are many ways that this price could be calculated by
court (could set it at market price, average market price for term,
or etc.) However, the fact that the court is able to name 4 ways to
interpret the terms actually affirms the Majority’s opinion that
there is no right/correct choice and thus there is no K.
c. D refused to negotiate even though there was an “agreement to
agree.” However, court sidesteps this question because P did not
bring it up. Ct focuses on the actual breach itself.
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d.
5.
This is D’s form contract suggesting that D meant it to be K (court
could look to see how D used this form with other clients:
“comparable comparisons”)
e. Today
Hypo: landlord/tenant have 5yr K with option for tenant to renew at the
end of term for new TBD price. At time of renewal landlord says new rice is
$900 (it was $650 before, for a property appraised at $500.)
a. Sun Printing: no K because of ambiguous terms
b. Ct could say both were free to K
II. Enforcement
a. ProCD v. Zidenberg (7th circuit, 1996, p473): D buys private consumer version of P’s software
(people search database) and resells the information in his private internet business. The
license agreement is inside the plastic wrap of the software. PH verdict for D (one cannot
agree to hidden terms.) H reversed (P can propose a different way to make K and D has
accepted by act of buying)
i. D can be bound by license because terms are discoverable when package is open (D
could return if he disagreed with the license.) Selling the software constitutes an
offer and acceptance is upon use.
ii. Dual contract view: one K between ProCD and retail seller, another between retail
seller and buyer. This view is interesting, but complicates the issue of how to bind a
buyer to ProCD’s license.
b. Hill v. Gateway and Klocek v. Gateway (p479, 483) Enforcing arbitration clause in licenses
i. Hill: P’s buy a Gateway to have delivered to their home. The license is in the box
when the computer arrives. H verdict for D.
1. P claims that they are not bound by the license that is delivered because K
was complete when computer arrived (says that ProCd does not apply
here.) Courts reject, saying that there was an expectation of future promises
(warranty on the computer.) These promises (warranty and arbitration)
bind both the D to P, and P to D respectively. Ct also points out that P could
have returned the computer if they really were opposed.
2. Problem with the Mirror Image Rule (UCC excludes Mirror Image Rule from
sale of goods.)
ii. P claims breach of contract and breach of warranty because consumers were
induced to purchase special support packages with their computers. H motion to
dismiss denied.
1. D did not indicate to P that the transaction was conditioned on P’s
acceptance of the Standard Terms. P is not bound because the terms did not
become part of the agreement
iii. Comparison
1. In Hill, Gateway is the offeror and Hill is the acceptor (vendor is the master
of the offer). In Klocek, Buyer is the offeror and seller is the acceptor
(offeror is master of the offer.)
2. Battle of the Forms: In Klocek, UCC 2-207 applies.
3. Without a possibility to return, seller cannot bind purchaser (no way for
purchaser to reject terms.)
Parole Evidence
/ Rule of Extrinsic Evidence (oral & written info outside K)
§209. INTEGRATED AGREEMENTS
(1) An integrated agreement is a writing or writings constituting a final expression of one or more
terms of an agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application of the parol evidence
rule.
(3) Where the parties reduce an agreement to a writing which in view of its completeness and
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specificity reasonably appears to be a complete agreement, it is taken to be an integrated agreement
unless it is established by other evidence that the writing did not constitute a final expression.
Partially integrated terms can add new terms as long as they don’t contradict explicit terms
§210. COMPLETELY AND PARTIALLY INTEGRATED AGREEMENTS
(1) A completely integrated agreement is an integrated agreement adopted by the parties as a complete and
exclusive statement of the terms of the agreement.
(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
(3) Whether an agreement is completely or partially integrated is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application application of the Parol Evidence
Rule.
Integrated but not complete means you can add new terms. Extrinsic evidence can be admitted to
interpret meaning of ambiguous terms even is K is completely integrated.
§213: EFFECT OF INTEGRATED AGREEMENT ON PRIOR AGREEMENTS (PAROL EVIDENCE RULE)
(1) A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.
(2) A binding completely integrated agreement discharges prior agreements to the extent that they are within its
scope.
(3) An integrated agreement that is not binding or that is voidable and avoided does not discharge a prior
agreement. Bunt an integrated agreement, even though not binding, may be effective to render inoperative a
term which would have been part of the agreement if it had not been integrated.
Process: Court determines preliminary decision of whether or not evidence should be admitted
1. Plain language Rule: see if vague and ambiguous (not looking to evidence of prior information or
negotiations.) If unclear, PE is allowed to show meaning.
a) Type of lack of clarity:
1. vagueness (“chicken”)
2. ambiguous (“peerless”)
2. Evidence of prior relations is admissible during 1st stage to help trial judge figure out of language is
value or ambiguous (new liberal rule)
1. Was K meant to be final? (Rule 209)
2. Was K meant to be complete and exclusive? (cannot use extrinsic evidence to add new terms Rule 210.
Have to look to intention of parties.)
a) proving intention of parties
i) 4 corners of K (possibly sacrifices unsophisticated parties)
ii) Whigmore on Evidence: evidence in conduct, language, circular (makes it harder to reply
on K’s but better chance of holding to intent.)
I.
Determining Intent of Parties
a. Brown v. Oliver (Kansas, 1927, p489) P buys hotel and land from D. D acquires occupancy
through lease years later and moves out all the furniture in the middle of the night. Ample
evidence that there was oral agreement to include furniture in sale originally. P sues for
replevin. H parole evidence admitted.
i. If parties meant to limit the written document to only a certain area of the sale (ie
only addressing land), then PE can be used to show that furniture agreement was
separate.
ii. Parole evidence is used to determine intent of parties in forming original K in order
to decide whether or not to allow parole evidence in.
1. Step 1: Judge hears PE to determine intent of parties and determines how
the element in question is dealt with in the document
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2.
If intent is not complete established by conduct, language, and
circumstances (ie agreement is not complete, Wigmore on Evidence), judge
can allow jury to hear the PE)
b. UCC 214: Parties are free to leave terms open to be determined later.
II. Intent within the “4 corners of the document”?
a. Yes: Thompson v. Libby (Minnesota, 1885, p488) D buys logs from P, saying that there was an
oral warranty along with the logs. P denies, saying that a warranty was not included. No
mention of warranty in written sale K. H no parole evidence of warranty allowed.
i. When parties have unambiguously contracted, parole evidence is not applicable.
Problem: have to determine if the contract is unambiguous and complete (this could
require parole evidence, which presents a problem of circularity.)
ii. UCC §210: Completely and Partially integrated Terms (if there were a separate K,
parole evidence would be admissible. But a completely integrated agreement is
“complete and exclusive statement of the terms of the agreement.” UCC §210(3): “An
integrated agreement that is not binding or that is voidable and avoided does not
discharge a prior agreement. But an integrated agreement, even though not binding,
may be effective to render inoperative a term which would have been part of the
agreement if it had not been integrated.”
1. “all my logs” could support the idea that this was completely int. agreement.
b. No:
i. All language is ambiguous: Pacific Gas & Electric v. G.W. Thomas Drayage & Rigging
(CA, 1968, p494) P hires D to furnish labor and equipment for maintenance of
turbine. D agrees to indemnify P to all loss/damages to property. D damages P’s
property and P sues D for recovery, saying that this indemnification only applied to
third parties. PH no parole evidence admitted. H reversed, PE admitted.
1. Words do not have mystical absolute potency and PE is necessary to
consider the context. Even the lower court said that the agreement was
susceptible to 2 different interpretations. Court should enforce 201(1) if
there is evidence to show that parties had same intent/definition of term.
ii. Some language can be ambiguous: Trident Center v. Connecticut General Life
Insurance Co. (CA, 1988) P obtains 15 years loan from D for a new building, with
high interests rate. Market improve and interest rates decline, D wants to refinance
but is bound to contract which does not allow prepayment of principals (P can only
pay annual interest for first 12 years.) P says that the fact that there is a default
clause with penalty fee means that they can just repay the principal and fee. PH
verdict for D (no ambiguities in K.) H: P has right to present PE.
1. Rejection of PG&E decision that suggests all language is ambiguous (too
harsh—would render all K’s meaningless and impossible upon which to
depend.)
