Remedies
Expectation Interest
Definition
Contract remedies should be administered to put the non-breaching party in as a
good a position as if the other party had fully performed.
 Rest. § 347: “Loss in value” because of other party’s breach, plus “other
loss” (incidental/consequential damages), minus cost or loss avoided.
UCC Article 2
Applies only to GOODS, not SERVICES.
 Seller’s Remedies
 Buyer’s Remedies
Mitigation of Damages
 POLICY
o Losses incurred upon unreasonable rejection of substitutes should
not be the responsibility of the breaching party (Cardozo); mitigation
minimizes the personal and social costs of contract breach (Sullivan).
 GENERAL RULE
o Rest. § 350(1): non-breaching party cannot recover for damages
which could have been avoided through reasonable diligence and
without incurring undue risk, expense or humiliation (e.g.,
accepting an inferior job.)
o Rest. § 350(2): NOT an unqualified duty: “reasonable but
unsuccessful efforts” are sufficient.
o EMPLOYMENT: Subsequent employment (or employment which
should have reasonably been taken) offsets damages, unless such
employment could have been performed in addition to fulfilling
contractual duties.
 UCC
o § 2-706: Seller may resell goods to cover.
o § 2-708, 712, 713: Seller/Buyer entitled to difference between
market and unpaid contract price (implies cover).
o § 2-709: Seller only entitled to contract price if he is unable after
reasonable effort to resell.
o § 2-715: Buyer’s consequential damages limited to those which
could not be reasonably prevented by cover.
 Parker v. 20th Century Fox
o π contracted to provide acting services for a musical production
(“Bloomer Girl”). Δ cancelled and offered a part in a western (“Big
Country”). π refused the western offer. Δ argued that π failed to
mitigate.
o Substitute employment must be “comparable or substantially
similar”. “Different or inferior” substitutes do not count.
Lost Volume Seller (LVS)
 POLICY
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o
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Had there been no breach, seller would have had two sales one
(including resale) instead of the. Thus, seller is entitled to profit from
first sale.
GENERAL RULE
o An LVS has an inexhaustible supply of standard priced goods, and
the loss of the contract sale is not replaceable by resale.
o Key consideration: Did seller make a “substitute” or “additional”
sale?
UCC
o UCC § 2-708(2): if damages under § 2-708(1) are not inadequate,
seller is entitled to lost profit (plus reasonable overhead, incidental
damages.)
 Official Comment (2): “This section permits the recovery of
lost profits in all appropriate cases, which would include all
standard priced goods.”
 “due credit for payments or proceeds of resale” (last line of §
2-708(2)) applies to salvage of scrap, and does not preclude
LVS application.
Neri v. Retail Marine Corp.
o Δ was considered an LVS for the purposes of a boat that was resold
after π’s breach and was entitled to lost profits (and incidental
damages.)
Mount Pleasant Stable Co. v. Steinberg (LVS for services)
o Mount Pleasant was an LVS because (a) contract services did not
require any special skills (hired employees could complete them),
and (b) the contract did not preclude MP from carrying on as many
other contracts as it saw fit (time did not belong to buyer.)
Specific Performance
 POLICY
o The only way the expectation interest of the non-breaching party can
be fulfilled is an order to perform.
o This remedy is unfavorable if any other remedy is adequate (“dismal
swamp” policy.)
 GENERAL RULE
o Specific performance is less desirable if adequate legal remedy can
be found. (Particularly in continuing relationships.)
 UCC
o § 2-709 (Seller’s Action for Price): When buyer fails to pay, seller
may recover price if (any of):
 Buyer has accepted goods
 Goods were lost or damaged after risk of loss passed to
buyer
 Seller is unable after reasonable effort to resell the goods at a
reasonable price
o § 2-716 (Buyer’s Right to Specific Performance): Available when
goods are unique or “in other proper circumstances.”
 Comment 2: “inability to cover is strong evidence of ‘other
proper circumstances.’”
 Copylease v. Memorex (Federal Court interpreting California Law)
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If Copylease has “no adequate alternative source” of toner, the
Memorex product is “unique” for purposes of § 2-716, or the
situation might present an example of “other proper circumstances”
in which specific performance is appropriate.
