Contract – a promise for which the law gives remedy in the case of a breach
I. Formation – is there a contract in the first place?
A. Types of Contracts (Formation):
i. Express K – formed by language; can be oral or written
ii. Implied in Fact K – formed by manifestations of assent other than language
(conduct)
iii. Quasi-K or Implied in Law K – not Ks at all but constructed by the courts to avoid
unjust enrichment
a. Permits ∏ to bring an action in restitution to recover the amount of the benefit
conferred on the ∆
B. Types of Contracts (Acceptance):
i. Bilateral K – exchange of mutual promises
a. I promise to pay you $1000 if you promise to paint my house
ii. Unilateral K – acceptance by performance
a. I promise to pay you $1000 if you paint my house
b. Test – a unilateral K is made if at the time the contract is formed, ONLY the
offeror has unperformed duties
II. Offer and Acceptance
A. Offer – a statement of terms that creates the power of acceptance
i. Was there an expression of promise, undertaking, or commitment to enter into a
contract? – must be intent to enter into a contract
a. Language – technical “I offer/I Promise” terms are not necessary
1. Ambiguous language will be construed in favor of the offeree
b. Surrounding Circumstances – context of the statement will be interpreted
according to a reasonable person’s expectations
c. Prior practice and relationship of the parties
d. Method of Communication – advertisements are usually construed as invitations
for offers
e. Industry Custom
f. Certainty and Definiteness of Terms – the more inquiries there are, the more
likely it is part of preliminary negotiations
ii. Were there certainty and definiteness in the essential terms? – must contain
essential elements to make K capable of being enforced:
a. Identification of the Offeree – actual person or class to which she belongs
1. Performance can constitute both identification and acceptance (reward)
b. Definiteness of Subject Matter – doesn’t have to spell out every material term
but must contain some objective standard
1. Requirements for specific types of Ks
a. Real Estate Transactions – must identify land and price
b. Sale of Goods – quantity must be certain or capable of being made
certain
(1) Requirements Contract – a buyer promises to buy from a certain
seller all the goods she requires and the seller agrees to sell that
amount to the buyer
(2) Output Contract – seller promises to sell to a certain buyer all the
goods the seller produces and the buyer agrees to buy that amount
from the seller
c. Employment Contracts – duration must be stated or it is considered
employment at will
2. Inference of Reasonable Terms – terms not spelled out will be supplied by
the court by a “reasonableness” standard including:
a. Price Term – reasonable price will be supplied (2-305) unless parties have
showed they don’t want a contract until price is agreed upon
b. Specific Time Provision – performance within a reasonable time is implied
(2-309)
3. Vague Terms – if a term is included but too vague, the contract cannot be
enforced
a. Ex. Agreement to purchase land for “$8000 or less” or agreement to
divide profits “on a liberal basis” both too vague
b. Vagueness can be cured by part performance – where part performance
supplies the needed verification
c. Uncertainty can be cured by Acceptance – if offeree is given choice
alternatives, offer is definite when offeree communicates her choice
d. Focus on Contract – offer uncertainty problems can often be cured by
looking at the contract as a whole or performance
4. Terms to be Agreed on – if offer states that terms are to be decided at later
date, the offer is too uncertain if the term is a material term
iii. Was there communication of the above to the offeree? – offeree must have
knowledge of the offer to have the power to accept
iv. Termination of Offer – power of acceptance ends when offer is terminated
a. Termination by Offeror – Revocation
1. Must be communicated before the offeree accepts
2. Revocation is effective when it is received
3. Offers can be revoked at will by the offeror even when he promised not to
revoke it for a certain period of time
4. Limitations to revocation:
a. Options – when the offeree gives consideration for a promise by the
offeror not to revoke
b. Firm offers under the UCC – an offer by a merchant to buy or sell goods in
a signed writing that states it will be held open is not revocable for stated
period of time (2-205)
(1) If time is not stated, then a reasonable time no longer than 3 months
c. Detrimental Reliance – where offeror could reasonably expect that
offeree would rely on the offer, it’s irrevocable for a reasonable length of
time (R2d 87)
(1) Ex. General contractor relies on subcontractors’ offers to generate
overall bid. Subcontractor must reasonably foresee use of its bid.
d. Part Performance (True Unilateral Contract Offers) – offer becomes
irrevocable once performance has begun
(1) Once offeree begins, she is given a reasonable time to complete
performance (R2d 45)
(2) Part performance doesn’t include preparation to perform but
substantial preparations may constitute detrimental reliance
sufficient to maker offeror’s promise binding (R2d 45, 87, 90)
b. Termination by Offeree
1. Rejection
a. Express Rejection – statement by offeree that she does not intend to
accept offer (R2d 36)
b. Counteroffer as Rejection – rejects the offer but serves as a new offer on
same subject matter but with new terms
c. Effective when received by offeror
d. Rejection of an option does not constitute termination of the offer –
offeree is still free to accept unless offeror has detrimentally relied on the
offeree’s rejection
2. Lapse of Time
a. Must accept within specified or reasonable time
b. Time period commences when offer is received by offeree
c. Termination by Operation of Law
1. Death or Insanity of Parties – isn’t necessary that it is communicated to other
party (R2d 48)
2. Destruction of Subject Matter – (R2d 36)
3. Supervening Legal Prohibition of Proposed Contract – if subject matter
becomes illegal (R2d 36)
B. Acceptance – manifestation of assent to the terms of an offer creating a contract
i. Offer may only be accepted by the person to whom an offer is addressed
ii. Acceptance must be unequivocal
a. UCC Rule – proposal of different terms by offeree does not constitute rejection
or counteroffer and acceptance is effective unless it is expressly made
conditional on assent to the additional terms.
b. When do additional terms become part of the contract?:
1. Party not a Merchant – Terms of offer govern
a. Additional terms are considered proposals to modify the K that do not
become part of K unless offeror agrees
2. Both Parties Merchants – Acceptance terms usually included
a. Additional terms automatically become part of K unless:
(1) They materially alter the original terms of the offer,
(2) The offer expressly limits acceptance to the terms of the offer, or
(3) The offeror has already objected to the particular terms or objects
within a reasonable time after notice of them is received
3. Writings that do not Create a Contract – when offeror enters clause saying
“no additional terms” allowed and offeree responds with new terms only
agreeing if offeror consents to new terms
a. No contract until performance begins, then there is K
b. K consists of all terms on which the writings agree plus supplementary
terms supplied by the UCC (2-207)
c. Generally, Acceptance must be Communicated
1. May be accepted by any medium reasonable in the circumstances (2-206)
unless unambiguously stated in the offer
2. Acceptance by unauthorized means may still be effective if it is actually
received by the offeror while the offer is still in existence
3. Exception – Acceptance without Communication
a. Express Waiver in Offer –
(1) Ex. Mail-in order form is offer pending home office approval. Home
office doesn’t have to notify offeror of acceptance
b. Act as Acceptance – offer requires some act (not performance) and when
offeree performs the act requested with intent of accepting, K is formed
c. Silence as Acceptance – if offeree silently takes offered benefits, courts
will often find acceptance (R2d 69)
(1) Courts will look to prior dealings between parties or trade practices
known to both which give the offeree a duty to notify the offeror if
she doesn’t intend to accept
III. Consideration
A. Consideration – in order to be enforceable in court, a contract must have consideration
(there must be a bargained-for exchange between parties which must be considered of
legal value (a benefit to the promisor or a detriment to the promisee))
i. Elements of Consideration:
a. Bargained-for Exchange – the promisor makes his promise in exchange for the
promisee’s giving of value or circumscription of liberty
1. Gift – if either of the parties intended to make a gift, he was not bargaining
for consideration and this requirement will not be met
a. Act or Forbearance by Promisee must be of Benefit to Promisor
(1) Ex. Come to my house and I will give you my old television – promisee
suffers detriment by going to promisor’s house but the promise was
probably not made to induce the promisee to come to the promisor’s
house; no consideration
b. Economic Benefit Not Required
(1) Ex. Father tells daughter he will give her $1000 if she stops smoking –
emotional gratification from daughter’s health suffices as
consideration
2. Past Consideration – generally if something was already given before the
promise was made, it will not satisfy the bargain requirement
a. Exceptions:
(1) Debt Barred by a Technical Defense – if past obligation would be
enforceable except for technical defense (statute of limitations, etc.),
courts will enforce new promise if it is in writing or has been partially
performed
(2) Promise to Pay for Past Requested Act – if acts were previously
performed at the request of promisor, a new promise will be
enforceable (R2d – covers unrequested acts if they were rendered
during emergency)
(3) Terms of New Promise Binding – most courts will apply terms of new
promise
b. Legal Value – exchange must constitute a benefit to the promisor or a detriment
to the promisee
1. Adequacy of Consideration – courts will normally not inquire into the relative
values exchanged
a. Token Consideration – where consideration is only a token (devoid of
value), it will usually not be legally sufficient and rather a gift
b. Sham Consideration – if consideration was $1 its frequently never paid
and evidence is allowed to show it was not paid and no other
consideration was given
c. Specific Situations
1. Pre-existing Legal Duty – generally the promise to perform and existing legal
duty will not be sufficient Consideration
a. Exceptions – R2d 82-90 and UCC 2-209
2. Forbearance to Sue – the promise to refrain from suing on a valid claim (or
an invalid claim that the claimant in good faith believes is valid) constitutes
consideration
ii. Mutual and Illusory Promises – consideration must exist on both sides of the
contract, i.e. promises must be mutually obligatory. If one party has become bound
and the other is not, it is illusory and consideration fails. Mutuality still exists in
certain situations even though the promisor has some choice:
a. Requirements and Output Contracts – promisor is suffering legal detriment by
promising to buy/sell all goods from promisee (UCC 2-306)
1. No Unreasonably Disproportionate Quantities – may not be disproportionate
to any stated estimate or any normal or comparable prior need even if the
change is made in good faith
2. Going out of Business – promise is still mutual
3. No Reasonably Established Business – UCC reads the “good faith” agreement
into the contract, must operate according to commercial standards of fair
dealing in the trade
b. Conditional Promises – are enforceable unless the “condition” is entirely within
the promisor’s control
1. Promise conditioned on satisfaction is not illusory since one cannot reject
them unless dissatisfied, must use good faith (UCC 1-304)
c. Right to Cancel or Withdraw – consideration is valid if the right is in any way
restricted (e.g. right to cancel upon 60 days notice).