2. In K, the default penalty is the option of the D (not a liquidated damages
clause.) It’s existence, if valid as a way out for P, would render the binding
12 year non-payment clause meaningless.
3. Some CA courts now argue that there are some terms that are just not
susceptible to different interpretations (a boxing in of Trident’s
interpretation of PG&E)
Statute of Frauds
Restatement §110 Classes of Contracts Covered
(1) The following classes of contracts are subject to a statute, commonly called the Statute of Frauds,
forbidding enforcement unless there is a written memorandum or an applicable exception:
(a) a contract of an executor or administrator to answer for a duty of his decedent (the executor
administrator provision);
(b) a contract to answer for the duty of another (the suretyship provision);
(c) a contract made upon consideration of marriage (the marriage provision);
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(d) a contract for the sale of an interest in land (the land contract provision);
(e) a contract that is not to be performed within one year from the making thereof (the one-year
provision).
(2) The following classes of contracts, which were traditionally subject to the Statute of Frauds, are now
governed by Statute of Frauds provisions of the Uniform Commercial Code:
(a) a contract for the sale of goods for the price of $ 500 or more (Uniform Commercial Code §2-201);
(b) a contract for the sale of securities (Uniform Commercial Code § 8-319);
(c) a contract for the sale of personal property not otherwise covered, to the extent of enforcement by
way
of action or defense beyond $ 5,000 in amount or value of remedy (Uniform Commercial Code §1-206).
(3) In addition the Uniform Commercial Code requires a writing signed by the 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.
(4) Statutes in most states provide that no acknowledgment or promise is sufficient evidence of a new or
continuing contract to take a case out of the operation of a statute of limitations unless made in some writing
signed
by the party to be charged, but that the statute does not alter the effect of any payment of principal or interest.
(5) In many states other classes of contracts are subject to a requirement of a writing.
I.
110(1)(d): land contract provision
a. Boone v. Coe (Kentucky, 1913, p511) P’s enter into parol contract for lease with D, a farm
owner. D promises to erect housing and furnish necessary materials for P when they arrive
in his farm in Texas. K was formed in Ky so under Ky law. On reliance of K, P’s moved to
Texas, traveling for 55 days. Upon arrival, they found that nothing was ready and D refuses
to permit P to occupy the houses and premises, or to let them cultivate the land. P returns to
Ky, sues for $1387.80 in damages (moving, loss of time and wages, transportation, etc.) PH
plaintiff’s petition denied. H affirmed (no remedy.)
i. Not enforceable under statute (not in writing)
ii. P’s try to claim K for personal services, however Ct. rejects the argument, saying that
in order to be enforceable, D must have received some benefit (which he did not)
iii. Rejects McDaniel ruling which the opposite ruling was made.
b. Schwedes v. Romain (Mont., 1978, p520)
i. P, buyer, sues D for either specific performances or damages for breach. Parties
enter into oral confirmation of land sale and D’s lawyer, Tom Hoover, takes charge
of the paperwork and etc. Hoover tells P that he is sending the paperwork and title
reports to them in the mail. P offers to pay upfront, but D says it is unnecessary. In
the meantime, P sells to third party. PH granted SJ for D (no written contract,
Hoover did not have power to enter into K with P anyway.) H affirmed.
ii. No K: Four essential elements of a K
1. Legally capable parties
2. Their consent
3. A lawful object
4. Consideration
a. There was no consideration that passed between P and D
iii. Specific Performance
1. No enforceable contract
2. No partial performance: all the P’s acts were in “contemplation of eventual
performance” and not partial performance (would have been the same if
they got the K or not—no loss)
a. P also cannot claim partial performance of D as an reason for
exception because that defense can only be used by D
b. If P had paid when they offered, they probably would have found
that SofF had been satisfied.
iv. Estoppel does not apply: “the moral wrong of refusing to be bound by an agreement
because it does notcomply with the SofF does not of itself authorize the application
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of the doctrine of estoppel because the breach of a promise which the law does not
regard as binding is not a fraud.” (Sinclair v. Sullivan Chevrolet)
c. Leonard v. Pepsico (excerpt, p524) UCC 2-201;
i. Threshold requirements of a K that is combination of signed and unsigned writings,
“provided they clearly refer to the same subject matter or transaction” (Crabtree v.
Elizabeth Arden.)
1. The signed writing relied upon must by itself establish “a contractual
relationship between the parties”
2. The unsigned writing must “on its face refer to the same transaction as that
set forth in the one that was signed.”
II. Action in Reliance; Specific Performance
a. Riley v. Capital Airlines (Ala., 1960, p515) 110(1)(e): one year provision; UCC2-201 ((3)(a):
specially manufactured goods) P, a supplier of water methanol, enters into oral agreement
with D’s employee for 5 year supply contract. D denies entry into contract, saying it is a
Blanket Purchase Order agreement (pay for each invoice.) H: no enforceable K, but P is
entitled to damages for the supplies they purchased in reliance on agreement.
i. P claims that the goods are manufactured uniquely for D (UCC 2-201-3a) (exception
to SofF in Ala. Code.) Ct rejects this, saying that the water methanol was only mixed
for each invoice and thus P does not suffer any overstock.
ii. P claims that doctrine of partial performance invalidates SofF. Ct. rejects this saying
that partial performance doctrine does not take the executory portion of the K out
from under the purview of the SofF.
iii. P is not entitled to claim anything for breach of K (P was paid for each invoice and
delivery.) However, he is entitled to recover the cost of equipment purchased in
reliance. (Rest. §139: Enforcement by virtue of action in reliance: enforceable
notwithstanding the SofF if injustice can be avoided only by enforcement of the
promise.)
iv. Arguably, the court is confusing statue of frauds with elements of K (they are looking
for the elements of K in the written elements.)
v. Reliance damages awarded for the machinery (not for breach of K because there was
no breach of K) loss for purchases made in good faith. This remedy is available if
reliance is expected and desired by D.
vi. Modern doctrine of promissory estoppel: reliance and restitution damages offered to
deal with underenforcement issues:
1. They are independent of K (remedy for good faith reliance)
2. Refusal to reard expectation damages w/o writing acts as incentive to
manifest intentions to contract in a written document..
III. Memorandum
a. Restatement 131: General Requisites of a Memo “any writing, signed by or on behalf of
party charged, which :
i. reasonably identifies the subject matter of K,
ii. is sufficient to indicate K had been made, and
iii. states with reasonable certainty the essential terms of the unperformed promises
Doctrine of Consideration: “Motives to bargain”
Bargain theory
-A particular type of promise is enforceable. (“All that matter is that the promises of each party are
drawn out by the promises of another.” Farnsworth) each party’s promise must be motivated by
action/promise of other)
-The existence of bargains give evidence that parties are serious and meant for this to be binding
-Problem: when parties clearly want to be bound, but cannot without an exchange of consideration.
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-The distinction between a bargain for exchange and a conditioned gift is that the sole motive for the
exchange in a bargain is the desire for the consideration the language of a conditioned gift and a
bargain can be the same (“I’ll give you $100 if you cross the street.”)
Consideration as an objective/subjective test?
1. motivations/intent (subjective)
2. conduct/language of K (objective)
If courts see an objective consideration, they will not look to find subjective intents.
Devised as a means of limiting the potentially open-ended nature of assumpsit (can sue on a promise as
long as there is consideration; no real effect then, but most contract law today)
Restatement:
1. A contract is an enforceable promise (§1,2)
2. With some exceptions (§17(2)), to be enforceable, a promise must be supported by a consideration (§17(1))
and manifestation of mutual assent;
3. A promise is supported by a consideration if it is bargained for (§71(1))
4. 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))
§71. REQUIREMENT OF EXCHANGE; TYPES OF EXCHANGE
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return 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) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
(4) The performance or return promise may be given to the promisor or to some other person.
It may be given by the promisee or by some other person.
