Contracts Outline
Preston, BYU, 1L Contracts
I. Phase 1- Formation
Freedom of K- Government won’t get involved when two sober adults form a K
Conflicting Policies
 Realists- Protect people from bad decisions, high emphasis on fairness, like flexibility to deal
with unforeseen circumstances, don’t mind subjectiveness
 Classicist- Favor rigid rules, freedom to K, high emphasis on predictability & consistency
Sources for K Law: Restatements, common law, and UCC
 Where the K is silent, UCC applies
 Where the UCC is silent, common law applies
 Plan A- O + A + C (+s/f)= Duty to negotiate (and a real K)
o The parties know that there is an obligation to pay
 Plan B- O + A + PE (+ PE)= PE and a K
o PE- Is it reasonable to rely
 Plan C- (Quasi-K) –
o This is farfetched and hard to get into practice
o If you see restitution as a cause of action it is plan C
o If you see unjust enrichment it is plan C
o If you see quantum meruit (just what you deserve) it is plan C
Remedies
 Specific Performance- When a party breaches a K the court orders the party to perform what
they contracted to do
o Rarely happens—usually only happens with real estate (presume it with real estate)
o To receive this remedy you must prove:
 (1) Extraordinary (Money Won’t Do)
 Prove that monetary damages are inadequate (asking judge for a favor)
 (2) Discretionary and Clean Hands (Deservingness)
 Go to ct with clean hands and they have discretion to look at your
character
 Ct’s don’t want to do serious injustice (Ex- Sick lady selling her house)
 (3) Clear Standards (Favor to Plaintiff)
 The K terms must be clear and concise
 (4) Entanglement of the Court (Minimal follow up by the court)
 Courts resist equitable relief because of the needed follow up—prove
minimal supervision and follow-up are required
 Expectation Damages- Award the monetary amount of the K (happens 99% of the time)
 If the K price goes negative (you got a better deal b/c they breached) you aren’t awarded
expectation damages b/c of the price, but you do get miscellaneous damages (attorney fees,
interest fees, etc…)
UCC (First question to ask on a test: does the UCC apply?)
 Applies to all Ks for the purchase and sale of tangible, moveable goods
 Drafted by NCCUSI and recommended to state legislatures (all have adopted except Louisiana)
 Where the code is silent, common law continues to rule
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Does NOT apply to the sale of services, if a combination the courts rely on the following tests:
o Predominant Purpose Test- Used to determine whether the K was predominantly
meant to exchange goods, not services by looking at: (don’t have to meet all four-just
balance the significance of them) (Majority view)
 Language of the K
 Nature of the business involved (look at overall business structure)
 Reason these particular parties entered the K (ex- service the airplane or
replace the wing)
 Amount charged for goods versus the amount charged for services
o Gravaman Test-Used to determine of the breach occurred in the goods part of the K or
in the services part of the K—thus reqring the K to be divided into parts. (Minority view)
 Ex- UCC applies to a breach of warranty claim on a defective diving board even
though most of the K price went to labor for building the pool.
Potential Benefits of the UCC
o Statute of limitations for UCC & Common Law are different
o Statute of fraud (UCC requires greater than $500 to be in writing)
o UCC has stronger implied warranties
Supplier and Distributor Relationship:
o Scenario 1: Distributer actually buys the supplies from the supplier (UCC applies)
o Scenario 2: Distributer markets the products—finds buyers—never owns the good (UCC
doesn’t apply)
Article 2 applies to all sale of goods—regardless of the parties occupation
Merchants (only required for some provision in article 2)- Someone who is a dealer in goods and
has a higher standard for the UCC
o Dealer in goods
o Holds itself as having knowledge or skills
o Peculiar to the practices of the goods
o By occupation having knowledge or skills
Good faith
o Non merchants are based on their honesty
o Merchants have two higher tests:
 Honesty in fact (subjective standard)
 Commercially reasonable- should one in your position know it was wrong
Assent
A. Generally:
1. Must be a “meeting of the minds” (typically does not happen)
2. Objective Theory of Ks: How would a reasonable person understand the terms?
a. “Intent” Does Not Matter—mental assent is not required—as long as the words
communicated could be reasonably interpreted as assent (Lucy v. Zehmer—“Jokingly”
negot. terms for to sell farm for $50K)
b. Words and Actions sufficient if they would lead a reasonable man to believe party
assented to the K
c. Conduct Consistent- Conduct between parties shows that mutual assent had occurred
d. Exception to objective tests (may use subjective evidence when…)
i. Fraud
ii. Oral Contracts
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3. Reasonable standard: Who determine what is reasonable?
B. Mutual Mistake—Whose Meaning Prevails: (Restatement §§ 20, 201)
1. No mutual assent if parties attach materially different meaning to their manifestations and:
a. Neither party knows or has reason to know the meaning attached by the other party;
OR
b. Each party knows or each party has reason to know the meaning attached by the other
2. Manifestation is operative with meaning attached by one of the parties if:
a. First party doesn’t know of any different meaning attached by other, and other knows
the meaning of first
b. First party has no reason to know different meaning of other, and other has reason to
know meaning of first
i. Thus, innocent party wins if other party knows or has reason to know intent
but does not act accordingly
C. Determining Meaning:
1. Services—Three Situations (Restatement §§20, 201)
a. Where there is a misunderstanding and neither party knows other party’s intent:
i. Materially different  No K
ii. Non-materially different  (Restatement §219-223) Court considers:
1. Express Terms — unless parties don’t agree on meaning
2. Course of Performance [performance of this K over time] — unless agreed
against it
3. Course of Dealing [performance of other Ks over time] — unless agreed
against it
4. Usage of Trade—if both parties knew or should have known, it gives
meaning or sheds light
a. If both parties knew or should have known of a usage AND neither
party knew or should have known other party had something else in
mind, then usage will supplmnt.
b. If one party knew that other was thinking of that usage, then use
that usage
SUMMARY
a. Where one party knows/has reason to know the other’s intent  Court will use innocent
party’s terms
b. If both sides know that they have a different meaning and say nothing  No K
2.
Goods — (UCC §1-205)
a. Express Terms
b. Course of Performance [performance of this K over time]
c. Course of Dealing [performance of other Ks over time]
d. Usage of Trade—if both parties knew or should have known, it gives meaning or sheds light
i. Must tell party when you will be using this as evidence
e. Usage: Restatement 219: habit or practice; the way that the term is used.
i. 220: you have to know or have reason to know
ii. 221: usage can supplement an unclear agreement
iii. 222: Usage of trade in a whole industry
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iv. 223: course of dealing: previous conduct between two parties that makes them
assume that’s what they’re agreeing to
f. If a party has an idea or should have an idea of what the other party is thinking, then he
should be bound
g. Although K law is supposed to effectuate the intent of the parties, this doctrine tries to look
at what someone reasonably believed
Offer
1. Definition: An unequivocal manifestation of an intent to be bound
2. The hallmark of an offer is that gives the offeree the power to make the decision on whether or
not there will be a K (offeror CANNOT keep that right or power for it to be an offer)
a. The offer MUST make clear “to the reasonable offeree that acceptance will bind the
parties immediately, without the offeror having the opportunity to make the final
decision.”
3. Offeror can revoke the offer any time before the offeree accepts the offer
4. Based on assent—they must intend to enter the agreement
a. Intent is measured by objective and subjective tests
i. Objective test- As manifested to a reasonable person in the position of the
other party (primarily use this to determine acceptance)
1. Holds a party accountable for words or actions by looking at outward
manifestations to determine her assent
ii. Subjective- Used in fraud and face to face communication
5. Must determine WHEN the offer was made
a. Exception: §2-204 means you don’t have to know when the offer is actually made
6. Bid from a contractor is an offer (follow custom of the industry) (General rule)
a. Exception: Unless internally overwritten in the bid
7. Advertisements are not offers (General rule)
a. Exceptions:
i. If the commercial is clear, concise, and specific than it is an offer
1. Express language (Clearly phrased as an offer: “First come first serve”
a. Restrictions (ex-“while supplies last” is so the advertisement
doesn’t become an offer—Subject to availability)
2. Invites specific action w/o further communication (Ex- Wanted poster)
ii. BUT If a commercial is “Too good to be true” than it is not a K
iii. Prove me wrong cases (Considered a K)
8. K can form even if statements are vague (General rule)
a. Exception: In criminal law where the standards is beyond a reasonable doubt and the
statute requires more than verbal assent
9. Offeror can tell the offeree exactly how they want acceptance
10. REWARDS: A person enters a K by their outward manifestations (General Rule)
a. Exception: In the case of rewards, does the subjective evidence indicate that they were
unaware of the reward
i. Government awards are written so that if unaware you still get award, private
awards are different and usually require awareness of the award
ii. Intent of an award is to induce someone to act a certain way—were you
induced?
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Methods of Terminating an Offer
1. Lapse of an offer
a. Lapses at time specified by the offer OR if not specified, within a reasonable time
2. Rejection
a. By statement or conduct (silence MAY be considered rejection in some cases)
i. Rest. §38- Manifestation of intent is good enough (Ex- Tom sees Sue accept a
different offer to go skiing for the weekend)
3. Counteroffer
a. Counter-offers replace and kill original offer when: (Restatement §39)
i. Propose a substantially different bargain
ii. Accepts offer but is conditioned on the offeror’s assent to terms additional or
different from those in the original offer [“mirror-image rule”] (Rest. §59)
b. Mirror Rule- The acceptance must “mirror” the terms in the original offer and cannot
deviate on any “material items”
c. Exceptions: Counter-offer is acceptance when:
i. The offeree manifests intention to accept notwithstanding the counter-offer
ii. Offeror manifests an intention to view the counter-offer as an acceptance
iii. The conditional acceptance is just a form letter, and there was intent of
acceptance
iv. The conditional term was implicit in the original offer, such as:
1. Condition to tender title to a car after purchase
2. Take a job as a lawyer if you pass the bar exam
4. Revocation
a. An offeror can revoke any offer as long as the revocation is received by the offeree
before the effective moment of acceptance
b. A revocation is any conduct/action which manifests that you don’t have an intent to
have an open offer with the offeree
i. Offeree receives manifestation from offeror of an intention not to enter into
the K (Rs §42)
ii. Offeror takes definite action inconsistent with an intention to enter into the
proposed K, AND
iii. offeree acquires reliable information to that effect (Rs §43)—in effect, indirect
communication
c. Indirect Revocation- Hearing the revocation from a reliable third party source
i. Perfectly aware of revocation= Revocation (Evaluate “perfectly aware” by the
outward manifestations of both parties)
d. Exception:
i. Offeror sells to a third party without notifying offeree; not a revocation
(Dickinson v. Dodd—Offeror sold to 3rd party. Rule: Offeror must inform the
offeree! )
ii. Option Ks/Firm Offer: (Keeps an offer open—it can’t lapse or revoked)
5. Death or Mental Disability of the Offeror
a. If the offeror dies or becomes mentally incompetent between the time that the offer is
made and the time that it is accepted, the offer lapses
6. Exceptions (Option Contracts and Firm Offers):
a. Services- An offer is open and binding when… (Rest. §87)
i. The following conditions apply,
1. It is in writing, AND
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2. It is signed by the offeror, AND
a. Nominal consideration is acceptable (NEED Consideration)
b. Cnsdration is very lax in an option K—cts. may even just allow
recitation of cnsdration to be sufficient for consdration
3. It recites a purported consideration for the making of the offer, AND
4. It proposes an exchange on fair terms w/n a reasonable amount of time
ii. OR, made irrevocable by statute
iii. OR, an offeree relies:
1. The offeror reasonably expects to induce action of forbearance of a
substantial character
2. The offer does induce such action
iv. Miscellaneous option contract details:
1. Occurs when an offeror, in exchange for consideration, promises to limit
his power to revoke
2. Distinct from the original K (you’ll have two K’s)
3. Even if the offeree rejects or makes a CO, the original offer will remain
open b/c of the option K
4. May form by beginning performance
b. Goods- A “firm offer” is good even without consideration: (UCC §2-205)
i. It must be an offer by a merchant, in writing, and signed by the offeror
ii. assuring that the offer will be held open,
1. Must be held open during the time stated or for reasonable time
2. However, irrevocability may not exceed three months (this limit only
applies for reasonable time stnd. you can have a 6 month period under
the “time stated”)
Acceptance
1. General things to consider
o (1) Correct method, (2) Correct Medium, and (3) Timely
2. Acceptance must be (1) knowing, (2) Voluntary, and (3) a Deliberate Act
3. UCC defines acceptance as “an offer to make a K shall be construed as inviting acceptance in any
manner and by any medium reasonable in the circumstances.”