1. Reasonable notice implied by the UCC if not specified in K (UCC 2-309(3))
d. Best Efforts Implied – court may find implied promise in appropriate
circumstances
1. Ex. Y has exclusive rights to sell D’s dresses in return for ½ profit. K said no
obligation for Y but court implied Y promised to use best efforts to sell (UCC
2-306(2))
e. Voidable Promises – although a contract is voidable by one party, they are not
held objectionable on “mutuality” grounds (R2d 78)
iii. No Requirement that all Consideration be Valid – not all of the promises given as
consideration necessarily must be sufficient as consideration, as long as one is,
consideration is satisfied
iv. Substitutes for Consideration – can make an agreement partially enforceable
a. Promissory Estoppel or Detrimental Reliance
1. Majority View – consideration is not necessary where the facts indicate that
the promisor should be estopped from not performing
2. Elements of Promissory Estoppel (R2d 90):
a. A promise is enforceable to the extent necessary to prevent injustice if:
(1) The promisor should reasonably expect to induce action or
forbearance;
(2) And such action or forbearance is in fact induced
(3) Remedy for breach may be limited as justice requires
b. Promises in Writing
1. UCC and Written Promises
a. Modification of a Contract – consideration is not necessary to a good
faith modification, oral or written. Only has to be written if the K as
modified is within the Statute of Frauds (UCC 2-209)
b. Firm Offers by Merchants – merchants may bind themselves to keep an
offer open (not over 3 months) if it is in writing and signed by offeror
(UCC 2-205)
c. Any claim arising out of alleged breach of sales contract may be
discharged without consideration by agreement of the aggrieved party in
an authenticated record (UCC 1-306)
c. Reaffirmation of Voidable Promise – although originally not enforceable, if an
incapacitated person affirms the contract upon attaining capacity, her promise at
that time will be binding
IV. Defenses
A. A contract will not be enforceable if there is a valid defense to formation of the
contract, a defect in capacity, or a defense to enforcement of certain terms
B. Defenses to Formation
i. Absence of Mutual Assent
a. Mutual Mistake – where both parties entering into a contract are mistaken
about facts relating to the agreement, K may be voidable by the adversely
affected party if:
1. The mistake concerns a basic assumption on which the contract was made;
2. The mistake has a material effect on the agreed-upon exchange; and
3. The party seeking avoidance did not assume the risk of the mistake
a. Assumption of Risk – mutual mistake is not a defense if the adversely
affected party bore the risk that the assumption was mistaken (common
where parties knew that assumption was doubtful
b. Ex. Roger finds stone and shows to Betsy. Both assume it is Topaz and he
sells to her for $100. Stone is actually diamond worth $1000. Roger
cannot recover because they knew assumption was doubtful
c. Ex. Roger finds stone and shows to Jeweler. Jeweler in good faith tells
Roger it’s Topaz and buys for $100. Roger finds out it’s a diamond worth
$1000. Roger can rescind because he relied on the expert’s opinion.
b. Unilateral Mistake – where only one of the parties is mistaken about facts
relating to the agreement, mistake will not prevent formation of K. However, if
nonmistaken party knew or had reason to know of the mistake made by the
other party, he will not be permitted to snap up the offer
1. Unilateral Mistake May be Canceled in Equity – authority holds that Ks with
errors (such as mistake in computation) may be canceled in equity assuming
that the nonmistaken party has not relied on the contract.
a. Also authority that a unilateral mistake that is so extreme that it
outweighs the other party’s expectations will be ground for cancellation
2. Error in Judgment – an error in judgment as to the value or quality of work or
goods will not prevent formation of a K, even if the nonmistaken party knows
or has reason to know of the mistake made by the other party
c. Latent Ambiguity Mistakes – Mutual Misunderstanding – the expression of the
parties’ agreement appears clear at the time K is formed but because of
subsequently discovered facts, the expression may be reasonably interpreted in
either of two ways. Possibilities:
1. Neither Party Aware of Ambiguity – NO Contract unless both parties
happened to intend the same meaning
a. CASE – Raffles v. Wichelhaus – Ship to deliver cotton named Peerless but
there were 2 ships with that name. Buyer expected ship in Sept. while
seller meant ship in Dec. They did not intend the same ship therefore no
contract
2. Both Parties Aware of Ambiguity – NO Contract unless both parties in fact
intended the same meaning
3. One Party Aware of Ambiguity – Contract enforced according to the intention
of the party who was unaware of the ambiguity
4. While courts normally use an objective test, these situations require the
courts to look to the subjective intention of the parties
d. Misrepresentation
1. Fraudulent Misrepresentation Voidable – if a party induces another to enter
into a K by using fraudulent misrepresentation (e.g. asserting info she knows
is untrue), the K is voidable by the innocent party if she justifiably relied on th
fraudulent misrepresentation (Fraud in the Inducement)
a. Fraud in the Factum – if one of the parties was tricked into giving assent
to the agreement under circumstances that prevented her from
appreciating the significance of her action, K is void
2. Nonfraudulent Misrepresentation Voidable if Material – even if
misrepresentation was not fraudulent, K is voidable by innocent party if they
justifiably relied on the misrepresentation and it was material
a. A misrepresentation is material if either:
(1) The information asserted would induce a reasonable person to agree,
or
(2) The maker of the misrepresentation knew the information asserted
would cause a particular person to agree
3. Innocent party doesn’t have to wait until she is sued on the contract but can
rescind the agreement.
ii. Absence of Consideration – if promises at formation stage lack elements of bargain
or legal detriment, no contract exists (one of the promises is always illusory)
iii. Public Policy Defenses to Contract Formation – if either the consideration or the
subject matter of a K is illegal, this will serve as a defense to enforcement
a. Contracts may be illegal because they are:
1. Inconsistent with the Constitution,
2. Violate a Statute, or
3. Against public policy as declared by the courts
b. Most Common Areas of Illegality:
1. Agreements in restraint of trade
2. Gambling contracts
3. Usurious contracts
4. Agreements obstructing administration of justice
5. Agreements inducing breach of public fiduciary duties
6. Agreements relating to torts or crimes
c. Effect of Illegality
1. Generally Contract is Void
2. Effect Depends on Timing of Illegality – if subject matter or consideration:
a. Was illegal at time of offer – no valid offer
b. Became illegal after offer but before acceptance – revokes the offer
c. Became illegal after valid K was formed – discharge of contract
3. If contract was formed for an illegal purpose, but neither consideration nor
subject matter was illegal: (R2d 182)
a. Contract is only voidable by the party who
(1) Did not know of the purpose, or
(2) Knew but did not facilitate the purpose and the purpose does not
involve “serious moral turpitude”
b. Contract is void and unenforceable if:
(1) Both parties knew of the illegal purpose and facilitated it, or
(2) Both parties knew and the purpose involves serious moral turpitude
d. Limitations on Illegality Defense
1. Plaintiff Unaware of Illegality – if ∏ contracted without knowledge of
illegality and ∆ knew of illegality, innocent ∏ may recover on K
2. Parties Not in Pari Delicto – a person may successfully seek relief if he was
not as culpable as the other
C. Defenses Based on Lack of Capacity
i. Individuals who are legally incapable are protected from contractual obligations.