Comments:
b. "Bargained for." In the typical bargain, the consideration and the promise bear a reciprocal relation of
motive or inducement: the consideration induces the making of the promise and the promise induces the
furnishing of the consideration. Here, as in the matter of mutual assent, the law is concerned with the external
manifestation rather than the undisclosed mental state: it is enough that one party manifests an intention to
induce the other's response and to be induced by it and that the other responds in accordance with the
inducement....But it is not enough that the promise induces the conduct of the promisee or that the conduct of
the promisee induces the making of the promise; both elements must be present, or there is no bargain.
Moreover, a mere pretense of bargain does not suffice, as where there is a false recital of consideration or
where the purported consideration is merely nominal. In such cases there is no consideration and the
promise is enforced, if at all, as a promise binding without consideration under §§82-94.
c. Mixture of bargain and gift. In most commercial bargains there is a rough equivalence between the value
promised and the value received as consideration. But the social functions of bargains include the provision
of opportunity for free individual action and exercise of judgment and the fixing of values by private action,
either generally or for purposes of the particular transaction.
Those functions would be impaired by judicial review of the values so fixed. Ordinarily, therefore, courts do
not inquire into the adequacy of consideration, particularly where one or both of the values exchanged are
difficult to measure. See §79.....
d. Types of consideration....Though a promise is itself an act, it is treated separately from other acts/part of
prima facie case for Contract
I. Bargains v. Gratuitous Gifts
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a.
Johnson v. Otterbein University (Ohio, 1885, p620) P gives D a note promising to give
institution $100 in three years if the university is still in debt at that time. D tries to collect
and D claims that it was only a gratuitous gift. PH verdict for D, H reversed (creation of fund
was a consideration in law and mutual promises were created.)
i. A duty to apply the money expressly for the debt was the consideration to P.
ii. Mutual promises made: the institution relied on this note and agreed to pay over the
money to their debtors (promise and liabilities incurred on the faith of orginal
promise serves as considerations each for the other.)
b. Hamer v. Siday (NY, 1891, p622) Verdict for P
i. P, nephew, was promised by D, uncle, that he would receive $5k on his 21 st birthday
if he refrained from drinking, smoking and gambling until then. Uncle sends him
letter saying that the money is his, to be turned over when Uncle knows that he can
handle it. Uncle dies and estate refuses to pay, saying it was a gratuitous gift, not a
bargain (lack of consideration for P) PH verdict for D (it was a gift). H reversed,
verdict for P (he restricted his own behavior in reliance of this)
ii. D claims that asking D to refrain from this activity is actually a benefit to him. Ct
declines to address this (not under their power.)
iii. Consideration= the benefit of seeing his nephew refrain from these bad habits
iv. P’s freedom of action was restricted as a result of this agreement, and he performed
his end of the bargain.
v. SofF waived (waived by D’s letter and oral statements subsequent to the date of
final performance)
c. Kirksey v. Kirksey (Ala., 1845, p629) Verdict for D. (Brother derives not benefit from her
move)
i. D, brother in law, writes to P upon brother’s death, inviting her to move onto his
land if she has not yet gained preference for the land she is on (preference = right to
buy currently occupied land for $1.25/acre from government under resettlement
acts of 1840s.) P relies on this and moves to D’s land. He sets her up to occupy a
piece of government land for statute of limitations (2 years) and then evicts her (in
order to gain possession of preference in favor of his sun, who was co-possessor of
the land with P.) Evidence that both parties knew what was going on. PH verdict for
P ($200 = $1.25 x 160acres.) H reversed (promise was gratuity only.)
ii. No consideration?
1. Possible consideration: Acquiring the land through her occupation (because
D was precluded from partaking in the preference act because he owned
320+ acres already); “more open land than I can tend.”
d. Dahl v. HEM Pharmaceuticals (9th, 1993, p635) P, a group of patients in clinical trial for D’s
drug treating chronic fatigue syndrome, sue for injunctive and other relief at the end of the
trail, claiming that D had promised to continue providing the drug after end of clinical
studies if drug withstood placebo effect. H verdict for P.
i. The consideration for D was the participation of the patients in the study; for P, it
was the promise of continued supply of drug after the trial.
II. Past consideration: Consideration is acceptable for past performance if there was prior expectation
of promise if promisor makes promise after activity has occurred, then the action could not
have been induced by the promise.)
a. Moore v. Elmer (Mass. 1901, p639) No consideration
i. Client offers to pay a clairvoyant’s entire mortgage if he does die before the date she
predicted. H: no consideration.
ii. Client was giving psychic a promise of inheritance for past performance (her
predictions and their sessions), but she did not perform for this promise of
inheritance. (she did not receive promise until she was done performing.)
b. Mills v. Wyman (Mass, 1825, p641)
i. Good Samaritan gives care to D’s son, a sick sailor. D writes letter promising to pay
P. PH non-suit. H affirmed; no consideration.
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ii. Good Samaritan behavior is based on presumption of no payment/expectation of
payment
iii. Father has not been unjustly enriched (the son has.) no restitution damages.
However, if child was a minor, promise may have been binding (father would have
legal obligation to pay)
c. Webb v. McGowin (Ala., 1935, p649): Material Benefit => consideration (even if past consid.)
i. P saves D, boss, by using his body to physically redict a falling wooden block. P is
permanently injured and partially paralyzed. P promises to pay $15/2 weeks for the
rest of P’s life. D dies 10 years later and estate says that he was only supposed to pay
the amount required by Worker’s Comp. H: verdict for P, yes it is consideration.
ii. D has received a material benefit (his life.) A moral obligation is a sufficient
consideration to support a subsequent promise to pay where the promisor has
received a material benefit, although there was no original duty or liability resting
on the promisor. As related to Cotnam v. Wisdom, assumption that D would have
wanted this deal.
III. Contract Modification
a. Stilk v. Myrick (Eng., 1809, p656) K for services cannot be modified w/o consideration
i. Stilk (P) was to be paid 5 pounds per month during a voyage at sea. Two seamen
deserted and the Captain agreed that the wages of the two deserters would be
divided equally among the remaining hands if the two seamen could not be replaced
at Gottenburgh. Myrick (D) refused to honor the agreement and Stilk sued. H:
Verdict for D, no consideration. P limited to 5 pounds/month (org. K price)
ii. there were not changed circumstances sufficient to compel a change in the contract.:
P’s had the obligation to do all that they could under all emergencies (desertion =
emergency) during the voyage.
iii. Emergency is not consideration (loss of labor through death or desertion is an
emergency and an employee cannot demand raise unless loss of labor was voluntary
by boss and resulted in preventable harm to laborer.)
b. Alaska Packer’s Assn. v. Domenico (9th Circuit, 1902, p659) coercive tactictsnot enforceable
i. Emplyees demand raise mid-trip because of faulty nets. Superintendant says he has
no authority to change K, but he does in the end. Terminated old K and began new
terms for a new K.
ii. P’s were already under a pre-existing legal duty to perform work for D. D did not
breach initial K. Also, supervisor had no authority to create new K
iii. PP reasons (incentives to keep employees from blackmailing bosses)
iv. Rule: No modification unless consideration.
IV. Subsequent Agreements
a. Brian Construction and Dev. Co. v. Brighenti (Conn., 1978, p666) additional considerations
i. Contract for excavation work. During the course of performing the excavation work,
the defendant discovered considerable debris below the surface, which would make
the job considerably more difficult and costly. Defendant refused to perform.
Defendant and plaintiff entered into a subsequent oral contract for the excavation
work that compensated defendant an additional ten percent. Subsequently, the
defendant ceased working on the contract and the plaintiff was forced to complete
the work incurring damages. H: there is consideration and there is a separate,
enforceable K.
ii. The Court will enforce a subsequent agreement which includes an additional
obligation not specified in the original contract and for which there is additional
compensation (seen as a separate, valid agreement.)
iii. Theory of unforeseen circumstances: Evergreen Amusement Corp. v. Milstead: once
work is underway, it becomes obvious that additional burdens/obligations are
necessary. This allows exceptions under the rule that says that parties cannot
contract for a duty already owed (Willison on Contracts, §130)
iv. Bailey v. Breetwor: oral agreement constituted a separate, binding contract because
P incurred a new detriment and D received a new benefit.
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b.
c.
d.
e.
