Contracts 2002 – Professor Finkelstein
In Contracts, the prima facie case of breach of contract comprises the elements: mutual assent, enforceability, and
breach
ELEMENTS OF A CONTRACT –
1. Offer and Acceptance
2. Bargained for Exchange – Consideration
3. Clear terms
4. No reason not to enforce
5. Promissory Estoppel
6. Breach
7. Defense
Contract: promise or set of promises for breach of which law gives a remedy, or performance of which the law
recognizes as a duty - 2nd R §1
 Requirements:
o Must make it of your own free will
o Must refer to future performance
o Must be consequences if someone breaks contract
 may be oral or written, or inferred from conduct [implied-in-fact K]
 UCC – applies to sale of goods, if K is for sale of goods.
o If UCC is adopted by state and contradicts common law, UCC prevails
o If UCC and common law are consistent, common law may supplement statute
 2nd Restatement of Contracts – 2ndary authority which gives rules extracted from cases
 for a valid contract – there must be some form of a remedy for breach.
o Shaheen v. Knight – P contracted with D for sterilization, but then wife got pregnant. Court
found Dr. breached promise, but no damages since P gets rewards of love of another child.
“The Beautiful idea” behind contract law – Contracts are good since they leave both parties better off than
before they enter the contract.
1. Assuming:
a. People knowing what they want – ex/prefer a belt over the money it costs to buy the belt
b. Giving people what they want will make them happier/better off
2. Why do we need to enforce contracts?
a. Since it is a promise for future action, if there are changes in the future one party may be better
off not doing contract.
b. Need enforcement to make sure that both parties under the contract end up better off - If A acts
1st, the party who acts 2nd is even better off than before the contract, without having to perform
their end. Without enforcement 2nd party gains more without having to go through with their
performance.
3. Why we need contract law?
a. In a small community - word of mouth will spread that someone defaulted and others won’t do
business with him - operates like contract enforcement
b. Contract enforcement is necessary for large, anonymous communites since the inherent
reputational effects don’t take place
Promise: A manifestation of intention to act or refrain from acting in a specific way, made so promisee
understands that a commitment has been made – 2nd R §2 sec (1)
 Promise may be stated orally or written or may be inferred wholly or partly from conduct – 2nd
restatement §4
II. Damages for Breach of Contract:
Legal consequences for breach of K – assuming that there is a valid and enforceable K and one party has
materially breached K.
A. The 3 Damage Interests
1. 3 Questions when awarding damages: (1) What is P’s injury; (2) What remedy most effectively
addresses injury; (3) do any policies or principles limit D’s liability for the loss?
2. 3 Principles of remedies:
a. Looking to compensate P, not punish D
b. If remedy is given, almost always $ damages
c. If damages given, almost always expectation damages
3. 3 Damage interests: Measure how much relief ($ amount) should be awarded in terms of these interests a. Expectation – “benefit of the bargain”; put promisee in position they would have been in if K
had been performed –(includes reliance damages)
i. Reasonable certainty – expectation damges may only be recovered if P can prove them
with reasonable certainty.
b. Reliance – put promisee “back to start”; put promisee back in position which they would have
been in if K had not been made
i. if promisee changed position to his detriment in reliance on the promise.
ii. Doesn’t include lost profit, so less generous than expectation damages
c. Restitution – put promisor “back to start”; put promisor back in position which they would
have been in if K had not been made
i. If promisee conferred a benefit on promisor in expectation of promise – deprives
promisor of unjust enrichment
ii. Doesn’t include lost profit or reliance by promisee – less generous than expectation
4. Expectation Damages:
a. Hawkins v. McGee – hairy hand case. Dr. guarantees P a perfect hand from operation. Surgery
fails and P’s hand is worse off. Court rules Dr. should pay expectation damages = to
promised hand – hand after operation. But P not able to recover p&s since he would have
experienced this even if K had been performed correctly.
i. R §347 – Expectation damages = Loss of value of promised performance + incidental
or consequential loss (amount set back, reliance damages) – any cost plaintiff didn’t
have to pay as a result of breach
ii. Damages can decide where you bring your case – tort v. contract
b. Nurse v. Barns: D must compenstate P for “special damages”. Expectation damages include
incidental and consequential losses.
c. Hooker v. Roberts: Roberts (sub-contractor) sues Hooker (GC) for breach of contract for tearing
out and installing cabinets. Dispute over who disposes of cabinets so GC declares contract void.
Expectation damages are $ value of benefits promisee would have received had K been
performed minus loss avoided by not having to perform. Storage costs are not part of the
reliance damages since rent would have been paid even if no contract. Including storage
costs in damages would have made P better off than before K.
i. Mixed contracts – for sale of goods and performance of services. When mixed to decide
whether to use UCC or general contract law look at (a) nature of contract and (b) is
dispute primarily over goods or services.
d. Lost profits = value of a fulfilled contract
5. Cover –
a. UCC §2-711 – Buyer’s Remedies - When seller breaches contract, buyer can cancel contract,
recover his reliance damages, and can decide to either:
i. “cover” for the contract, or
ii. recover damages from seller between the K-price and the market price
b. UCC §2-712: Buyer’s Cover - After a breach, buyer may “cover” by making a reasonable
contract/purchase in substitution for those due from seller. Buyer may get damages = cost of
cover - contract price + incidental damages (reliance).
c. Tongish v. Thomas: D breaches contract to sell seeds to P at $13/ton since prices rose and D was
able to get a better price elsewhere. Issue over how to calculate damages. When conflict
between UCC statutes, the more specific statute controls, unless leg. intended more general
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statute to be controlling. Computing damages under UCC §2-713, it discourages sellers from
breaching and creates market stability – no incentive to take advantage of rising prices.
i. §1-106: Remedies should put injured party in as good a position as if other party had
fully performed, but no consequential or penalty damages
ii. §2-713: Damages for Sellers breach of contract - difference b/w market price at time
buyer learns of breach and contract price + incidental damages – expenses avoided
(traditional expectation damages)
iii. Why OK to create windfall for P under §2-713?
1. Fairness issue, creates penalty to discourage parties from breaking promises
2. Rebuttal: Theory of Efficient breach – when gains are to be had from breaking
contract, then it is up to a party whether or not to breach. If 1 party gains more
by breaching, then all are better off than w/ contract since breacher gets
addtl profit, and breachee is paid damages to make him as good as he would
have been under contract
d. UCC §2-706 – Seller Covers – If buyer breaches, the seller may resell the goods in a reasonable
manner and recover  (contract price-resale price) + plus indicental damages – expenses saved
by buyer’s breach
B. Limitations on Damages
1. Remoteness or foreseeability of harm – person who breached the contract must be able to foresee
the damages at time of contract.
a. Foreseeable consequences rule (default rule) – did party in breach cause damages and were
damages foreseeable?
b. Hadley v. Baxendale: P needed crank shaft fixed and hires D to deliver, saying that mill was
stopped and shaft must be sent immediately. D told P it would take 24 hours; ends up taking
several days. Court rules for D saying that lost business was not foreseeable when P dropped off
crank. Two types of foreseeable damages:
1. arise normally from the breach of contract – (general damages)
2. the party in breach was notified of the possibility of damages in advance –
(consequential/special damages)
i. 2nd Restatement - §351 Consequential damages - damages are not recoverable for
loss that party in breach didn’t have reason to foresee as a probable result of breach
at time of making K.
3. Sec (2) Loss is foreseeable as result of breach if it follows from breach:
a. In ordinary course of events, or
b. As result of special circumstances that party in breach had reason to
know.
4. Sec (3) allows court to limit damages for foreseeable loss of profit by allowing
recovery only for loss incurred in reliance, if it concludes that justice requires in
order to avoid overcompensating P.
a. Martinez v. S. Pacific Transportation: P contracts with D for delivery of dragline. Dragline
arrives months late and damaged from transit. Damages awarded only if injury is reasonably
foreseeable and special damages awarded only if notice is given to the carrier of the
possibility of injury. Since damage arising from loss of use of equip. was foreseeable, then
compensation for lost use is appropriate measure of damages for breach of K. P is not required
to show that harm suffered was the MOST foreseeable of possible harms; P only has to
demonstrate that harm was not so remote as to be unforeseeable.
ii. When deciding foreseeable damages:
5. 1st choice – Court looks at what parties actually contracted for – even if a tacit
agreement
6. 2nd best solution - Make a hypothetical contract – what would parties have agreed to?
b. Consequential (special) damages:
iii. Majority rule (49 states) –can award if notice was given of special circumstances if
there is a breach of contract
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iv. Minority rule (Arkansas) - Tacit agreement test:
7. Notice was given of the special circumstances if there was a breach of contract
8. Defendant implied or expressly assented to bear these risks
i. EX of tacit agreement test/Morrow v. 1st National Bank: D employees promise to tell P
when deposit box becomes available. D forgets and P has coins stolen. No recovery for
P since D didn’t agree to bear risk.
9. Problem w/tacit agreement test – almost no one can pass it since parties rarely agree
to bear risk, so special damages are rarely awarded.
2. Certainty of harm – How certain we are that the damages would have occurred
a. Chicago Coliseum Club v. Dempsey: P contracts with fighter and promoter, then gets D to agree
to fight. D not supposed to fight anyone else, but breaches contract by having another boxing
match. Only recoverable damages are reliance damages because lost profits (expectation
damages) are too uncertain as a basis for damages. Expenses incurred prior to the
execution of the agreement are not recoverable.
i. R §346 – allows court to award “nominal damages” if there is no loss under the contract
1. **A valid contract must have some remedy
a. Winston Cigarette v. Wells Tobacco: It is better to make damage estimates on concrete evidence
that may fall somewhat short of actual damages than to let a jury make a damage decision without
some structure. Rule that damages aren’t allowed if incalculable isn’t meant to benefit a D
who breached in bad faith.
b. Anglia TV Ltd. v. Reed: P started production of a film, then hired D to star in film. D backed
out a few weeks before start of film. P sues for wasted expenditures before contract, not lost
profits since they were incalculable. If P claims wasted expenditures damages he can claim
expenses incurred after making contract (reliance) PLUS expenses before contract if the
expenditures would be wasted by broken contract. OK to award costs incurred before making
contract since D knew that company had spent money on project before he was hired and knew
those fees would be wasted if he breached
ii. Big picture – Court is saying that reliance damages can include opportunity costs –
opportunity the D deprived the P’s of to profit from film, when he breached.
c. Reliance Damages usually DO NOT include opportunity costs
iii. Dempsey is example of not including opportunity costs
iv. Anglia is an example of including opportunity costs
v. Problem w/including opportunity costs – dramatically expands liability of party in breach
d. View Anglia as awarding expectation damages: If Anglia “expected” to break even on project,
would pay off their expenses before the contract, which court says are reliance damages. So by D
breaking contract, Anglia doesn’t have ability to break even. Therefore to put them in “break
even” position (benefit of bargain), P deserves $ spent towards performing up until the breach.
vi. Under this view, Anglia is consitent w/Dempsey case.
vii. But it is unlikely Colliseum would have made $0 profits, so under this methodology, the
Colliseum is under compensated
e. Mistletoe Express v. Locke: P enters 1 year contract w/D providing delivery service. P made
reliance expenditures, but was lost $ each month under the contract. D breaks contract after 6
months. P sues for reliance damages, since expectation damages would have been low since
losing $. P is entitled to her reliance expenditures since she was deprived of opportunity to
recoup these expenses. D has burden to proving losses sustained if contract was performed.
i. R §349 – Reliance Damages - P can chose to recover under reliance damages instead of
expectation damages. If a losing contract instead of a profitable one, D may provide
evidence to the amount of the loss and have it subtracted from the reliance damages.
1. Limits expenses incurred before signing contract to costs specifically made in
preparation for performance or in performance.
2. Doesn’t say whether opportunity costs should be part of reliance damages
ii. §349 reliance theory is consistent w/ §347 Expectation damages:
2. Under expectation theory P would get reliance + her “profit”
3. When neg. profit expectation damages = reliance + negative profits (-losses)
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4. Under §349 – D has to prove losses v. under expectation damages, P would have
burden to prove profits.
3. Avoidability of harm – Whether or not the damages could have been avoided
a. Doctrine of Avoidability §350 - Damages are not recoverable for loss that injured party
could have avoided without undue risk or burden. The injured party may still recover if he has
made reasonable, but unsuccessful efforts to avoid loss
i. If a court finds the reason for not mitigating damages is unreasonable, they may limit
damages to the amount she would have lost if she had mitigated damages, not the $
actually lost.
ii. If goods are resaleable and seller choses not to resell, seller’s recovery is limited to the
difference between contract price and market price on day of delivery – UCC §2-708
b. Rockingham County v. Luten Bridge Co.: County originally awarded P a contract to build
bridge, but then revoked contract before P did much work. But P continued to work on bridge
even they knew County breached their end of contract. P sues D for cost of construction. After a
contract is breached, the injured party has a duty to do nothing to increase the resulting
damages (duty to mitigate). If P doesn’t try to mitigate avoidable damages, he may not
recover them.
i. Reasoning for duty to mitigate: economically inefficient to pile up damages
1. If P had stopped building when contract was breached, they could have sued D
for reliance damages + profits from project
2. By continuing construction, P raised reliance damages, but profits stay the same.
So P isn’t made better off by completing work, but D is made worse off, since
reliance damages are higher
3. Pure waste if bridge is completed since no one is made better off – extra $ spent
in reliance after breach is dead weight loss
c. Shirley Maclaine v. 20th Century-Fox Film Corp: Film comp. signed P to make a movie. Fox
canceled 1st film and offered P another movie. P didn’t take the offer saying it was inferior
employment. P is not required to take role in 2nd movie to mitigate the damages since the
type of role Fox offered was both different and inferior employment than the original
contract. Injured party has a duty to mitigate damages by making reasonable efforts to find
alternative employment and accept comparable employment.
i. With personal service contracts – P is not required to accept a position that is
substantially different or inferior to the one contracted for.
d. Difference between Maclaine and Luten case?
i. Luten – P had to mitigate damages since covering by moving on to another bridge job
was an adequate substitute for building the bridge for the county (all bridges are equal)
ii. Maclaine – P didn’t have to mitigate damages to accept substitute employment since it
wasn’t comparable employment (each film is unique)
e. Cooter and Ulen article
i. Efficient contracts do not cover every contingency – a lot of situations are left up to the
courts.
ii. Efficient breach – when cost of performing contract exceeds the benefits of the contract
to all parties.
iii. Efficient breach happens when:
1. Windfall arises that makes non-performance more profitable than performance
2. Accident happens that imposes larger loss on performance than non-performance
iv. Court’s tend to favor damages rather than specific performance since it allows efficient
breach – party may breach contract and pay money damages
v. BUT, when transaction costs are zero, Efficient breach will result under specific
remedy or money damages, but the surplus from exchange is distributed differently.