Assertion of this defense by a promisor makes the K voidable at his election
a. Contracts of Infants
1. Who is an Infant?
a. Most jurisdictions say the age is 18. Some are passing legislation for
contractual purposes at a younger age. In many states, married persons
under 18 are considered adults
2. Effect of Infant’s Contract – a contract made between an infant and an adult
is voidable by the infant but binding on the adult
3. An infant may affirm (choose to be bound) the contract upon reaching
adulthood either expressly or by conduct
4. Exceptions – infant cannot choose to avoid the contract entered into by him:
a. Necessities – an infant is bound to pay the reasonable value of necessities
(1) These depend on the infant’s station in life
b. Statutory Exceptions – some states have statutory exceptions (usually
insurance, student loans, etc.)
b. Mental Incapacity – one whose mental incapacity is so deficient that he is
incapable of understanding the nature and significance of a contract, it is
voidable
1. May affirm during a lucid interval or upon complete recovery
2. Liable in quasi-contract for necessities furnished to them
c. Intoxicated Persons – one who is so intoxicated as to not understand the nature
and significance of promise may have a voidable promise only if the other party
had reason to know of the intoxication
1. May affirm the K upon recovery
2. Quasi-contractual recovery for necessities furnished during period of
incapacity
ii. Lack of Volitional Consent – although party may have the legal capacity, consent to
the bargain may be ineffective
a. Duress and Coercion – Ks induced by duress or coercion are voidable and may be
rescinded as long as not affirmed
1. Duress will usually not be found where one party takes economic advantage
of the other’s pressing need to enter into a contract
b. Fraud in the Inducement – voidable at the election of the innocent party
D. Defenses to Enforcement
i.
Defenses that involve failure of the agreement to qualify for judicial relief and may
arise at the formation stage or later
ii. Statute of Frauds – contracts that must be evidenced by a writing signed by the
parties sought to be bound
a. Agreements Covered:
1. Executor or Administrator Promises Personally to Pay Estate Debts – a
promise by an executor or administrator to pay the estate’s debts out of his
own funds must be in writing
2. Promises to Pay Debt of Another (Suretyship)
a. Must be a collateral promise
b. Main purpose must not be pecuniary interest of promisor
3. Promises in Consideration of Marriage – promises that induce marriage by
offering something of value (not return promise to marry)
4. Interest in Land – includes the sale of real property or interest therein, and
also other agreements pertaining to land
a. Covered by the statute:
(1) Leases for more than one year
(2) Easements for more than one year
(3) Fixtures
(4) Minerals (or the like) or Structures if they are to be severed by the
buyer.
 If they are to be severed by the seller they are not an interest in
land but rather goods
 If subject matter is growing crops, timber to be cut, or other
things attached to realty capable of severance without material
harm thereto, contract for sale of goods (UCC 2-107)
(5) Mortgages and most other security liens
b. Items not within the statute – even though end result may be an interest
in land, they still do not come within the statute
(1) Ex. Contract to build a building
(2) Ex. Contract to buy and sell real estate and divide the profits
c. Effect of Performance on Contracts – if the seller conveys to the
purchaser (i.e. fully performs), the seller can enforce the buyer’s oral
promise to pay
d. Seller may be able to specifically enforce a land contract if the “part
performance doctrine” is applicable
(1) Part Performance Doctrine – conduct (i.e. part performance) that
unequivocally indicates that the parties have contracted for the sale
of the land will take the contract out of the Statute of Frauds
(2) Most jurisdictions require at least two to constitute sufficient part
performance:
 Payment (in whole or part)
 Possession
 Valuable Improvements
5. Performance Not Within One Year – a promise that by its terms cannot be
performed within a year
a. Effective Date – the date runs from the date of agreement and not from
the date of performance
b. Contracts not within the statute:
(1) Possibility of Completion Within One Year – even though actual
performance may extend beyond the one-year period, if it is possible
to complete within one year it is not within the provision
(2) Right to Terminate Within Year – where the K cannot be performed
within a year but allows both parties to terminate within a year, there
is a split as to whether this is within the Statute of Frauds
(3) Lifetime Contracts – contracts measure by a lifetime is not within the
statute because it is capable of performance within a year since a
person can die at any time
6. Goods Priced at $500 or More (UCC 2-201)
a. Oral contracts for the sale of goods over $500 are enforceable in the
following situations:
(1) Specially Manufactured Goods – if goods are to be specially
manufactured for the buyer and are not suitable for sale to others by
the seller in his ordinary course of business AND the seller has made
either a substantial beginning or commitments for their procurement
before notice of repudiation is received, the oral contract may be
enforced (UCC 2-201(3)(a))
(2) Written Confirmation Between Merchants – a writing in confirmation
of the K that is sufficient against the sender and received by the other
merchant who has reason to know of its contents satisfies the SOF
against recipient unless written notice of objection to the writing’s
contents is given within 10 days after the writing is received (UCC 2201(2))
(3) Admissions in Pleadings or Court – if party against whom
enforcement is sought admits in pleadings, testimony, or otherwise in
court that the contract for the sale was made, K is enforceable but
not beyond the quantity of goods admitted (UCC 2-201(3)(b))
(4) Partial Payment or Delivery – contract is enforceable to the extent of
the payment received and accepted or to the extent of goods
received and accepted (UCC 2-201(3)(c))
b. Goods – all things that are movable at the time of identification to the
contract of sale (tangible, movable property in general) (UCC 2-105)
c. Oral Modification Clause – UCC 2-209(2) expressly makes a “no oral
modification clause” enforceable. However, such a clause can be waived
(UCC 2-209(4)) and if the waiver is relied on, it is irrevocable (UCC 2209(5))
b. Requirements – any writing will suffice as long as it contains every essential item
of the oral or implied agreement. Statute will be satisfied if the memorandum
contains:
1. The identity of the party sought to be charged,
2. Identification of the contract’s subject matter,
3. Terms and conditions of the agreement,
4. Recital of consideration (in most states), and
5. Signature of the party to be charged or of his agent
c. UCC Requirements (UCC 2-201)
1. Quantity
2. Signature of party to be charged
3. A writing sufficient to indicate that a contract was formed
a. A writing is not insufficient because it omits or incorrectly states a term
agreed upon but the contract is not enforceable beyond the quantity of
goods shown in such writing
d. Effect of Noncompliance with Statute – noncompliance renders the K
unenforceable at the option of the party to be charged
1. If it is not raised as a defense, it is waived
e. Other Situations Where Statute Not Applicable
1. Full Performance of Contract Not Performable Within One Year – generally
full performance will remove the bar of the Statute
2. Promissory Estoppel – sometimes applied where it would be inequitable to
allow the SOF to defeat a meritorious claim
a. Ex. When defendant falsely and intentionally tells plaintiff that the
contract is not within the SOF or that a writing will subsequently be
executed
b. Ex. When defendant’s conduct foreseeably induces a plaintiff to change
his position in reliance on an oral agreement
f. Remedies if Contract is Within Statute – where a K is within the Statute but there
is no writing, in almost all cases a party an sue for reasonable value of the
services or part performance rendered or the restitution of any other benefit
that has been conferred.