4. If the offeror is not specific by the means and forms by which one may accept, the “standard of
reasonableness governs the question of whether the method of acceptance was appropriate
and effective.”
5. Rest. §30- Offer may invite acceptance by words, performance, or refraining from an act, or
may empower the offeree to make a selection of terms in his acceptance
o Unless indicated, acceptance is invited in any medium reasonably in the circumstances
6. Substantive aspect- Terms within the offer (i.e. you agree to the terms)
7. Procedural aspect- acceptance was done in the right procedure/medium
o Tests to use to determine procedural acceptance
 Is the offeror the master of his offer? Is there a custom btwn parties?
 What’s the holding that would make the people more careful in the future?
 Is it equal to or “as good as”? Typically a realist court will say it as good as
 Does renewal matter? (Are you starting or renewing a lease?)
8. Duty to Read- A K need not be read to be effective
o Exception: Don’t have a duty to read rental car co. Ks
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9. Motives and Objective Manifestation- Objective manifestation (signing a K) gives more
evidence than you underlying motive (ex- joking around with someone)
10. Silence- Not acceptance, unless… (Restatement §69)
o (1) Prior relations between two parties indicates silent acceptance is normal
o (2) Offeror has indicated silence or inaction is acceptable for acceptance
o (3) Offeree takes the benefit of offered service with reasonable opportunity to reject
them and reason to know that they were offered with the expectation of compensation
o (4) ???????
11. Mailbox Rule- Where the mail is an expressly or implicitly authorized medium of acceptance, a
properly addressed acceptance takes effect when deposited in the mail.
o Measure acceptance from dispatch
o This is ONLY good for acceptance—revocation is at receipt, not when mailed
o This can be overruled by the text of the offer!
12. Insurance Company Rule- Courts don’t like to rule in favor of an insurance company (legitimate
rule for the test daw)
13. Sometimes the evidence of the state of mind the offeree is too compelling to disregard and the
rigid determination of outward expressions should be disregarded
14. Third Party Rule- If you communicate an acceptance to a third party that is considered
reasonably reliable acceptance has occurred (mailbox rule still applies)
15. Reasonable Time- Offer must be accepted within a reasonable amount of time
o Use past conduct, industry standards, and common sense to determine reasonable time
16. Face to face Communication- Offer lapses when the party leaves the room
o “Let me think about it” changes the time for acceptance—it is a counter offer
17. Shipment Acceptance- (The order is the offer, shipment is the acceptance)
o UCC 2-206- “an order or other offer to buy goods for the prompt of current shipment
shall be construed as inviting acceptance either by a (1) prompt promise to ship or by (2)
the prompt or current shipment of conforming or nonconforming goods, but the
shipment of nonconforming goods is not an acceptance if the seller seasonably notifies
the buyer that the shipments is offered only as an accommodation of the buyer”
18. General rule: It is not a K if you still have terms to clarify in the future in the K
o Exception: If it is just standard terms to be ironed out, then a K is made
19. Conduct Consistent- Is the “conduct consistent” with either side of the transaction—meaning,
did one or both parties act consistently as though a K was made
o This is a UCC doctrine—not a common law doctrine
20. Notification- Acceptance occurs at notification (Ex- You sign a letter of intent, but don’t deliver
it or notify the offeror-no acceptance has occurred)
Consideration
Offer + Acceptance + (Consideration X 2) >= a peppercorn = K!
 You must consider consideration for both parties and both considerations must be equal to or
greater than a peppercorn
 If you will do X, I will do Y (Did he give me something that induced me to act)
o Consideration only exists when A is induced by what B is giving
 Adequacy- Courts will not inquire into the adequacy of consideration in a K, unless the
consideration is so grossly inadequate as to shock the conscience of the court
 To constitute consideration, a performance or a return promise must be bargained for
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(Ex- Consideration is best seen by a gift—if I promise to make a gift but never give it can the
disappointed recipient sue for K? No. There is no consideration or other end to the deal)
Policies underlying doctrine of consideration:
1. Evidentiary—Difficult to discern legitimate claims between parties when terms are not
documented
2. Cautionary—Protect people from their own rashness, or from importuning of others
3. Channeling/earmarking—Give clear, written signal to parties of their legal obligations (to
ensure legitimacy)
4. Injury is more with consideration—When some consideration is given, unfulfilled promise
causes real injury
5. Economic exchange—Encourage social utility of enforcing promises
A. What is Consideration?
§17—Requirement of Bargain
“The formation of a K requires a bargain in which there is a manifestation or mutual assent to the
exchange and a consideration.”
“Whether or not there is a bargain a K may be formed under special rules applicable to formal Ks or
under the rules stated in §§82-94”
§71—The Requirement of Exchange
“A performance or return promise is bargained for if it is sought by the promisor in exchange for his
promise and is given by the promise in exchange for that promise”
“The performance may consist of
 An act other than a promise, or
 A forbearance, or
 The creation, modification, or destruction of a legal relation”
“The performance or return promise may be given to the promisor or to some other person. It may be
given by the promisee or by some other person.”
B. What is NOT Consideration?
1. Past performance/acts- Can’t have consideration for the past
2. Consideration cannot be nominal (Ex- $.01 for $600)
3. Illusory promises –One side retains too much discretion
a. [Ex: I will buy as much coal as I want to]
b. Mutuality of Obligation- both parties must be bound, or neither is bound
i. Does not apply in unilateral Ks [Ex: If you mow the lawn, I’ll give you $10]
ii. Examples of lack of mutuality
1. Illusory promises
2. Unrestricted termination clause—[Ex: I can cancel any time I want]
iii. There is mutuality when:
1. Conditional promises that limits future options [ex: If I buy a boat, I will
ship your products]
2. Restricted Termination clause [ex: 10 day notice, opportunity to bind]
3. Output Ks [ex: K to buy all product a factory produces]
4. Requirement Ks [ex: K to buy all products required by business]
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4. Preexisting Duties- (Promisee must give up some legal right) (§73 Performance of a legal duty)
a. Consideration means not so much that one party is profiting as that the other abandons
some legal right in the present, or limits his legal freedom of action in the future, as an
inducement for the promise of the first
b. Anything that is received in exchange for a promise to do what one is already obligated
to do is a mere gratuity or, perhaps, a bribe
c. (Ex- Fisherman refusing to work unless new K- same terms- had a preexisting duty-no K)
d. No legal benefit to the promisee nor detriment to the promisee = no consideration
e. Exceptions/Defenses: Restatement § 73
i. The legal duty is doubtful
ii. The legal duty is the subject of honest dispute
iii. The legal duty differs more than in pretense of bargain
5. Gifts and Conditional Gifts- (Ex- Donation to a charity)
6. Forbearance- §74 (Settlement of Claims)
a. Forbearance to assert of the surrender of a claim or defense which proves to be invalid
is NOT consideration unless
i. The claim or defense is in fact doubtful b/c of uncertainty as to the facts of the
law, OR
ii. The forbearing or surrendering party believes that the claim or defense may
be fairly determined to be valid
b. The execution of a written instrument surrendering a claim or defense by one who is
under no duty to execute it is consideration if the execution of the written instrument is
bargained for even though he is not asserting the claim or defense and believes that no
valid claim or defense exists
c. If the K is made on good faith or a reasonable claim, there is adequate consideration for
the K to exist (Ex-Man who got the woman buntis-wasn’t his)
7. Exclusive Dealings- §2-306
a. Two parties agree to work with each other for a certain period, ordering goods from
time to time
i. Cts. apply:
1. Commercial norms
2. Reasonable person standard
3. Good faith (especially if the first two are hard to determine)
b. Exclusive agent implied in that agreement is that you will do your best efforts which is
essential for consideration in Ks
i. If it appears to be a K of exclusive dealing, you consider best efforts for
consideration
8. Sexual ServicesC. Exceptions to Consideration- When a K is valid despite lack of consideration
1. Promissory Estoppel- Reliance to replace consideration
Fix Doctrines
1. Promissory Estoppel- Detrimental reliance (Protects a promisee who as relied to his detriment
on the promise, even though consideration may not otherwise be present)
a. Fixes (1) consideration and (2)statute of fraud problems
b. Elements of Restatement 90- Promissory Estoppel
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i.
ii.
iii.
iv.