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Posner: US v. Stump Home: Traditional rule of requiring consideration in order to validate a
modification is aimed at preventing coercive modifications, but is not effective because any
consideration (even a tiny one) will render modification valid. Instead, Posner suggests that
we make all written modifications enforceable and then rely on the defense of duress to
prevent abuse.
Change of market question: Rest. 89 Illustration 3: parties can adjust value of K (willingness
of breach is not a consideration.)
Newman v. Hunter (674) Widow promises to pay husband’s debt to bank (P) in exchange for
his worthless stock. She was not misled (knew the stocks were useless.)
i. H: no consideration, verdict for D. There was no fraud. Her desire for husband’s
honor is not consideration.
Dyer v. Nat’l By-Products (677): Injured P promises to forebear from suing employer in
exchange for lifetime employment. P did not know that he was barred from bring suit under
Workers’ Comp act, but had good faith believed that he was offering sufficient consideration
in exchange.
i. Sj for D was reversed. P’s good faith belief meant more than the validity of the
threatened claim.
Intent to be Bound
I. Intent to create legal relations
a. Applications
i. The presence of a manifested intention to be legally bound can justify the
enforcement of commitments that lack either consideration or detrimental reliance.
1. Enforceable because of the formality that indicates an intention to be
bound.
ii. Absence of such a manifestation under (i) or a manifested intention not to be legally
bound might prevent the enforcement of bargained-for commitments or those that
have induced reliance.
b. Rest. 2nd §21: Intention to be legally bound: Neither real nor apparent intention that a promise
be legally binding is essential to the formation of a K, but a manifestation of intention that a
promise shall not affect legal relations may prevent the formation of a contract. (you don’t
need intent to make a K, but an express intent not to be bound can destroy a K)
c. English common law: A K needs (1) agreement (2) consideration AND (3) intent to be create
legal relationship. There is debate about whether (3) is necessary, but common law seems to
support it. Cases in which a K is denied on (3) are divided into: (a) social, family, or domestic
agreements and (b) commercial agreements where intention is presumed and must be
rebutted by arty seeking to deny it.
d. Formalities: formal commitments that express intent to be bound.
i. Functions
1. Evidentiary: compliance with formalities indicate a transaction existed
2. Cautionary: act of completing agreement (seal w/wax) implies serious act
of volition by both parties
3. Channeling: populace is aware that use of a given device will retain a
desired result (judicial task of determining intentions is facilitated)
4. Clarification: act of putting into writing forces clarification of details not
always done when making an oral agreement.
ii. Option K’s: binding even though there is no consideration (Restatement 87)
e. Schnell v. Nell (Ind., 1861, p693)
i. Wife, in will, dictates that husband, in light of her love and affection while they were
married, to pay $200 each to three parties in exchange for $0.01 from each of them.
Husband refuses to pay. H verdict for D (no consideration)
1. No consideration
a. $0.01: one cent for $600 is unconscionable and void.
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b.
Wife’s love and affection is past consideration (even if it could be
said to have value, which is questionable) and her love cannot be
consideration in exchange for his promise to pay.
c. Wife’s desire in will: husband’s veneration of his wife’s memory is
not legal consideration
f. Option Contracts: Restatement §87: An offer is an option contract if it (a) is in writing and
signed by the offeror, recites a purported consideration for the making of the offer, and
proposes an exchange on fair terms within a reasonable time.
i. Pretense: mere pretense is not binding. While courts will usually not inquire into the
adequacy of the consideration bargained for, gross disproportion between the
payment and value of the option commonly indicates a mere pretense.
II. Recitals: gives rise to a rebuttable presumption of consideration
a. Ceremonial delivery of $1 is a mere formality. Thus, the option agreement is not invalidated
by proof that the recited consideration was not in fact given.
b. Guaranty: §88: A promise to be surety for the performance of a contractual obligation, made to
the obligee is binding if (a) the promise is in writing and signed by the promisor and recites a
purported consideration
c. Smith v. Wheeler (Ga., 1974, p698): actual payment of consideration not necessary in option
K
i. P, buyer, enters into option K with D, seller, for $1. This $1 was never actually paid.
D wanted to withdraw offer. P sends registered mail with notice that he was
prepared to exercise his option and included $1 in the letter. D refuses to receive
delivery of the letter and files declaratory suit asking for option K to be declared
void. PH verdict for D. H reversed, verdict for P.
ii. D claims that he withdrew his offer before the $1 was paid. Court rejects this, saying
that the recital of the $1 consideration gives rise to an implied promise to pay which
can be enforced by the other party.
III. Written Expression of Intention to be Legally Bound
a. Unless specifically deemed valid by state statute, an agreement without bargained-for
consideration or formality or recital of consideration will not be enforceable, even if person
expressly, in writing, declares intent to be bound. The 2nd Restatement §95(2) says that, to be
valid under the statute, (a) the promise must be expressed in a document signed or otherwise
assented to by the promissory and delivered; or (b) be expressed in a writing to which both
promisor and promisee manifest assent.
Promissory Estoppel
I. As a consideration substitute
a. Background theory
i. Induced reliance detriment is induced by promise, not the motive for the promise
(uneasy co-existance with the doctrine of consideration.)
ii. Promissory Estoppel v. Gift Cases/Consideration
a. If consideration binding promise
b. If not, maybe a claim under Promissory Estoppel
iii. Pomeroy standard for equitable estoppel:
1. Concealment of material facts (acts, language, or silence.)
2. D had knowledge of facts (or imputed knowledge—aka should have known)
3. P had no knowledge of these facts
4. Conduct done with intention or expectation that P will act upon it
5. Conduct is actually relied upon by P
6. P changes her position for the worse (suffers harm)
b. Types
i. Family promises
1. Ricketts v. Scothorn (Neb, 1898, 723) P, granddaughter, receives note from
deceased saying he will give her $2000 to ensure that she does not have to
work. P relief upon this note and quit her job later.
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a.
P’s reliance makes this enforceable even if there was no
consideration. Equitable estoppel grants equitable relief to P.
Whether her unemployment is a condition of the gift is not
established—court says grandpa knew it was a possibility but not a
requirement.
2. Promises to convey land
a. Grenier v. Grenier: Mom promises lot and house to disinherited son.
Son’s reliance is consideration even though there is a question of
whether or not the mother really had intent to be bound. Her
silence if face of reliance solidifies the reliance.
3. Promises of Pension
a. Feinberg v. Pfeffer: CEO promises pension for treasurer when she
retires in exchange for 40+ years of loyalty and hard work. She
retires and then payments stop when she reaches 65. She also gets
cancer after the payments stop, serving as an additional obstacle
for her getting work.
b. Reasonable reliance even though no consideration: her age at time
when payment stopped was too high to find other job
(equitable/justice argument.) Her getting cancer before or after the
payments stopped is immaterial.
c. Hypo: if promisor is a friend and not the company, there is a more
hazy justice argument. The company pensions could be related to
compensation (just deserts) while this sense of injustice is not
present when promise is from a friend.
II. As an alternative to breach of contract
a. Goodman v. Dicker (DC, 1948,751) P, radio distributers, induced D’s to apply for franchise
and led them to believe that franchise would be accepted. Extensive application of PE.
i. Reliance damages awarded. No K, but reliance on promise.
ii. Possibility of fraud?
b. Hoffman v. Red Owl Stores, Inc. (WI, 1965,752) P, in hopes of getting D to build a franchise
grocery store, sold his business, moved, borrowed money, and paid down-payment on a plot
of land in reliance of agent’s assurances. Negotiations stopped when D required P’s father-inlaw, who was to lend P $13000, sign a statement saying that this sum was an outright gift. PH
verdict for P, but undecided on damages.
i.
Adopts cause of action grounded on promissory estoppel as exemplified by
Rest.1st 90 (“A promise which the promisor should reasonably expect to induce
action or forbearance of a definite and substantial character on the part of the
promisee and which does induce such action or forbearance is binding if injustice
can be avoided only by enforcement of the promise.”)
ii.
The facts support a case for PE. D’s claim that essential details of a proposed
transaction need to be as expansive as an offer to be accepted in order to qualify for
PE is rejected: “It would be a mistake to regard an action grounded on PE as the
equivalent of a breach-of-contract action.” (759) PP argument gives discretion to ct
to decide.
iii.