(So it doesn’t matter which side is awarded the entitlement)
1. Ex/A contracts to sell house to B for $100. A values house at $90; B values
house at $110. C offers A $120 for house. A wants to breach and sell to C.
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f.
2. Money damages – A can sell house to C for $120, receiving $30 surplus. B
expected $10 surplus from the exchange, so gets $10 in damages from A, leaving
A with $20 surplus. – A is better off than under contract and B is just as good.
3. Specific performance – A must sell house to B for $100; A receives $10
surplus. Because there are zero transaction costs and everyone are rational
economic actors, B sells house to C for $120. So B gets $20 surplus – A is just
as good off as under contract and B is better off.
vi. Prof – If no doctrine of avoidability, in Luten Bridge, If bridge co. had right to build
bridge, and county has to pay, they would negotiate so that count would pay Luten a bit
over their profit, before bridge co. ran up expenses. So bridge co. happy since got profit
+ surplus. County happy since doesn’t have to spend as much on reliance damages.
vii. From view of efficient breach, we don’t need doctrine of avoidability. So why have it?
1. We care about things other than efficiency – fairness
2. There are transaction costs – expensive to add clauses to a contract so we need
default rules. When no transaction costs, don’t need doctrine of avoidability
Neri v. Retail Marine Corp: P contracted to buy boat form D and put down deposit to secure
early delivery. P rescinded the contract, but boat was already delivered. 4 months later D sold
the boat P ordered to another buyer for same price. P sues for deposit. In cases involving an
indefinite supply of goods, buyer’s breach enables seller to recover profits on 1 sale +
incidental damages (ex/storage).
i. Lost Volume Doctrine – Dealer agrees to sell a fungible good at a standard price and
buyer breaches contract. If dealer has unlimited supply of boats, then the resale to
replace breached buyer, costs the dealer a sale. If breached buyer had performed, dealer
would have made 2 sales. Therefore, measure of damages is dealer’s profit on one sale.
ii. UCC §2-718 – (would have resulted in P getting back deposit minus $500)
1. Sec 2 – Where seller justifiably withholds goods because buyer breached, buyer
is entitled to get back his deposit less:
a. Liquidated damages clause for seller OR
b. If no liquidated damages clause, then less $500 or less 20% of purchase
price, whichever one is less.
2. Sec 3 – buyer’s right to restitution is offset if seller establishes right to recover
damages under other provisions
iii. UCC §2-708 – Seller’s damages for buyer’s breach
1. Sec 1: Seller can claim difference between market price, (what he sold it for),
and orig. contract price plus incidental damages. (Market price – contract price
= Cover) + incidental damages.
2. Sec 2: If damages provided by Sec 1 are inadequate, measure of damages is
profit from full performance of the buyer, plus incidental costs.
3. 2-708, when buyer breaches, is analogous to 2-713, when seller breaches in
Tongish case
iv. Damages under UCC 2-708, buyer should get back:
1. Deposit $4350 minus $500 – amount reduced by 2-718 sec 2(b) – this is the first
“offset” in damages, not a replacement
2. Minus $2579 – seller’s profit UCC 2-708 sec 2
3. Minus $674 – incidental damages UCC 2-708
4. =$479
v. Relation between Neri and Maclaine cases – sellers get to mitigate damages and claim
lost volume when contract is for a mass produced good, but not when it is for personal
services. So Maclaine can’t claim that she could have been able to do 2 movies instead
of one
C. Contracting Around the Default Rules of Damages
1. Default Rules – rules that can be contracted around by inserting a specific clause in the contract
2. Express Limitations on Consequential and Incidental Damages
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a. Parties may seek to limit liability under default rules by including a clause intended to be the
exclusive remedy for breach of contract, excluding damages for other foreseeable losses.
b. UCC §2-718 – Liquidation of Damages – (Sec 1) Damages for breach may be liquidated in a
reasonable amount in light of the anticipated/actual harm of breach, the difficulties of proof of
loss, and the inconvenience or unavailability of another adequate remedy. A clause
w/unreasonably large liquidated damages is void as a penalty.
c. UCC §2-719 – Limitation of Remedy
i. Sec 1 – Parties may agree on clauses as a measure of damages in the contract as replacing
traditional methods of damages. Clause is optional remedy, unless it is agreed to be the
exclusive remedy in the contract
ii. Sec 2 - If the exclusive remedy “fails in its essential purpose” parties can obtain a
traditional remedy
iii. Sec 3 – Parties may limit/exclude consequential damages when loss is commercial, but
can’t limit/exclude damages regarding personal injury w/consumer goods.
d. R §355 (p.185): Punitive damages are not recoverable for a breach of contract unless the conduct
constituting the breach is also a tort for which punitive damages are recoverable.
e. R §356 (p.185): Liquidated Damages – (Sec 1) Damages for breach by either party may be
liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated
or actual loss caused by the breach and the difficulties of proof of loss. A term fixing
unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
i. Look at reasonablility of liquidated damages clause as an estimate at time of contract – if
the amount is reasonably calculated (even if it turns out to be inaccurate after the breach)
it is still valid.
3. Liquidated Damages vs. Penalty Clauses
a. Contract law is based on a compensation theory “contracting party should only recover
compensation for loss actually suffered from breach of contract,” therefore no penalty clauses
allowed
i. If function of courts is to make sure parties follow through with contracts, then penalty
damages are good idea
ii. If function of courts is to provide compensation for loss suffered by breach, then
expectation damages are correct remedy
b. Liquidated Damages Clauses – settle in advance what damages will be due in the event of a
breach. Enables parties to set damages amount.
i. Courts will uphold liquidated damages only if it is for a reasonable amount and actual
damages would be difficult to calculate/prove.
ii. Liquidated damages may or may not be more than actual damages.
iii. Use of liquidated damages clause doesn’t preclude injured party from asking for specific
performance
c. Penalty Clauses – If liquidated damages clause is so large as to be unreasonable, a court may
find them to be penalty damages, and therefore invalid – Penalty clauses are not allowed in
contracts and parties may not contract around this rule
d. Signs of a valid liquidated damages clause:
i. Damages are hard to determine, so more legitimate for parties to specify in contract
damages for breach
ii. If damages can be clearly determined, (ex/Kemble case) more likely a penalty clause
iii. Court considers all circumstances under which a liquidated damages clause would be
imposed – if buyer breaches, if seller breaches.
e. Kemble v. Farren: D agreed to work for 4 years at a theater paid £3/night. Clause in contract that
if someone breaches they will pay £1000 as liquidated damages. D refused to act during 2nd year.
Liquidated damages clauses are unenforceable when the amount fixed is unreasonable
relative to the anticipated/actual loss from breach or when an adequate remedy may be
accurately calculated. Large disparity between actual damages and amount in clause – if P
breached by not paying D £3/night, P would owe D £1000. Damages for not paying were clear £4, so no need for damages clause.
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Lake River Corp v. Carborundum Co.: Posner – Should court refuse to enforce penalty clauses?
i. Ex efficient breach/ A contracts with B. Breach would cost B $120 in damages but
would give A $200 in addtl profit. A will breach, pay B the $120 in damages, and retain
$80 – Net social gain
1. If the contract had clause that breacher must pay $250 penalty damages, A won’t
breach contract, since $250 penalty >$200 profit
ii. Penalty clauses only discourage efficient breaches, since compensatory damages are
sufficient to deter inefficient breaches (where cost to B>profit to A from breach)
iii. Willingness of a company to pay penalty damages may make him look credible enough
to get an important contract.
iv. Sometimes parties wouldn’t have entered into agreement at all w/o penalty clause.
This is a net social loss since contract wouldn’t have been made – we see world as
better off with having contract made
v. But Courts are paternalistic therefore refuse to enforce penalty clauses
g. Can get around penalty clause by phrasing it as a reward and then artificially lowering price –
ex/Willing to pay $500 to have house painted, but will only do it if painter promises to finish on
time. Set price of service at $300, and if painter finishes on time, he gets an addtl $200
h. Wassenaar v. Towne Hotel: P hired under 3 year contract stipulating damages if D terminates
employment early. “D is responsible for entire financial obligation for full period of 3 years”.
Liquidated damages clauses will be upheld only if the amount is reasonable in light of
anticipated/actual harm and it is difficult to estimate damages at time of contract. If a stipulated
damages clause is found valid, then they can’t be reduced at trial by amount employee
could have or did earn (no duty to mitigate). Test for reasonable liquidated damages clause
i. Did parties intend to provide for damages or a penalty?
ii. Is injury caused by breach one that is difficult to estimate at time of contract?
iii. Are the stipulated damages a reasonable forecast of the harm caused by breach?
i. Argument against penalty clauses
i. If we allow penalty clauses we discourage efficient breach it gives a party “threat power”
to make other party to comply
ii. The State has exclusive power to punish. We don’t let private parties set punishments,
even if they are voluntary. “No private punishment”
iii. Protecting systemic requirements – ex/can’t allow parties to set their own rules of
evidence. There are backround rules to enforcing trials can’t be contracted around, i.e.
contracting around right to trial.
j. Two extremes views of Penalty clauses:
i. Contractarian position – Parties should have freedom to contract for anything – rational
actors should be able to interact with one another voluntarily (“The beautiful idea” of
contracts argument)
ii. Interventionist position – Parties can’t contract around background issues.
2. Punitive Damages and Arbitration Clauses
a. Parties may insert clauses requiring Alternative Dispute Resolution (ADR) by arbitrators in
their contracts to circumvent the legal system.
b. Even when punitive damages are awarded by an arbitrator, judges are still hostile to upholding
the damages – may vacate award if court feels it is unjust
c. Benefits of Arbitration: Faster and cheaper process for resolving disputes
i. Less stringent procedural and evidentiary rules
ii. Discovery may be limited, so its faster
iii. Not as many motions filed
iv. No hearsay rule
v. Arbitrators don’t have to issue written opinions
d. Disadvantages:
i. Parties lose the court’s protection
ii. Non-predictability
iii. Parties try to manipulate the selection of arbitrartors
f.
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iv. Not much oversight of arbitrators
e. Garrity v. Lyle Stuart, Inc.: P sued D over publishing contract of P’s books. While case#1 is
pending, P sues D under case#2. At arbitration of case #2, Arbitrator awarded P punitive
damages. D objects saying punitive damages are out of scope of arbitrator’s authority. An
arbitrator has no power to award punitive damages, even if agreed upon by the parties
i. Public Policy Reasoning: Punitive damages is a sanction reserved to the state. Allowing
arbitrators to award punitive damages would make the scope of their authority
uncontrollable, therefore not useful as a way of deciding disputes without the expense
and delays of courts
ii. Dissent: Dispute resolution through arbitration outweighs public policy against punitive
damges where the unjustifiable conduct was malicious
f. Willoughby Roofing v. Kajima International: Issue: Does public policy prohibit arbitrators from
considering punitive damages when a contract is breached due to fraud? Federal policy favors
arbitrator’s authority. So if they award punitive damages they are OK, even if there is a
contrary state law/policy
i. Federal Arbitration Act provides a way to void award if arbitrator is found to be corrupt –
a check on awarded punitive damages. (seems to allow arbitrators to award punitive
damages)
III. Other Remedies and Causes of Action:
A. Specific Performance and Injunctions
1. 3 types of Equitable remedies:
a. Coercive remedies –Power to order D to stop/start conduct of a specified sort and subject
defendant to punishment if he did not obey – ex/injunction
b. Declaratory remedies – P’s purpose in seeking equitable relief was to obtain a declaration of
his rights - Gives P an understanding of what he could/couldn’t do.
c. Restitutionary remedies – Restored to the P something that belonged to him
i. Restitution remedy at law – plaintiff gets property back if he has title – writ of replevin
ii. Restitution remedy at equity – If legal title passed to D, even by fraud, no remedy in law
court. But could get the property back in equity court
2. P may only ask for Equitable Remedy if $ damages are inadequate. EXCEPTIONS:
3. Contracts for Land - Specific performance is default rule when contracts over land.
a. Loveless v. Diehl: D leased farm to P w/option to buy at end of lease for $21000. P made $5000
improvements on land. Unable to buy property themselves, P found 3rd party to buy land from
them for $22,000 (so P would have $1000 profit). D convinced 3rd party not to buy land. When
a contract for land is breached, there is a presumption in favor of awarding specific
performance – gives them exactly what they bargained for and this is perfect relief
4. Contracts for Goods – all legal remedies must be inadequate before awarding specific performance.
a. Scholl v. Hartzell: P agreed to buy car from D and gave D a deposit. D repudiated contract and
returned $100 deposit. P sues for action in replevin - force P to sell D the car. If good isn’t
unique then monetary damages are sufficient for breach of contract
i. Reasoning: Car isn’t unique since buyer could have covered by purchasing another car,
and this is preferred to specific performance
ii. UCC §2-716 - Gives specific performance if the goods are unique.
iii. UCC §2-712 - Buyer could have covered the contract and been able to sue for the
difference between the cover price and the contract price + incidental costs, minus
expenses saved by breach
iv. UCC §2-713 - If Buyer doesn’t want to cover he gets the difference between the contract
price and the market price.
b. Sedmak v. Charlie’s Chevrolet: P, Corvette collectors, make oral contract w/D to buy limited
edition car. P puts down deposite and requests special features. D breaches contract by selling
car to 3rd party for more $. P sues for specific performance. Under UCC §2-716 Court may
award specific performance as a buyer’s remedy for breach when goods are unique. Special
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ed. Corvette is unique since there are a limited # and P asked for special options, that not many
other cars would have. UCC §2-712 doesn’t apply since it is unlikely that D can cover by finding
another car
c. RULE: with unique goods, specific performance is default remedy. Only way to guarantee
that parties are put in position they would have been in if contract was performed
i. With a market good, buyer can always cover (find another Toyota) or we can determine
the average value of item across society, by market price.
ii. NO EFFICIENT BREACH when there is a sale for a unique good.
1. Sedmak Case: Efficient thing would be for D to sell car to a higher bidder,
compensate P and pocket the difference.
2. Problem w/Efficient Solution: How much would it cost to put Sedmaks in
postion they would have been in if contract was performed? CAN’T
DETERMINE P’S SUBJECTIVE VALUE OF THE CAR
d. Problem w/ordering Specific performance for unique good- discourages efficient breach:
i. Coase Counter – Injunction will not discourage efficient breach. Whoever gets car, P
or D, can then sell it to 3rd party.
1. If P doesn’t sell car to 3rd party, then they value car more than bid price (most
valued position)
2. If P does sell car to 3rd party, then they value car less than bid price and get a
windfall (most valued position)
ii. Problem w/Coase – Transaction costs would prevent P from finding the 3rd party, so hard
to get goods to highest utility
e. Problem w/Court ordering money damages for unique good:
i. Can’t determine Sedmak’s subjective value of Corvette. People value money
differently so the price of a car doesn’t indicate how much utility they receive from it.