Clear and definite promise
Promisor knows or should have knows it may induce reliance
Actually induces reliance that is significant and detrimental
That reliance is reasonable
1. (Must run through first four with every prom. Est. question)
v. Enforced as justice requires
vi. Damages are usually limited to reliance damages
c. Gratuitous promises, given in a personal or charitable context, are traditional fodder for
consideration doctrine, but it is recognized in some jurisdictions as means for
promissory estoppel to occur
i. To show reliance:
1. Other donors to match or help on project
2. Already hired a contractor, etc…
3. Obligation to perpetuate ones name
ii. If a charity substantially relies on pledged donations (indicated by borrowing
money against pledges, expending money, expending labor, etc…) it is sufficient
to constituent promissory estoppel (EX- CJP case)
iii. Written charitable promise is enforceable without consideration
iv. Look for any economic benefit to how it is advertised
d. Commercial Context- Courts are less likely to recognize PE in commercial cases
i. Part of the reason we don’t use promissory estoppel in business situations is b/c
most actions by a co. has an economic business interest
e. Another use of PE is continue to negotiate in good faith (Ex- Garwood Packging)
f. (On test) Mention that promissory estoppel is accepted by the cts, but it is NOT a sure
thing B/C court’s are asked to use their discretion—AKA it will depend on the judge!
g. May use PE to fix a statute of frauds problem (Rest §139)(Must prove an
unconscionable injustice can be avoided by enforcing the K through PE)
h. Always look for an “interim agreement” to bargain in good faith for PE cases
i. Remedies: “Remedy granted for breach may be limited as justice requires” (Rst 90) (You
won’t get equitable relief in PE cases-Preston)
i. PE doesn’t always get full Kual remedies (it is a hybrid)
2. Quasi-Contracts (Not a real K case, but merely treated as such for procedural reasons)
i. Biggest thing missing in quasi-k is acceptance
ii. Rule: A party is entitled to restitution when they (1) w/o an intent to act
gratuitously (2) Confer a measureable benefit upon another, AND (3) afford
the other party an opportunity to decline the benefits, OR (4) has a reasonable
excuse for failing to do so
iii. Note: If there was time to make a K, there will be NO quasi-k
a. Unjust Enrichment- Tries to fix acceptance
i. A party was enriched by obtaining property, services, etc… that would be unjust
for the beneficiary to keep the benefit of that enrichment w/o paying or
compensating the other party
ii. Exception: A person who voluntarily and officiously pays another debts is not
entitled to reimbursement unless the payment is made under the compulsion
of a moral obligation (family mem. takes care of grandma)
iii. Elements:
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1. Injustice
a. It is not always unjust for a person to keep a benefit w/o paying
(Ex- volunteer, officious intermeddler)
b. It is unjust of the imposed benefit is prop. w/tangible existence
that is returnable
i. (Ex- Someone puts a license plate on your car that you
know isn’t a gift, but you don’t return-you accepted)
2. Enrichment—The Benefit
a. If unjust, restitution is the appropriate remedy
i. Quantum meruit- as much as deserved OR Quantum
valebant- market value of goods (benchmarks)
3. Not intended as a gift
iv. Damages: No profit, just the bare, actual damages (Minimal amount possible)
1. If the “enrichment” is excessive or has an unethical taint to it, the cts.
won’t allow unjust enrichment (or any damages)
b. Promises for Past Benefits (Applying with Unjust Enrichment) (Very unlikely to succeed)
i. Moral Obligation/Material Benefit- Where a person makes a promise that is in
effect a ratification of an existing, but unenforceable or voidable legal obligation
1. Ex- A owes B money for work, but A never pays and statute of limit.
expires-if A promises to repay B, he has a moral obligation to do so
2. Obligation exists if… (Rest. §86)
a. A promise is made in recognition of a benefit previously
received by the promisee… to prevent injustice
3. Promise isn’t binding if…. (Rest. §86)
a. Conferred originally as a gift or the party is not, for other
reasons, unjustly enriched
b. The value is disproportionate to the benefit
4. Only occurs when it is a dire, life saving situation, and the promise is
reasonable
a. More likely to get it when it is your profession (a dr) and you
pull over to perform life saving medical work
Unilateral Ks- (Brooklyn Bridge Hypothetical) (Handout 5(G))
Definition- A K in which the obligation of one party is completely performed at the point of formation
and all that remains is the promise or the performance by the other
 General rule- Unless the offer clearly requires acceptance to be only by performance, it can be
accepted either by performance or promise
Acceptance by Performance§54-Acceptance by Performance: Necessity of Notification to Offeror
“Where an offer invites an offeree to accept by rendering performance, no notification is necessary to
make such an acceptance effective unless the offer requests such a notification”
“If an offeree who accepts by rendering performance has reason to know that the offeror has no
adequate means of learning of the performance with reasonable promptness and certainty, the
contractual duty of the offeror is discharged unless…
 The offeree exercises reasonable diligence to notify the offeror of acceptance or
 The offeror learns of the performance within a reasonable amount of time
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The offer indicates that notification of acceptance is not required
Option K (Part Performance)- (Know by # daw for the test)
§45-Option K Created by Part Performance
“Where an offeror invites an offeree to accept by rendering a performance and does not invite a
promissory acceptance, an option K is created when the offeree (1)tenders or (2)begins the invited
performance or (3)tenders a beginning of it”
“The offerors duty of performance under any option K so created is conditional on completion or tender
of the invited performance in accordance with the terms of the offer”
 Offeror is bound when offeree tenders or begins performance—offeree is NEVER bound
 This restatement only applies when offeror invites the offeree to accept by performance
 Offeror cannot revoke without giving a reasonable time to quit if already started b/c partial
performance of offeree is considered consideration
 Preparing to perform does not count as performance
 Offeree may quit halfway through—no breach (no one owes the other anything)
 Once an option K is created, rejection, counter-offer, revocation, or death does not terminate
the offer (Res §37)
§62- Effect of Performance Where Offer Invites Performance or Promise as Acceptance
“Where an offer invites an offeree to choose between acceptance by promise and acceptance by
performance, the tender or beginning of the invited performance or a tender of a beginning of it is an
acceptance by performance—Such a perf. operates as a promise to render complete performance”
 If the K allows acceptance by performance or promise, starting to perform binds the offeree to
render complete performance
 Offeree quits halfway—breach has a occurred and is liable
Uncertainty- (Indefinite or Vague Contracts) (Handout 7(C))


UCC policy to fix if possible (can’t fill quantity gap)
Rely on judgment call about how much needs fixing and what is available to draw reasonable
parameters around terms
 Typically will enforce if partial performance has occurred
Specific Uncertainty Problems
1. Too Uncertain to Enforce- “Alleged K” may be entirely unenforceable or just parts
o Realists will enforce if there is “mechanism for objectively setting material terms in the
future without future negotiations” (Ex- Using a third party to fix price)
o Courts are less likely to enforce and try to fill in missing terms if material terms are just
omitted or left blank
 Most material terms are quantity and subject matter (price sometimes is…)
o Courts are less likely to “fix” a deal with several significant holes
o Courts are suspicious of too much unfettered discretion of one party (without a clear
agreement to delegate absolute discretion to one party, as in Arbitron)
o Price is considered reasonable when
 Nothing is said over price when goods are delivered
 Price is left to be agreed by the parties and they fail to agree
 Price is to be fixed in terms of some agreed market or other standard as set or
recorded by a third person
2. Agreement to Agree in the Future- A term in a decided K, that is not decided
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o
o
Typically NOT a K
Most cts enforce if stated expressly (formalist cts are less likely to enforce)agreed to by
both parties (Ex- Employment K with the salary being decided later after a period of
time has lapsed)
o If there is no standard or reference for what is an acceptable solution or how to reach it,
courts are less likely to enforce (courts want some basis for judging or monitoring the
attempts of the party at negotiating) (See Arbitron)
3. Agreements to Bargain in Good Faitho General rule- There is no obligation to barter in good faith
o Requires a separate agreement to bargain in good faith (similar to an option K)
 Most courts will enforce an agreement to bargain in good faith
 Realist courts may just look for an implied agreement
 Courts will likely enforce if the proposed K contains sufficiently definite terms so
a court can judge the reasonable of the negotiation
 Courts will enforce if consideration has been paid specifically of the
commitment to bargain in good faith
o Courts will NOT find an implied duty to negotiate in good faith from merely an:
 Agreement to bargain exclusively with the other party
 Written letter of intent, without more
o If bargain of good faith exists it does NOT mean that the parties will ultimately reach
agreement on the price of the house—it means simply that they are both committed to
make an honest effort to try
4. Intent to Reduce to Writing Later- (Handout 7)
o Consider facts of the situation to determine (Ex- Is there an express declaration of intent
not to be bound without a writing? Was partial performance completed? Is it a large
transaction? Is it missing details? Prior dealings? What is custom or trade?)
Statute of Frauds- General Statute & UCC 2-201 (Handout 8)
General Information- (Made in England 1677)
 On test ask: (1) Is statute of frauds evoked? (2) Is it satisfied?
 Statute of Frauds serves two functions: (Used in defense)
o Provides evidence of the promise
o Serves a cautionary function
o Protects against bad memory
 All states have adopted the statute of frauds except Louisiana
 It is an affirmative defense that can be waived (i.e., must be raised by defendant)
 Statute of frauds can also promote frauds through forgery of written Ks
General Statute
A. Six Ks that MUST be in Writing and are Covered by Traditional Statute of Fraud
1. Ks that cannot be performed within a year of execution
a. It applies to ANY kind of K
b. The question is how long is the gap from start to finish
c. If the K could be completed within one year, then it does not have to have in writing
i. So if you employ someone for five years, then you must have a writing, even if
he will die before the five years are up (b/c it will be impossible to complete the
K, even if the party dies or the world ends)
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2.
3.
4.
5.
6.
ii. If you employ someone for life, then you do not need a writing b/c did not know
how long the K would last—could die within a year
Ks for the sale of land or the transfer of an interest in land
a. “A promise to transfer to any person any interest in land is within the statute of frauds.”