1. The rationale is that it would be unjust to permit a party to retain benefits
received under the failed contract without paying for them
iii. Unconscionability
a. UCC 2-302 allows a court to refuse to enforce a provision or an entire contract (or
to modify the contract) to avoid unconscionable terms
1. The principle behind this provision is to the prevention of oppression and
unfair surprise
b. Basic Test – whether in light of the general commercial background and needs of
the particular parties, the clauses involved are so one-sided as to be
unconscionable under the circumstances existing at the time the contract was
formed
c. Often applied to one-sided bargains where one party has substantially superior
bargaining power and can dictate the terms of the K to the party with the
inferior bargaining power
d. Typical Elements of Unconscionability:
1. Inconspicuous Risk-Shifting Provisions – standardized printed form contracts
often contain a material provision that seeks to shift a risk normally borne by
one party to the other. Examples are:
a. Confession of judgment clauses, which are illegal in most states and have
been attacked on a constitutional basis
b. Disclaimer of warranty provisions
c. “Add-on” clauses that subject all of the property purchased from a seller
to repossession if a newly purchased item is not paid for
(1) These clauses are typically found in the fine print in printed form
contracts
(2) Courts have invalidated these provisions because they are
inconspicuous or incomprehensible to the average person, even if
brought to his actual attention
2. Contracts of Adhesion – “Take it or Leave it”
a. Courts will deem a clause unconscionable and unenforceable if the signer
is unable to procure necessary goods (e.g. automobile) without agreeing
to similar provision – buyer has no choice
3. Price Unconscionability – few cases have invalidated price term when buyer
is charged more than the goods were actually worth
a. Courts are generally reluctant to determine fairness on pricing
b. Analysis relates primarily to consumer transactions in which the buyer is
unaware of the actual price he was agreeing to pay
V. Rights and Duties of Nonparties to the Contract
A. Third Party Beneficiaries
i. Basic Situation: A enters into a valid contract with B that provides that B will render
some performance to C.
a. A = Promisee
b. B = Promisor
c. C = Third Party
ii. Types of Beneficiaries (R2d 302)
a. Intended Beneficiary – circumstances and contract show that the promisee
intended to obtain performance for beneficiary
1. Or promisee owes debt or duty to beneficiary
b. Incidental Beneficiary – derives benefit from contract but is NOT the intended
beneficiary
c. Rights of Beneficiaries
1. Intended beneficiary may seek specific performance if it is otherwise an
appropriate remedy (R2d 307)
a. Intended beneficiary may recover debt if she has an enforceable claim
against promisee (R2d 310)
2. Can obtain a judgment against either promisee, promisor, or both based on
their respective duties to him
3. All of promisor’s defenses against promisee are available against the
beneficiary (R2d 309)
4. Incidental Beneficiary has no contract rights against promisee or promisor
(R2d 315)
B. Assignment of Rights and Delegation of Duties
i. Basic Situation: X enters into a valid K with Y. This K does not contemplate
performance to or by third party. Subsequently, one of the parties seeks to transfer
her rights/duties under the K to a third party.
ii. Assignment of Rights
a. Terminology: X and Y have a K. Y assigns her rights to Z.
1. X = Obligor
2. Y = assignor
3. Z = assignee
b. Generally all contractual rights may be assigned
1. Exceptions
a. Assigned Rights Would Substantially alter Obligor’s Duty
(1) Personal Service Contracts – where obligor would have to perform
personal services from someone other than the original obligee
(2) Requirements and Output Contracts – generally not assignable
because the assignment could change the obligation
 There are exceptions to this under “good faith” practices or
delegation of duties
b. Rights Assigned Would Substantially alter Obligor’s Risk
(1) Ex. John’s home insured by Acme for loss due to fire. John sells home
to Joanne who intends to convert it to a restaurant. Rights cannot be
assigned from John to Joanne without consent of Acme.
c. Assignment Prohibited by Law – public policy against assignment may be
embodied in either statute or case precedent
(1) Ex. Many states have laws prohibiting, or at least limiting, wage
assignments
d. Express Contractual Provision Against Assignment – unless the
circumstances indicate the contrary, a clause prohibiting the assignment
of “the contract” will be construed as barring only the delegation of the
assignor’s duties (R2d 322 & UCC 2-210(4))
c. Effect of Assignment – assignee replaces the assignor as the real party in interest
and she alone is entitled to performance under the contract
1. Obligor may usually assert any defense that he can against promisee
iii. Delegation of Duties
a. Terminology: X and Y have a K. Y delegates duties to Z.
1. X = Obligee
2. Y = Obligor / Delegator
3. Z = Delegate
b. Generally all contractual duties may be delegated to a third person
1. Exceptions
a. Duties involving personal judgment and skill
b. “Special Trust” in Delegator
c. Change of Obligee’s Expectancy
(1) Ex. Requirements and output contracts
d. Contractual Restriction on Delegation
(1) Where a contract restricts either party’s right to delegate duties, such
a provision will usually be given strict effect
c. Rights and Liabilities of Parties
1. Obligee – must accept performance from delegate of all duties that may be
performed
2. Delegator – will remain liable on his contract even if delegate expressly
assumes the duties
a. Novation – when obligee expressly consents to transfer of duties, original
obligor may be released from liability
3. Delegate – liability turns on whether there is mere delegation or that plus an
assumption of duty
a. Delegation – creation of power in another to perform.
(1) Obligee cannot compel delegate to perform as they have not
promised to perform
b. Assumption – delegate promises to perform the duty and the promise is
supported by consideration or its equivalent.
(1) Obligee can compel performance or bring suit for nonperformance
VI. Rules of Contract Construction and The Parol Evidence Rule
A. Rules of Contract Construction
i. Frequently invoked general rules of construction applied by the courts when
interpreting contracts:
a. Construed as a Whole – specific clauses will be subordinated to the contract’s
general intent
b. Ordinary Meaning of Words – unless clearly shown that they were meant to be
used in a technical sense
c. Inconsistency Between Provisions – written or typed provisions will prevail over
printed provisions (which indicate a form contract)
d. Custom and Usage – in the particular business industry and in the particular
locale where the contract is either made or to be performed (UCC 1-303)
e. Preference to Construe Contract as Valid and Enforceable – inclined to construe
provisions in such a fashion as to make them operative
f. Ambiguities Construed Against Party Preparing Contract – absent evidence of the
intention of the parties
B. Parol Evidence Rule
i. Where the parties to a contract express their agreement in a writing with the intent
that it embody the full and final expression of their bargain (i.e. integration), any
other expression – written or oral – made prior to the writing, as well as any oral
expressions contemporaneous with the writing, are inadmissible to vary the terms of
the writing.
ii. Designed to carry out the apparent intention of the parties and to facilitate judicial
interpretation by having a single clean source of proof (the writing) on the terms
iii. Determining whether the writing is an “Integration” of all agreements between
parties, ask:
a. Is the writing intended as a Final Expression?
1. Do the parties intend such writings to be merely preliminary?
a. If so, parol evidence rule will not bar introduction of further evidence
2. The more complete the agreement appears to be on its face, the more likely
that it was intended as an integration
3. Whether there is an integrated agreement is determined by the court as a
preliminary question (R2d 209)
b. Is the writing a Complete or Partial Integration?