No objective scale to determine a party’s utility.
ii. Diminishing marginal utility - Giving an additional $1 to a rich person gets much less
utility than giving an additional $1 to a poor person.
iii. Impossible for a judge to put a value on P’s happiness – No interpersonal comparisons
of utility, so impossible to determine which party would get more utility from car.
iv. Money damages attempt to approximate the $ value courts place on goods, but since
people value $ differently, money damages aren’t a perfect way to translate 1
person’s utlity scale into another’s utility scale
f. If it is a market “fungible” good, why use money damages?
i. We have a way of telling how much someone is willing to pay for good
ii. Can tell how much someone would have to pay to cover the contract
g. If it is a unique good, why use specific damages?
i. Only way to assure that person will get the utility they would have received under the
contract if the contract had been performed.
ii. We can’t use money damages since we can’t determine the value of contract to them.
5. Contracts for Personal Service – General Rule – no specific performance for service contracts, but
P may enforce non-compete clauses by ordering negative injunctions. All Efficient breach cases
a. Rule applies to both sides – employee can’t be forced to work for employer, and employer can’t
be forced to retain/rehire employee.
b. Problem w/ ordering specific performance in personal service contracts:
i. A form of slavery. Forcing someone to do something even if they don’t want to do this.
ii. If personal service is for artistic performance - Can’t force someone to make art. A
coerced performance wouldn’t be as good.
c. Lumley v. Wagner: D contracted to perform for 3 months at P’s theater and signed non-compete
clause. D entered contract with 3rd party for greater $ to perform at his theater. Court may grant
a negative injunction to prevent a party from performing for another during the contract
period. Court believes injunction will compel D to perform original contract (indirect specific
performance). Injunction OK since P specifically contracted not to sing outside contract
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d. Ford v. Jermon: P seeks specific performance of contract w/D to perform at his theater for a
specified time. D can’t be indirectly forced into specific performance by issuing negative
injunction (Minority Rule) Negative injunction doesn’t force D to work for P – could still
chose to work in another profession.
e. Duff v. Russell: D makes contract w/P to sing in operas for 2 years. D refuses to perform w/P’s
opera for a pre-textural reason, then signs contract to perform w/3rd party rival theater. P tries to
cover, but wasn’t able to. Court can order an injunction against one party from performing
outside the contract if there is no valid excuse. If there is a valid excuse, party can be
justified in breaking the contract. – implies negative covenant (non-compete clause) to get
same result in Lumley, even though no express clause. No monetary damages – difficult to
determine, and D is so famous that her service is unique so can’t cover.
f. Bailey v. State of Alabama: P enters contract to work for 1 year and receives $15 at signing.
After 1month, he quits without returning the $15. AL had law that made breach personal service
contract a crime. Bailey forced to work in labor camp to work off damages. Violation of 13th
Amendment: amendment was intended to abolish slavery, but state statute sets up
involuntary servitude. Statute is doing indirectly (make breach a crime) what it can’t do
directly (specific performance). Alabama’s law violated amendment since existence of
criminal law would compel people indirectly to comply with personal service contracts.
i. Holme’s Dissent – Statute Ok since it is providing incentives for party not to breach
contract. If party does breach, then they are required to pay a price (here, hard labor).
Statute protects freedom of contract. State exercising police powers to promote contracts
g. Lochner v. NY: P violated NY statute that bakers can’t work more than 60 hours/wk. NY statute
which limits maximum # of hours a baker can work is unconstitutional infringement on parties
right to contract under the 14th amendment. For an act to be valid in interfering with parties
right to contract, it must have a direct relation to promoting public welfare.
i. Holme’s dissent - States can pass laws that regulate life and interfere with ability to
contract, under their “police powers”. To just say that the statute imposes limitations on
life doesn’t matter since states are allowed to do this
h. Holme’s opinions are same in Bailey and Lochner: In both cases he defers to states under their
police powers. He takes a broad view of state’s ability to regulate under the 10th amendment.
i. Caveat on freedom of contract - There is a tension between right to contract under 14th
amendment and state powers to regulate under 10th amendment.
B. Restitution – Damage Interest and Cause of Action
1. R §373 – Restitution (to victim of breach) if you have performed some of duties before other party
breaches, you are entitled to restitution damages for what you performed. But if party has performed all
his duties and all that is left is payment, can’t recover under restitution damages. (Why? Because victim
can recover under expectation damages)
a. Victim may recover the market value of the work/benefit performed, even if it is in excess of
the contract price or in excess of how much it cost the victim to perform.
2. R §374 – Restitution (to party in breach) – party in breach is entitled to restitution of any benefit he
conferred minus the loss that he caused by his own breach.
3. Restitution to the Party in Breach:
a. Britton v. Turner: P contracted to work for D for 1 year at the end of which he would be paid
$120. P quit work after 9 ½ months and Turner refused to pay Britton for the time he did work.
P sues for breach and quantum meruit. When breaching party has fulfilled some terms of the
contract, injured party is liable to pay the value of the benefit he received minus the
loss/damages he incurred – default rule. D can’t give back the labor to P, so must compensate
for the services.
i. Quantum meruit – equitable doctrine allowing recovery of labor and materials provided
by one party even w/o contract, to avoid unjust enrichment of benefited party.
2. Restitution and Quasi Contract – When a benefit has been given under circumstances where it is unfair
to permit him to retain it w/o payment, the giver of benefit may sue for unjust enrichment to get back the
value of benefit.
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a. Cotnam v. Wisdom: P, a doctor, tried to help man who was hit by street car. Man died from
injuries. P sues D, the executor, for value of his services. Where a remedy is merited but no
contract exists, the court may create the legal fiction of a “quasi-contract” implying a
promise even though there wasn’t one, to award a restitution interest for unjust
enrichment.
i. We impute consent to a contract to a person who needs emergency medical care. P
provided a service, therefore is entitled to be paid
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IV. REACHING AN AGREEMENT
A. Introduction to Offer and Acceptance
1. Three types of Contracts
a. bilateral – those agreements that result from acceptance by a promise – promise is exchanged for
a promise
i. Both sides have duties (buyers duty to pay and sellers duty to deliver) and rights (sellers
right to payment and buyers right to deliver)
ii. Conditions of the offer determine whether it is a bilateral or unilateral offer.
b. unilateral – those agreements that result from acceptance by performance - offerer promise is
exchanged for offeree performance
i. Only offerer has a duty (buyers duty to pay) and only offeree has a right (sellers right to
payment)
c. Option contract – R §87 –
i. An offer is binding as an option contract if it:
1. Is in writing and signed by offeror
2. Recites a purported consideration (can be nominal), and
3. Proposes an exchange on fair terms within a reasonable time
ii. An offer which the offeror should reasonably expect to induce action of a substantial kind
on the part of offeree before acceptance, and which does induce such action, is binding as
an option contract, to the extent to avoid injustice (promissory estoppel for options)
iii. **UCC §2-205 Firm Offers – An offer to buy/sell goods in a signed writing which gives
assurances that it will be held open, is not revocable, for lack of consideration, during
the time stated, or if no time stated then a reasonable time (maxing at 3 months).
2. Contract requires the mutual assent of the parties and some showing of the mutual assent that the
law will enforce.
a. An offer creates the power in another person to create a contract (ex/A makes offer)
b. The person then can accept offer creating binding contract (ex/B accepts=binding contract)
3. Dickinson v. Dodds: D gives P option to purchase land until specified date. Before expiration date, P
learns that D offered land to 3rd party. When P finds D to accept, D says he already sold land to 3rd party.
When offeror revokes offer, either directly to offeree or indirectly through actions, the offeree’s
power of acceptance is terminated. No meeting of the minds since by the time P decided to accept
offer, D had already sold to someone else.
a. R §43 – Indirect communication of Revocation - Offeree’s power of acceptance is terminated
when the offeror takes action inconsistent w/ an intention to enter into the proposed contract and
offeree acquires reliable info to that effect.
b. R §17 – Requirement of a Bargain - Formation of a contract requires a bargain in which there
is:
i. Manifestation of mutual assent (objective - requires specific action of mutual assent)
AND
ii. Consideration
c. R §18 – Manifestation of mutual assent to an exchange requires that each party either make a
promise or begin to render a performance – (An offer is a conditional promise)
d. R §24 – Offer: Showing willingness to enter a bargain, which would make other party understand
that his assent will form a contract
e. R §35 – Offeree’s power of acceptance: he can complete the manifestation of mutual assent by
accepting offer, but he can’t accept if offer is terminated under §36
f. R §36 – Offer can be terminated if: a)rejection/counteroffer by offeree, b)lapse of time,
c)revocation by the offeror, d)death/incapacity of offeror or offeree. Offer can also be revoked by
non-occurance of any condition of acceptance under the terms of offer
g. R §42 – Revocation by communication from offeror - Offeree’s power of acceptance is
terminated when offeree receives a manifestation of an intention by offeror not to enter into
proposed contract
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4. Gratuitious Promise – A gift where 1 side gives something, but the other paty doesn’t give anything
B. Objective Theory of Assent – meeting of minds requirement
-Two minds must be thinking the same thing at the same time for there to be a legal contract.
-Today we use “mutual assent” in place of meeting of the minds.
1. Embry v. Hargadine McKittrick Dry Goods: 1 week after P’s contract was up, P demanded another
contract from CEO or he would quit right there. CEO said you are OK, not meaning a contract. P went
back to work and was fired 2 months later. Mutual assent of parties is determined by their expressed
intentions, not their secret intentions – an objective view. D’s statements were enough that a
reasonable person would think there was a contract. CEO knew P wouldn’t go back to work w/o a
contract.
2. Lucy v. Zehmer: D was drinking w/P and wrote contract that he would sell farm to P for $50,000. D and
wife signed paper. When P called D a few days later w/ $, D refused to sell saying it was all a joke. If a
party’s outward manifestations of assent were enough to create a contract, it doesn’t matter if
party really intended to be bound, as long as his conduct reasonably suggests that he intended to be
bound – subjective intent doesn’t matter – Objective Theory of Assent. P must be reasonable in
interpreting the offer to be real and sincerely believe offer to be real.
a. R §19 sec 2 – Conduct as Manifestation of Assent - Conduct of a party can’t be manifestation
of assent unless he intends to engage in the conduct and knows that other party may infer from his
conduct that he assents. (In Lucy, whatever D did showing that he was willing to sell his farm).
b. Hypo: Lucy knew Zehmer was joking, but Zehmer doesn’t know that Lucy knows he is joking.
Is there a manifestation of assent that is binding?
i. For an acceptance to form contract: Acceptance must be reasonably interpreted as
manifesting assent AND offeror has to sincerely believe that the offeree intends to be
bound.
ii. In Hypo, Lucy known Zehmer is joking so Lucy knows that Zehmer doesn’t intend to be
bound, therefore no contract
3. Mirror image rule: a response is not an acceptance if offeree imposes conditions on the acceptance or
seeks to change/qualify the terms of the offer. Contemporary approach is to tolerate minor discrepancies
and apply only where response makes material changes.
a. Acceptance has to match the terms of the offer. If terms of acceptance don’t match terms of
offer, it can be considered a counter-offer
b. EX/US v. Braunstein: US invites bids on raisins. D sent offer and US sends back acceptance of
the offer but with a typo in D’s favor. If either party knows that the other doesn’t intend
what his words/acts express, this knowledge prevents the words/acts from being an
obligating offer or acceptance – no contract due to mirror image rule. US typo results in
ambiguous acceptance. Court expects greater precision of expression when parties are on the
threshold of a contract
i. Test: Whether a reasonable man acting as an offeror would conclude that the offeree’s
response was a commitment.
4. Courts will only imply contracts if:
a. 1 side is unjustly enriched – promissory estoppel
b. Quasi-contract – but this is not used in situations where parties were intending to contract (only
where there was no contract intended, but restitution on unjust enrichment theory)
C. What is an Offer?
1. Preliminary Negotiations:
a. Nebraska Seed Co. v. Harsh: D sends letter that he has seed for sale and wants $2.25/cwt. P
telegraphs back that they “accept his offer at $2.25”. P sues D for breach. Something is not an
offer if it contains general, nonspecific terms. – Advertisements aren’t offers. D’s letter was
a proposal or “invitation to trade”, inviting offers. P can’t accept a proposal to form a binding
contract.
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b. R §26: Preliminary negotiations: Manifestation of willingness to enter into a bargain is not an
offer if the person it is addressed to knows/has reason to know that person making it does not
intend to form a contract until he has made a further manifestation of assent.
c. R §29): To whom an offer is addressed: (1) Manifested intention of offeror determines the
person/s who has power of acceptance. (2) An offer may create a power of acceptance in a
specified person/s in a group, or in anyone who makes a specified promise or renders a specified
performance.
d. R §33: Certainty: (1) Even if a manifestation of intention is intended to be understood as an
offer, it cannot be accepted to form a contract unless the terms of the contract are reasonably
certain. (2) Terms of a contract are reasonably certain if they provide a basis for determining
existence of breach and for giving appropriate remedy. (3) Fact that one or more terms of a
proposed bargain are left open may show that a manifestation of intention is not intended as an
offer or as an acceptance.
e. UCC § 2-204): (1) Contract for sale of goods may be made in any way sufficient to show
agreement, including conduct that recognizes the existence of such a contract. (2) Agreement
may constitute a contract even if moment of making is undetermined. (3) Even though one or
more terms are left open, contract for sale doesn’t fail for indefiniteness if the parties intended to
make a contract and there’s a reasonably certain basis for a appropriate remedy.
f. UCC §2-305: Open price term:
i. Parties can form a sale contract even if price isn’t settled. Price in that case is a
reasonable price at time of delivery if
1. nothing is said as to price, or
2. price is left to be agreed and there’s failure to agree, or
3. price is to be fixed in terms of some agreed upon standard, and it’s not so set.
ii. Price to be fixed by seller or buyer means a price that is set in good faith.
iii. When price left to be fixed otherwise than by agreement of parties fails to be fixed
through the fault of one party, the other may treat the contract as cancelled or fix a
reasonable price.
g. UCC §2-308: Fixes place for delivery in absence of one set by agreement—place of business
or residence, or if parties know that goods are in some other place, that place.
h. UCC 3-309: Absence of specific time provisions: (1) Time if not agreed upon shall be
reasonable time. (2) If contract is indefinite in duration it is valid for a reasonable time but may
be terminated at any time by either party. (3) Termination by 1 party except on happening of an
agreed event requires that reasonable notification be received by other party. An agreement
dispensing with notification is invalid if its operation would be unconscionable.