Long Beach Drug Co. v. United Drug Co. (California Supreme Court)
o Specific performance is NOT appropriate in “contracts which by
their terms stipulate for a succession of acts whose performance
cannot be consummated by one transaction, but will be
continuous and require protracted supervision and direction.”
o
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Penalty Clauses v. Liquidated Damages
 POLICY
o Pros:
 Penalty clauses provide an earnest of performance
 May be necessary to induce value-maximizing contracts
 Rational parties will include penalty clauses only when costs
exceed benefits
o Cons:
 Penalty clauses increase the risk to other creditors
 Penalty clauses may discourage efficient breaches
 GENERAL RULE
o Rest. § 356: Damages may be liquidated in the agreement if:
 Reasonable estimate of the anticipated or actual loss caused
by breach
 Difficult to prove loss
 If unreasonable (by these terms), it will be considered a
“penalty” and is unenforceable.
o Liquidated damages require two keys:
 (1) Reasonable estimate (forecast) of damages
 (2) Damages are difficult to ascertain at time of contract
o Liquidated damages are not exclusive of actual damages.
 UCC
o § 2-718(1): (identical to Rest., but includes an additional factor)
“inconvenience of otherwise obtaining adequate remedy”
 Lake River Corp. v. Carborumdum Co. (US Court of Appeals interpreting
Illinois Law)
o “A liquidation of damages must be a reasonable estimate at the time
of contracting of the likely damages from breach, and the need for
estimation at that time must be shown by reference to the likely
difficulty of measuring actual damages from a breach of contract
after the breach occurs.”
Incidental Damages
 GENERAL RULE:
o Buyer and Seller entitled to damages arising directly out of breach
(transportation, storage, inspection, commissions, expenses, etc.)
 UCC
o § 2-710 (Seller)
o § 2-715(1) (Buyer)
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Consequential Damages
 GENERAL RULE:
o Rest. § 351: Damages limited to those reasonably foreseeable as a
probable result of the breach when the contract was made.
 “Foreseeable…” means it follows from the breach: (a) in the
ordinary course of events OR (b) as the result of special
circumstances which the breaching party had reason to
know.
 UCC
o § 2-715(2) (Buyer ONLY): Consequential damages include: (a) loss
resulting from general or particular requirements of K that seller had
reason to know at time of K and which could not be reasonably
prevented by cover or otherwise, and (b) injury proximately resulting
from a breach of warranty.
 Hadley v. Baxendale
o Two possible ways to measure consequential damages:
 Those that may “fairly and reasonably” be considered to
“arise naturally” from the breach (objective standard, “usual
course of things”)
 Those that are reasonably supposed to have been in the
“contemplation of both parties” at the time of contract (as
the probable result of the breach. (subjective standard)
o “Naturally”:
 Predictable consequences
 Exclude damages to the extent they are exacerbated or could
have been prevented by non-breaching party.
Proof of Damages (“Reasonable Certainty”)
 POLICY:
o Charles McCormick: Law originates from a lack of confidence by
American judges in the discretion of juries.
 GENERAL RULE:
o Rest. § 352: “an amount that the evidence permits to be established
with reasonable certainty”
o “Reasonable certainty”: (1) damage is caused by breach, and (2)
damages are a reflection of actual suffering.
 UCC:
o § 2-715 (Comment 4): While burden of proof of damages is on buyer
(for consequential damages), the doctrine of certainty (mathematical
proof) is rejected. Loss may be determined in any reasonable manner
(under the circumstances.)
 New Business Rule
o Generally, new business cannot prove consequential damages with
reasonable certainty because they have no track record. (Evergreen
Amusement v. Milstead)
o However, wrongdoer cannot rely on the uncertainty created by his
own bad acts. (Lakota Girl Scouts Council v. Havey Fund Raising
Mgmt.)
o Emerging trend is to REJECT new business rule. It is unfair to deny
damages based on an absence of track record when breach itself
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prevents the track record. (Chung v. Kaonohi Center Co. [used the
“replacement” business to calculate lost profits.])
Reliance Interest
 DEFINITION:
o Instead of putting the aggrieved party in the position he would have been in
had the contract been performed (expectation interest), the reliance interest
puts the aggrieved party in the position he would have been in had the
contract NEVER EXISTED.
o “In some instances, the injured party may recover expenses incurred in
relying upon the contract, although such expenses would have been incurred
had the contract not been breached.” (Security Stove)
o Aims to refund expenses wasted or equivalent losses by the plaintiff in
reliance on the contract, thereby restoring him to the status quo ante.
 POLICY:
o In some cases, expectation damages cannot be proved with reasonable
certainty (Evergreen), or damages are not foreseeable (Hadley). In these
cases, it is not practical to put the aggrieved party in the position they would
have been in had the contract been fulfilled.
o Driven by concerns of efficiency, justice, retribution and expression of social
disapproval.
 GENERAL RULE:
o Rest. § 349: expenditures in preparation or performance, less any loss that
the breaching party can prove with reasonable certainty would have been
suffered by the aggrieved had the contract been performed.
 Comment 1: Available where profit is uncertain or performance
would have resulted in a loss.