1. After determining that the writing was “final”, determine whether it was
complete or partial
2. If there was Complete Integration, the contract may not be contradicted or
supplemented
3. If there was only Partial Integration, the contract cannot be contradicted but
may be supplemented by proving up consistent additional terms
4. Whether agreement is completely or partially integrated is determined by
the court as a preliminary question (R2d 210)
5. Where the agreement contains a merger clause reciting that the agreement
is complete on its face, this clause strengthens the presumption that all
negotiations were merged in the written document
c. The judge will decide whether the writing was an integration of all agreements
between parties
1. If it was, he will exclude any offered evidence
2. If it wasn’t, he may admit the offered extrinsic evidence
3. Willingston Test: Would parties situated as were these parties to this
contract naturally and normally include the extrinsic matter in the writing?
a. If yes, evidence of the extrinsic matter will not be admitted
b. If no, evidence of the matter may be introduced
4. Wigmore Test: if the extrinsic matter was mentioned or dealt with in the
writing, presumably the writing states all that the parties intended to say as
to that matter and evidence is excluded
d. Extrinsic Evidence Outside Scope of the Rule – since the rule prohibit
admissibility only of extrinsic evidence that seeks to vary, contradict, or add to
an integration, other forms of extrinsic evidence may be admitted where they
will not bring about this result (i.e. they will “fall outside of the scope of the
parol evidence rule” (R2d 214)
1. Attacking Validity – party concedes the writing reflects agreement but
asserts, most frequently, that the agreement never came into being because
of any of the following:
a. Formation Defects – may be shown by extrinsic evidence (e.g. fraud,
duress, mistake, illegality, lack of consideration, or other invalidating
cause)
b. Conditions Precedent – where a party asserts that there was an oral
agreement that the written condition would not become effective until a
condition occurred, all evidence of the understanding may be offered and
received (R2d 217)
(1) Rationale is that you are not altering a written agreement if it never
came into being
(2) Distinguish from Condition Subsequent – parol evidence is
inadmissible as to conditions subsequent, i.e. an oral agreement that
the party would not be obliged to perform until the happening of an
event
 This condition limits or modifies a duty under an existing or
formed contract
2. Interpretation – if there is uncertainty or ambiguity in the written
agreement’s terms or a dispute as to the meaning of those term, parol
evidence can be received to aid the fact-finder in reaching the correct
interpretation
a. If the meaning is plain, parol evidence is inadmissible
3. Showing of “True Consideration” – parol evidence rule will not bar extrinsic
evidence showing the true consideration paid (R2d 218)
a. Ex. Contract states that $10 has been given as consideration. Extrinsic
evidence will be admitted to show that this sum has never been paid
4. Reformation – where a party to a written agreement alleges facts (e.g.
mistake) entitling him to reformation of the agreement, the parol evidence
rule is inapplicable
a. For ∏ to obtain reformation, he must show:
(1) There was an antecedent valid agreement that
(2) Is incorrectly reflected in the writing (e.g. mistake)
b. The variance must be established by clear and convincing evidence rather
than by merely a preponderance of the evidence
e. Parol evidence rule applicable only to prior or contemporaneous Negotiations
1. Parol evidence can be offered to show subsequent modifications of a written
contract
f. UCC Rule 2-202:
1. A writing intended to be a final expression may not be contradicted by
evidence of any prior agreement or contemporaneous oral agreement but
may be explained or supplemented
a. By course of dealing or usage of trade (1-205) or by course of
performance (2-208) (even if the terms appear to be unambiguous)
b. By evidence of consistent additional terms unless the court finds the
writing to have been intended also as a complete and exclusive
statement of the terms of the agreement (merger clause?)
VII. Interpretation and Enforcement of the Contract
A. When Has a Contracting Party’s Duty to Perform Become Absolute?
i. Distinction Between Promise and Condition
a. Definitions
1. Promise – commitment to do or refrain from doing something
a. Unconditional promise is absolute
(1) “I promise to pay you $1000 for painting my house”
(2) Failure to perform according to its terms is a breach of contract
b. Conditional promise may become absolute by the occurrence of the
condition
(1) “I promise to pay you $1000 if you paint my house”
2. Condition – an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before performance under a contract becomes due
(R2d 224)
a. “Conditions of Sale” and such language is a term of the agreement, not a
condition
b. Interpretation of Provision as Promise or Condition – basic test is one of intent of
the parties determined by different criteria:
1. Words of Agreement – specific words of the phrase and words of the rest of
the agreement
2. Prior Practices – of contracting parties, particularly with one another
3. Custom – with respect to that business in the community
4. Third-Party Performance – if performance is to be rendered by a third party,
it is more likely to be a condition than an absolute promise
5. Courts Prefer Promise in Doubtful Situations – most courts will hold that the
provision in question is a promise if the situation is doubtful (R2d 227)
a. Rationale is that this result will serve to support the contract, thereby
preserving the expectancy of the parties
b. Particularly significant in situations where breaching party has
substantially performed because if provision is a condition, nonbreaching
party is completely discharged from obligation, but if provision is a
promise, nonbreaching party must perform, although she may recover for
the damage she has suffered as a result of the breach
(1) **Pipe Case**
c. Differences Between Conditions and Promises
1. Failure of condition discharges other party’s duties, breach of promise only
gives rise to damages
a. Consequences of failure of condition are more severe
2. Breach of promise results in claim for remedy, while failure of condition
excuses performance (i.e. is a defense)
3. Conditioning a promise reduces promisor’s risk
ii. Classification of Conditions
a. According to the Time of Occurrence
1. Condition Precedent – condition that must occur before an absolute duty of
immediate performance arises in the other party
a. Party’s satisfaction as Condition Precedent – if party has no duty to
perform unless “satisfied” with another party’s performance, level of
satisfaction depends on the subject matter of the K
(1) If the K involves mechanical fitness, utility, marketability, etc.,
performance is objectively judged and must satisfy a reasonable
person (R2d 228)
(2) If the K involves personal taste or judgment, performance is judged
subjectively and must satisfy the particular party, however that party
must act honestly and in good faith
2. Conditions Concurrent – conditions capable of occurring together and that
the parties are bound to perform at the same time (e.g. tender of deed for
cash)
3. Condition Subsequent – condition that the occurrence of which cuts off an
already existing absolute duty of performance
4. Condition Precedent vs. Condition Subsequent – no substantive difference
between conditions, important only in regard to burdens of pleading and
proof
a. Condition Precedent – plaintiff must usually plead and prove because she
claims there is a duty to be performed
b. Condition Subsequent – defendant must usually plead and prove because
he claims the duty that existed no longer exists
b. Express, Implied, and Constructive Conditions
1. Express Conditions – those expressed in the contract
2. Implied Conditions – those fairly to be inferred from evidence of the parties’
intention (i.e. determined by contract interpretation)
a. Usually referred to as “implied in fact” conditions
3. Constructive Conditions – conditions read into a contract by the court
without regard to, or even despite, the parties’ intention
a. Done in the interest of fairness to ensure that both parties receive the
performance for which they bargained for
b. Usually referred to as “implied in law” conditions
4. Effect of Condition – if K is not enforceable due to failure of occurrence of
condition, the party who provided benefits can usually recover under unjust
enrichment theories (although the measure of damages in that case may be
less advantageous than the contract price)
c. Have Conditions Been Excused?
1. A promise does not become absolute until the conditions
a. Have been performed, or
b. Have been legally excused
2. Excuse of Condition by Hindrance or Failure to Cooperate – if party having a
duty of performance that is subject to a condition prevents the condition
from occurring, she no longer has the benefit of the condition if the
prevention is wrongful (not necessary to prove bad faith or malice)
3. Excuse of Condition by Actual Breach – actual breach of K when performance
is due will excuse the duty of counterperformance only if the breach is
material
4. Excuse of Condition by Anticipatory Repudiation
a. Anticipatory Repudiation – promisor, prior to the time set for
performance of his promise, indicates that he will not perform when the
time comes (R2d 250 and UCC 2-610)
b. Anticipatory Repudiation (AR) will excuse conditions when requirements
below are met:
(1) Executory Bilateral Contract Requirement – AR will only apply where
there is a bilateral contract with executory (unperformed) duties on
both sides
 When the non-repudiator has nothing further to do at the
moment of repudiation (as in a case of unilateral K or bilateral K
fully performed by non-repudiator), the doctrine of AR does not
apply
(2) Requirement that Anticipatory Repudiation be Unequivocal –
promisor must unequivocally indicate that he cannot or will not
perform when the time comes, mere expressions of doubt or fear will
not suffice
(3) Effect of Anticipatory Repudiation – non-repudiating party has four
options: (UCC 2-610 and R2d 253)
 Treat the AR as total repudiation and sue immediately
 Suspend performance and wait to sue until performance date
 Treat the repudiation as an offer to rescind and treat the contract
as discharged
 Ignore the repudiation and urge the promisor to perform
(4) Repudiation may be retracted until the non-repudiating party has
accepted the repudiation or detrimentally relied on it (R2d 256 and
UCC 2-611)
5. Excuse of Condition by Prospective Inability or Unwillingness to Perform –
when a party has reasonable grounds to believe that the other party will be
unable or unwilling to perform when performance is due
a. Ex. John contracts with Barbara to buy her house for $150,000. Payment
is due on August 1. On July 10, John goes into Bankruptcy (or Barbara
transfers title to house to Emily). Prospective inability to perform has
occurred.