2. Written Memorial Contemplated
a. R §27: Manifestations of intent that are themselves sufficient to conclude a contract will not
be prevented from operating by the fact the parties also intend to create written memorial of the
agreement, but circumstances may show that the agreements are preliminary negotiations.
b. Empro Man v. Ball-Co Man: P sent D letter of intent to purchase D with statement that
agreement is subject to contract signed by both parties. D backs out of deal. Letter of intent is
not a contract since there were still points of contention that needed hammering out. Letter
of intent is enforceable as contract only if it has a full agreement and a formal contract is
only to memorialize agreement reached in letter of intent
c. Texaco v. Penzoil: Similar facts to Empro, but court finds that letter of intent is a contract.
d. Why the different opinions in Empro and Texaco?
i. Intent to formalize an agreement is evidence of intent not to be bound before signing a
formal writing, but it’s not conclusive.
ii. If there is understanding that a signed writing is unnecessary, and all substantial
terms are agreed upon, an informal agreement can be binding, even if parties
contemplate later putting things into a formal doc.
D. What is an Acceptance? Types of Acceptance
1. Acceptance by Correspendence – The Mailbox Rule
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a. Traditional Mailbox Rule - A contract is deemed accepted the date the letter is posted (valid
once offeree has done their bit to make it valid)
i. It can take several days for letter to make it to the offeror, during which time the offeror
could revoke the offer  but courts will still find it a binding contract
ii. A revocation of an offer is not binding until it is received by the offeree (so if an
acceptance is mailed before the offeree actually receives revocation – valid contract)
b. Issues with rule:
i. If the offeror never received the letter, the acceptance is still valid
ii. Mailbox rule doesn’t apply to revoking an offer
iii. Under option contract, contrac not formed until acceptance letter reaches offeror.
iv. Post office allows you to retract a mailed letter. But contract is created the minute the
offer goes into the mail. Creates a problem since it looks as though the offeree can retract
his acceptance.
c. R § 63 Time when Acceptance makes Binding Contract - An acceptance is valid as completing
contract once it has been dispatched by the offeree, unless the acceptance is under an option
contract, where the acceptance is valid only once it has been received by offeror
d. R §65 (p.381) An acceptance is reasonable if there is a customary way offers are accepted in a
business, and the offeree accepts in that customary manner
2. Acceptance by Silence:
a. Hobbs v. Massasoit Whip (p.382): P shipped skins to D, who held them for months without
telling P whether he accepted them. P had made several prior shipments to D which had been
accepted and paid for. Silence can’t be generally construed as an acceptance unless a given
course of dealing established a pattern which gave buyer reason to believe seller would see
silence as acceptance. P had reason to believe there was a “standing offer” for skins. D had a
duty to act, either accept or deny skins since conduct that imparts acceptance is acceptance in
view of the law, no matter party’s state of mind
b. R §69 – If offeree fails to reply to an offer, his silence becomes acceptance only if:
i. Offeree benefits from the offered services, with the opportunity to reject them and reason
to know that the services were offered w/expectation of compensation.
ii. Offeror has given offeree reason to understand that silence is a manifestation of assent
and the offeree in remaining silent and inactive intends to accept the offer
iii. Where because of previous dealings, it is reasonable that the offeree should notify the
offeror if he does not intend to accept
E. Acceptance by Performance and Unilateral Contracts
-R §30 –Form of Acceptance invited: offerors may specify that acceptance may take the form of performing or
refraining from performing a specified act.
1. Carlill v. Carbolic Smoke Ball Co.: D advertised medical device saying they would pay £100 to anyone
who gets flu after using devise according to instructions. P used as directed, but got flu. D refused to pay
claiming P never accepted their offer since she didn’t notify them. If offer implied that it is sufficient to
act on the proposal without telling them, then performance of condition is sufficient acceptance
without notification, - therefore there was a binding contract. Advertisement was a unilateral offer.
Acceptance was implied to be using medical devise as company described.
a. Concurrence: Compares to a situation with a lost dog. If a person hangs up a sign promising a
reward for finding a lost dog, you accept the offer by finding the dog and bringing dog in. You
don’t call up the person who posted the sign and tell them I promise to find your dog.
2. Petterson v. Pattberg: P took out mortgage from D. D offered a discount on mortgage if it was paid by X
date. Before that date, P offered to pay D the mortgage, but D told P that he already sold the mortgage to
a 3rd person. P had to pay 3rd party full mortgage. P sues claiming the loss of proffered discount. An
offer to enter into a unilateral contract may be withdrawn at any time prior to performance of the
act requested. Since D’s offer was withdrawn before P’s performance was started, no contract.
a. Caveat: R §45 – Option Contract created by Partial Performance
i. If unilateral offer, then an option contract is created when offeree begins performance
(So if P had started to pay (perform) D can no longer revoke the contract)
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ii. Offeror’s duty to perform under an option contract is conditional on completion of
performance by the offeree. (Offeror doesn’t have to give his promised performance
until other party hands over all of the money)
iii. **Unilateral Offeror is bound not to revoke offer once acceptance has begun (option
contract is created). But since offeree isn’t bound to complete the performance, and
offeror isn’t bound to perform until offeree completes performance, the contract isn’t
created until offeree’s performance is complete.
3. Petersen v. Ray-Hof Agencies, Inc.: D offers employment contract to P (Miami resident) if he comes to
their offices in GA. P went to Atlanta and is later injured on the job. P applies for worker’s comp in FL,
but will only receive if contract was made in FL. Contract is formed where the offer is accepted. Under
a Unilateral offer, offeror is bound to contract the minute offeree begins partial performance, therefore
they consider the contract created the minute P starts towards GA. (offer accepted when performance is
initiated) CASE WAS OVERRULED BY SUPREME CT OF FLORIDA:
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V. INTERPRETING ASSENT
A. Filling in Gaps in Assent
 When courts fill in gaps they use:
a. Implied-in-fact terms – those that the parties actually, though implicitly, agreed to.
b. Implied-in-law terms – those that are imposed on the parties without their consent
 Modern version of gap fillers:
a. Default rules – legal rules that the parties can avoid by means of an express clause that
differs from the term a court will otherwise supply by default
b. Immutable rules – legal rules that may not be varied by consent and will override any
expressed clause to the contrary in the contract. Ex/defense of unconscionability
1. Agreements to Agree
a. Sun Printing v. Remington Paper: P agreed to buy paper from D w/ pricing and length of time
pricing would apply TBD, but price wouldn’t exceed a market standard. D delivered paper for 1st
4 months, then refused to deliver paper claiming contract was incomplete. Where an essential
term to a contract is lacking, and there is no reasonable basis by which the court can supply
an omitted term, a contract is unenforceable. Even if price had been ascertainable, it is still
unknown how long it should be effective for. Court won’t read in too many terms into a contract.
There was a failure to form a contract – agreement called for parties to agree to price and
time and no such agreement was made, therefore D wasn’t bound.
b. “Beautiful idea”: parties might intend to be bound, but if there’s a huge gap in what they intend
to be bound by and the court ends up supplying the terms, the court is binding the parties to an
agreement. To defend freedom of contract (beautiful idea require parties to contract w/ each
other in more definite terms.
i. Almost all contracts need some gaps filled. Must look at the cost of a court supplying
terms v. parties supplying terms.
ii. Penalty Default Terms: idea of court implying off-the-rack terms that parties hate:
incentives for them to negotiate terms they would want and put them in the contract.
c. UCC §2-309 - either party can terminate contract if an unclear terms regarding duration.
d. UCC §2-204: (3) even if 1 or more terms are left open, the contract doesn’t fail if the parties
intended to make a contract and there is a reasonable basis for deciding a remedy
i. (Goes against outcome in Sun Printing since there was a reasonable basis to decide a
remedy)
e. R §204: When parties to a contract haven’t agreed on an essential term, a reasonable term may
be supplied by the court
f. Difference between Restatement §204 and UCC §2-204 approach?
i. UCC limits the supplying of terms to when parties clearly intend to be bound by a
contract.
ii. R §204 suggests that even if parties didn’t manifest intent to be bound, court could still
imply a term
g. Texaco v. Penzoil: Holding - There was a contract since the terms were sufficiently definite
to identify a breach and figure out damages if there was a breach
2. Illusory Promises – Gap in manifestation of assent. Is promise of 1 party “illusory” since it leaves
complete discretion to perform in hands of promisor so that he has really promised nothing? Court fills
gap by supplying an obligation to exercise this discretion in good faith
a. Wood v. Lucy, Lady Duff-Gordon: P agrees to be exclusive agent licensing out D’s name. D
places endorsements without P’s knowledge and withholds profits from P. Where a party
obtains exlusive agency through a contract, the law implies into that contract a party’s
promise to use its best efforts
b. Cardozo decisions in Wood and Sun Printing are the same – In Wood, judge feels he is
interpreting the contract, not adding a term to a contract, as in Sun Printing
c. Two ways a promise can be illusory:
i. If promise is so indefinite it can’t be enforced, or
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ii. Provisions contained in promise make its performance optional or at discretion of
promisor.
B. Interpreting Assent Subjectively or Objectively
 Objective theory of assent: A contract is an obligation attached by law to certain acts of the parties,
usually words, which represent intent to enter an agreement, regardless of the party’s secret intents
 R §201 (p.465): Whose meaning prevails?
1. Where parties have attached same meaning to term, that meaning prevails.
2. Where parties have attached different meanings, contract can be enforced if
i. (a) party A didn’t know that party B meant something else, and B party knew what party
A’s meant or vice versa
ii. If none of that applies (ex/Peerless), no contract even if that means mutual assent fails.
 UCC 2-208 (p.467): (2) Ambiguous terms of an agreement should be interpreted by trade.usage
1. Raffles v. Wichelhaus: Parties agree to sell and buy cotton delivered on a ship called Peerless, but they
both had different ideas of which of 2 Peerless ships they were contracting about. Where parties to a
contract give different meanings to an essential term in contract, and neither party knows or should
know what the other party meant then contract is not binding. (no meeting of the minds)
2. Comparing Objective standard in Lucy v. Zehmer and Reasonableness standard in Raffles:
a. We really use a reasonableness standard, not an objective approach, to determine if there is
a contract. If there is a meeting of the minds, that will trump the reasonableness standard.
b. We only use objective standard when we can’t sort out intent.
c. Test for assent – Tend to use a subjective standard with a reasonableness component if there is a
contract.
i. Did the parties subjectively agree?
ii. If parties disagree over a term and Party A was aware or should have been of Party B’s
understanding of term, the contract is in terms of B’s understanding.
Contract Creation v. Contract Interpretation
Using Lucy v. Zehmer Rule/Reasoning
Using the Approach in Raffles v. Wichelhaus
Situation 1:
L believes Contract
Z feels that he was joking, so no contract
S believes they wanted Peerless #1
B believes they wanted Peerless #2 so no contract
Situation 2:
-L believes contract
-Z believes he was joking
-Lucy knows Zehmer is joking, but feels that
there is a contract even though he knows Z is
joking
-Therefore no Contract since L knows other
party doesn’t intend to enter contract. L can’t
rely on Z’s outward manifestation
-S believes Ship 1, but S becomes aware that B
thinks Ship 2
-B believes Ship 2
-There is a contract since there is a meeting of the
minds. Both parties understand that they are using
Ship 2 interpretation, even though S intended Ship
Situation 3
-L is unreasonable in thinking there is a
Contract
-No contract since if L knows or should have
known Z was joking; no meeting of the minds
-S believes Ship 1, but S unreasonable in believing
Ship 1
-B believes Ship 2
-Contract for Ship 2
3. Oswald v. Allen: P agrees to buy “Swiss coins” from D. P thinks this refers to all Swiss coins in D’s
collection; D thinks this refers only to her collection titled “swiss coins”. When the terms used in the
agreement are so ambiguous that you can’t decide between conflicting meanings, there is no
contract, unless one side should have been aware of the other’s understanding.
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4. Weinberg v. Edelstein: P and D have stores in same building. P had deal w/landlord that he wouldn’t rent
a store to another tenant who would sell dresses. D sold skirt-blouse combos. Disagreement over term
“dress”. Where parties have different understandings of an essential term in a contract, but trade
usage fixes meaning of that term, the court will rely on objective trade standard to interpret term in
contract.
5. Frigaliment Importing v. BNS International Sales: D agrees to sell “chickens” to P. P thinks chickens
means young chickens. D thinks chickens means any age chicken. Where parties to a contract have
different meanings to an essential term, but 1 party should have known what the other party
meant, then the other party’s meaning governs. P didn’t prove burden that chickens is used as a
matter of common usage in their narrower sense
VI. WRITTEN MANIFESTATIONS OF ASSENT
A. Interpreting a Writing – The Parol Evidence Rule
 Parol evidence – evidence of the meaning of the written contract that is not a part of the contract itself.
 Parol Evidence Rule: If everything the parties intended to contract for is covered by the written
contract, you may not turn to extrinsic evidence (No parol evidence if integrated contract)
 Ways parties can “intend” for everything to be covered by contract
a. Partial Integration: Everything they agreed to is in the contract, but not every part is explained
in the contract.
b. Complete Integration: Parties intend that everything needed to understand agreement is
contained within agreement itself
c. Unintegrated – parties didn’t intend written contract to represent the whole agreement. Intended
contract to be governed by facts outside writing so can use parole evidence.
 R §209:
a. Integrated agreement = writing constituting final expression of one or more terms of an
agreement.
b. Court must decide if agreement is integrated, then determine whether or not to use parole
evidence rule.
c. Where a written agreement, in view of its completeness and specificity, reasonably appears to be
a complete agreement, it is taken to be integrated unless it is established by other evidence that
the writing did not constitute a final expression.
 R §210:
a. A completely integrated agreement is a complete and exclusive statement of terms.
b. Partially integrated is a final expression of agreemnent, that isn’t completely integrated.
c. Integration to be determined by court prior to interpreting parol evidence rule.
 R §213: (1) A binding integrated (completely or partially) agreement discharges prior agreements to
the extent that it’s inconsistent with them. (2) A binding completely integrated agreement discharges
prior agreements to the extent they’re in its scope. (3) An integrated agreement that isn’t binding or
voided does not discharge a prior agreement. Even so, it might be enough to render inoperative a term
which would have been part of the agreement had it not been integrated.
 R §214: Agreements and negotiations prior to the adoption of a writing are admissible to show
a. (a) that a writing is integrated or not
b. (b) complete or partial integration
c. (c) meaning of the writing, integrated or not
d. (d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause
e. (e) ground for granting or denying rescission, reformation, or other remedy.
 R §215: If there is an integrated agreement (either partially or completely), you can not enter evidence
that contradicts the terms that are in writing
 R §216:
a. Evidence of a consistent additional term is admissible to supplement a partially integrated
agreement but not a completely integrated one
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
b. An agreement isn’t completely integrated if the writing omits a consistent additional term which
is: (a) agreed to for separate consideration, or (b) such a term as in the circumstances might
naturally be omitted from the writing.