Ks for the sale of goods for the price of $5,000 or more
a. This dollar figure is the total K price for all the goods bought under the K
b. If the price is paid other than in cash, the value of the non-cash price must be
determined to decide whether the statute applies
Ks made upon consideration of marriage
a. This is not a marriage K; rather, it covers prenuptial Ks, motivated by the marriage, in
which some property settlement or other financial arrangement is made relating to
marriage
Ks of executors or administrators to answer for the duty of their decedents
a. This provision covers a K in which the executor or administrator of an estate assumes
personal liability to a creditor of the decedent for a debt incurred by the decedent
before his death
Ks to answer for the debt or obligation of another (Surety)
a. This provision covers suretyship Ks
b. Surety- A person who promises a creditor that he will pay a debt owed to the creditor
by someone else if the principal debtor fails to pay it (parents sign on your car loan)
B. Five required elements which state the terms with reasonable adequacy:
1. Must state the parties
2. Must state the subject matter
3. Basic terms: Quantity and (in some states) price
4. Must be signed by the party being sued
C. Exceptions
1. Part Performance:
a. Goods: Insofar goods have been tendered & paid for, there doesn’t have to be a writing
b. One-Year Provisions: Part perfor. is an exception only if one side completely performs
c. Land: Part performance is an exception sometimes: (Res §129)
i. If the party seeking enforcement reasonably relied on the K, AND
ii. Had continuing assent of the other party, AND
iii. Changed his position, AND
iv. Injustice can only be avoided with specific enforcement
v. Marriage: Part performance not an exception
vi. Surety: Part performance is not an exception (b/c by the time creditor sue the
surety, the creditor has always partly performed)
UCC 2-201(General Statutes applies to goods, except where UCC specifically modifies)
A. Three requirements for it to be enforceable- §131 General Requisites of a Memorandum
1. Writing of Recorda. Agreement must be written down (may be across several documents or be digital)
2. Signaturea. The writing must be signed by the party against whom the K is to be enforced
i. The K does not have be signed by both parties—just the one that is denying its
existence
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ii. Signatures include any symbol used to indicate and authenticate the writing
iii. Think “authenticate” not “signing” a K
3. Contenta. The writing does not have to be full and complete, provided that it has enough content
to show that a K was made, it identifies the subject matter, and sets out its material
unperformed terms
B. Exceptions- A K not satisfying the written requirements may still be enforceable if:
1. Merchant’s Confirmatory Memorandum:
a. Good if the other party does not reject within (10) days
b. Valid against merchant who signed it and against anyone who does not sign it or reject
c. Does not form a K; only satisfies Statute of Frauds
2. Specially Manufactured Goods (UCC only):
a. If goods are specially manufactured and cannot be sold to anyone else and one party
begins performance:
i. There is no need to have written evidence
ii. Why would someone make specially made goods without a K? (i.e., false teeth)
b. Protects against hardship, which is greater if the oral K is not performed
3. Admission: Enforced if other party admits there was a K in court, pleadings or depositions
4. Part-Performance — When buyer has accepted the goods or paid for the goods
a. Goods: Party can recover only up to the amount paid for the part performance
b. Surety: Not an exception (even if parties pay, no evidence of surety promise)
c. Marriage: Not an exception
d. Land: Maybe. Part performance is an exception sometimes: (Res §129)
i. If the party seeking enforcement reasonably relied on the K, AND
ii. Had continuing assent of the other party, AND
iii. Changed his position, AND
iv. Injustice can only be avoided with specific enforcement
e. One-Year Provision: Exception if other side has fully performed
5. Restitution: If the K isn’t enforceable under the statute of frauds, the party can sue in restitution
and/or reliance (b/c this is not a K doctrine—separate theory in equity)
6. Reliance (Res §139): [See above]
7. Oral Rescission Allowable—just b/c the K for something had to be in writing doesn’t mean that
rescission had to be in writing.
a. However, once perform is complete, rescission not possible
8. Year Application- “A K that is enforceable under this section is not unenforceable merely b/c it
is not capable of being performed within one year or any other period after its making.”
Standard Contracts
A. General Information1. Issues:
a. Whether the party’s unilateral attempt to include them in K prevented formation
b. Whether those terms became part of the K
2. Terms
a. Shrink-wrap terms- Terms that are not seen until you open the box and they are inside
b. Box-top terms- Terms printed and labeled on the outside of the box (Ex-Lexmark Case)
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i. This is an enforceable K b/c the consumers have notice of the condition, have a
chance to reject the K on that basis, and receive consideration in the form of a
reduced price in exchange for limits
ii. Terms are on the outside of the package, terms can be rejected, and
consideration are given—this makes this an easy case daw
c. Click-wrap terms- Terms found on a website that you just click through
i. Will typically be enforced if they are “fundamentally fair”
ii. Terms must be conspicuous & fairly come to the attention of the purchaser, if
not, they will NOT be enforced by the court (no K is formed)
B. Rolling Contracts- When certain things are agreed to first, following by other terms later (Ex- ProCd
case-purchased database at individual value, but redistributed and sold on the internet)
1. General Rule: Looking for (1) Notice of additional terms and (2) Chance to reject those terms
2. Cash now, and terms later and it can form at inception, or when they use the product. There is
a series of acceptances
a. Acceptance 1: When you initially purchased the product from the retail store
b. Acceptance 2: Opportunity to enter into an agreement with the manufacturer that has
new terms—you put in the disc and you have new terms. You can select yes for those
terms and you are now bound by those new terms.
c. Acceptance 3: You begin to use the software and your final acceptance occurs when you
choose to keep the product for the 30 days or not
3. Enforce acceptance at various stages
4. Fundamentally Fair- Terms that come after purchase will be enforced if “fundamentally fair”
a. What is the standard consumer’s opinion about the potential acceptable standards—
what is the expectation of the parties?
5. People have a “reasonable time” for the terms to come after K in order to consider the terms
a. Can’t agree with silence though..
C. Battle of the Forms- UCC §2-207
1. Common Law: [“mirror-image rule”] If forms are not identical, then no K is formed. When forms
do not match, you have (A) an offer from the seller, (B) a counter-offer from the buyer
a. If and when buyer accepts the shipped goods form the seller, he accepts the counteroffer
b. This produced the “last shot” analysis b/c whoever sends the last form “wins!”
2. Goods (UCC 2-207): UCC attempts to eliminate battle of the forms (K should be based on those
terms on which the communications agree—not the last shot rule)
a. General rule:
i. Decide if they are merchants— if no, new terms are proposals until the parties
accept them/ if yes, add them to the contract UNLESS offer limits, changes
materially alter, offeror timely objects
b. A definite and seasonable expression of acceptance or a written confirmation which is
sent within a reasonable time operates as an acceptance even though it states terms
additional to or different from those offered or agreed upon, unless acceptance is
expressly made conditional on assent to the additional or different terms.
c. The additional terms are to be construed as proposals for additional to the K.
i. If Non-Merchants: the proposed terms die without specific acceptance
ii. Between Merchants: such terms become part of the K unless:
1. The offer expressly limits acceptance to the terms of the offer;
2. They materially alter it; or
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3. Notification of objection to the new terms has already been given or is
given within a reasonable time after notice of them is received
d. Conduct by both parties which recognizes the existence of a K is sufficient to establish a
K for sale although the writings of the parties do not otherwise establish a K.
i. In such case the term of the particular K consists of those terms on which the
writings agree, along with any supplement terms incorporated [by other rules].
e. Knock-Out Rule: When Ks prohibit “additional terms,” but a K has a “different” term,
the court has three general approaches
i. The different term is the same as “additional” terms.
1. A term that merely adds new matter to the offer is additional, but a
term that contradicts or alters the terms of the offer is more properly
classified as different
ii. The different term is not additional—the “different term” drops out!
iii. General rule: A significant additional or different terms contained in an
acceptance seldom become part of the K
iv. Knock-out Rule: Both terms drop out b/c the parties are presumed to object to
the other terms—they cancel each other out (see: UCC 2-207 Cmt. 6)
1. When this happens, the default UCC rules apply [ex: if warranty knocked
out, use UCC warranty]
3. Examples
a. Lively v. Ijam (Rule from this case): Telling them they have to respond within 5 days and
not drawing it to their attention is outrageous and NOT fundamentally fair
b. Watcher Co. v. Dexter (Takeaway): You must expressly agree to new material terms that
are presented AFTER the original K is formed
i. Opening the shrink wrap is too much like acceptance by silence—not strong
c. Problems 6.2-6.7 (Know for the exam daw)
Electronic Media
A. Offer and Acceptance
1. Most of the rule governing acceptance can apply easily to electronic media
2. Where a party uses automated means of entering into transactions, UETA §14 recognizes the
machines as “electronic agents” of the party
a. Electronic agent is “a computer program or an electronic or other automated means
used independently to initiate an action or respond to electronic records or
performances in whole or in party, without review or action by an individual”
3. A K is formed where one of the parties uses an electronic agent and the other does not
4. Human intent or action NOT necessary for a K to form
5. UETA and E-SIGN are applicable to all Ks, including sales of goods, so there is no need to add
anything to article 2 to cover transactions of this kind
6. The offer for the acceptance is when you programmed the computer to do the function for
which it was programmed
7. Online Auctions
a. Mutual assent of both parties occurs in online auctions—there is a bidding process and
the winner is given the item that they bid for (Ex- EBAY is used as an example of this
process)
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II. Phase 2- Defenses to Formation
Fraud
1. A contract is voidable if obtained by a: (Rest. §164)
a. Fraudulent misrepresentation, OR
b. Material misrepresentation (this is a negligent stand. & not every court will apply this
unless there is a major injustice or a bodily harm)
c. That was relied upon
2. Misrepresentation is fraudulent when: (Rest. §162)
a. Maker intends his assertion to induce a party’s assent and the maker
i. Knows the assertion is false, OR (Affirmative Lie)
ii. Has a reckless disregard for the truth
b. It is material when: (Rest §162)
i. Likely to induce assent to the K
3. Cover-up
a. An affirmative cover-up is the same as a fraudulent misrepresentation (Rest. §160)
i. AKA Affirmative concealment is a fraudulent misrepresentation
b. Materiality is req. where the mistake or false statement was not intentionally made
i. Did concealment induce assent to the K?=material
4. Omission (must have a duty to disclose for this to constitute fraud)
a. A mere omission is not grounds for voiding a K UNLESS: (Rest. 161)
i. Another fact is necessary to make a previous truth not misleading, fraudulent, or
material;
ii. Another fact is necessary to correct a mistake of
1. A basic assumption (major premise of the K); AND
2. Disclosure is required for good faith (This is sketchy and not evenly applied)
iii. There is a mistake in integration
iv. There is a fiduciary relationship (trustee, agent, guardian, executor, etc…)
b. In omission cases, the req. of materiality and reasonable reliance are given more weight
c. Consider: (1) Past relationships, (2) materiality of K, and (3) likelihood P would be able to
find the infrmtn out on their own—to determine whether an omission is fraudulent
i. (Ex- Kellog Sales Dist. and Kaloti Dist. entered a K, Kel changed strategy, Kal hosed)
d. General Rule: Caveat emptor- buyer beware
5. Misrepresentation must be of a present fact—NOT an opinion or future action that will be taken (in
order to use the fraud defense)
a. Puffery, personal opinions, and predictions of the future are NOT actionable
6. Fraud can always be used to override a written document
Duress
1. “An improper threat that leaves the victim no reasonable alternative” (Restatement § 175)
a. Improper threats: unfair pressure that is not normal in give-and-take barg, pressures (§ 176)
b. A threat is improper if:
i. Threat of crime or tort or threat itself is a crime or tort if it resulted in obtaining
property, (2) Threat of criminal prosecution, (3) Threat of civil suit, if in bad faith, (4)
Threat is breach of duty of good faith and fair dealing
c. Threat results in an exchange not on fair terms and
i. Would harm the recipient and not benefit threatening party, OR
ii. The effectiveness of the threat is increased by prior unfair dealing by threaten or
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2.
3.
4.