 Comment 2: Also available in cases of promissory estoppel.
o Damages must be foreseeable and reasonably certain.
o Essential Reliance v. Incidental Reliance
 Essential: things that are needed to get the K performed (costs listed
in the K)
 Incidental: caused by party’s reliance on the K; foreseeable (losses
incurred in obtaining cover, reasonable expenses resulting from the
breach, and expenses incurred in handling and caring for goods
which were subject of the K.)
 UCC
o
 Security Stove & Manufacturing Co. v. American Railways Express Co.
o π shipped prototype stove to trade show for the purpose of building good will
with prospective buyer. There was no anticipated profit from the event, so
the court implemented reliance damages to put the π where it would have
been had he never contracted with the Δ to ship his prototype. (Cost of trade
show, shipping [technically, restitution].)
 Albert & Son v. Armstrong Rubber Co.
o π built foundations in preparation to receive refiners to be supplied by Δ.
o “(Learned) Hand Rule”: restricts reliance interest by allowing seller to prove
buyer would have incurred a loss had the contract been performed. Since
difficulty of proof is created due to seller’s breach, he has the burden of
proof.
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
Distinguishes between not making promisor pay for what would
have been a loss (reliance) and paying back what he has already
received (restitution).
Restitution
In General
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DEFINITION:
o Based on disaffirmance – treats the breach as having caused the
contract to fall away
o Subset of Reliance (Fuller & Perdue)
o Allows for “disengorgement” of value paid when breaching party is
“unjustly enriched”.
o Aggrieved party gets its money/value back, even if that would be
more than ordinary expectation damages.
o Quantum meruit
o Return the plaintiff the value of any benefit conferred on the
defendant under the breached contract. The extent of the defendant’s
enrichment at her expense.
POLICY:
o The breacher is “unjustly enriched.” Aggrieved party has lost value
in reliance on the contract, and what’s more, the breacher still has
that value.
o The restitution policy says that in addition to putting the nonbreaching party where they should be, the breaching party cannot be
“unjustly enriched.”
GENERAL RULE:
o Rest. § 370: Party is entitled to restitution only to the extent that he
has conferred a benefit on the other party by way of part
performance of reliance.
o Rest. § 371: Damages can be measured (“as justice requires”) by one
of two ways:
 (1) The reasonable value to the other party (market value;
what it would have cost from another in the claimant’s
position)
 (2) The extent to which the other party’s property has been
increased in value or his other interests advanced.
o Rest. § 373: No restitution if:
 injured party has performed all his duties under the contract
and
 the only remaining performance by the other party is
payment of a definite sum of money.
UCC
o § 2-711 (Buyer): “…in addition to so much of the price as has been
paid.”
Acceptance, Rejection, Revocation
 UCC § 2-601(Perfect Tender): “if the goods or the tender of delivery fail in
any respect to conform to the contract, the buyer may” reject, accept, accept
part and reject rest.
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UCC § 2-606 (Acceptance): occurs when buyer signifies that goods are
conforming (or will take them anyway), or if buyer fails to make an effective
rejection (or when the buyer does any act inconsistent with seller’s
ownership).
UCC § 2-602 (Rejection): After rejection, buyer has no further obligations.
UCC § 2-508 (Right to Cure): Seller has a right to cure for goods rejected
for non-conformity.
UCC § 2-608 (Revocation): acceptance may be revoked if “non-conformity
substantially impairs its value to him.”
o Have to have a reasonable assumption that non-conformity was
going to be cured, or no discovery of non-conformity because of
difficulty or seller’s assurances.
o Has to occur within reasonable time after buyer discovers (or should
have discovered) and before substantial change to the goods’
condition.
Class Struggle
o (Board game company v. manufacturer of the boards.)
Colonial Dodge v. Miller
o Buyer of an automobile revoked acceptance because it was missing a
spare tire.
o Before Acceptance:
 Tender of goods must be “perfect.”
 Buyer has reasonable opportunity to inspect goods.
(Acceptance cannot occur until “reasonable” opportunity to
inspect.)
After Acceptance:
 Buyer may revoke only where nonconformity substantially
impairs value.
 “Determination of substantial impairment is made from an
objective view or from the buyer’s subjective view,
considering the particular needs and circumstances.”
Substantial Performance
 (Plante v. Jacobs): Contract to build a house; the wall is one foot off from
plans. Buyer cannot withhold last payment and seller is entitled to contract
price minus damages that could be proved because of defect.
 No “perfect tender” required in cases where it would involve “unreasonable
economic waste.”