b. Different from AR because involves conduct or words that merely raise
doubts that the party will perform
c. In judging what conduct may suffice, a reasonable person standard will be
applied
d. Effect of Prospective Failure is to allow innocent party to suspend further
performance until she receives adequate assurances that performance
will be forthcoming (R2d 251 and UCC 2-609)
(1) If no adequate assurances are given, she may treat as repudiation and
may be excused from her own performance
e. Retraction is possible if defaulting party regains ability or willingness to
perform unless other party has changed her position in reliance on the
prospective failure
6. Excuse of Condition by Substantial Performance
a. The Rule of Substantial Performance – the condition of complete
performance may be excused if the party has rendered substantial
performance. Then the other party’s duty of counterperformance
becomes absolute
b. If breach is material then performance has not been substantial, but if
the breach is minor, performance has been substantial
c. Most courts will not apply the substantial performance doctrine where
the breach has been “willful”
d. Nonbreaching party will be able to mitigate by deducting damages
suffered due to the first party’s incomplete performance
e. UCC perfect tender rule is allows buyer to reject goods that do not
conform to the contract in any manner (UCC 2-601)
(1) Exceptions:
 The parties may otherwise agree
 Rejection of goods under installment K may occur only if there is
substantial impairment of value
 Failure of seller to make reasonable contract with carrier gives
buyer to reject only if material delay or loss ensues
 If buyer has accepted goods he no longer has the right to reject
 A bad faith rejection by buyer in relation to an immaterial defect
may preclude his right of rejection
 If contract time remains, seller has right to cure
7. Excuse of Condition by Waiver or Estoppel
a. Estoppel Waiver – if a party indicates that she is waiving a condition or
some performance before it is rendered, and the other party
detrimentally relies on such indication, the courts will hold this to be a
binding (estoppel) waiver
(1) Promise to waive a condition may be retracted at any time before the
other party has changes his position to his detriment
b. Election Waiver – when a condition or a duty of performance is broken
and the beneficiary continues under the contract, she will be deemed to
have waived the condition or duty (R2d 246 and UCC 2-606)
(1) Requires neither consideration nor estoppel
c. Conditions that may be Waived – if no consideration is given for the
waiver, the condition must be ancillary or collateral to the main subject
and purpose of the K
(1) i.e. one cannot waive entire or substantially entire return
performance or would be really a gift
d. A waiver severs only the right to treat the failure of the condition as a
total breach excusing counterperformance, the waiving party still has the
right to damages
8. Excuse of Condition by Impossibility, Impracticability, or Frustration of
Purpose
B. Has the Absolute Duty to Perform Been Discharged?
i. Once it is determined that a party is under immediate duty to perform, the duty to
perform must be discharged
ii. Discharge By Performance – most obvious way to discharge contractual duty
iii. Discharge by Tender of Performance – good faith tender of performance made in
accordance with contractual terms will discharge duties
a. Tendering party must possess present ability to perform (promise insufficient)
iv. Discharge by Occurrence of Condition Subsequent
v. Discharge by Illegality – if subject matter becomes illegal, performance will be
discharged, aka “supervening illegality”
vi. Discharge by Impossibility, Impracticability, or Frustration – where the
nonoccurrence of the event was a basic assumption of the parties in making the
contract and neither party has expressly or impliedly assumed the risk of the event
occurring, contractual duties may be discharged
a. Discharge by Impossibility – duties will be discharged if it has become impossible
to perform them
1. Impossibility must be objective, i.e. could not be performed by anyone
2. Impossibility must arise after the contract has been entered into
a. If it already existed when contract was formed, rather a contract
formation problem – whether voidable because of mistake
3. Effect of Impossibility – each party is excused from duties arising under the
contract that are yet to be fulfilled
4. Partial Impossibility – if performance becomes only partially impossible, the
duty may be discharged only to that extent
5. Temporary Impossibility suspends contractual duties, it does not discharge
them
6. If part performance has been rendered by either party prior to impossibility,
that party will have the right to recover in quasi-contract for the reasonable
value of his performance
7. Specific Situations:
a. Death or physical incapacity of a person necessary to effectuate the
contract serves to discharge it
b. If the Ks subject matter is destroyed or the designated means for
performing the K are destroyed, duties will be discharged
(1) With destruction of subject matter, destruction of a source for
fulfilling the contract will render the contract impossible only if the
source is the one specified by the parties
(2) Discharge because of destruction of subject matter will not apply
where the risk of loss has already pass to the buyer
b. Discharge by Impracticability
1. Test for Impracticability – the party to perform has encountered:
a. Extreme and unreasonable difficulty and/or expense; and
b. This difficulty was not anticipated
(1) A mere change in the degree of difficulty or expense due to such
causes as increased wages, prices of raw materials, or costs of
construction, unless well beyond the normal range, does not amount
to impracticability because these are the types of risks that a fixedprice contract is intended to cover (R2d 261)
2. UCC allows discharge of seller’s duty to perform where performance may be
impractical (UCC 2-615)
a. Typical examples of conditions giving rise to “commercial
impracticability” include embargoes, crop failure, currency devaluation,
war, labor strikes, or the like entailing substantial unforeseen cost
increases
3. The rules that apply to temporary and partial impossibility are equally
applicable to temporary and partial impracticability
c. Discharge by Frustration
1. Frustration will have occurred if: (R2d 265 and UCC 2-615)
a. There is some supervening act or event leading to the frustration;
b. At the time of entering the contract, the parties did not reasonably
foresee the act of event occurring;
c. The purpose of the contract has been completely or almost completely
destroyed by this act or event; and
d. The purpose of the contract was realized by both parties at the time of
making the contract
vii. Discharge by Rescission
a. Mutual Rescission – express agreement between the parties to rescind; this
agreement is itself a binding contract supported by consideration
1. Duties must be executory on both sides
a. Unilateral Contract – for effective rescission where offeree has already
performed, rescission must be supported by:
(1) An offer of new consideration by the nonperforming party
(2) Elements of promissory estoppel, i.e. detrimental reliance, OR
(3) Manifestation of an intent by the original offeree to make a gift of the
obligation owed to her
b. A mutual rescission on a partially performed bilateral contract will usually
be enforced, with the party who has partially performed entitled to
compensation depending on the terms of the rescission agreement
2. Formalities – mutual rescission may be made orally even if the contract
expressly states that it can only be rescinded by a written document
a. Exceptions:
(1) If the subject matter falls within the Statute of Frauds then the
rescission should generally be in writing
 Some courts still enforce oral where it is executed or promissory
estoppel is present
(2) UCC requires written rescission or modification where original
contract expressly requires it (UCC 2-209(2))
3. Where the rights of third party beneficiaries have already vested, contract
may not be discharged by mutual rescission
b. Unilateral Rescission – where one party desires to rescind the contract but the
other desires it to be performed, unilateral rescission may be granted with
adequate legal grounds (mistake, misrepresentation, duress, failure of
consideration, etc.)