5.
iii. What is threatened is otherwise a use of power for illegitimate ends
d. If somebody not a party to the K induces duress, K is still voidable, unless:
i. The other party in good faith
ii. And Without reason to know of the duress
1. Gives value or relies materially on the transaction
Not improper to threaten in good faith something you have every legal right to do, UNLESS you
caused disproportionate bargaining positions and exploited the financial needs of the other
If assent is obtained by unfair persuasion of a person who is in a relationship of dominance or
confidence, the resulting K is voidable by the victim
Every ct. will recognize some form of duress
Undue influence—situation where you have unusual relationship btwn the parties (Ex- dad and son)
Midstream Modification
1. Generally: (Making an exception to the preexisting duty rule)
a. A K cannot include a clause prohibiting modification
b. Modifications: changes promises in a K
c. A change to an existing K is NOT enforceable unless it is supported by consideration
i. OR, a party merely agrees to do what she is already obligated to do is not giving
consideration in exchange for an increase in the burden of another party
d. Find a “peppercorn” of consideration
e. There is nothing wrong in being a K breacher, you just have to make the other party whole
f. Must want show, as P, that you are innocent and acted promptly
2. Two Ways to Correctly Modify:
a. Offer new consideration
b. Supervening Difficulties (ONLY APPLIES IF THERE IS NO CONSIDERATION!)—Preston tests
this a lot and don’t get confused and think it applies otherwise
i. K not fully formed
ii. Unanticipated circumstances
1. Substantial and burdensome
2. Not anticipated
3. Not just an error in judgment
4. No coercion (Ex- Fishing company in Alaska was coerced)
iii. Fair and equitable (honest and fair in dealings)
3. Servicesa. A modification requires no consideration if: (Restatement §89)
i. Modif. to the original K was made before the K was fully performed on either side;
ii. Underlying circumstances which prompted the modification were unanticipated by
the parties involved;
iii. The modification is fair and equitable. (NO COERCION)
iv. Consider the relative financial strengths of parties, formality of the modification,
extent to which it is
1. performed or relied on (unfair surprise)
2. OR to the extent provided by statute (UCC)
3. OR to the extent that justice requires
3. Goods-UCC (Goods contracts may always be modified)
a. Applicable to promises (UCC § 2-209)
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i. Modifications of Ks are enforceable without consideration if in good faith (must
conform with statute of frauds §2-201)
ii. If K provides that all modifications must be in writing (b/w a merchant & nonmerchant) then the non-merchant must separately sign the clause specifying so.
4. Accord and Satisfaction of Debta. Applies only to debts
b. Accord- the offer or agreement by promises to settle for less than full amount owing
c. Satisfaction- agreed lesser sum is paid and accepted
d. Will not be undone if the accord and satisfaction were proper
Unconscionability
1. Elements of Unconscionability-Something that offends the conscience of the court b/c it is
unreasonably excessive, unscrupulous, or egregious (Ct., not juries, determine unconscionability)
a. Procedural (“Bargaining Naughtiness”)- Refers to how a K was formed
i. Unfair surprise, fine-print clauses, mistakes of fact, ignorance of important facts,
size of the print
ii. Unequal bargaining power
iii. Absence of meaningful choice
1. Courts prefer procedural to substantive unconscionability
b. Substantive (Terms of the resulting K) (Takes an extremely realist ct. to bite)
i. Actual K terms are unreasonably favorable to one side; imbalance of obligations;
overreaching terms
1. Cts. prefer to hold parties to the terms of their bargain—generally do not
review “fairness” issues
c. Both elements need to be fulfilled to some degree
d. Cts. rarely apply this doctrine
e. Things that are discretionary, luxury, or high risk are less likely to be unconscionable (flip
side, things of necessity are more likely to be considered unconscionable)
2. UCC 2-302 (Goods)
a. If the ct. finds a term unconscionable at the time the K was formed, the ct may...
i. Refuse to enforce the K
ii. Enforce just the remainder of the K’s provisions
iii. Limit the application of the term or K to avoid an unconscionable result
b. Parties shall be given an opportunity to prove the term/K’s commercial setting & purpose
3. Rest. §208 (Services)
a. If K or terms are found unconscionable by the ct., the ct may… (same three options as UCC)
4. Unconscionability rarely works between exp. business people b/c they are represented and cts. just
don’t favor businesses using this doctrine
5. Contracts of Adhesion- (Often denote unconscionability)
a. K in which one of the parties, having superior bargaining power, is able to dictate the terms
of the K to the other on a take-it-or-leave-it basis, and the weaker part has no choice but to
adhere to the terms
b. Typically seen in standard form K, where a larger co. is able to dictate all the terms in the K
c. No negotiations takes place
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Other Defenses to Formation…
*Some Ks are void for reasons not b/c assent of one of the parties is obtained improperly, but b/c the K
itself harms societal interests, and public policy
1. Illegality- Enforcing a K would be illegal
a. Divorce or actions to defraud creditors,
b. K in violation of duties or ethics
c. Ks for sexual services
d. Party will find for the most innocent party OR will say you are both guilty, and we’ll
make a decision based on the best public policy
i. The guilty party will be the person that should have know or knew it was illegal
(Ex. Two brothers and one was an attorney (Danzig))
2. Public Policy- The ct must resolve the tension between the competing concerns of enforcing the
K and upholding the countervailing public policy
a. If the K is not for a public necessity, but for luxury, cts. are unlikely to undo the
formation of the K for public policy reasons (Ex-Ski resort case and negligence waiver)
3. Infancy- A person has power to enter only voidable Ks until the day they turn 18
a. The infant has the option of avoiding the K until a reasonable time after the infant
reaches the age of majority—she may also choose to enforce it instead
b. Sword v. Shield- Some cts. allow the infancy doctrine to be used as a sword (affirmative
grounds) for punishing an adult by releasing the infant from all obligations
c. Exceptions:
i. K of necessity for infants will be enforced
ii. Infant misrepresents their age (fraud)—enforced under tort (major still has to
make a reasonable effort to ascertain age)
iii. Infant maliciously damages property in a K—enforced under tort
iv. Soccer Mom- Allows moms to sign waivers ONLY as against volunteers and np
org. involved in recreational sports and ONLY for mere negligence
v. Hollywood Mom- Allowing moms of famous children to sign waivers in their
behalf
4. Incapacity
a. Three degrees of crazy (first two are based on status—the 3rd is based on behavior
combined with substance-(is the K fair))
i. Adjudicated incompetent by the court- ct. or some other official determines
that you’re incompetent
ii. Cognitive test- Inability to understand the nature and consequences of the
transaction (Rest. §15)
iii. Irresistible urge test-Inability to act in a reasonable manner in relation to this
transaction AND other party has reason to know of the condition (Rest. §2)
1. We still enforce under #3 if:
a. The K is fair; AND
b. The other party is without actual knowledge (just implied
knowledge) AND
c. Some of the contract has been performed
2. Power to void ceases WHEN
a. The K has been performed in whole or in part, OR
b. Changed circumstances render the avoidance unjust
b. Consequences: K is voidable at the option of the incompetent person or persons estate
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i. Incompetent party must return the consideration IF:
1. The transaction has been performed in whole or in part; AND
2. The K is fair; AND
3. The other party had no reason to know of the infirmity
c. Intoxication: Includes both cognitive and irresistible urge test, however, for either test
to apply the other party must have reason to know of the infirmity
III. Phase 3- Interpretation
Rules of Interpretation
* Interpretation- The process of discerning the meaning reasonably intended by the parties to a K
1. General Rules (Rest. §202)
a. Writing are interpreted as a whole, and all writings that are part of the same K are
interpreted together
b. Use generally prevailing meaning
c. Technical terms are given their technical meaning when used in a K in a tech. field
d. When a K involves repeated occasions by either party, any course of performance
accepted or acquiesced in w/o objection is given greater weight in interpretation
e. Interpret, when possible, to be consistent w/any relevant course of performance,
course of dealing, or usage of trade
2. Ordering of Preferences for Interpretation (Rest. §203)
a. Choose the interpretation that gives a reasonable, lawful meaning
b. Express terms→ course of performance→ course of dealings→ usage of trade
c. Specific terms get more weight than general terms
d. Separately negotiated terms get more weight than standard terms
3. Additional Definitions (UCC 1-303)
a. Course of performance- A sequence of conduct between the parties to a K that exists if
(1)have/had repeated occasions for performance, (2)Other party accepts the
performance (after having a chance to reject)
b. Course of dealing- sequence of conduct between the two parties establishing a
common basis of understanding for interpreting their expressions and other conduct
c. Usage of trade- Industry standard that can be applied to the transaction
4. Process (Ex- “Chicken” case)
a. Look at the four corners
i. If you mention a different doc. in the original K, the other doc. is considered
within the four corners
b. Is there a plain meaning or a dictionary meaning?
c. Did the parties agree (subjectively) on the meaning of the term at the time the K was
entered?
d. If not, did one party know or have reason to know the others subjective interpretation?
i. It is a form of misrepresentation to take advantage of another party’s
misunderstanding
e. If not, can the K as a whole shed light on the meaning of the contested term?
f. If not is there express terms→ course of performance→ course of dealings→ usage of
trade that give meaning to the term?
i. With usage of trade, does the other party have actual knowledge of the
existence of that usage? Is it well established? Is it reasonable? How long has
the party been involved in the industry?
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g. Is one party more deserving than the other in arguing her interpretation?
i. Who is asking for equitable relief? Did one party have more power to draft the
K correctly?
ii. Is ambiguity just a pretext?
iii. Did the parties speak different languages?
h. Is there no reasonable objective meaning or are two or more objective meanings
equally reasonable and likely?
i. If yes, this precludes enforcement (realists avoid this conclusion)
5. Standard Ks
a. Typically, cts. don’t like to hold up standard Ks and if an ambiguity is found, most cts.
have little trouble interpreting the ambiguity against the drafter of the standard K and in
favor of a reasonable interpretation advanced by the other party
b. Technical def. will not be interpreted so as to defeat the reasonable expectations of the
other party (that didn’t create the standard K)
6. Last copy of a K, although not complete is the K that will be used to determine meaning of terms
Rules of Construction
*Construction- The process of adding K terms by legal implication
1. Generally: Construction supplies Kual content based on public policies or general principles of
law
2. Gap Fillers- IF an intention to be bound is clear and most of the material terms are
ascertainable, a ct. may seek to fill out any gaps in the parties K
a. Gap fillers will not be used if parties have explicitly agreed to a different K term, OR
other circumstances indicate that they reasonable intended something else
b. Rest §204- Where an essential term is not present, a term that is reasonable may be
supplied by the ct.
c. UCC Gap Fillers: If parties intended to make a K and there’s a reasonably certain
remedy, default gap rules:
i. Price: Reasonably set at time of delivery if nothing is said about price, parties
must agree but fail, or market fix
1. If price to be fixed by a party, must be fixed in good faith
2. If price fails to be fixed through fault of one party, the other may cancel
the K or fix a price
3. If parties agreed not to be bound unless price was fixed, there is no K
(make restitution, if need)
ii. Delivery: Seller’s home/place of business, or where displayed at the time of K
(UCC §2-308)
iii. Time: Reasonable, prevailing time (UCC §2-309)
iv. Quantity: Court will not gap fill quantity—probably no K if no agreement on
quantity
v. Payment: Normally due at the time and place of delivery
vi. Shipment: Unless otherwise agreed, specifications relating to assortments of
the goods are at the buyers option and specifications or arrangements relating
to shipment are at the sellers option… (UCC 2-311)
d. Output and Requirement K’s- Cts. construe these under the good faith standard (what
was the reasonable expectations of the parties) (Ex- Oil or water supplier cases)
Page 23 of 38
i. Under UCC and Rest. there is an obligation of good faith in enforcement and
application (by the cts.)