UCC §2-202: Final agreement can’t be contradicted by evidence of a prior agreement, but may be
explained or supplemented (a) by course of dealing or usage of trade or course of performance, or (b) by
evidence of consistent additional terms unless court finds writing to have been intended to be completely
integrated.
1. Thompson v. Libbey: P signed a contract with D for to sell D certain quality logs. D refuses to pay
claiming P made verbal warranty on quality of logs. A writing intended by the parties to be a full and
final expression of their agreement (completely integrated) may not be supplemented/contradicted
by any oral or written agreements made prior to the writing. It defeats the purpose of parol evidence
rule to look outside the contract to decide if you need parol evidence. If writing purports to be
complete, no parol evidence is allowed.
a. Two separate inquiries:
i. Integration. If contract not completely integrated, was there a side agreement that would
lead us to conclude something besides what contract says on its face?
ii. Interpretation. Substantive question about what parties intended to be bound by
2. Integration clause: Clause in contract that says nothing beyond contract should be looked at to interpret
the contract. – Courts have found these valid even if ambiguous
3. Problem w/ Language – since language is “open textured” it is always possible to find an ambiguity in
words and believe that you require assistance to interpret the contract. Always a possible gap in
contract that parties forgot to plug since you can bring up issues with any particular term. - So maybe
never possible to make a contract completely integrated
4. Brown v. Oliver: P bought hotel from D, not mentioning the furniture inside. D takes furniture. Oral
expressions before contract show that furniture wasn’t part of hotel sale. If subject of controversy is in
writing you can assume that the parties said what all they wanted to say in the contract. If parties
left a term out all together then you could use parol evidence to determine if fully integrated.
a. Wigmore Test to determine if contract is completely integrated:
i. Did the parties intend to include this part in another contract?
ii. To decide, look at the conduct and language of parties and surrounding circumstances
(parol evidence) to decide intent – question for the judge
5. Wigmore test v. Thompson test
a. Wigmore’s test: You can never figure out if contract is completely integrated without
looking outside contract
i. If Wigmore is correct, then no way to be faithful to parol evidence rule since you have to
look outside document to determine if you should look outside document
b. Thompson test: You must look only at the contract itself to decide if contract is completely
integrated.
i. If the Thompson court is correct, then you have defeated the parol evidence rule if you
look outside the contract
6. Pacific G&E v. GW Thomas Drayage: D contracts to fix P’s machine. D agreed to indemnify P from
loss resulting from injury to property. During work, machine part fell and injured P’s turbine. D says
indemnity clause was for injury to 3rd party’s property, not P’s property. Contractual obligations flow not
from the words of the contract, but from intentions of the parties so words need to be interpreted –
word has no meaning without context. So must always use parol evidence to interpret contract
(Wigmore test)
a. Prof point – under this holding, no need for parol evidence rule since you always need
extrinsic evidence to interpret contract
7. Trident Center v. Conn. General Life Insurance: P and D drew up contract for commercial loan, w/no
pre-payment clause during first 12 of 15 year loan. When interest rates dropped 5 years into the loan, P
wanted to refinance, but D wouldn’t allow it. Court is bound by Pacific Gas precedent to allow parol
evidence, but doesn’t think parol evidence should be allowed since:
i. Gives 1 party motive to challenge the contract, even if language is unambiguous.
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ii. Idea that words can’t adequately express intentions of parties undermines the basic
principle that language can constrain conduct – how could we send people to jail for
violating the law?
b. Prof point – just because there are ambiguous terms in a contract, it doesn’t mean that all words
in contract are ambiguous
B. Requiring a Writing
 Statute of Frauds: some contracts must be in writing. Sometimes leads to underenforcement of
contracts since can’t enforce oral contracts
 R §110 :
o The following classes of contracts must be made in writing:
 Contract of an executor’s duty to a decedent – ex/ a will
 Contract to answer for duty of another – ex/a guardianship
 Contract made on consideration of marriage
 Contract for sale of real estate
 Contract that isn’t to be performed within 1 year from making it
o The following classes are governed by UCC:
 Contract for sale of goods more than $500 (UCC §2-201)
 Contract for sale of securities (UCC §8-319)
 Contract for the sale of personal property over $5000 not otherwise covered (UCC §1206)
o UCC also requires a writing signed by debtor for agreement which creates a security interest in
property not in possession of the secured party – ex/a loan with land as collateral
 R §131 – Requirements for a writing to be enforceable contract within statute of frauds, it must be in
writing, signed by the party to be charged and:
o Identify subject matter of contract
o Sufficient to indicate that the writing is a contract between parties
o Includes essential terms of unperformed promises
 Exceptions to Statute of Frauds requirement: (serves as evidence that an agreement existed)
o Promissory Estoppel – R §129 – If party is seeking enforcement of a contract normally under
statute of frauds, if they made reasonable reliance on contract, then there would be specific
enforcement of contract
o Partial performance - UCC §2-201 (3)(a) – contract is enforceable since the goods were special
ordered by the buyer
1. Boone v. Coe: P went to Texas in reliance on oral contract to lease land from D. A party can’t recover
for reliance on a promise that is not considered a contract under Statute of Frauds. Real estate
leases must be written.
2. Schwedes v. Romain: P and D contracted over the phone for sale of land. D then sold land to 3rd party.
P sues for specific performance. Even though P took steps to perform contract (securing financing)
there is a distinction between preparation for performance and partial performance. No partial
performance here on oral contract to make it an exception to statute of frauds.
3. Parma Tile v. Estate of Fred Short: D orders materials from P, but P will only deliver titles if D has a
guarantor. D2 faxes guarantee of payment w/company letterhead to P. P delivers but Ds refuse to pay. A
letterhead on fax is enough to satisfy signature requirement under Statute.
a. Courts find a way to see contracts anyway even if statute of frauds isn’t met, so do we need
statute of frauds? Since it is expensive to litigate, we would prefer to get a contract in writing.
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VII. ENFORCEABILITY
-Courts don’t always enforce every clear offer and acceptance. May refuse to enforce contract: Ex/Prostitution,
Can’t contract to sell a kidney or a baby.
A. 3 Approaches to Contract Enforceability:
1. Deontological approach: A moral approach
a. Court asks: What is the morally/fair thing to do in this case?
b. Versions of this approach:
i. Moral obligation for parties to follow through with their agreements
1. When you exchange promises, you are morally bound to make good on promise,
since promise is morally binding commitment.
2. So court should enforce agreements if promises have this moral approach
ii. Fairness in results: Court looks at What is the fair outcome in this case?
2. Utilitarian approach: Courts should adopt rules about contract enforcement that will maximize
society’s utility.
a. No way to measure utility since there is no interpersonal way to compare utilities
b. Legal Economist: But we should come up with general rules that will maximize utility into a
workable, legal suggestion
i. Court should enforce contracts, since can assume that parties wanted to enter
contract, enforcing will make everyone better off –“ Beautiful idea”
ii. So Courts should enforce contracts since they will maximize utility
c. Apply to Baby M example:
i. Surrogate got money, couple got a baby.
ii. We assume that when surrogate entered agreement, she valued money more than baby,
and couple valued baby more than money
iii. Surrogate’s utility shifted – she now regards baby more than money
d. In this case, Utilitarian would say enforce a contract even when there is a change of heart.
e. What if efficient breach? – You still enforce contract, pay damages and move on.
f. Posner article – Market of babies – shortage of babies available and way to solve this problem is
to allow a market for babies, since it would cause supply to increase
3. Contractarian Approach: Would parties want courts to fill gaps in contract or dissolve contract
rather than fill gaps?
a. Courts should decide the way parties would decide as behind the veil of ignorance
b. If parties were contracting behind “veil of ignorance” – would come up with legal rules that
would satisfy preferences without knowing what their particular preferences would be in a
situation
i. This is the best way to come up with legal rules – lets parties themselves decide what
rules should be, instead of the courts.
ii. EX/Group of you must share pie. If you don’t know when you would be able to select
your piece of pie, you would maximize your return by making all of the slices even, that
way you could get the largest slice of pie possible. Could gamble and make some slices
bigger than others, but wouldn’t want to gamble, since the only way to guarantee a fair
return would be to make all slices even.
iii. So – you would end up with the fairest rules possible
c. Legal rule – Society may establish that there are certain types of contracts that shouldn’t be
enforced
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VIII. CONSIDERATION
A. Origins of Doctrine of Consideration – WHAT YOU WANT TO GET OUT OF THE
PROMISE/EXCHANGE – So if Julie is selling me a book if I pay her $5 – my consideration is the book (its
what I want) and Julie’s consideration is the $5 (what she wants from the exchange)
1. Doctrine of Consideration – helps determine when an informal promise should be enforced by looking
to the circumstances in which the promise in question was made
a. “Motive” is the closest synonym – person’s reason for entering into agreement.
b. Consideration is the reason person entered into agreement
c. Consideration is the thing the person was trying to get by entering into the agreement.
Makes sense: A BARGAINED FOR EXCHANGE —the thing you’re bargaining over—is the
reason you have for entering into the contract in the first place.
2. For a promise to be legally enforceable it must be “supported” by sufficient consideration.
a. A promise on its own, without consideration, is not sufficient to impose liability
b. Reasoning – a promise which lacks adequate motive can not have been serious, and therefore
should not be taken seriously.
3. Bargain Theory of Consideration - Restatment’s Approach to enforceability:
a. A contract is an enforceable promise (§1 and 2)
b. §71 – Requirement of Exchange:
i. An enforceable promise is supported by a consideration if it is bargained for
ii. A promise/performance is bargained for “if it is sought by promisor in exchange for
his promise and it is given by promisee in exchange for that promise”
1. Motive is not a part of what is actually “exchanged for”. True motive isn’t
necessarily the consideration.
2. Ex/A promise to pay for apples is bargained for if it is sought by the seller in
exchange for his promise to supply apples and it is given by buyer in
exchange for the promise to supply apples.
iii. Performance may consist of
1. An act other than a promise
2. A forbearance – to refrain from doing something
3. Creation, modification, or destruction of a legal right
c. R §17(1) – Enforceable promise (contract) requires a bargain in which there is:
i. Manifestation of mutual assent – that there was an offer and acceptance
ii. Bargain
iii. Consideration
4. Ex/ of agreement w/no bargained for exchange (no consideration) – A gift
5. Why no enforcement of gratuitous promise? Because societies utility isn’t increased by enforcing
gratuitous promise.
B. Distinguishing Bargains from Gratuitous Promises:
1. Johnson v. Otterbein University: D promises to pay P $100 on condition P uses money to pay off
school’s debt, D doesn’t pay. A promise unsupported by proper consideration, as in a gratuitous
promise, does not make a contract. Acceptance of the promise giving directions on how to use $ is not
consideration. Anytime money is given to the school there is an implied promise to use for school’s
needs. It was a conditional gift. No benefit to D in giving gift.
a. Pleasure from giving the gift can not be consideration since then all gratuituous promises would
be enforced.
b. Using §71 - A promise to use $ to pay off debt is bargained for if it was sought by Johnson in
exchange for his promise to pay $100, and is given by college in exchange for Johnson’s promise
to pay.
c. Applying §71 to Johnson v. Otterbein: No contract since Johnson wasn’t seeking a promise in
exchange for the money. He was making a conditional gift, so wasn’t necessarily seeking
university to pay off its debt when he gave money
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d. Difference between conditional gift and contract - Conditions promisor places on gift are not
the reasons the promisor decided to give the gift.
2. Hamer v. Sidway: Uncle promises nephew to pay him $5000 if nephew stops his vices until 21. Nephew
performs and uncle says he will give him the money. Uncle dies before nephew gets money and sues
executor for money. Consideration doesn’t require that a promisor receive a tangible benefit, but
that the promisee gives up a legal right, presently or in the future, as an inducement for the
promise. Binding contract since P gave up something (his legal rights) in consideration of the contract.
– Classic unilateral contract.
a. Applying §71 to Hamer v. Sidway: Yes there is a contract since Uncle was seeking nephew to
give up drinking in exchange for $5000 and nephew performed in exchange for that promise.
b. Hypo: “Jill, if you cross the street, I will give you $5.” – Promise supported by consideration?
No, I was not motivated by desire to have Jill cross the street. Crossing the street was a condition
so I could give Jill $5.
C. Past Consideration:
1. Moore v. Elmer: At D’s request, P performed psychic readings for Elmer. In return for previously
performed sittings, D promises to pay off P’s mortgage. Past performance can’t serve as consideration
of a future promise unless parties previously agreed that performance was given with
understanding that compensation would be made
D. Moral Consideration:
1. Mills v. Wyman: D father promises to pay P for taking care of his son while he was ill. D doesn’t pay
for services. P sues for expenses claiming parent has obligation to support son. Moral obligation is not
sufficient consideration for a contract unless there is also valid legal consideration. Moral duty
shouldn’t enter court’s thinking when deciding contract
2. Contract enforcement under Theoretical approaches:
a. Deontological approach - Contracts that morality requires are those courts should enforce Supports view of moral consideration as sufficient to make contract
b. Utilitarian Approach - Enforce those contracts that increase society’s overall utility.
i. Would NOT enforce promise based on moral consideration. Mills v. Wyman: If
contract is enforced, Mills gains utility, but Wyman loses utility. Can’t be sure whether
or not society’s aggregate utility is better off.
ii. This approach supports bargained for exchanges under Restatement view.
c. Contractarian Approach – Would NOT enforce promise based on moral consideration
i. If parties were choosing rules behind veil of ignorance, they probably wouldn’t have a
rule that moral duty plus promise to pay becomes a contract.
ii. What if both parties intended to enter a contract? Wouldn’t a contractarian approach
enforce contracts both parties intended to enter into?
1. Prof says it is possible that parties may chose to have their intended promises are
honored
2. Counterargument – make sure there is consideration for the promises parties
want to be enforced.
3. Webb v. McGowin: P incurs permanent injuries in saving D’s life. D promises to care for P for the rest
of his P’s life in consideration of P saving his life. D paid P until he died, but estate refuses to pay.
Moral obligation is a sufficient consideration to support a subsequent promise when promisor
received a material benefit, even if no original duty resting on promisor. (Deontological Approach)
D received a massive material benefit which morally bound him to compensate P. Would be unjust
enrichment if court didn’t enforce promise to pay. There was an actual contract, not quasi contract (as
in Cotnam v. Wisdom) since there was an actual promise.
a. Distinction between moral obligation of the promisor, based on ethical duty (Wyman case),
without material benefit, and one in which there was a material benefit (Webb)
b. R §86 – A promise made for a benefit previously received by the promisor is binding to the
extent necessary to prevent injustice. A promise is not binding if:
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i. The promisee conferred the benefit as a gift or for other reasons the promisor hasn’t been
unjustly enriched, or
ii. To the extent the value of promise is disproportionate to the benefit.