Damages: no expectation damages. Equitable justice doesn’t require anything
more than FRV-sales price of purchased equipment of small temporary grocery
store made in reliance of promise (he did it to gain experience.)
iv.
Compare with Empro where no promise was evident.
Promise: (1) promise (2) reliance (3) injustice
Rest.3rd 90: In the absence of consideration, a promise is binding if:
a. The promise is accompanied by a formality that manifests an intent to be bound, such as:
i. A seal OR
ii. Recital of nominal consideration OR
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iii. Expression of intention to be legally bound OR
iv. Copies of a writing bearing the signatures of both parties; OR
With knowledge of the promisor, the promisee induces reliance by the promisee
i. That is so substantion that would be unlikely in the absence of a manifested intention
by the promisor to be legally bound AND
ii. The promisee expects the promise to be enforceable and is aware that the promisor
has knowledge of the promisee’s reliance AND
iii. The promisor remains silent concerning the promisee’s reliance.
II. Blatt v. USC (CA, 1970, 772) P claims that he relied on a promise made by D that induced him to work
harder in law school on reliance that he would be elected to the Order of the Coif Goodman v.
Dicker (DC, 1948,751) P, radio distributers, induced D’s to apply for franchise and led them to
believe that franchise would be accepted. PH verdict for D (failure to state a claim.) H affirmed
a. PE does not apply: he suffered no real, actual damage as reliance (no forbearance of an act
Hamer v. Siday)
b. No breach of K: the promise was that he “would be eligible for election” does not support
breach of K
III. Spooner v. Reserve Life Insurance Co. (WA, 1955, 775) P, agents of D’s insurance company, rely on a
promise of annual bonus. D released bulletin (requiring signature of each individual P to
participate) that said that the bonus was a voluntary contribution that is at mercy of D’s
discretion. PH verdict for P. H reversed and dismissal directed.
a. No breach of K and no reliance can be established on voluntary contribution (states plainly
that it is subject to change and or cancellation without forewarning.)
IV. Yosilanti v. General Motors (MI, 1993, 779) In 1987, GM courts tax break from P and P’s county in
exchange for keeping a plant open for as long as “market demands” manufacture of Caprice. P gives
GM 12 year tax subsidy under statute. GM decides to close plant and move manufacturing of Caprice
to Texas (combining two factories.) P sues for breach of contract and promissory estoppel.
a. Circuit Court, Washtenaw County: Statute does not create a K even though the legislation is
unwise. Therefore, no breach. Promissory estoppel is applied because there was a promise
made and a subsequent reliance. PE is granted on grounds of equity and justice. (Arguably,
the initial law was create to protect states from suits.)
b. Michigan Ct. of Appeals: Reversed, no promise had been made. Reliance was unreasonable.
i. Tax abatement has never been construed as promise to keep plant running.
Representations of job creation and retention are statutory prerequisites (not
promises.) Hyperbole and puffery do not create a promise.
ii. Even if a promise had been made, reliance is unreasonable. Many, during
preliminary consideration at Town Meeting, warned that GM had made no concrete
promises.
Performance: Good faith (taking an action that does not act in contrary to motives of K)
I.
Implied duty of good faith performance: Rest. 205 and UCC 2-103
a. Goldberg 168-05 Corp v. Levy (NY, 1938, 817): Tenant shopowner purposefully sabotages
business in order to set up a termination of a conditional percentage lease (purposefully
directed business away from his store to another of his chain locations.) D was found to have
breached good faith covenant (K had implied promise of good faith obligation)
b. Mutual Life v. Tailored Woman (NY, 1955, 818): P (landlord) leases main premises to D for
clothing store with clause for additional rent of 4% of gross receipts over $1.2m P
subsequently leases additional floors to D, who then moves the fur department to new floors
(which are not bound to percentage lease.) H: No good faith breach because D was only
exercising his rights under lease by integrating the levels via a elevator. P is only entitled to
collect from fur sales that were directed to upper level from the lower level floor.
i. CofA claimed: 1) all furs are part of the main premises and subject to percentage
lease 2) if fur was not sold on main floor, removal was a breach of good faith.
ii. Dissent: Court should look into the motives for moving the fur
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Stop & Shop, Inc. v. Ganemi (MA, 1964, 824) 1.25% percentage lease on gross receipts over
$1.269m plus difference in property taxes. P tries to close this particular branch and D sues
for change in K to force P to stay open and to be allowed to collect percentage of gross
receipts from other chains. D claims P has diverted sales to other locations and breached
good faith. H for P because there was no good faith breach (K had no implied covenant to
continue operations.)
Prospective Nonperformance: Anticipatory Repudiation and Material Breach
Anticipatory Repudiation and Material Breach both speak to when non-breaching party is discharged of their
duty to perform. Both speak to an indication of future performance (has breaching party’s actions given other
party the idea that future performance is in jeopardy.) Theoretically, to what extent we want to address nonbreaching party’s fear of future non-performance is an analysis that courts’ adjudication rests on.
Can non-breaching/aggrieved party stop performing?
Yes (starts clock on duty to mitigate)
No
-Repudiation (Hochster)
-Request for recission (Harrel v. Sea Colony)
-Material breach (B&B v. Bowen)
-No response to unreasonable or unfair request for
-No response to reasonable request for assurances
assurances (Scott v. Crown)
(Lane v. Foster)
-Non-material breach (Lane v. Foster -$7k)
-Agreement for mutual recission
I.
Anticipatory Repudiation
a. Breach occurs the moment of repudiation, not when K is to start: Hochster v. La Tour (Eng.,
1853, 892): P, courier, sues D for breach of contract for services beginning June 1 st. D
repudiates on May 11, and P engages in another contract to begin on July 4. P sues for
damages.
i. Future performance contracts carry an implied promise that both parties will act
upon expectation. When repudiation happens, suffering party has immediate
recourse to mitigate damages (this would be impossible if the repudiation is not
considered a breach until June 1st.)
b. Harrel v. Sea Colony, Inc. (MD., 1977, 895): P, buyer, enters into K with D for sale of a condo,
to be delivered December of 1974. P pays $5k deposit plus a promissory note for $6,235. In
May, P asked D if he could assign the contract. When D refused, P made statements that he
wished to back out. A “cancellation request” was sent to P and P filled it out returning it,
saying that the release is “contingent upon refund of deposit by July25.) D returned saying
that the issue can be settled at one of two lawyers’ offices, requesting P to pick one. P fails to
act before 30 day deadline (D claims this is partial breach.) D sells condo to third party in
August, and a couple days later, informs P that they are keeping the $5k deposit as liquidated
damages. Freeman, D’s agent, writes a couple days later returning the cancelled promissory
note. P sues for anticipatory breach because condo was sold to third party. D counters saying
that P had unilaterally breached K already. Trial court found for D based on a finding that P
had unilaterally breached. Holding: P did not unilaterally breach. Remanded to determine if
D had anticipatorily breached.
i. “cancellation request” is only an offer, and P’s reply cannot constitute unilateral
breach
ii. P’s failure to choose a lawyer’s office cannot be a partial breach because the contract
did not import a duty to him to do so.
UCC § 2-610: When either party repudiates the contract with respect to a performance not yet due the loss of
which will substantially impair the value of the contract to the other, the aggrieved party may
(a) for a commercially reasonable time await performance by the repudiating party; OR
(b) resort to any remedy for breach (Section 2-703 or Section 2-711), even though he has notified the
repudiating party that he would await the latter's performance and has urged retraction; AND
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(c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on
the seller's right to identify goods to the contract notwithstanding breach or to salvage unfinished goods
(Section 2-704).
UCC § 2-611. Retraction of Anticipatory Repudiation.
(1) Until the repudiating party's next performance is due he can retract his repudiation unless the aggrieved
party has since the repudiation cancelled or materially changed his position or otherwise indicated that he
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, but must include any assurance justifiably demanded under the provisions of this Article
(Section 2-609).
(3) Retraction reinstates the repudiating party's rights under the contract with due excuse and allowance to the
aggrieved party for any delay occasioned by the repudiation.