1. Cts. are concerned in these types of Ks where people are requesting
more than they originally expected to take advantage of mkt prices and
the other party (cts will not allow this b/c of good faith standard)
2. “What we need” is measurable by the UCC b/c it follows a predictable
pattern that the ct. could measure
e. UCC Warranties
i. UCC will imply warranties (if UCC applies you need to apply warranties)
1. Does it perform within its expected performance?
2. Warranty fit for the average purpose (warranty of merchantability)
3. Common law workmanlike manner (good faith)
3. Parol Evidence
a. Parol literally means oral, but P/E covers not only oral extrinsic evidence, but also
certain kinds of written evidence that is extrinsic to the written memorial of K
b. Parol Evidence may always be admitted to prove:
i. Intentional fraud, illegality, or overreaching
ii. Mistake in integration
c. P/E can be used to add something not intended to be included, unless the K is fully
integrated
d. Collateral Agreement: An oral arrangement which is not excluded by P/E rule when it
does not contradict the written K and is not directly tied to the written agreement
e. Oral discussion and prior written document are barred by the P/E unless you can find
an exception (e.g. usage of trade)
f. Merger or Integration Clauses: The same thing that protects from allowing P/E to be
admitted to the K
i. Cts. give them great weight, but they aren’t conclusive b/c parties may use them
to defeat legitimate expectations
g. Negligent fraud misrepresentation does not negate the P/E rule (it must be fraud or
intentional/reckless misrepresentation)
h. Policy: Cts. want people to reduce their understanding to a writing and have people be
accountable for the terms that they have signed
i. Decision tree:
i. Is the K written? If no, parol evidence is not admissible
ii. Is P/E used to vary or contradict the express terms of the K? If no, go to iii. If
yes:
1. Did the parties intend the K to be integrated?- If yes, the P/E will not be
admitted
2. Is the P/E admissible to prove parties intended K to be integrated? Cts.
split on the issue
iii. Is P/E being used to add to or supplement the terms of the K? If no, go to iv. If
yes:
1. Did the parties intend the K to be completely or fully integrated? If yes,
P/E will not be admitted
2. Is P/E admissible to prove parties intend the K to be fully integrated?
Cts. are split
iv. Is the P/E being used to interpret a term? If no, go to v. If yes:
1. Is the term ambiguous? If no, P/E is not admissible
Page 24 of 38
j.
2. Can we use P/E to determine if a term is ambiguous? Cts. are split.
a. If P/E can’t be used, a ct. will look at the four corners and plain
meaning of the doc. to determine ambiguity
b. P/E may be used even if the language isn’t ambiguous if it is
natural that the agreement would be added
c. Course of performance, course of dealing, or usage of trade
may be added even if unambiguous (Under UCC)
v. If the P/E being used to prove fraud, illegality, overreaching in the formation of
the K? If yes, P/E is admitted.
Summation
i. Integration: Parties meant for written agreement to be final settlement of some
terms (throws out old agmt.)
1. If true, admit evidence of “consistent terms” to supplement or fill gaps
ii. Complete or Full Integration: Parties intend writing to be complete and
exclusive settlement of all terms
1. If true, no parol evidence may be admitted except to define ambiguous
terms/words
2. Exceptions:
a. The (additional) agreement must in form be a collateral one
b. It must not contradict the signed form
c. It must be something that the parties would not ordinarily be
expected to embody in the writing (Myskina Case)
Parole evidence is admissible:
To vary
To add
To interpret ambiguity
If trade usage
To prove intentional fraud
To prove negligent misstate.
To prove mistake in integration
Integrated writing
(FINAL)
no
yes
yes
UCC: yes CL: probably
yes
Courts split
yes
Fully integrated writing
(COMPLETE AND FINAL)
no
no
yes
UCC: yes CL: courts split
yes
Courts split
yes
IV. Phase 4- Defenses to Enforcement
Misunderstanding, Mistake, and Excuse (Impracticability & Frustration of Purp.)
1. Misunderstanding- Arises when neither interpretation is better than the other (Parties manifest
assent to the same words, but attach materially different meanings to those words)
a. If misunderstanding is sufficiently extreme and if neither party bears greater
responsibility for the misunderstanding, a ct. may simply say that the requisite
manifestation of mutual assent is missing (rarely happens)
b. Try to see if either party tried to mislead the other party
c. Materially different  No K
2. Mistake- Parties reach an agreement, but one or both of the parties reach the agreement on
the assumption that certain state of affairs exist
a. General Requirements:
i. Mistake must relate to a fact that was in existence at the time of the K
ii. Mistake must relate to something that is central to the K and must have
significant effect on the benefits the mistake party receives or the burdens he
undertakes in the K
Page 25 of 38
iii. It must be unfair or otherwise inappropriate to allocate the risk of mistake to
the aggrieved party
b. Mutual Mistake- Arises when both parties have mistaken belief of fact (mistake must
be fundamental to both parties)
i. General rule- Leave it where it lies (truly possession is nine tenths of the law)
1. Not all cts. apply mutual mistake doctrine
ii. Mutual mistake will be grounds for void a K if…
1. Mistake relates to a present fact?
2. Mistake is shared by both parties
3. Mistake relates to a basic assumption? (More than just a difference in
what the supposed value ($$) is)
4. Mistake has a material effect on the agreed K of performances
5. Were the parties equally able to know the fact? (Is one party a expert?)
iii. Remedy: Rescission
iv. Risk may be allocated according to an agreement (Say “neither party is relying
upon the representations of the other)
v. Who bears the risk: A person bears the risk of mistake when… (Rest. §154)
1. When risk is allocated to him in the agreement
2. He is aware, when the K is made, that he has only limited knowledge
with respect to the facts to which the mistake relates but treats his
limited knowledge as sufficient
3. Ct. allocates risk to party b/c it is “reasonable under the circumstances”
vi. A seller that neglects to investigate his property or real property sold, bears the
risk in the transaction
vii. You assume the risk of agents, working in your behalf, will make a mistake
viii. “As is” agreements (in homes or cars) limit the risk b/c you are going through
with the K using your “limited knowledge” as “sufficient”
c. Unilateral Mistake- Mistake relates more to one party than to the other
i. The mistake doesn’t have to be material to both parties (as in mutual mistake),
but the more the noncomplaining party can be said to have legitimate
expectations flowing from the K, the less likely relief is available
ii. A K is voidable by the adversely affected party if it contains: (Rest §152)
1. Mistake of one party at the time of K
2. About a basic assumption on which the K was made which has a
material effect on the exchange
3. Is voidable by him if he does not bear the risk and:
a. Effect of enforcement of the mistake would be unconscionable
b. Other party had reason to know the mistake, or his fault caused
the mistake (material)
4. No gross negligence on the part of the plaintiff
5. Defendant must “reasonable care”
iii. Only remedy for mistake is rescission
d. Mistake in Expression- K doesn’t represent “true” intention of the parties b/c of a
typists error
i. A party seeking to establish an error in expression over the objections of the
other party to the K should be able to obtain relief it she can persuade the court
than an error in expression was in fact made
ii. Remedy is usually not rescission of the K, but reformation of K’s terms
Page 26 of 38
1. (Ex- Hunt sells her alcohol store and misvalues the inventory)
Mutual Mistake
Unilateral Mistake
Mistake relates to facts in existence at the time of the K
Mistake is shared by both parties
Mistake relates to a basic assumption on which the K
was made
Mistake has a material effect of the agreed exchange
Complaining party did not bear the risk of the mistake
Mistake relates to facts in existence at the time of the K
Mistake may be by one party only
Mistake relates to a basic assumption on which the K
was made
Mistake has a material effect of the agreed exchange
that is adverse to the mistaken party
Mistaken party did not bear the risk of the mistake
Either (a) the effect of the mistake is such that
enforcement of the K would be unconscionable or (b)
the other party had reason to know of the mistake of his
fault caused the mistake
*Excuses due to changed circumstances: Impracticability & Frustration of Purpose
*These are defenses AFTER K has formed
3. Impracticabilitya. Old Rule: Parties will be excused from K if performance is objectively impossible
b. New Rule: Commercial impracticability- There is a change in circumstances that so
drastically increase the burden on the party claiming relief that performance can fairly
be regarded as impracticable
c. Rest §261 & UCC2-615- A K is deemed impracticable if…
i. After a K is formed, a party’s performance is made impracticable if by no fault of
his own
ii. An event or occurrence happens
1. Must be an extraordinary event
iii. Which relates to a basic assumption on which the K was formed
d. If $$ is the problem, that is usually not enough for a K to be impracticable
e. Steps or decision tree…
i. Is the intervening event extraordinary?
1. Must be outside the normal risks
a. Normal risks: change in mkt price, risk that demand will increase
or decrease, risk of bad business luck, risk purchase won’t be
able to pay…
2. Extraordinary events include acts of govt., war, riots, power outages,
weather related disasters, aliens, etc…
3. Unforeseeable
a. Not a determinative factor but still should be considered
b. If foreseeable, we can assume an equal assmptn of risk
4. Unavoidable
a. Which party could have avoided the problem?
b. Who could have planned for this problem? (hedge Ks)
c. Who could have drafted the K to cover the risk?
d. Who normally insures for this type of risk?
ii. Has the risk been allocated by the parties?
1. Express Kual allocation
2. Implied allocation
a. Custom, usage of trade, course of dealing or perf.
b. One party went forward with accepting unmitigated damages
after awareness of possible risk
Page 27 of 38
iii. Is performance substantially impracticable or impossible?
1. Must be more than just an increase in price (for some cts)
2. If based on price, must be vast difference in price
3. Must be more than a contemplated alternative
4. Is the party capable of performing a more difficult alternative
iv. Does justice require relief?
1. Is there real hardship? What is the cts policies?
v. What remedy is being sought?