4. Taken together, Webb and Mills suggest that moral obligation may support a promise in the absence
of traditional consideration, but only if the promisor has been personally benefited or enriched by
the promisee’s sacrifice and there is a just and reasonable claim for compensation. (Chirelstein, p.31)
E. Contract Modification – Preexisting Duty Rule
1. Stilk v. Myrick: 2 sailors desert ship while in port. Captain attempts to replace but was unable to.
Captain agreed to split up the salary of the two deserters among the rest of the crew. When a party
makes a promise in exchange for performance the other party was already under a duty to
perform, the later agreement is void of consideration.
a. Sailors didn’t agree to perform anything in addition to what they were already obligated to do
under the original contract.
2. Alaska Packers v. Domenico: D contracted w/P to work salmon season in Alaska. Once in Alaska, P
went on strike if not given higher wages. D’s manager agrees to higher wages. Modifications to a
contract are not binding w/o additional consideration
a. Reasoning: P breached contract first by striking. P was already under a duty to perform under
original contract so they had just held up D for more money by striking.
3. Brian Construction v. Brighenti: P, subcontracts out to D to perform everything needed to lay foundation
to new building. D discovers rubble that neither party was aware of when making contract and would be
expensive to remove. P agrees to pay D to remove rubble for costs + 10%. D starts work, then refuses to
finish. P sues for damages resulting from D’s breach. Theory of unforeseen circumstances – when an
unforeseen condition is discovered during performance of original contract, the promise of
additional compensation in return for promise of additional work is a separate, valid contract.
a. Basically, when there are unforeseen circumstances, then modification of a contract is ok, even
without consideration.
4. Modification of contract is supported by consideration even if it is small consideration. (Promise to
take on additional duties is consideration)
5. R§89 – Modificaton of a Contract
a. A promise modifying a duty under a contract not fully performed is binding:
i. If modification is fair in view of unforeseen circumstances which arise after contract is
made
ii. To the extent provided by statute
iii. To the extent that justice requires enforcement in view of reliance on the promise
b. Apply R §89 to Alaska Packer’s case: There were no circumstances not anticipated by the
parties. If fisherman relied on the new contract for higher salary, then modified contract would
have been valid.
c. Apply R §89 to Stilk v. Myrick case: The desertion is a change in circumstances that neither
party anticipated so the modified contract would be valid
d. Apply R§89 to Brian Construction case: The rubble was unanticipated so modified contract is
valid.
6. UCC §2-209 – An agreement modifying a contract within this article needs no consideration to be
binding. (Takes a much more liberal approach than R §89)
7. US v. Stump Home Specialties: (Posner) Consideration requirement serves to prevent coercive
modifications, but it isn’t effective since it would validate modifications supported even by slight
consideration. Recommends enforcing contract modifications relying on the defense of duress to
prevent coercive modifications (enforce modificiations on basiss of good faith). Still need consideration
for original contract for the evidentiary and policy reasons.
8. Compare Older view of consideration v. Pre-existing duty rule
a. Older view of consideration - view that a private moral duty combined with a gratuitous promise
becomes an enforceable contract. (Moral duty + promise = binding contract)
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b. Pre existing duty rule – if you have a new promise, and you combine it with a prior duty (original
contractual duty), you have no new contract since you were already bound to perform prior duty
in first contract. (Legal duty + promise = no binding contract)
c. Difference - legal duty v. moral duty.
i. Moral duty is not legally obligating.
ii. Under pre existing duty rule, person has to give you something new, that you didn’t have
before to serve as consideration. If you already had the benefit before, then you aren’t
being supplied with anything new.
F. Adequacy of Human Action
 Usually, adequacy of consideration is not a question for court since parties have freedom to contract and
value the prevention of evading contractual duties, even under mistaken economic judgment, except in
cases of fraud, unconscionability, mistake, or nominal consideration
1. Newman & Snell’s State Bank v. Hunter: D widow gives P her own note in exchange for P absolving
loan her husband had owed and shares of stock in bankrupt company. P sues to have D repay her note. D
argues no consideration since husband’s loan and stock were valueless. Nominal or sham consideration
is insufficient to serve as basis of contract. D received no benefit when she took over husband’s loan
and bank received no additional loss, since the his loan and stock were already worthless.
2. R§79 – Adequacy of Consideration : If the requirement of consideration is met, there is no additional
requirement of:
a. Gain, advantage, or benefit to promisor or a loss or disadvantage to promisee, or
b. Equivalence in the values exchanged, or
c. “mutuality of obligation”
d. Comment d – “Disparity in value exchanged…sometimes indicates that the purported
consideration was not bargained for but was a mere formality or pretense. Such a sham or
nominal consideration does not satisfy the requirement of consideration under §71.”
i. In Newman – since stock shares had no value, there was no bargained for exchange
3. Dyer v. National By-Products: P gave up lawsuit over injury in exchange for lifetime employment by D,
but was laid off 6 months later. Giving up a claim is sufficient consideration if P held a good faith
belief that he was giving up a valid claim when entering contract
4. Big idea – there is real consideration if the party giving the consideration thinks they are giving up
something of value.
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IX. INTENTION TO BE LEGALLY BOUND
 Bargain Theory of Consideration requires supplementation – commitements should be enforced when
parties have manifested their intention to be legally bound
 Intention can be applied 2 ways:
a. Presence of intention to be legally bound can justify enforcement of commitments that lack
consideration or reliance
b. Absence of manifestation of intention may prevent enforcement of bargained-for
commitments
st
 1 Restatement – took position if when parties enter into agreement don’t really intend to be bound, but
there is real consideration and an offer and acceptance, then it is an enforceable contract. – so could be
bound to a casual agreement
 2nd Restatement §21 – Intention to be legally bound
c. Intention that a promise be legally binding is not needed for contract formation
d. BUT, showing intent that a promise is not supposed to be legally binding, MAY prevent
formation of a contract
e. So, if you are treating something as a casual agreement and parties know that agreement isn’t
binding, then a contract may not have been formed.
 Prof – difference between intent to enter into an agreement and intent that agreement is legally binding
 If there is consideration, we presume intention to be legally bound, but if there is manifested intent
that agreement not be legally binding, then no contract.
f. So consideration provides prima facie evidence that parties intended to be bound
g. Therefore, there should be a binding contract
h. Unless specific evidence parties did not intend to be bound.
A. Using Formalities to Manifest Intention to be Legally Bound – formalities serve an evidentiary function
1. The Seal
a. Original idea was seal served as consideration. Getting document sealed was difficult so hard to
accidentally slip into a legal relationship.
b. Today a signature serves the function a seal once served
c. **Could see doctrine of consideration itself as a mere formality
2. Nominal Consideration
a. R §79 – nominal consideration doesn’t serve as adequate consideration for a contract
b. R §87 – nominal consideration is adequate consideration in option contracts – Why valid for
option contracts?
i. Option is preliminary step in creating a “socially useful” transaction
ii. options facilitate transactions; transactions are good bc increase utility. Options make it
easier to enter into real contracts (supports “beautiful idea.”)
c. Schnell v. Nell: Wife leaves money in will to 3 people. D agrees to honor wife’s wishes and pay
people. D signs contract to give $200 to P in exchange for 1 penny from P. Even though there
was intent to be bound, the obvious disparity in value between 1 penny and $200 shows that
there was no real consideration.
3. Recitals - are normally not consideration. But sometimes, an agreement supported by a recital of
consideration is enforced despite lack of consideration or reliance
a. Smith v. Wheeler: P gives D 1 year option to buy property in consideration for $1 (which wasn’t
paid at time of contract). P claims contract void for lack of consideration. Right before option
ran out, D sent P letter exercising option and included $1 consideration. When a contract
contains a recital of a payment in consideration, the contract is valid, even if the
consideration wasn’t paid. P could have sued D for the $1 consideration. Implied promise to
pay $1 so consideration is valid, so option is valid. (Minority Rule)
i. Majority Rule – If $1 wasn’t paid at time of agreement, then no consideration, so no
contract.
b. Jolles v. Wittenberg: Even if nominal consideration is not paid, the contract is still valid.
Compares $1 recital to a contract under seal. Raises prima facie argument of consideration.
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X. Promissory Estoppel
 A separate basis for enforcing contracts, unrelated to consideration. Enforce promise since there was
reliance on the promise even if bargained for consideration doesn’t exist.
 First look to see if there is a full contract under §71. If not, then turn to §90 to look for promissory
estoppel.
 R §90: Promise Reasonably Inducing Action
a. A promise which the promisor should reasonably expect to induce action or reliance on the part
of the promisee/3rd party and which does induce such action/reliance is binding if injustice can be
avoided only by enforcement of the promise. Remedy granted for breach may be limited as
justice requires
 Test For Promissory Estoppelt:
a. Is there a promise?
b. Should promisor reasonably have expected to induce action of a definite character on part
of promisee?
c. Was there actual reasonable detrimental action?
d. Can injustice be avoided only by enforcement of the promise?
 Problem w/Promissory Estoppel: Moral Hazard – since you can make a gratuitous promise binding by
acting in reliance on the promise, it causes people to act in immoral ways. EX/You promise to give me a
watch, when my watch is gone. I go throw out my watch, and come to you saying I want the promised
watch –
A. Development of Promissory Estoppel as Substitute for Consideration
1. Family Promises:
a. Ricketts v. Scothorn: Grandpa promises to pay P $2000, saying he didn’t want her to work. P
quit job. P sues grandpa’s estate for $. Contract is enforceable when a promisor reasonably
expects to induce action of promisee, promise does induce such action, and injustice can
only be avoided by enforcing the promise. Grandpa’s promise of gift wasn’t conditional on P
giving up work, therefore no consideration. But Grandpa influenced P to change her position on
the faith of the $ being paid to her, so it would be unfair not to pay note even if there was no
consideration.
2. Two ways of looking at Promissory Estoppel:
a. Estopped from arguing lack of consideration - Party who made the promise is “estopped” from
arguing lack of consideration since there was reliance on the promise. (extension of
consideration doctrine)
b. Enforce promises in which the promisee’s rely - Reliance Theory - Can still argue promissory
estoppel even if reliance isn’t to your detriment. Just matters if party relies at all. This makes
reliance a true substitute for consideration. Court acts as if there is considertation when it
enforces contract, therefore allowing expectation damages. (whole new doctrine)
3. Promises to Convey Land
a. Greiner v. Greiner: Mom promises to convey land to son. Relying on promise, son moves onto
land and makes improvements. Mom retracts promise and sues for removal of son. A promise
which promisor should reasonably expect to induce action on part of promisee and does
induce such action, is binding, if injustice can only be avoided by enforcement
i. Under §90 – Mom could reasonably expect that son would act in accordance with the
promise. But how do you test if a party’s expectation is reasonable?
4. Charitable Subscriptions
a. Allegheny College v. Chautauqua Bank of Jamestown: (Cardozo) Johnson promises $5000 to P
to start fund for students entering ministry, after her death. Johnson paid $1000 during her life,
then revoked. P sues D executor for unpaid balance. P gave consideration in exchange for
$5000 promise – implied promise to set up memorial fund, so there is a valid contract.
When Johnson paid P $1000, P kept money for fund instead of using on other things – so
relied on Johnson’s promise by performing their implied promise.
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i. Cardozo found that condition on gift was valid consideration since he felt it was better to
stretch consideration doctrine than expand promissory estoppel.
a. 3 theories argued in Allegheny:
i. Standard bilateral contract – promise to set up fund for promise to pay money. Cardozo
accepts this theory, dissent rejects
ii. Promissory estoppel – dissent will apply in principle, but feels it doesn’t applies here.
Cardozo won’t apply at all.
iii. Unilateral contract – college couldn’t perform setting up fund since never got all of
money from Johnson, so no contract. Dissent would apply this.
2. Promises of a Pension
a. Feinberg v. Pfeiffer (Shows why we need §90): D promises to pay P pension for life when she
retired. P retired and began receiving payments. Payments were stopped, then P becomes ill and
can’t work. A promise which the promisor should reasonably expect to induce action on
part of the promisee and which does induce such action is binding if injustice is avoided by
enforcement of the promise. No consideration for promise here since P’s work was “past
consideration”. Pension was reward for past work, not incentive for future work.
i. If P had been healthy and able to work, then no recovery since no injustice (P can go out
and get another job)
ii. If P had continued to work for D and became ill, forcing her to retire, then no recovery –
P’s retirement wouldn’t have been in reliance on D’s promise.
iii. If P had retired on promise of pension then got another job which paid more money, then
no recovery - P didn’t rely to her detriment, court wouldn’t enforce since no injustice.
3. Construction Bids:
a. GCs must bid on a contract and deposit $ to ensure they will do work. But a GC puts together his
bid without making binding contract w/sub-contractor. (Sub makes offer, GC uses offer to put
together bid) If GC gets bid, there is window of time where GC is bound to perform before he can
accept sub’s offer.
b. James Baird v. Gimbel Bros: D (sub) offers linoleum to 20 contractors. D makes error in offer
price. P contractor, relying on D’s offer, submits bid before D telegrams withdrawing bid due to
mistake. P’s bid is accepted. D won’t sell to P at that price. No contract since offer was
withdrawn before it was accepted. Where a promisor wouldn’t reasonably expect his promise
to induce reliance on the part of the promisee, promissory estoppel doesn’t apply. D
couldn’t reasonably expect reliance on its offer since D expressly stipulated that fulfillment of
promise was conditional on acceptance of P.
i. Sub could structured things better by making a conditional offer – “I offer to sell GC
linoleum, and if GC includes me in the bid, I agree to be bound by this promise.”
c. Drennan v. Star Paving Co.: P (GC) relied on D’s (sub) bid that was incorrectly underestimated.
GC gets the job, and then finds that D (sub) won’t do bid. P found another sub who willing to do
job and sues D for difference covering. When a promisor makes a promise which he would
reasonably expect to induce reliance on the part of promisee, and promisee does rely, then
the promise is binding if injustice can only be avoided by its enforcement. D knew P would
rely on its bid. Court sees unilateral contract - P relying on D’s offer, is partial performance.
d. Baird approach v. Drennan approach:
i. Drennan - better since people in construction industry understand trade practices and
know there is a possibility that their offer would be used in bid by GC.
ii. Baird – these are business people and GC can use option contracts or conditional offers if
they didn’t want to end up in these situations.
e. R §87 – Option Contracts:
i. Offer is binding as option contract:
1. If in writing and signed, gives a purported consideration (basically means that
nomial consideration is enough)
2. Is made irrevocable by statute
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f.
ii. An offer which the offeror should reasonably expect to induce action by offeree before
acceptance and which does induce such action is binding as an option contract to extent
necessary to avoid injustice ( no consideration needed for binding contract)
Under §87:
i. Baird and Drennan: Offer that sub made becomes an option contract, meaning that
offeror can’t withdraw, therefore offer was valid.
ii. In Baird, P knew that D had withdrawn offer, and yet still went forward with their bid. –
So not necessarily to find an option contract; use §90 “to avoid injustice”
iii. In Drennan, P didn’t know that D’s offer was invalid before submitting the bid.