II. Adequate Assurances of Performance (one party wishes to withhold performance because he
suspects that other party may not perform)
a. Scott v. Crown (Col., 1988, 901): P, seller, contracts to sell grain to D. They execute a contract
to be paid 30 days after delivery. In the meantime, they engage in 2 more K’s. P hears that D
is having financial difficulties and refuses to deliver any more grain. P’s lawyer sends D a
letter demanding payment on the 1st contract (already delivered) and partially performed
second K. Holding: verdict for D.
i. While P had reasonable grounds to demand assurances under UCC 4-2-609(1), their
demand was initially oral, not written (in addition, the oral demand was ambiguous
and not direct.) The written demand came after P had already stopped performance
(effectively breaching.)
ii. P had no right to use a demand for assurance a way to force a modification of the
contract (in this case, earlier payment.)
III. Material Breach: any failure to perform that permits the other party to the contract to either compel
performance or collect damages because of the breach; the breach defeats the entire purpose of
the contract and the expectations of the non-breaching party. However, if a breach is found to be
not material, it is not thus forgiven (damages are still due.)
a. Materiality of breach seems to rest on intent and desires of parties (did parties contemplate
the possibility of breach?)
i. Facts to Consider:
1. Purposes to be served (contractual intent)
a. Courts look to preferences at time of K formation (If intent of
having Redding pipes were central to K, this had to be explicit. A
clause saying any little breach constitutes forfeiture is not
applicable because there is already substantial performance.)
2. The desire to be gratified
3. Excuse for deviation
4. Cruelty of enforced adherence.
ii. Does the breach constitute a forfeiture?
1. Does it frustrate K’s intent?
2. Willful?
3. Substantial cost compared to value? (economic waste/disproportionate
loss)
b. B&B Equipment Co. v. Bowen (MO, 1979, 907): P hired D as partner, with promise of 100
shares of corporate stock. Since P couldn’t afford to purchase the stock from previous
owners, company purchased them on his behalf. Dividends were paid to D, who reverted
them back to P in effort to pay off the principal plus 6% interest paid to owners. D’s
performance at job declines seriously and P fired him. D sues for the value of the stock as
damages for breach of K. Holding: P granted declaratory judgment for their right to
terminate stock K.
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i. Contract was based in an employment contract, which D did not uphold. D’s
performance was defective and “his wound is self-inflicted.” P did not breach any
good-faith because they gave him a chance (repeatedly complained about his
performance.)
ii. Guidelines from Rest., 275:
1. Deprivation of expected benefit
2. Adequacy for compensation for loss to non-breaching party
3. Partial performance: extent to which the party failing to perform has
already performed or made preparations for performance
4. Likelihood of cure of breach: not material if non-breaching party cure the
breach
5. The willful, negligent, or innocent behavior of the party failing to perform
6. Delay in performance: the greater or less uncertainty that the party failing
to perform will perform the remainder of the contract.
c. Lane Enterprises, Inc. v. L.B. Foster Co. (PA, 1998, 910): D contracts with P to coat bridge
components in accordance with state safety specifications in two stages. P does stage 1, but
realizes that they don’t have the capacity to meet regulations and thus subcontracts the
work out, deducting cost from amount owed to them. At the end of stage 1, P is owed about
$7k by D. P informs D that they will not be able to meet specifications for stage 2. D refuses
to pay $7k until they receive assurances from P. P fails to perform and D is forced to hire
another company for the job, incurring a net loss of $42k from the difference in K’s. Both sue
for material breach of contract. Trial court finds that D materially breached and owes P
damages. Holding: reversed. P materially breached and owes damages to D for the $42K $7K owed to P.
i. D did not materially breach. Their withholding of $7k only constituted 5% of total
contract value and they had right to withhold pending performance assurance
(based on reasonableness as defined by Rest.2nd 251)
ii. P materially breached by failure to provide assurance (Rest.2nd 251.) The fact that D
agreed to let P subcontract out the work does not waive their right to demand
assurances (“mere failure of the obligee to press a claim for damages for minor
breaches will not preclude him from basing a demand for assurances.” Rest.2 nd 251)
d. Calculating Damages: Calculating what exactly the P lost: for expectation damages, do we use
Cost of Performance or Value Rule?
i. Jacob & Youngs v. Kent (NY, 1921, 883): D contracts P to build him a house
specifically with Reading manufactured pipes. When D discovers that other pipes have
been used, he demands P to replace them and withholds payment. Holding: the
difference between pipes was insubstantial enough to make the demand for
replacement an independent and collateral contract and thus D has no right to
withhold payment. Verdict for P.
1. Damages owed to owner is insignificant: measure of allowance is difference
in pipes, not total replacement. Court applies subjective assessment of
value of this difference. D should not have to forgo benefits of K for this
breach because the real exchange is the delivery of the house (money for
house.) Contractor’s promise to specific details are independent promises.
2. To demand what owner wants is to allow economic waste.
3. Dissent: D had right to demand that his house be built the way he wants. P
violated a stipulation in the contract, whatever may be the intentions for
the stipulation. Also, it can be argued that P (or P’s subcontractor) was
negligent in not noticing.
b. Cost of performance rule: Groves v. John Wunder Co. (Minn., 1939, 929) P leases out gravel
field to D, a competitor, in a 7 year contract for P to remove the gravel and maintain the same
property grade as present. At end of contract, D left premises at a very inferior grade. Cost to
correct the damage would be $60,000. Value of the property would have been $12,160. Jury
awards verdict for P, with a remedy of $15,000. P appeals for more. Holding: reversed and
new trial demanded. Remedy for expectation damages should have been the $60k to put the
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property in the state as if D had been performed (and not what the land would have been
worth if D had performed.) Rest.346
i. Since D had willfully breached, they should not be able to benefit from fraud (imports
question of willfulness in calculating damages.) No issue of waste here (as there was in
Jacob & Youngs) so remedy needs no adjustment.
Value (of diminution rule: Peevyhouse v. Garland Coal Mining, Co. (OK, 1962, 934) P leases
coal lot to D, with stipulation that D shall perform restorative and remedial work. D fails to do
so and P sues. The property value fell $300 and the cost of removing the damage to the
property is $29,000. Jury verdict for P, who is awarded $5000. Issue is over damages: to use
value rule (diminution of property value = $300) or cost of performance ($29K) Holding:
remedy should be value of performance unless this amount is so much higher than
diminished value as to render payment grossly unfair. Verdict affirmed for P, but remedy
changed to $300.
i. Court says K was about leasing land for coal and remedial work is not central (D has
substantially performed.) Economic waste is applied here in different way (putting
money into something that won’t increase value very much.)
ii. Dissent: D willfully chose to breach and should not be able to benefit from doing so.
Misrepresentation
I.
Rebutting the prima facie case of contract: defense/denial: undermining enforceability
a. A “plea in avoidance”: setting out additional facts and circumstances that, if are true and not
rebutted, the void the normal significance of the prima facie case of contractual obligation,
breach, and damages. The party seeking contractual enforcement is not ordinarily entitled to
a remedy.
i. If maintaining a CofA is desirable, then defenses to that CofA cannot be permitted to
completely undermine it (can lead to seemingly arbitrary limits on the reach of a
contract defense)
ii. Categories
1. Incompetence and infancy: circumstances in which the promisor’s capacity
to assent is deficient
2. Failure of a basic assumption underlying K (both parties had incorrect
assumption; ie mistake, impossibility, and frustration)
3. K obtained by improper means (misrepresentation, duress, undue
influence, unconscionability)
a. Halbert v. Rosenthal (R.I., 1970, 982): D tries to buy a house from
P and pays deposit. Before closing, termites were discovered,
though P had repeatedly conveyed to D that the house was termitefree. D breaches and P sues for damages (remedy being the
difference in price upon which the parties had agreed, and the
lower price that P had ended up selling the house to a 3rd party for.)