1. Rescission of K?
2. Compensation for the value of alternative performance?
3. Half-measures (split the baby?)
4. Frustration of Purpose- The purpose of entering the K is frustrated by circumstances
a. Ex- Krell v. Henry-Henry rented Krell’s apartment at a very high rate to watch King’s
coronation parade and parade was cancelled
b. Rule: To have frustration of purpose there must be:
i. Unexpected contingency
ii. Risk not assumed by party who wants to be excused from the K
iii. Occurrence effects a basic assumption of the K
iv. Purpose of K was destroyed—must be the principal purpose of the party
v. Value of performance is destroyed (meaning the value decreases)
c. May need to have people initial the frustration of purpose clauses that provide relief
from almost every type of occurrence imaginable
V. Phase 5- Breaches
Material Breach, Substantial Performance, & Anticipatory Repudiation
1. Conditions- Terms that you say, but are more than a promise and if not met, the K can be
stopped and P may sue for damages
a. Express Condition- A reader of a K would know that if the condition is not met, the K is
called off
b. Implied Condition- Even if not in the K, we can tell that if the condition is not met there
is no point in having the K
c. Conditions may be waived
d. Conditions are more harsh b/c of ramifications
2. Material Breach- A breach so serious, substantial, and important as in truth and in fairness to
defeat the essential purposes of the parties
i. Similar to anticipatory repudiation, but it comes AFTER the K is started
b. Allows other party to decline perfrmance, terminate the K, and sue for full exp. damages
c. If the breach is not of this gravity, it is called a partial breach, and the performance of
the breaching party, even though it falls short of what is required by the K, is called
substantial performance
d. Cure- A party may rectify a material breach by fixing the defect before the deadline
i. Proper time for cure depends on the K
1. If compltin date is material, cure must be complete before the deadline
a. “Time is of the essence” makes time an explicit term
2. Under CL, if you want to make a term material you MUST state that the
term is considered “material” to the parties
Page 28 of 38
e. Things to consider in determining a material vs partial breach
i. Willfulness of the breach
ii. Ked party doesn’t have to know the reason behind a certain term, but if it is
obvious, the ct. is more sympathetic to the non-breaching party
iii. Is the P “personally affected” by the breach (Ex- Custom home case)
iv. Did P pay “above FMV”—indicating they were King for a specific house/product
(Ex-Custom home case)
v. Motivations to perform
vi. Term specifically mentioned in the negotiations
vii. Something of value given up in exchange for inclusion of the term
viii. Extent to which injured party will be deprives of the benefit which he
reasonably expected;
ix. Extent to which injured party can be adequately compensated for benefit he
will be deprived of;
x. Extent to which the party failing to perform or to offer to perform will suffer
forfeiture (i.e. loss of something it won’t be able to use for something else if this
K is cancelled)
xi. Likelihood of cure
xii. Innocence of breaching party
f. Breaching party may NOT recover ANY damages under the K
g. Remedies
i. Suspend performance
ii. Seek ct. intervention through declaratory judgment (put for point on the exam)
iii. Request adequate assurance that the K will be completed
1. Can’t shift the burden between the two parties
2. Can’t be something to make up for lack for lack of due diligence
iv. Repair and replace
v. Rescission
1. Watch out and consider “unjust enrichment”
vi. Finish the K and then sue for damages (or sue for specific performance unless
substantial performance doctrine bars it)
h. Divisible K (Dividing the K into separate portions/K)
i. Even if breach is material, breacher may argue for a division in the K to
independent units
ii. Only allowed if…
1. Consistent with the intent of the parties (intent must be manifested)
2. Expectations of the parties wouldn’t be defeated by a division
iii. If a K is divisible [installment K, etc.], party must pay for work already done
before breach. If not divisible, non-breaching party can withhold entire K
iv. Non-breaching party wants the K to be divisible so that they can still get a profit
on the divided portion of the K
3. Substantial Performance- A partial breach of an incidental element of the K
a. Remedies
i. Can’t terminate the K; instead, the party is allowed to finish the job and receive
the full K price less any damages incurred to fix the non-material breach in the K
1. Exception: Sometimes the cost to rectify the defective performance and
cost of completing performance is “disproportionately high”
Page 29 of 38
a. Here, damages are confined to the amount by which the
defective work reduced the mkt value of the product/job
b. Breaching party may receive restitution for any benefit he conferred on the job (under
unjust enrichment)
i. May only receive the actual economic enrichment of the other party (AKA
quantum meruit)
4. Perfect Tender Rule-UCC (purchase/sale of goods)
a. Sellers obligation under the K for sale of goods is to tender delivery of the goods at the
time and place provided in the k
i. If a breach, common law would look into significant to determine mat. breach
ii. UCC, instead, adopted the perfect tender rule
b. Buyers Rights under Perfect Tender Rule (UCC 2-601) (NOTE: This is for goods and
delivery, NOT for payment of money! If you pay late, you are under CL!)
i. If the goods or delivery fail in ANY respect to the K, the buyer may
1. Reject the whole;
2. Accept the whole; OR
3. Accept any commercial unit or units and reject the rest.
c. Exceptions/Limitations to right to cure:
i. Good faith-using the problem as a pretext to get out of the K
ii. Right to cure
1. If before delivery date, seller must (1) act in good faith and (2) give
buyer notice of intent to cure and pay for the expenses of curing
2. If trying to cure AFTER delivery date, seller must do steps (1)&(2) above,
and (3) the cure must be appropriate and timely under the
circumstances
iii. Installment Ks (Buyers Choices in an Installment K) UCC 2-612
1. If, a non-conformity or default with respect to one installment
SUBSTANTIALLY impairs the value of the whole, THEN there is a
material breach, but…
2. If the non-breaching party
a. Accepts a non-conforming installment; AND
b. Fails to seasonably notify of cancellation; OR
c. Brings an action only with respect to past installments; OR
d. Demands performance as to future installments (i.e basically
requests that the breaching party go forward)
3. Then the K is reinstated!
iv. NO substantial performance exception for perfect tender rule
d. In determining the of the goods conform to the K, a ct. may examine the K in the light of
course of performance/trade, and usage of trade standards (usage of trade for
construction may indicate that construction jobs don’t start or finish on time)
5. Anticipatory Repudiation-A material breach that occurs before the time of beg. of performance
a. Where a party repudiates through either conduct or explicit comments, a cause of
action for breach immediately arises
i. Repudiation requires a definite and unequivocal manifestation of intention and
a positive and unconditional refusal to perform
b. Definition (Res §250)
Page 30 of 38
i. A statement by the obligor to the obligee indicating that the obligor will commit
a breach that would of itself give the obligee a claim for damages under §243
ii. A voluntary affirmative act which renders the obligor unable or apparently
unable to perform without such a breach
c. Consequences of Anticipatory Repudiation (Res §253)
i. Innocent Party Does Not Have to Tender Performance
1. Does not have to wait for other party to change its mind
2. It’s a hardship to force the plaintiff to wait when he knows the other
party will not perform
3. It’s not hard for the court to determine who’s in breach, so other party
doesn’t need to tender
4. Allows the plaintiff to mitigate
ii. Injured Party May Sue Immediately
1. A threatened injury is breach in and of itself
2. Repudiation is a breach of duty of good faith
3. The party is interfering with the other party’s reasonable expectations
4. The party is destroying the value of the K right
iii. Policy Reasoning
1. Increased efficiency of commerce
2. Allows non-breaching party opportunity to cover or mitigate
d. UCC Approach
i. If either party repudiates the K with respect to performance not yet due, the
loss of which will substantially impair the value of the K to the other, the
aggrieved party can: (UCC §2-610)
1. Wait and see if the other party will perform, OR
2. Sue for breach of K, OR
3. In either case, he need not tender performance
e. Retraction of Repudiation
6. Retraction of Repudiation (Res §256) (Same under UCC 2-611) (See handout 19(a))
a. Repudiation can be retracted if it is before the performance is due and unless other
party has:
i. Accepted the repudiation, OR
ii. Relied on the repudiation
b. Notification of retraction of the repudiation must come before the other party:
i. Materially changes his position in reliance on the repudiation, OR
ii. He accepts indication the repudiation as final
c. If reinstated, the aggrieved part is allowed an excuse for being behind if caused by the
delay and/or damages caused by the delay
7. Right to Adequate Assurance
a. Where reasonable grounds arise for insecurity to believe the obligor will commit a
breach by non-performance the obligee may… (Rest. §251)
i. Demand “adequate assurance” of due performance
ii. May, if reasonable, suspend any performance (only if commercially reasonable)
until assurance is received
iii. May, treat as repudiation the obligor’s failure to provide within a reasonable
time such assurance of due performance as is adequate in the circumstances
b. UCC- 2-609- Same as Rest. §251 (just mentioned), BUT it specifies that…
i. the demand for assurances must be in a record, and
Page 31 of 38
ii. After receipt of the demand, failure to provide within a reasonable time (NOT
exceeding 30 days) such assurance, is adequate for repudiation for K
c. This allows the obligee the power to take precautionary action
d. Assurances don’t have to be great, just “adequate”
VI. Phase 6- Damages
Remedies
1. Damages Generally
a. Three types of damages—only one is generally awarded: (Restatement § 344)
i. Expectation Interest- Put people “in as good as position as they would have
been had the bargain been performed” (Standard)
1. Preserves benefit of the bargain
2. Parties expect to be made better off through K-making
ii. Reliance Interest –Reimburse for “loss caused by reliance” on the K by being
“put in as good a position as he would have been have the K been made”
iii. Restitution Interest- The interest in having restored any benefit that was
conferred to the other party (i.e. cash)
1. Always less than reliance or expectation interest
2. Prevents unjust enrichment
b. No damages for:
i. Pain and suffering/emotional duress, UNLESS
1. In some courts, NEVER
2. In some courts, if accompanied by bodily hard
3. In some courts, if K was clearly one that was meant to assure mental
and emotional happiness (best rule)
ii. Punitive damages (except for tort issues—duress and fraud)
c. Which damages to apply?
i. Plaintiff can usually choose
ii. Usually only reliance available when the K lacks consideration
iii. Breaching party can usually only get restitution
d. Damages are used to put them in as good as position, NOT in a better position
i. Policy: Cts. are concerned with compensating the victim, not punishing the
other party
2. Expectation Damages for Service Ks- Puts party back where he would have been had the K been
performed—typically provides the largest reward
a. Definitions:
i. Incidental losses- refer to the plaintiffs costs of coping with the breach such as
the costs of inspecting the defective performance of the costs of arranging
substitute performance, commercially reasonable charges
ii. Consequential losses- losses that relate not to the value of the K itself, but
instead arise b/c of the breach (e.g. lost profits, injury to property, etc…)
b. Steps:
i. Direct Damages: (1) Lost profits, (2) Cover, (3) Other Specific Request
ii. Incidental Damages: Administrative Costs
iii. Includes commercially reasonable charges (UCC 2-710, 2-715)
iv. Consequential Damages: Ripple effect damages (measure against remoteness)
Page 32 of 38
c. General Formula: (Rest. §347)