B. Promissory Estoppel as an Alternative to Breach of Contract:
1. Goodman v. Dicker: P applies for radio dealer franchise to D. D implies franchise will be granted. P
relies on D’s words; franchise isn’t granted. Promise to be enforced is D’s promise that franchise will be
granted. Justice requires P get reliance damages for acting on the faith of D’s promise.
a. Reasoning: Court sees promissory estoppel as replacement for consideration. Don’t need
consideration if there is reliance. Court award’s reliance damages; not expectation damages –
use a Torts outlook (reliance theory of enforcement w/reliance measure of damages)
b. If had been a contracts style enforcement, court would have awarded expectation damages.
2. Hoffman v. Red Owl Stores: P relies on D’s statements that if he paid $18000 they would set up a
grocery franchise. D keeps increasing price of P’s investment until P negotiations broke down. P sues D
for breach, but no real contract. Holding: §90. Court says that to find for promissory estoppel
under §90, the promise giving reliance, doesn’t have to be as comprehensive as an offer that would
give rise to a contract if accepted. Feels action for promissory estoppel is not equal to breach of
contract action so damages should only be large enough to prevent injustice (reliance).
a. Problem – If promissory estoppel is seen as its own doctrine, then all you need is reliance on
a promise, no offer and acceptance
b. Court awards damages on promissory estoppel basis. TREATS RECOVERY AS A TORT,
NOT AS A CONTRACT: PE not used as a consideration substitute, only reliance damages
granted, damages even granted to Hoffman’s wife, which clearly wouldn’t have happened in a
contracts action, but fits in a torts framework: damage to her was foreseeable.
i. Under Contract – would have awarded expectation damages. But can’t find a
contract here since not enough specifcs to fill in the gaps and no idea what lost profits
would have been - Only have intense preliminary negotiations.
3. Tension between torts and contracts under promissory estoppel:
a. Gilmore article: – promissory estoppel is leading to death of contract law. As time goes on
contract law and tort law will fuse together.
b. In Response:
i. Red Owl’s reliance damages can be said to protect contract law – if you want real
contract damages, must have real contract.
ii. In real world, people aren’t winning many cases based on promissory estoppel
C. Modern Applications and Limits of Promissory Estoppel
1. Blatt v. USC: P was told that he would be eligible for honor society (D) if at top of class. P graduates at
top of class, but not admitted to order since not on Law Review. For a court to apply promissory
estoppel, the promissor must be able to reasonably expect to induce action of definite character on
part of promisee. The promise wasn’t definite enough to be valid. D couldn’t expect that promise of
eligibility would induce definite action on part of P.
a. No consideration since performance (working hard and getting good grades) was not sought
by D in exchange for its promise (eligibility for honor). Even if there was consideration, no
breach of contract – D only promised that P would be eligible, not that he would be admitted.
b. Caveat – decided under old §90 which required action of a definite and substantial character. But
would probably be decided the same way under new §90 due to “as justice requires”
2. Spooner v. Reserve Life Insurance: D issued memo about incentive based bonus plan. Bulletin stated
that D retained the right to withhold bonuses with or without notice. D ended up not giving bonuses. A
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3.
4.
5.
6.
promise made illusory by a clause which make its performance optional or discretionary prevents a
party from claiming they reasonably relied on the promise – so can’t apply promissory estoppel.
No real offer, just an intention to pay a reward. Unreasonable for employees to rely on a promise that is
clearly at the discretion of employer – not the type of promise employer would reasonably expect to
induce action
a. Two ways a promise can be illusory:
i. If promise is so indefinite it can’t be enforced, or
ii. Provisions contained in promise make its performance optional or at discretion of
promisor.
Ypsilanti v. GM: When applying for tax abatement from P, D makes statements about job retention, w/
caveat on market conditions. P grants tax abatement. 4 years later, D decides to close factory and move
operations. P sues for injunction. Grants injunction since D made a promise to maintain plant, P
relied on this promise (gave up $2 million in taxes), and injustice can only be avoided by making
GM stay in the town. No contract since no bargained for exchange.
a. Court defines promise as “expression of intention” – but this is too vague, since (a promise
should invite reliance).
b. Non-Utilitarian opinion – problematic for court to order injunction when GM thinks its more
profitable to close plant. Court would be enforcing inefficiency.
i. Could argue “unique goods” in favor of injunction – GM’s role in economy is so unique
and unique that a company employs 5000 workers
Ypsilanti v. GM: Appeal to Mich Ct of Appeals. For promissory estoppel rule to apply, the court
must find that a definite promise, not mere salesman’s puffery, has induced reliance.
a. Reasoning: GM did not make a clear promise to keep plant open. The fact that a company
solicits a tax abatement with assurances of jobs and exaggerations is not evidence of a promise.
Even if GM made a promise, reliance wouldn’t have been reasonable since town board
understood that GM was not making a promise.
Alden v. Presley: P continues with divorce proceedings and property settlement after she knows Elvis’
estate will not honor his promise to pay off her mortgage. Since P had prior notice that promise was
revoked she can’t reasonably rely on promise.
a. Rule: When a promisee is able to avoid reliance, it is unreasonable to detrimentally rely on
the promise - doesn’t support a claim under promissory estoppel.
b. Though you would think that D can argue that P is made better off from knowing Elvis even if
she has to pay off her own mortgage, you must only look to the beneficial/detrimental effects of
the promise and reliance – can’t look back too far.
Cohen v. Cowles Media: P sues D newspaper for breaching promise of confidentiality on info he gave
them regarding a political candidate.
a. Minn. Supreme Ct: Won’t apply promissory estoppel even if there was a promise and detrimental
reliance, since enforcing won’t avoid injustice. Court balances state’s interest in enforcing
contracts v. constitutional rights of the newspaper to determine if unjust to enforce promise.
Court feels that newspaper’s free speech rights are more important than preventing injustice in
enforcing a contract.
b. US Supreme Ct: A generally applicable law only violates 1st amendment rights if it substantially
affects free speech. Ex/criminal law – can’t break and enter building to get info for magazine
article. Promissory estoppel is a law of general applicability therefore 1st amendment
doesn’t forbid its application to the press.
i. Dissent: Majority’s distinction between laws that directly target free speech and ones
that indirectly affect speech is misapplied. When operation of a general law has a direct
impact on speech then can’t see it as not substantially affecting free speech
c. Minn. Supreme Ct – On Remand: D’s promise to keep P’s name out of press was clear, P
relied to his detriment, enforcing the law will prevent injustice since law shouldn’t allow the
breaking of promises. (Seems to say the newspaper should have done its own balancing of need
to publish D’s name and the “contract” it entered into.)
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XI. PERFORMANCE
A. Implied Duty of Good Faith Performance
 R §205 - Every contract imposes upon each party a duty of good faith and fair dealing in its
performance and its enforcement.
 UCC §1-203 – Every contract or duty with in the UCC imposes an obligation of good faith in its
performance or enforcement.
a. Difference between §205 and §1-203 – R §205 includes “fair dealing” a broader provision in
favor of good faith.
 Contracts usually contain an implied duty to perform in good faith (Wood v. Lucy, Lady Duff Gordon).
 Issue – Should court interpret contract as though there was a “best efforts” clause?
a. In cases where courts are willing to read in best efforts clause:
i. Doing it since this was the intention of the parties?
ii. Doing this even if parties didn’t have this in mind?
 Problem - Are courts reading in duty of good faith bc they think parties meant it to be there, or are courts
reading it in because they think it should be there?
a. Should courts be reading in these clauses, or should they let agreements be illusory and make
parties draw up better agreements?
b. Position depends on whether you think these clauses are somehow inherent in the Ks, OR you
think the courts are just making things up where parties didn’t intend to include good faith clause
c. Possibly an issue to imply that one party should have the best interests of the other party in mind.
1. Goldberg Corp v. Levy: P rents property from D w/part of rent TBD by gross sales. D had right to
terminate lease if proceeds didn’t exceed X amount. D intentionally mismanaged his business to cause
income to fall below X to get out of lease. D made an implied promise of good faith to make
reasonable efforts to run a profitable business. Court reads in covenant of good faith since if there
was no covenant, it would make the rent as % of profit clause have no weight. To find real
consideration and make sure promise isn’t illusory, Court reads in covenant of good faith.
a. Prof – Acting in bad faith doesn’t mean acting w/bad motives. If D had been siphoning
money off business to help his sick wife, he might have good motives, but acting in bad faith w/in
the context of contract. Covenant of good faith has nothing to do with motive
2. Mutual Life Insurance v. Tailored Woman: P leases to D basement-3rd floor of building w/ part of rent
TBD by sales. Later, P leases D additional space on 5th floor, but no requirement to pay % of sales as
rent. D moved high ticket fur dept up to 5th floor. OK for D to move furs to 5th floor with flat-rent lease,
thus avoiding paying % of sales on those items as rent: no bad faith there, D just exercising his rights.
a. Goldberg court would likely have found bad faith here.
b. Dissent: Provision in contract for rent as % of sales would have no meaning if contract wasn’t
found to have covenant of good faith
B. Implied and Express Warranties
1. Implied Warranties of Merchantability and Fitness for a Particular Use
a. UCC §2-314 – Implied Warranty of Merchantability
i. Warranty is impled if seller is a merchant with respect to goods of that kind.
ii. For goods to be merchantable they must fulfill all of following:
1. Pass without objection in the trade under the contract description
2. W/fungible goods, are of fair quality within description
3. Are fit for ordinary purposes fo which they are used
4. Run/work, with some variations allowed as provided by contract
5. Are contained, packaged, and labeled, as agreement requires
6. Conform to promise of fact made on label
iii. Unless excluded or modified other implied warranties may arise
b. UCC §2-315 Implied Warranty of Fitness for Particular Purpose if:
i. Seller must have reason to know buyer’s particular purpose for goods
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ii. Seller must have reason to know that buyer is relying on seller’s skills in furnishing
goods
i. Buyer must rely on seller’s skills
c. Step-Saver Data v. Wyse Technology: Since P can’t demonstrate breach of warranty of fitness or
merchantability, they can’t recover under these theories.
i. Warranty of fitness for particular purpose: Goods must be ok for the purpose buyer
intended to use them (narrower than merchantability)
ii. Warranty of merchantability only requires that goods be of reasonable quality for
uses these goods are usually put to, as accepted by the trade (reasonable way to figure
out if product is merchantable)
2. Express Warranties – promise to make good on losses within a particular scope, whether or not losses
wree foreseeable or avoidable
a. Royal Business Machines v. Lorraine: P sues D for breach of express warranties related to
performance of copiers. Some of D’s representations were not warranties, just statements of
seller’s opinion. Since purchases were made over 18 months, P must have had expanding
knowledge about copier so factual affirmations might not be basis of the bargain. An express
warranty can only arise from a statement of fact that relates to the goods and formed the
basis of the bargain.
i. Test for express warranty – Is seller telling a fact of which the buyer is ignorant, or is
seller just giving his opinion on something he has no special knowledge about?
b. UCC §2-313 – Express Warranties:
i. Express warranties are created as follows:
1. 1)Affirmation of fact or promise made by seller to buyer which relates to the
goods AND 2)becomes part of basis for the bargain
2. Any description of the goods which is made the basis of the bargain
3. Any sample which is made as part of basis of bargain, creates warranty that
goods shall conform with sample
ii. Seller doesn’t have to say he is making a warrant or guarantee, for there to be an
express warrantee, but if seller is just stating opinion, then no warranty.
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XII. BREACH
A. Anticipatory Breach– One party announces before the contract is due that he will not perform. This is a
repudiation of contract
 Usually would wait to see if a party does breach instead of asking for remedy now – inefficient
 More efficient to anticipatory breach for it allows party to take advance action to minimize his losses
 Problem with anticipatory breach – you don’t know if party is actually going to breach until they do.
1. Harrell v. Sea Colony: P contracted to purchase condo from D and put down deposit. P asks D if they
will terminate contract. P agrees to cancel on condition that his deposit is returned. D didn’t give deposit
back and just sold condo to 3rd party. To constitute anticipatory breach, there must be a definite
manifestation of intent that a party will not give promised performance; a mere request for change
in terms or cancellation is not by itself enough. P was raising possibility of mutual recision, not
canceling contract.
a. Problem: If P didn’t breach contract, then when D sold condo to 3rd party, D anticipatorily
breached contract. What are damages?
i. If we see it as a mutual cancellation – P gets back deposit
ii. If D anticipatorily breached – P gets deposit (reliance) + expectation damages (diff
between contract and market price)
2. UCC §2-610 – Anticipatory Breach: When either party rejects contract with respect to a performance
not yet due, the loss of which will significantly impair value of the contract, aggreieved party may:
a. wait for performance for reasonable time
b. resort to any remedy for breach
c. suspend his own performance
3. UCC §2-611 – Retraction of Anticipatory Breach: Until repudiating party’s performance is due, he
can retract his repudiation unless other party has since cancelled the contract or changed his
position on reliance of the repudiation
a. ex/If Sea Colony sells condo and Harrell goes out and buys another condo, Sea colony can’t come
back and say that they now want to sell to Harrell
B. Constructive Conditions and Material Breach:
1. Constructive (Implied) Conditions –
a. A condition – one of the things that has to be performed before the other party’s performance is
due
b. ex/Insurance contract that insures home against fire. Insurance company doesn’t have to pay you
unless there has been a fire. A fire is the condition
c. R §224 – A condition is an event, not certain to occur, which must occur, before performance
under a contract becomes due, unless non-occurrence is excused
d. If condition that was not performed was so minor, a court may find that party
“substantially performed” ( no material breach) – they can recover under contract.
i. Damages may be based on loss in value to the owner or cost to remedy defect
ii. Substantial performance is usually found in construction contracts since the value of
builder’s performance can’t be returned to him. If it can be returned, probably no
substantial performance.
2. Jacob & Young v. Kent: P builds mansion for D. Provision in contract calls for “Reading” pipe. P uses
different type of pipe. D asks P to replace w/correct pipe which would be expensive than the cost of
substituting pipe alone. Using wrong pipe is small error compared to overall size of contract 
substantial performance. Since P substantially performed, then measure of damages is difference in
value between pipes, not cost of completing contract. When the cost of completion is grossly out of
proportion to the benefit to be attained, the measure of damages is the difference in value (rather
than cost of replacement).
a. Substantial performance only applies if mistake is not intentional or willful
b. Dissent: D’s failure to perform any condition of contract constitutes a breach of contract. Parties
have a right to contract for anything they want.