PH verdict for D (for return in deposit). P appeals judgment, saying
that a directed verdict should be granted. P claims that 1) the
statements were made in good faith and thus D’s counterclaim
should not have been sustained and 2) there was a merger clause
in the K (saying that the parties agree that everything as stated in
the K was true) could only be defeated by showing of a breach in
good faith. Holding: 1) fraud (misrepresentation) in K needs no
show of good faith. 2) merger clause also does not require good
faith breach and cannot be used to bar D’s rescission of the K (“the
speaker who uses the unqualified statement does so at his peril.) P
is not allowed to blame D for not specifically contracting in a
termite-free clause.
b. Byers v. Federal Land Co. (8th, 1924, 988) P contracts to buy a plot
of land from D, and then wants to cancel the K because he found
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out that D never actually owned the land and that D’s agents had
told him the value was $35/acre when it was actually only worth
$15/acre. PH grants dismissal to D. Holding: reversed. While
agents’ valuation of land was only an opinion and cannot not
constitute sufficient misrepresentation, land ownership is
misrepresentation and thus verdict for P.
Vokes v. Aurthur Murray, Inc. (Fl, 1968, 991): P was induced to
purchase $31K+ worth of dance lessons by a flattering D. P sues
under misrepresentation. PH dismisses P’s complaint. Holding:
reversed. D had fiduciary duty to P (as instructor) to give truthful
opinions (even though, ordinarily, these assessments are not
subject to misrepresentation.) While generally, the court will leave
parties as they are to contract among themselves, this does not
apply when one party takes advantage of their knowledge of the
true situation (duty to disclose the full truth, Rest. 169)
i. Rest. 2nd 168: Reliance on Assertions of Opinions:
1. An assertion is one of opinion if it expresses only a
belief, without certainty, as to the existence of a fact
or expresses only a judgment as to quality, value,
authenticity, or similar matters
2. If it is reasonable to do so, the recipient of an
assertion of a person’s opinion as to facts not
disclosed and not otherwise known to the recipient
may properly interpret it as an assertion
a. That the facts known to that person are
not incompatible with his opinion OR
b. That he knows facts sufficient to justify him
in forming it.
ii. Rest. 2nd 169: When reliance on an assertion of opinion
is not justified: to the extent that an assertion is one of
opinion only, the recipient is not justified in relying on it
unless the recipient
1. Stands in such relation of trust and confidence to
the person whose opinion is asserted that the
recipient is reasonable in relying on it OR
2. Reasonably believes that, as compared with himself,
the person whose opinion s asserted has special
skill, judgment or objectively with respect to the
subject matter, OR
3. Is for some other special reason particularly
susceptible to a misrepresentation of the type
involved.
In the matter of Baby M (NJ, 1987, 995): Whiteheads (surrogates)
claim that legal fraud in order to justify breach of K: 1) the infertile
state of Mrs. Stern 2) failed to alert that Mrs. Stern had multiple
sclerosis and 3) that the psychological evaluation of Mrs.
Whitehead could have indicated a predisposition to hide her
feelings and make her not adequate for surrogacy. Holding:
Whitehead’s argument denied (no material representation and also
no reliance by Whiteheads) 1) and 2) are immaterial and 3) the
evaluation, taken by the surrogacy agency (ICNY) cannot be
imputed onto Sterns because they are not an agent of Sterns (the
evaluation was taken a year and a half before Sterns entered into
contract with ICNY.)
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iii. Epstein, Pleadings and Presumptions (1973, 952): pleadings involve the
possibility of denial, demurrer, or plea in avoidance (affirmative defense.) The back
and forth of pleas in avoidance can generate issues in which facts are necessary to
prove a prima facie case. The measure of recovery depends on the last valid pea in
the case shown to be true and thus it is very difficult to classify actions by their
theory of recovery.
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Defenses: Failure of Basic Assumption
I. Mistakes of Present Existing Facts (mistaken assumptions at time of K)
a. Mutual Mistakes – another reason for avoidance/rescission of K
i.
Sherwood v. Walker (MI, 1887, 1051) Substance differences is a defense, but
qualitative differences are not.
(A) Facts: sale for a barren cow that was thought to be barren but then, when P tried
to pay for it and acquire title, D refused to sell because it was with calf.
(B) Rule: Substance v. quality – If object substantially different from what was
bargained for, mistake mutual and monetary consequences to disadvantaged
party significant, K voidable.
(C) If a question of quality, not substance, K enforceable. Voidable if assent
founded on mistake of fact.
(D) Holding: Barren cow substantially diff from a breeding one, therefore K not
enforceable.
(E) Dissent: The diff is a mistake in quality (the seller tried to sell her for the price he
believed her to be worth, and the D was willing to buy with these same
expectations: “when a mistaken fact is relied upon as ground for rescinding,
such fact must not only exist at the time the contract is made, but must have
been known to one or both of the parties.”)
ii.
Nester v. Michigan Land & Iron Co (Mi, 1888, 1059) No defense for expected value
of good
(A) Facts: D contracted to sell timber to P for $27,000. Nester was dissatisfied with the
quality and quantity of the timber and demanded that Michigan accept one half the
contract price. Michigan refused. P sued D and alleged that the quality and yield of
the timber was poor and that both parties had been mistaken as to the nature and
quality of the timber. (The trial court awarded P $12,800 and D appealed, arguing
that P had acted on the advice of his own agents, the mistake was unilateral, and D
had made no warranty as to the quality or quantity of timber that would be
produced.)
(B) Issue: Is a purchaser of goods entitled to reformation or rescission of a contract if
the quality or quantity of goods produced does not meet expectations?
(C) Holding and Rule: No. A purchaser of goods is not entitled to reformation or
rescission of a contract if the quality or quantity of goods produced does not meet
expectations, provided the seller has not made a warranty.
(1) Both of the parties were experienced businessmen. There was no warranty
made as to the quality of the cut timber from the tract but only an expectation
based on P’s informed business judgment. D is not bound by an implied
warranty that the timber rise to P’s expectations.
(2)
The court held that if P were entitled to reformation of the contract under
these facts, D should be entitled to reformation in cases in which the
estimated cut exceeded expectations. The court rejected this approach and
held that P bore the risk that the yield and quality would not meet his
expectations. Each party bore the risk that the timber produced would be of
greater or lesser worth than expected.
iii. Wood v. Boynton (WI, 1885, 1062) No defense if mutual mistake without evidence
of fraud.
(A) Facts: Ignorant little girl (P) sold a gem for $1 to Boynton (D), a jeweler. Both
parties believed the stone to be topaz at the time of the sale. Boynton later learned
that the stone was a diamond worth $700. Boynton declined Wood’s offer to buy
back the gem for $1.10 and Wood sued for its return. At trial the court directed a
verdict in favor of Boynton and Wood appealed.
(B) Issue: Is a party to a contract entitled to rescission if both parties were mutually
mistaken regarding the value of the items sold and the seller has not committed
fraud?
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(C)
Holding and Rule: No. A contract made where there is mutual mistake regarding
the nature and value of the items sold cannot be rescinded without fraud. The only
way P can rescind the sale is by showing that there was some fraud by D in
procuring the sale, or that the seller made a mistake by delivering an article that
was not the article sold. The latter amounts to a mistake in fact as to the identity of
the article sold. Except for these two cases, there can be no rescission of a contract
for sale based on mutual mistake.
(1)
In this case, both parties were ignorant of the true value of the gem. There
was no mistake regarding the identity of the item sold and delivered to D. P
made a bad bargain and that alone is not grounds for rescission of the
contract.
(2)
The court held that inadequacy of price as evidence of fraud depends upon
the facts known to the parties at the time the sale was made. When this sale
was made, the value of the thing sold was open to investigation by both
parties. Neither party knew its intrinsic value and believed that the price paid
was adequate.
(3)
Notes: The real issue underlying this case is one of proof. P should have
presented the testimony of an expert to prove that no jeweler would have
failed to recognize the gem as an uncut diamond. The jeweler had examined
the stone for some time before he made the offer to buy it from P.
iv. Rest 154(a): “Risk allocated to him by agreement of parties”: Lenawee Board of
Health v. Messerly (MI, 1982, 1065)
(A) Facts: P bought land from Messerly, previous owner put in bad septic tank.
Property was then condemned by Board of Health, clause in K said purchaser
examined and accepted in same condition as seen
(B) Issue: Can land sale K be rescinded because of mutual mistake
(C) Holding: No. Parties did disagree on facts but no rescission, Ct. throws out
substance v. quality (Sherwood) distinction, better to use §154 approach.