viii. Partial Discharge by Modification of Contract – if K is subsequently modified by
parties, it will discharge the terms of the modification, not the entire contract, if the
following requirements are met:
a. Mutual Assent
b. Consideration – generally fulfilled because each party has limited his right to
enforce the original contract
1. No consideration necessary where modification is merely to correct an error
in the original contract
2. No consideration for modification of a contract for the sale of goods (UCC 2209(1))
ix. Discharge by Novation
a. Novation – a new contract substitutes a new party to receive benefits and
assume duties that had originally belonged to one of the original parties and will
serve to discharge the old contract
b. Elements for a valid novation:
1. A previous valid contract;
2. An agreement among all parties to the new contract;
3. The immediate extinguishment of contractual duties as between the original
contracting parties; and
4. A valid and enforceable new contract
x. Discharge by Cancellation – if parties manifest their intent to have such acts serve as
discharge, destruction or surrender of a written contract will have this effect if
consideration or one of its alternatives is present
xi. Discharge by Release – a release and/or contract not to sue will discharge
a. Usually must be in writing and supported by new consideration or promissory
estoppel elements
b. UCC requires an authenticated record (such as a writing) but no consideration
(UCC 1-306)
xii. Discharge by Substituted Contract – parties enter into a second contract that
immediately revokes the first contract
a. Revocation may be express or implied
1. Revocation will be implied if the second contract’s terms are inconsistent
with the terms of the first contract
b. Intent Governs – if parties intend the first contract to be discharged only after
performance of the second contract, there is an executory accord rather then a
substituted contract
xiii. Discharge by Accord and Satisfaction
a. Accord – an agreement where one party agrees to accept, in lieu of performance
that she is supposed to receive from the other party, some other different
performance
1. In general an accord must be supported by consideration
a. If consideration is of lesser value than originally bargained-for, it will be
sufficient if it is of a different type or if the claim is to be paid to a third
party
(1) Majority view is that if a party offers a smaller amount than due
under original obligation in satisfaction of the claim (i.e. partial
payment of original debt), it will suffice for an accord and satisfaction
if there is a bona fide dispute as to the claim or there is otherwise
some alteration, even slight, in the debtor’s consideration
2. Accord will not discharge original contract but merely suspends the right to
enforce it in accordance with the terms of the accord contract
b. Satisfaction – performance of the accord agreement, which discharges original
and accord contracts
c. Effect of Breach of Accord Agreement Before Satisfaction
1. Breach by Debtor – creditor may sue on either the original contract or for
breach of the accord agreement
2. Breach by Creditor – i.e. creditor sues on the original contract, debtor may
either:
a. Raise the accord agreement as an equitable defense and ask that the
contract action be dismissed
b. Wait until she is damaged (creditor wins action) and then bring action at
law for damages for breach of the accord contract
d. Checks Tendered as “Payment in Full” – if monetary claim is uncertain or subject
to a bona fide dispute, accord and satisfaction may be accomplished by a good
faith tender and acceptance of a check when the check (or an accompanying
document) conspicuously states that the check is tendered in full satisfaction of
the debt (UCC 3-311)
xiv. Discharge by Account Stated
a. Account Stated – contract between parties to agree to an amount as a final
balance due from one to the other
1. Final balance encompasses a number of transactions between parties and
serves to merge all of the transactions by discharging all claims owed therein
2. The parties have to have had more than one prior transaction between them
b. Writing not usually required unless one or more of the original transactions was
subject to the SOF
c. Account may be implied, not required that it be express
xv. Discharge by Lapse – where a duty of each party is a condition concurrent to the
other’s duty, it is possible that on the day set for performance, neither party is in
breach and their contractual obligations lapse
a. If the contract states that “time is of the essence”, the lapse will occur
immediately, otherwise the K will lapse after a reasonable time
xvi. Discharge by Operation of Law – where one party obtains a judgment against the
other for breach, the contractual duty of performance is merged in the judgment
(i.e. damages) thereby discharging the original contract
a. Applies also to an award made pursuant to a properly provided-for arbitration
b. Discharge in bankruptcy bars any right of action on the contract
xvii. Effect of Running of Statute of Limitations – When the statute of limitations has
run, it is generally held that an action for breach of contract may be barred
a. Only judicial remedies are barred; the running of the statute does not discharge
duties (i.e. if party has advantage of the SOL but subsequently agrees to perform,
new consideration will not be required)
VIII. Breach of the Contract and Available Remedies
A. Breach occurs when:
i. The promisor is under an absolute duty to perform, and
ii. This absolute duty of performance has not been discharged, and
iii. There is failure to perform in accordance with contractual terms
B. Material vs. Minor Breach
i. Effect of Breaches
a. Minor Breach – when the obligee gains the substantial benefit of her bargain
despite the obligor’s defective performance
1. Effect – provide a remedy for the immaterial breach to the aggrieved party;
the aggrieved party is not relieved of her duty of performance
b. Material Breach – when obligee does not receive the substantial benefit of her
bargain as a result of failure to perform or defective performance
1. The nonbreaching party:
a. May treat the contract as at an end, i.e. discharge of duties, and
b. Will have an immediate right to all remedies for breach of the entire
contract, including total damages
c. If a minor breach is coupled with an anticipatory repudiation, the nonbreaching
party may treat as a material breach
1. Aggrieved party must not continue on because doing so would be a failure to
mitigate damages
a. UCC allow party to complete manufacture to avoid having to sell
unfinished goods (UCC 2-704)
ii. Determining Materiality of Breach
a. Generally courts apply the following six criteria (R 275):
1. Amount of Benefit Received – extent to which nonbreaching party will
receive substantially benefit anticipated (^E  vM)
2. Adequacy of Damages – extent to which injured party may be adequately
compensated in damages (^E  vM)
3. Extent of Part Performance – extent the party failing to perform completely
has already performed or made preparations to perform (^E  vM)
4. Hardship to the Breaching Party – extent of hardship on the breaching party
should the contract be terminated (^E  vM)
5. Negligent or Willful Behavior – extent of negligent or willful behavior of the
party failing to perform (^E  ^M)
6. Likelihood of Full Performance – extent of likelihood the party who has failed
to perform will perform remainder of K (^E  vM)
b. Failure of Timely Performance
1. If defaulting party had a duty of immediate performance when his failure to
perform occurred, then this failure on time will always be a breach of K
2. Additional specific rules for determining the materiality of breach by failure
of timely performance:
a. As Specified by Nature of Contract – unless nature of K is to make
performance on exact day agreed upon vital importance, or by its terms
provides time is of the essence, failure by promisor to perform at stated
time will not be material
b. When Delay Occurs – delay before the delaying party has rendered any
performance is more likely to be considered material than delay where
there has been part performance
c. Mercantile Contracts – timely performance as agreed is important and
unjustified delay is important
d. Land Contract – more delay in land Ks is required for materiality than in
mercantile Ks
e. Availability of Equitable Remedy – in equity, courts generally are more
lenient in tolerating considerable delay
(1) Hence, they will tend to find the breach immaterial and award
compensation for the delay where possible
C. The nonbreaching party who sues for breach of contract must show that she is willing
and able to perform but for the breaching party’s failure to perform
D. Remedies for Breach
i. Damages
a. Types of Damages
1. Compensatory Damages – purpose is to give compensation for the breach,
i.e. put the nonbreaching party where she would have been had the promise
been performed
a. Expectation Damages – generally the standard measure of damages that
are based on what the nonbreaching party expected
(1) i.e. sufficient damages for her to buy a substitute performance
b. Reliance Damages – awarded to the plaintiff if expectation is too
speculative or unfit and will measure the plaintiff’s cost of performance
(1) i.e. put the plaintiff in the position she would have been in had the
contract never been formed
c. Consequential Damages – damages holding breaching party liable for any
further losses resulting from the breach
(1) Further losses have to be those that any reasonable person would
have foreseen would occur from a breach at the time of entry into the
contract (UCC 2-715)
(2) Plaintiff has burden of proof of showing that both parties were aware
of the special circumstances that existed at the time of the K
formation
2. Punitive Damages – generally not awarded in commercial contract cases but
may be awarded in cases where the breach is also a tort (R2d 355)
3. Nominal Damages – token damages (e.g. $1) may be awarded where a
breach is shown but no actual loss is proven
4. Liquidated Damages – the contract may provide in advance the damages that
are to be payable in the event of breach as long as they are not punitive
b. “Standard Measure” – Specific Situations
1. Contracts for the Sale of Goods
a. Remedies for Seller (UCC 2-703) – when the buyer wrongfully rejects or
revokes acceptance of goods, fails to make a payment due on or before
delivery, or repudiates, seller may:
(1) Withhold delivery of the goods
(2) Stop delivery by the carrier
(3) Resell the goods and recover the difference between the resale price
and the contract price
(4) Cancel the contract
(5) Recover the price if: (2-709)
 Goods have been accepted or conforming goods were lost or
damaged within a reasonable time after risk of loss passed to
buyer, or
 Goods have been identified to the contract and the seller is
unable to resell
(6) Recover ordinary contract damages for nonacceptance, and the
measure is the difference between the market price at the time and
place for tender and the contract price, together with any incidental
damages (2-708)
b. Remedies for Buyer (2-711) – if seller fails to deliver or repudiates or the
buyer rightfully rejects or revokes acceptance with respect to the goods,
the buyer may:
(1) Cancel
(2) Cover, i.e. buy substitute goods and recover the difference between
the price of the substitute goods and the contract price (2-712)
(3) Recover goods identified in the contract if the buyer has paid a part or
all of the price
(4) Recover the goods contracted for if the buyer is unable to cover and
the goods were either in existence when the contract was made or
were later identified in the contract
(5) Obtain specific performance if appropriate (i.e. if goods are unique (2716))
(6) Recover damages for nondelivery which is the difference between the
market price at the time when the buyer learned of the breach and
the contract price, plus incidental and consequential damages (2-713)
 Anticipatory Repudiation by Seller – since AR is not a breach until
treated as such by the aggrieved party, the courts will usually
construe the breach as having occurred at the end of a
commercially reasonable time the buyer should await for
performance
 Buyer who Keeps Nonconforming Goods – if seller delivers goods
breaching one of his warranties and the buyer decides to keep the
goods, the buyer may recover the difference between the value
the goods would have had if they had been as warranted and the
actual value of the goods (2-714(2))
2. Contracts for Sale of Land – standard measure for breach of land sales
contracts is the difference between the contract price and the fair market
value of the land
3. Employment Contracts
a. Breach by Employer – irrespective of when breach occurs, standard
measure of employee’s damages will be full contract price
b. Breach by Employee
(1) Intentional Breach – standard is according to what it costs to replace
employee
 Difference between the cost incurred to get a second employee
and the cost to the employer had the first breaching employee
done the work, offset by work done to date
(2) Unintentional Breach – same as intentional but may allow quasicontractual recovery to employee for work done to date
4. Construction Contracts
a. Breach by Owner
(1) Breach Before Construction Started – profits builder would have
derived
(2) Breach During Construction – profits plus any costs incurred to date
(3) Breach After Construction Completed – full contract price plus
interest
b. Breach by Builder
(1) Breach Before Construction Started – cost of completion (amount
above the contract price) plus reasonable compensation for any delay
(2) Breach During Construction – cost of completion plus reasonable
compensation for any delay
 If completion would involve undue economic waste, damages will
be the difference between the value of what the owner would
have received and what the owner actually received
 Ex. Contract provides that all pipes will be copper. After
plumbing is installed but before construction completed,
Owner discovers pipes are PVC. The house with PVC pipes
would be valued at $500 less than the house with copper
pipes but it would cost Builder $10,000 to replace the pipes.