+ Loss in value to him from other party’s performance
+ Incidental Damages
+ Consequential Damages
- Cost or loss avoided by not performing
Expectation Damages
d. Three Formulas Cts. may use to compute damages
i. Measurement by Reference to a Substitute Transaction
1. P obtains a replacement for the defaulted performance and the ct.
measures the costs between the original K and the replacement K
a. P must use his best efforts to find additional K and act in a
economically responsible manner
2. If new K is better (you had to hire someone more qualified) that is ok
ii. Measurement by Reference to Market Value
1. Ct. determines a party’s direct losses by comparing the K price to the
market value of the performance promised under the K
a. The market value in some cases may bear no relation to the out
of pocket losses the plaintiff suffered
b. Ex- Satellite and NASA case (what is the FMV of the co. with the
additional satellite in space)
i. Note: If you are unprofitable, you get no lost profits
iii. Measurement by Reference to Lost Profits
1. Ct. affixes damages to equal the profit P would have earned under the K
a. Lost Volume Supplier
i. Supplier must have the capacity and be willing to sell
more of the product
e. Damages when Breaching Party Performs in Part
i. To the extent the deficient performance has value to P, that value should be
taken into account in determining damages for breaches
ii. May be considered a material or partial breach—damages change accdgly
3. Expectation Damages Under the UCCa. Remedies are to be liberally administered to the aggrieved party to put them in as good
as position as if the other party had performed (UCC 1-305)
b. The cover is presumptively FMV unless the party in breach can show that the AP didn’t
act in a commercially reasonable manner
c. Buyers Remedies when seller repudiates or goods don’t conform…
i. Specific Performance
1. Rarely happens under the UCC
ii. Cover- Buyer may purchase “substitute goods” if done in “good faith” and
“without unreasonable delay” and recover the difference in costs (UCC 2-712)
1. If the buyer doesn’t cover, they still may pursue different remedies (UCC
2-712(c) (e.g. it is not mandatory to cover)
d. If delivery is wrongful OR goods don’t conform, buyers damages equal…
Market Price (at time for tender under K)
–Original K Price
+Incidental/Consequential damages
Expectation Damages
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d. If seller repudiates, buyers damages equal…
Market Price (at expiration of comrcially reasnble time after buyer learnd of repudition)
–Original K Price
+Incidental/Consequential damages
Expectation Damages
e. Sellers Remedies (UCC 2-708)
i. K Price- Seller may simply demand original price (if buyer refuses to just pay)
ii. Profit from the transaction
1. Measure by substitute sale OR by the mkt value of the goods
2. If substitute K price is lower, seller gets dif. in prices LESS any expenses
saved in consequence of the breach (DON’T forget that for test)
3. “Lost profit” damage is used a lot in “lost volume” situations
a. May include reasonable overhead
4. Reliancea. Nonbreaching party is reimbursed the amount to which they “relied” on the agreement
i. Tries to put the party in the position as if a K had not formed
b. Typically used when:
i. When difficult to quantify expectation damages
ii. When contract lacks consideration
iii. When party suffers damages by relying on a promise [ex: forego one job on
promise of employment]
5. Restitution- Focuses on the benefits received by the breaching party
a. General measure is quantum meruit
b. Return any benefit one party conferred on the other party [i.e., money]
c. Used to prevent or rectify unjust enrichment when a party breaches (Restatement §345)
d. Limited to just the parties in the K—can’t get it back from a third party
e. Cts. consider the conduct of both parties when determining restitution amount
f. Restitution is available even if P would have LOST money on the K
g. Restitution is available to the party in breach
h. When used:
i. The K has not yet been fully performed (if substantially performed restitution
may be inappropriate)
ii. Material Breach: Innocent P can choose to sue under restitution rather than
expectation
i. Measure of Damages
i. Innocent Party chooses one of the following:
1. Fair market value of services performed, OR
2. Increase in value of other party’s interest
ii. Contract price – cost of completion – any other damages = damages
6. Limitations- On Recovery of Damages (Applies to all types)
a. Certainty
i. Damages are not recoverable for loss beyond an amount that the evidence
permits to be established with “reasonable certainty”
ii. Some cts. have held that the amount doesn’t have to be proven w/ precision or
certainty, just the fact that the damage exists
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1. More demanding certainty required in proving fact that some damage
occurred than in establishing the amount of damages
iii. All cts. agree if damages are speculative or uncertain, P won’t recover damages
iv. Case law considers:
1. Amount of damages and differences between awards
2. New Company Rule- New start-up company with little history MUST
prove w/reasonable certainty or above the amount of lost profits (this
standard is higher than business w/history)
a. Classicist cts. enforce this rule—especially if there is no other
comparable business to base damages on
b. Foreseeability- Requirement that damages must be foreseeable at the time K was
entered for them to be recoverable
i. If your situation is unique or peculiar, you MUST communicate your unique
circumstances to the other party for it to be foreseeable (maj. rule)
ii. Sometimes requires a tacit agreement by the other party to the commitment to
meet special needs (min. rule)
iii. Usually limits consequential damages (more remote the damages become, the
more foreseeability comes into play)
iv. Goods: Seller must have reason to know (UCC 2-715(2)(a))
1. Ex- Fabric for dresses-seller should have known they would be used for
circle skirts
v. Services: Breaching party must have reason to foresee (Restatement §351)
vi. Losses are foreseeable when:
1. Would arise in the ordinary course of events (i.e., natural
consequences), OR
2. As a result of special circumstances, beyond ordinary course of events,
that the party in breach had reason to know
c. Mitigation- Duty to stop racking up additional damages
i. Breaching party must prove that no “reasonable mitigation” occurred
ii. Duty to find a replacement deal if possible (must make a reasonable effort)
1. The value of the replacement deal then is compared against the K price
and only the difference is damages
2. If you can’t find a replacement deal you get full damages
3. If you didn’t try or didn’t take one available, the value of what you could
have done is deducted from your damages
iii. Mitigation under UCC—Not formally adopted, but the “good faith” principle to
“cover” does the same thing
7. Liquidated Damages- May not be a penalty
a. Liquidated damage clause- a clause that specifies the damages for a breach in a K
i. By including this clause, it puts people on notice of what they will have to pay
and saves time and money—it avoids costly litigation
b. Cts. are hostile to these clauses and certain requirements have to be met:
i. Services: (Rest. §356)- Only an amount that is reasonable in light of the
anticipated or actual loss caused by the breach & the difficulty of proof of loss
ii. Goods: (UCC 2-718)- Amount must be reasonable in light of the anticipated or
actual harm caused by breach
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c. Reasonableness is the test for the UCC and Rest.—if liquidating damages are reasonable
when compared to the actual OR anticipated damages, it’s sufficient under CL & UCC
i. Two Prong Reasonableness test:
1. Things we believed at the time we entered K (anticipated dam.) OR
2. Actual damages
ii. Cts. also determine if it is reasonable by determining if it would have been
difficult in proving losses by the nonbreaching party
d. Note: If the liquidated amount is just a static amount it won’t likely be enforced, but if it
is measured against an index or some sort, it may be enforced
e. Risk of doing liquidated damages is that it may be less than your actual amount of dam.
8. Specific Performance and Injunctionsa. Courts will not award specific performance when damages are an adequate remedy:
(Rest. §359) (up to the discretion of the cts.)
b. SP is used when:
i. Situation is extraordinary
ii. The subject of the K is unique or irreplaceable, etc…
1. Is the value economic or sentimental?
iii. When any other form of remedy would be inadequate
iv. K is clear (there can’t be ambiguity in the terms of the K)
c. Are Damages Adequate? (Rest. §360)—In determining if damages are adequate,
consider: difficulty of proving w/ reasonable certainty, procuring a substitute remedy,
likelihood of collection
d. SP will not be given when:
i. Huge inadequacy of consideration
ii. “Unclean hands”- moving party must not be at fault/must have clean hands
1. This req. occurs b/c this is equitable remedy
iii. Requires a lot of ct. supervision
e. Factors that influence the court:
i. Worried about involuntary servitude
ii. How do we know they are doing/will do their best job
iii. Might be create unreasonable requirements to monitor and evaluate perf.
iv. Is the object “unique”?
v. Is enforcing the K in the interest of the public
vi. Did parties originally agree that an equitable remedy would be appropriate
when they signed the K
vii. Is the object difficult to value
f. Mandatory injunction- Calls for something positive to be done
g. Prohibitory injunction- Calls for an action to be avoided
h. Replevin- Specific performance for goods (UCC 2-716)
i. SP may be decreed where goods are unique, where special circumstances, etc…
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Damages
Service :
Buyer Damages
(Provider Breach)
Seller Damages
(Breach by Buyer)
Goods :
UCC
Buyer Damages
(Seller Breach)
Goods Not
Delivered
Accepted Goods
(Damaged)
(§ 2-714)
Seller Damages
(Buyer breach)
(UCC §2-706 to 710)
When Buyer Refuses
Otherwise Perfect Goods
Damages Formula
When Used/Conditions
(1) “Cost of Completion”
(a) Standard
Cost of completion
- Amount not yet paid to K
= Damages
Type
EXP
(b) Also used when there is bad faith
even when conditions (below) apply
(2) “Diminution” [Difference] in Value
Promised condition [if completed]
- Present condition [fair market value]
= Damage
(a) Breach was incidental to K
EXP
(b) Impossible to perform
(c) If substantial economic waste, disproportion
(d) If bad faith, use “Cost of Completion”
(1) Majority Formula
K price
- Cost avoided
- Amount paid by owner
- Materials on hand = Damages
(a) Standard
(b) Essentially provides for lost profits
(2) Minority Formula
Profit (or loss)
+ Costs incurred
- Amount paid by owner
- Materials on hand = Damages
(a) Different, but same effect as above
(b) Essentially provides for lost profits
(1) “Cover” Remedy
(a) Standard when goods are undelivered
Cover price (market price for hypo)
- K price
+ Costs & Incidental Exps. (ship, storage)
- Expenses Saved
= Damages
(b) Buyer “covers” in good faith, and reasonable time
(c) Hypothetical Cover: If buyer does not try to cover,
or waits too long, no consequential damages, and
use market price at the time of breach
(2) “Difference in Value”
Promised condition
- Present condition [fair market value]
= Damages
(a) Typically, cost of repair (must notify seller of dmg.)
(b) Can also recover lost profits and incidentals
(c) Difference in value: when repair not possible
(d) If no comparable market, use other locations
(within reason), or trade price guides (e.g., KBB)
(e) If seller cancels, use value at time of breach
(1) “Cover K” UCC 2-706(1)
K Price
- Resale Price (or market if no resale)
+ Incidentals Exp. + Costs
- Expenses Saved
= Damages
(a) Seller may withhold or stop delivery, and must
try to re-sell to minimize damages and recover loss
(b) Consequential damages not counted, but
interest is included (§2-206)
(c) Must be re-sold at reasonable rate and place;
Must notify orig. buyer of re-sell (unless quick)
(d) Good-faith 3rd party purchasers = no legal liability
(2) Buyer Refuses Good Products
K Price
- Market Price (or Cover Price if re-sold)
+ Incidental Exp. + Costs
- Expenses Saved = Damages
(3) “Lost Volume Seller” = Profit
K Price
+ Overhead
+ Incidentals Exp. + Costs
- Payment/proceeds = Profit Recovery
(a) “Consequential Damages” = Profit
(b) Used when above is inadequate to
compensate seller for lost volume
if seller has virtually unlimited volume
(4) “Action for Full Price”
(a) Goods must be returned to buyer
(Used when goods cannot be sold, i.e. damaged, spoiled, too specialized)
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