Rescission is equitable remedy that Ct. has discretion to grant. There was a basic
assumption that has a material effect (R. §152) but parties contracted to have
buyer take property “as is” which means risk falls on buyer.
v.
154(b): Treats limited knowledge as “sufficient” : Conscious ignorance – must be
conscious of fact that you don’t know
(A) NO: Sherwood, seller could argue no conscious ignorance (conscious of fact they
didn’t know if it was barren or not), they really thought it was barren
(B) YES: Wood v. Boynton, (rough diamond) p. 1040 Absence of fraud or warranty by
D, difference between price and value is not valid ground for rescission of sale.
Seller (Wood) had responsibility to figure out value of stone before she sold it, she
bears risk b/c she knew she had limited knowledge, but sold it anyway.
vi.
154(c): Risk allocated to him by Ct. on ground it’s reasonable in circumstances
(A) Who can avoid mistake most cheaply? Posner argues that seller has greatest
access to info about good; therefore seller should bear loss.
(B) Ct. will allocate risk based on R. §154 and reasonable circumstances (who is in
best place to inquire, how would parties have allocated risk if they could
have)
b. Unilateral Mistake and Duty to Disclose: Rstmt § 153 When Mistake of One Party
(Unilaterial) Makes a K Avoidable:
i.
Tyra v. Cheney (MN, 1915, 1074)
(A) Subcontractor (P) forgot and incorrectly calculated his bid, D might have known of
mistake based on reasonable value of work and earlier discussions. Award
restitution damages to subcontractor. If there was a mistake  no meeting of
the minds, no mutual assent and no K to enforce. (Satisfies §153—unilateral
mistake—but not used b/c not in place yet, would be used today)
(B) Reasoning: Subcontractor leaves out one of the items. D either knew or didn’t
know mistake had been made
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(1)
If didn’t know mistake made – subcontractor gets agreed upon price
(unavoidable)
(2)
If knew of mistake: subcontractor can avoid terms because D could have
avoided reliance by not relying in the 1st place and restore true mutual
assent
(C) Drennan v. Star Paving (subcontractor) – Contractor had no reason to know of
mistake in bid (trade usage shows usual variance), risk falls on person who made
mistake (want him to be more careful in calculating bids in future)
ii.
Good faith: Buyer not obligated to tell seller about market conditions: Laidlaw v.
Organ (SCOTUS, 1817, 1078) (tobacco sale after treaty signed and blockage lifted)
(A) Facts: Organ (P) agreed to buy tobacco from Laidlaw/vendor (D) Prior to
completion of the sale, P learned the War of 1812 was ending and that the value of
the product would substantially increase. At close of the sale, D asked P if he knew
of any information that would affect the value of the product and P said no. The
next morning, D returned the tobacco, upon learning of the change in
circumstances, and P brought suit to enforce the contract. PH found that P’s silence
amounted to bad faith circumvention, which caused harm to the D.
(B) Issue: whether fraud necessarily voids a contract and whether it must be proven
by positive communication or whether suppression of information could also
amount to fraud.
(C) Holding: Remanded. there may be an affirmative duty to disclose, but that it must
be determined on a case-by-case basis and the question of whether P intentionally
circumvented necessary information is one of fact, for a jury to make a
determination upon. Plaintiff may have been under a duty to disclose that
information.
(D) Reasoning
(1)
If info publicly available → no duty to disclose.
(2)
If one party does not have access to info, then there is disparity in info
underlying bargain, K should be rescinded.
(3)
If buyer lied and said “No, I don’t have info”  misrepresentation
(4)
If costly to produce/product of investment, then no incentive to disclose –
justifies use of conscious ignorance – if other party has chosen not to get info
then they shouldn’t benefit if someone else decided to
(5)
Action preventing someone from learning fact  basis for avoidance
(6)
Look at good faith and fair dealing – could mean duty to disclose, or duty to
find out your own info
iii. Donovan v. RRL (jaguar newspaper ad) – Donovan had no reason to know ad was
mistake, but enforcement is unconscionable, P would get a $12K windfall. It is
material, dealer does not bear risk (§154 - no conscious ignorance, no express
assumption of risk)  shouldn’t be enforced against dealer (§153) –
Unconscionability treated diff than usually substantive and procedural
unconscionabililty test from Walker-Thomas, in this case focus on substantive only
(A) Hold: seller does not have risk of loss §154 b/c not allocated to him
iv.
Rstmt § 160 When an Action is Equivalent to an Assertion (Concealment): Action
preventing someone from learning a fact = assertion that fact does not exist.
v.
Rstmt § 161 When Non-Disclosure is Equivalent to an Assertion
(A) When disclosure is not in good faith requirement
(B) When disclosure would correct a mistake in agreement
(C) Where other party is entitled to know b/c they are in a trust relationship
II. Changed Circumstances
a. Impossibility/Impracticability Contemplated circumstances change, then intent of parties
may not be realized. (ie costs soar, benefit stays same)
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Absolute contractual liability: Paradine v. Jane (Eng., 1647, 1083) D says he can’t
pay rent because an alien Price Rupert invaded his land. Verdict for P: D cannot be
excused for a duty he contracted. He assumed the risks and could have contracted
around them if he thought they were considerable.
Destruction: Taylor v. Caldwell (Engl, 1863, 1087) (music hall burns down)
(A) Facts: Caldwell (D) contracted to permit Taylor (P) the use of the Musical Hall at
Newington. Caldwell was to retain possession of the hall and Taylor merely had
the use of it for four days to present four concerts in exchange for 100 pounds per
day. The contract stated that the Hall must be fit for a concert but there was no
express stipulation regarding disasters. The Hall was destroyed by fire before the
first concert was to be held and neither party was at fault. The concerts could not
be performed at any other location and Taylor sued for breach and sought
reimbursement for costs in preparing for the concerts.
(B) Holding: No breach. Parties contracted on basis of continued existence of music
hall, since it ceased to exist w/o fault of either party, both excused. Implied
condition of continued existence of theater – as if parties had put into K to
begin with because they would if they thought about it.
(C) Rule: Where performance depends on continued existence of person/thing, there
is implied condition that impossibility of performance from perishing of
person or thing excuses performance.
(1)
Fault: prevents party from being excused, except death, fault not considered
by Rstmts
(D) Death, even if self-induced, dissolves K: CNA & American Casualty v. Arlyn
Phoenix (Fl, 1996, 1092) (Death of River Phoenix)
(1)
Facts: P, insurers, sue D, River Phoenix’s mother and co-owner of Jude Nile, a
corporation run with a production company for breach of actor loan-out
contract. D tries to say that River’s overdose and death outside Viper Room
constitutes a breach. PH verdict for D, affirmed.
(2)
Holding: contract has implied condition that death dissolves contract. Parties
could have contracted against drug use and P’s argument that self-induced
overdose and death cannot excuse performance.
(E) Three part test for impossibility: Transatlantic Financing Corp v. US (DC,
1966, 1094)
(1)
Facts: K to ship wheat from Texas to Iran. The contract specified the
destination, but not the route. The ordinary route would be through the Suez
Canal. However, due to armed conflict, the Suez Canal had been blocked by
Egypt. P therefore proceeded along the route around the Cape of Good Hope
and then sued to recover the additional costs of taking the longer rout
(2)
Issue: Were the Plaintiff’s duties impossible to perform, thereby permitting
rescission of the agreement?
(3)
Holding: NO.
(4)
Reasoning: Three-part test for impossibility:
(a)
something unexpected must have occurred (Yes);
(b)
the risk of the unexpected occurrence must not have been allocated by
contract or custom (yes) and
(c)
the unexpected occurrence must have rendered performance
commercially impracticable (performed at unreasonable costs.) (No: the
performance was not rendered commercially impracticable. While
increased costs, no increased risk to the crew or goods. It is not always
the case that cost alone may never constitute impracticability, but here,
the added expense is not significant. P is also CCA— in a better position
to purchase insurance for this contingency as a commercial shipper)
36
Contracts, Wilkinson-Ryan 2010
M. Cheng
37