 Builder would not be compelled to replace the pipes
because it would be economic waste and Owner’s damages
would be $500
(3) Breach by Late Performance – any loss incurred by not being able to
use the property when performance was due (loss of rent, etc.)
 If damages for lost use are not easily determined or were not
foreseeable at the time the contract was entered into, owner can
only recover interest on the value of the building as a capital
investment
5. Contracts Calling for Installment Payments – this is only partial breach and
aggrieved party can only recover the missed payment, not the contract price
a. Contract may include an acceleration clause making the entire amount
due on any late payment, in which the aggrieved can recover full amount
(R2d 243(3))
6. Duty to Mitigate – All Contracts – when computing standard measure for
damages, keep in mind the duty to mitigate
c. Certainty Rule – plaintiff must prove that the losses suffered were certain in their
nature and not speculative
1. Profits from New Business – generally if breaching party prevented
nonbreaching party from setting up a new business, courts would not award
lost profits from the prospective business as damages because they were too
speculative
a. Modern courts may sometimes allow it if they can be made more certain
by observing similar businesses in the area or other businesses previously
owned by the same party
d. Duty to Mitigate Damages
1. The non breaching party has a duty to mitigating damages, and thus must:
a. Refrain from piling up losses after she receives notice of the breach
b. Not incur further expenditures or costs
c. Make reasonable efforts to cut down losses by procuring a substitute
performance at a fair price
2. If the nonbreaching party does not mitigate, she will not be allowed to
recover those damages that might have been avoided by such mitigation
after the breach
3. Generally a party may recover expenses of mitigation
4. Specific Contract Situations:
a. Employment Contracts – duty to use reasonable care in finding a position
of the same kind, rank, and grade in the same locale
(1) Not necessarily the exact same pay level
(2) Burden is on employer to show such jobs were available
b. Contracts for Sale of Goods
(1) Buyer is in Breach – seller has right to resell goods in a commercially
reasonable manner
(2) Seller is in Breach – buyer has right to purchase substitute goods at a
reasonable price
c. Manufacturing Contracts – generally if party for whom goods are being
made breaches, manufacturer is under a duty to mitigate by not
continuing work
(1) If facts are such that completion of the manufacturing project will
decrease rather than increase damages, the manufacturer has the
right to continue
d. Construction Contracts – duty to mitigate by not continuing work after
breach, but if completion will decrease damages, it will be allowed
(1) Builder does not owe a duty to avoid the consequences of an owner’s
breach, e.g. by securing other work
e. Effect of Liquidated Damages Provision
1. Requirements for Enforcement – parties may stipulate what damages are to
be paid in the event of a breach. Those liquidated damages clauses will be
enforceable if:
a. Damages for the contractual breach must have been difficult to ascertain
or estimate at the time the contract was formed
b. Amount agreed on must have been a reasonable forecast of
compensatory damages in the case of breach
(1) Test for reasonableness is a comparison between the amount of
damages prospectively probable at the time of contract formation
and the liquidated damages figure
(2) If amount is unreasonable, courts will construe this as a penalty and
not enforce the provision
 UCC allows a court to consider actual damages to validate a
liquidated damages clause even if it was not a reasonable forecast
at the time of contract formation (UCC 2-718(1))
2. If both of the requirements are met, plaintiff will receive the liquidated
damages even when no actual money or pecuniary damages have been
suffered
a. Should one or both of the requirements fail, plaintiff will only recover
those damages that she can actually prove
3. If a contract stipulates that a plaintiff can elect to recover liquidated or actual
damages, the liquidated damage clause may be unenforceable
ii. Suit in Equity for Specific Performance
a. Specific Performance – an order from the court to the breaching party to
perform or face contempt of court charges
1. Given if the legal remedy is inadequate
2. Generally when the subject matter of the contract is rare or unique
b. Available for Land and Rare or Unique Goods
1. Always available for land because land is considered unique
2. Available for goods that are rare or unique at the time performance is due
a. e.g. rare paintings, gasoline in short supply because of oil embargoes, etc.
c. Not Available for Service Contracts – even if services are rare or unique because
it is hard to enforce and possibly unconstitutional (involuntary servitude)
1. Injunction as Alternate Remedy – court may enjoin a breaching employee
from working for a competitor throughout duration of contract
iii. Restitution
a. Restitution is based on preventing unjust enrichment
b. Terminology – where a contract is unenforceable or no contract between the
parties exists, action to recover restitution damages is an action for an implied in
law contract or an action in quasi-contract
c. Measure of Damages – generally the measure is the value of the benefit
conferred usually based on the value received by the defendant
1. Recovery may also be measured by “detriment” suffered by plaintiff if the
benefits are difficult to measure or the “benefit” measure would achieve an
unfair result
d. Specific Applications
1. Where Contract is Breached
a. If nonbreaching party has not fully performed, he may rescind contract
and sue for restitution to prevent unjust enrichment
b. If nonbreaching party has fully performed, he is limited to damages under
the contract even if it may be less than he would have received in
restitution
c. “Losing Contracts” – a restitution remedy is often desirable in the case of
a losing contract (i.e. actual value of services or goods is higher than
contract price) because normal contract expectation damages or reliance
damages would be for a lesser amount
d. Breach by Plaintiff – modern courts will permit restitution of the contract
price, less damages incurred by the other party as a result of the breach
(R2d 374)
2. Where the Contract is Unenforceable
a. Restitution may be available in a quasi-contract action where a contract
was made but is unenforceable and unjust enrichment otherwise would
result
3. Where No Contract Involved
a. Restitution may be available in a quasi-contract action where there is no
contractual relationship between the parties if:
(1) The plaintiff has conferred a benefit on the defendant by rendering
services or expending properties;
(2) The plaintiff conferred the benefit with the reasonable expectation of
being compensated for its value;
(3) The defendant knew or had reason to know of the plaintiff’s
expectation; and
(4) The defendant would be unjustly enriched if he were allowed to
retain the benefit without compensating plaintiff
 Ex. Doctor witnesses automobile accident and rushes to aid an
unconscious victim. Doctor can recover the reasonable value of
his services
b. Where the parties are in a close relationship it is usually presumed that
the benefits were given gratuitously and the party claiming relief bears
the burden of showing expectation of being paid