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3. Test for Substantial Performance: How much of the benefit that the injured party reasonably expected
from the exchange has been received? Look at reason the injured party made the contract.
4. Distinction between 2 types of promises:
a. Independent promise – Promise on other party is not dependant on performance. (D’s promise
to pay isn’t conditional on P using Reading Pipe.) – So D substantially performed
b. Dependant promise - Promise on other party is dependant on performance of promise. (D
doesn’t have to pay if Reading Pipe wasn’t used) – So failure to use Reading Pipe was a material
breach
5. Material Breach – if other party has failed to live up to the contract in some way and failure
constitutes a material breach, then non-breaching party doesn’t have to perform his part (in
absence of expressed clause to the contrary)
a. A breach is material– if failure in performance jeopardizes party’s confidence in receiving
additional performances in the future – lack of confidence stems from the nature of a breach
that has occurred
i. Person entering contract is presumed to have confidence in future performance to make
the promises required to bind contracting partner to the deal
ii. Creation of obligations  interest in future performance
b. When a material breach has occurred, injury is to promisee’s “interest in future performance”
AND injury sustained from receiving less than what was bargained for.
c. Damages – loss suffered from lack of other party’s performance, minus, amount saved by not
having to render performance.
d. Opposite of Material Breach is Substantial Performance
2. The Perfect Tender Rule: Sellers are required to deliver goods that comply exactly with the sales
contract. Buyer is entitled to reject goods if they do not comply with contract.
a. Substantial performance doesn’t apply to sale of goods – must use perfect tender rule
b. Ramirez v. AutoSport: P agrees to purchase camper from D and trades in old van. P tries
repeatedly to pick up van but each time there were problems with the camper. P requests old van
back, but D had sold it to 3rd party. Seller has duty to turn over exactly the goods called for in
a contract and buyer has right to reject if goods if they do not conform with contract, no
matter the significance of the non conformity.
c. Rights of parties different if depending on when there is a rejection of goods:
i. UCC §2-508 (Sec 1) Before acceptance – buyer may reject for nonconformity, but
seller has right to cure defect within time period of contract
1. But if while seller is curing defect, buyer needs to buy another good to cover,
seller loses right to cure – contract is terminated.
ii. UCC §2-508 (Sec 2) After the time set for performance – Seller has further
“reasonable time” to cure defect if he reasonably believed that the goods would be
acceptable
iii. UCC §2-608 After acceptance - Buyer may reject only if nonconformity
substantially impairs value of the goods to him – protects seller from revocation for
trivial defects
d. Perfect tender rule is preserved to the extent that it allows a buyer to reject goods with defects,
but since the seller has the right to cure, rejection doesn’t terminate contract - May only cancel
the contract if buyer rejects goods and seller fails to cure
e. UCC §2-601 – if goods fail in any respect to conform to the contract, buyer may: 1)reject the
whole, 2)accept the whole, 3)accept any units and reject the rest
C. Cost of Completion v. Dimunition in Value: The Expectation Interest Revisited
1. Groves v. John Wunder Co.: P contracted w/D so D could take gravel from P’s land. Contract said D
would leave the land level, but D admittedly didn’t level the land. Will cost P $60,000 to level land, but
only $12000 reduction in value of the property as is. Where contractor willfully varied from contract,
he can’t claim substantial performance, so use cost of performing full contract as damages.
Contract called for restoring land to uniform level and cost of completion will put party back in the
position they would have been in if contract was performed.
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2. Subjective v. Objective valuation:
a. Cost of completion
i. View as inefficient – D is forced to pay more than the land is increasing in value.
ii. View as efficient – Expectation damages refer to the subjective value of land to P.
Could be more valuable to P to have level land.
b. Difference in value – P would have gotten the difference in value of level land and current state
of land ($12000) – If contract was performed P would have land worth X dollars so give him the
money to bring him to that level – objective determination of damages.
3. R §346 – Availability of Damages
a. Injured party has right to damages for breach unless claim for damages has been discharged
b. If breach caused no loss, or nominal loss, a small sum fixed without regard to the amount of loss
will be awarded as nominal damages
c. *Comment b (p.1014) – If tearing down structure to correct a defect is unreasonably costly,
the law doesn’t require damages to be measured by a method requiring economic waste.
4. Peevyhouse v. Garland Coal Mining: P leased land to D for strip coal mining operation. D promised in
contract to level land. D decided not to perform. Cost of performance is $25,000, but the value in land
would only increase $300. When condition breached is only “incidental” to the contract and cost of
performance greatly exceeds the difference in value, then the damages are the dimunition in value
resulting to the premises due to non-performance. Condition is seen as an independent promise not
condtional on fulfillment of the main contract.
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XIII. DEFENSES
 Does party in breach have a defense for denying compensation for their breach of contract?
 You can’t contract around defenses – they are Inalienable Rules – not default rules
A. Unconscionability - Court voids contract since it is “morally questionable”
1. Williams v. Walker-Thomas Furniture: P purchased furniture from D’s store on layaway. If P defaulted
on monthly payments D could repossess all items that the buyer owed money on. (Debt on items was
aggregated) P defaulted on monthly payment and D replevined all of the items. The contract is
unconscionable therefore it is voided and remanded to lower court to decide who gets the purchased
items. When a party has little bargaining power signs an unreasonable contract, with little
knowledge of its terms, its unlikely that there was consent given to all of the terms
2. Unconscionability – 2 approaches
a. Formal/procedural approach – only look at the exact terms of the contract. Make sure that
each party really did perceive themselves as better off under the contract.
i. Seems less problematic than substantive since it respects the autonomy of parties as long
as they know terms of contract and aren’t forced to enter contract
b. Substantive approach – more paternalistic, looks into the background of the contract as it is
made (even if parties regard themselves as better off, we won’t allow this contact to be enforced).
Constricts the freedom of parties to contract
i. In Walker, even if D fully explained the provisions to P, then it would still not be
approved by the court since P was in unequal bargaining power
3. UCC §2-302 – Unconscionable Contract (doesn’t really explain what unconscionable means)
a. If court finds a contract or any clause to be unconscionable at the time it was made the court may
refuses to enforce the contract, any part of contract, or limit application of unconscionable clause.
b. When it is claimed that a contract is unconscionable, the parties may present evidence to the court
to aid in its determination
4. R §208 – If a contract or term is unconscionable, court may refuse to enforce the contract, may enforce
the remainder of the contract without the bad term, or may limit the application of the bad term as to
avoid any unconscionable results.
a. Comments section suggests 2 part (formal approach) test to determine if contract is
unconscionable:
i. Bargaining unfairness (procedural unconscionability) and
ii. Unfair or oppressive terms (substantive unconscionability)
b. Usually both prongs are present, but court may balance them, so if there is more of one,
there can be a lesser showing of the other.
B. Failure of a Basic Assumption - Mistakes
 Mistake – wrong understanding of the facts (not a bad decision). The World is different than what the
parties expected, making agreement less than fair.
 RULE – If mistake is mutual, void the contract, if mistake is unilateral then enforce the contract.
1. Why different rule for unilateral mistakes?
2. If unilateral mistakes were allowed to void contracts, 1 party could insert a mistaken fact into the
contract to build in an “out” to the contract. 1 party would always have an escape clause.
1. Mutual Mistake:
a. Sherwood v. Walker: P agrees to buy barren cow from D for $80. Prior to delivering cow, D
realizes she is pregnant, increasing her worth to $750. Contract is void since there was a
mistake of material fact about the character of the item exchanged, not quality of the item.
The thing actually received and thing bargained for are substantially different.
i. Dissent: Since P was willing to assume the risk that the cow might breed, knowing that
she was barren, you shouldn’t void the contract
ii. Reasoning: 2 kinds of mistakes:
1. If mistake over the substance of the thing bargained for and intended to be sold
– then no contract (there was no meeting of the minds)
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a. Ex/bargaining over a cow, and it turns out to be a turkey
2. If mistake is over quality or accidental, even if the mistake was over the motive
of the contract – then there is a contract (If mistake is over an incidental feature
of the contract, then contract is still valid.)
a. Ex/ bargaining over a white cow, and it turns out to be a brown cow
b. R §151 – A mistake is a belief that is not in accord with the facts (at the time of making the
contract).
i. “Peerless” case - No mistake under §151 since there is no basis of facts about which the
parties are making a mistake
1. Hypo: A contracts to sell llama, B contracts to buy zebra, but in reality the
animal is a cow. The mutual mistake is the incorrect belief on the part of both
parties about what type of animal they are contracting for. We can objectively
say that both parties are mistaken in accord with the facts – the animal they were
contracting for was actually a cow.
c. R §152 – Sec(1) - Where a mutual mistake at the time a contract was made as to a basic
assumption has a material effect on the exchange of performances, the contract is voidable
by the adversely affected party, unless he bears risk of mistake under §154
i. A default rule since according to §154 parties can contract around the rule.
d. R §154 – A party bears the risk of a mistake when
i. The risk is allocated to him by clause in agreement, OR
ii. He is aware of his limited knowledge of the facts when contract is made, OR
iii. The risk is allocated to him by the court on reasonable grounds
2. Unilateral Mistake – mistake of 1 party – usually does not void contract
a. R §153 - With a unilateral mistake, there two circumstances where it will void contract:
i. Effect of the mistake on enforcing the contract would be unconscionable
ii. If the other party had reason to know of the mistake or his fault caused the mistake.
(creates obligation to affirmatively correct someone’s mistake)
iii. Prof - no point to §153 (a) – unless it is saying that the effect of a contract is
unconscionable as opposed to a term in the contract being unconscionable
b. Tyra v. Cheney: P Sub orally bid on sheet metal work. Put bid in writing but forgot to include a
cost of $963 in written bid. Sub does the work, but GC claims they shouldn’t have to pay for
mistaken cost. If one party to a contract is mistaken and other party is aware of that error
then the contract is void. If the party A is aware of B’s mistake, A can’t say there is a
meeting of the minds since A knew B party wasn’t of the same mind. Court is concerned with
D unfairly taking advantage of P’s mistake.
i. Court awards restitution damages, not expectation damages. Since no contract, can’t be
a breach of contract
c. Drennan v. Starr Paving: Unilateral mistake is not a defense to a promissory estoppel claim.
If 1 party relied on proposal, even if mistake in proposal, then mistaken promise is not voidable.
i. Rule fits with §153 – If a party had known of the mistake then they wouldn’t have acted
in reliance on it. Since they acted in reliance we can assume they didn’t know of mistake,
therefore contract not voidable.
d. Laidlaw v. Organ: P bought tobacco from D. D delivered it then took it back. D asked P of any
news that would affect the price of tobacco, and although P knew of the peace treaty, he said
nothing. A party is not bound to communicate extrinsic info which might influence the price
of the commodity to be exchanged.
e. R §160 – Action intended or likely to prevent another from learning of a fact is equivalent to an
assertion that the fact doesn’t exist.
f. R §161 – A person’s non-disclosure of a fact is equal to an assertion that the fact doesn’t
exist ONLY in the following cases:
i. Where he knows that disclosing the fact is necessary to prevent a previous assertion from
becoming fraudulent (duty to affirmatively correct)
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ii. Where he knows that disclosing fact would correct a mistake of the other party’s basic
assumption on which they made the contract and non-disclosure amounts to failure to act
in good faith
iii. Where he knows that disclosing fact would correct a mistake of other party as to contents
of a writing
iv. Where the other person is entitled to know the fact because of a relation of trust and
confidence between them
C. Failure of a Basic Assumption – Changed Circumstances
1. Impossibility and Impracticability – presuming a contract is made, whether an unforeseen
circumstances which has a serious effect on reasonable expectations of the parties, should be allowed to
excuse performance.
a. Paradine v. Jane: L is seeking rent; T claims he doesn’t have to pay since he was ousted from
land by invading army and couldn’t enjoy benefits of the bargain. Party that enters into a
contract assumes all of the obligations under it, regardless of any supervening events. (Old
Strict View)
i. Reasoning: Court distinguishes between 2 types of duties and what happens if
unforeseen circumstances:
1. Duties imposed by law on pain of penalty – since law is imposing duty it is unfair
to make you continue duty under unforeseen circumstances.
2. A voluntary contractual duty - you should be held to the duty since you could
have put clause in contract dealing w/ unforeseen circumstances
ii. Modern view - look to see if there is some horrendous circumstance that makes
enforcement of contract unconscionable
b. Taylor v. Caldwell: P rents music hall and gardens for concert from D. Gardens burnt down
accidentatlly. P sues for lost profits and rent already paid. If the existence of a particular thing
is necessary for a party’s performance, the party is excused if destruction or deterioration
of that thing prevents performance. Music Hall’s existence was basic assumption of contract.
The hall is so essential to the contract, that without it, the contract is void. So rental money D
received is returned to P. Treat as if the contract had never been made (restitution damages).
i. Reasoning:
ii. Damages Issue: P suffered loss; how to distribute damages?
1. What is the fairest way to distribute the loss? (Deontological approach)
a. Voiding contract is fair solution since it splits the difference – P gets
back money paid, concert hall isn’t held liable for lost profits
2. What would parties have bargained for if they thought about it in advance?
(Contractual approach)
a. There is an implied condition in contract that if hall no longer exists then
contract is void. Court is probably implying this as a moral matter.
3. What would be the welfare maximizing way to distribute the loss?
(Utilitarian) Could be different if defining utility in terms of $ or happiness.
a. Under this approach, look to sum total highest amount of money would
be in the aggregate.
b. Argue – If you believe as this court thinks that there is an implied clause
in contract for continued existence of hall, then void the contract, since
this is what parties intended.
c. Argue – Use Paradine Rule – under beautiful idea of contract law, parties
expect to do better under the contract. So if parties didn’t provide for
what to do when hall was destroyed, enforce the contract since this was
what parties wanted in first place so this will maximize their welfare.
c. R §261 (Rule of Taylor) – When a party’s performance is made impossible, not by his fault, by
failure of a basic assumption on which the contract was made, his duty to render performance is
discharged, unless the language or circumstances indicate otherwise
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d. R §263 (p.1213) – If a specific thing is necessary to perform a duty, and its failure to come into
existence or destruction makes performance impracticable, the specific thing was part of a basic
assumption on which the contract was made
2. Frustration of Purposes – the contract is void if circumstances destroy one party’s value of the other
party’s performance.
a. Krell v. Henry: P owns apt on King’s coronation route. D rents apt for procession and gives
deposit. King gets sick so no parade. P sues D for unpaid balance of rent. D doesn’t have to
pay balance of rent since the basic purpose for renting the apt no longer exists. Kings
illness deprived one party entirely of the benefit he expected from the other’s performance.
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