Quasi-Contract (“contracts implied in law”)
 Not a remedy cased on a contract (no contract exists)
 Based on policy of preventing “unjust enrichment”
 Remedy is restitution
o Money: the value conferred
o Services: Quantum meruit (as much as deserved)
o Goods: Quantum valebant (as much as they are worth)
Rescission & Restitution
 Once a contract is breached, the non-non-breaching party may treat the
contract as rescinded, which means that the contract vanishes (damages may
not be limited by the contract … because it doesn’t exist!)
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Damages measured by quantum meruit
Oliver v. Campbell
o Attorney provided divorce representation at far below a reasonable
market rate. His client did not pay for his services. The question is
whether the attorney can receive market value for his services or
only the contract price.
o If full performance: “what he ought to have received” (contract
price)
o If partial performance: “value of the services rendered” (market
price)
o Summary of restitution rule for alternative remedy:
 “total breach of contract” (not minor or partial failures to
perform)
 Not available if defaulting party has substantially performed
(Plante v. Jacobs)
 The aggrieved party cannot have performed fully.
Restitution for Defaulting Party
 POLICY:
o One the one hand, the risk of forfeiting all value rendered is an
incentive to complete performance.
o Also, it may serve as a rough substitute for actual damages in
difficult cases to calculate.
o On the other hand, it may dissuade efficient breach. (No reason to
complete contract if resources are better served elsewhere.)
 DeLeon v. Aldrete
o Buyer of land made most payments, but defaulted; Seller resold land;
Buyer sued for payments made. (Can defaulting buyer claim “unjust
enrichment”?)
o If the non-breaching party elects to rescind and resell, the breaching
party is entitled to restitution (minus any loss from the resale).
o The damages paid for breach of a contract should not increase the
closer the breacher comes to fulfilling the contract. (one payment left
= worse damages than if only one payment is ever made)
 UCC § 2-718(2-4)
Expectation, Reliance, and Restitution as Surrogates for Difficult Normative Choices
 Peevyhouse v. Garland Coal & Mining Co.
o π sold right to strip mine his land, with provision that Δ will fill in holes
when finished; Δ decided it was too costly to fill holes and would rather pay
expectation damages (difference in land value with v. without the hole
filled.) π argued specific performance (or cost to fill hole). Which is right?
o Where remedy is incidental to core purpose of contract (π was paid his
commission, in this case), the diminution in value remedy will be applied to
avoid “substantial economic waste.”
 π could have taken diminution award and purchased another piece of
land to serve the same purpose.
o (If remedy is main purpose of contract, cost of performance will be
awarded.)
 Hawkins v. McGee (“The Hairy Hand”)
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o
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Doctor talked patient into experimental surgery to make his burn-scarred
hand “100% perfect.” Hand was worse off after surgery (hairy, etc.). Is π
entitled to difference between a hairy hand and a perfect hand, or something
else?
o Using contract remedies as substitute to then non-existent tort claims.
(expectation and incidental/consequential damages instead of pain and
suffering, punitive, etc.)
 This doesn’t work well because of contract requirement of
“reasonably certainty,” for example.
 Contracts are better positioned to protect economic interests, not
emotional/psychological ones.
Sullivan v. O’Connor (“The Tremendous Nose”)
o Patient contracts to get her nose smaller. Nose gets jacked up. Patient sues
for damages for breach of contract.
o Again, an example of contracts being applied where they don’t fit very well.
 Expectation (Heady Lamarr nose) is too high
 Restitution (money back) too low
 Reliance (damage to her nose, doctors fees, pain and suffering
beyond what would have been incurred with a successful surgery)
JUST RIGHT!
CONTRACT AND CONTINUING RELATIONS
INTRODUCTION
Contract Formation
1) What is a contract?
i) Restatement § 1
(1) “A contract is a promise or a set of promises for the breach of which the law gives a
remedy, or the performance of which the law in some way recognizes as a duty.”
ii) Restatement § 2(1)
(1) “A promise is a manifestation of intention to act or refrain from acting in a specified
way, so made as to justify a promisee in understanding that a commitment has been
made.”
b) Bargain
c) Manifestation of mutual assent
d) Consideration
e) Offer/proposal followed by acceptance
f) “Meeting of the minds” no longer deemed necessary to from a contract, but many courts still talk
about it
2) Offer
a) Restatement §24: Manifestation of willingness to enter into a bargain, made so that another
person will understand that his assent is invited and will conclude it
i) Offer of exchange of promises or promise for an act
ii) Gives addressee apparent power to conclude a contract without further action by the
addressor
iii) Revocable until accepted
b) Restatement §33: Offer cannot be accepted unless terms are reasonably certain
i) Time: Where the contract calls for a single performance, the time for performance is a
reasonable time
ii) Price: Where the price is not settled, the price is a reasonable price at the time of
delivery/performance (see UCC § 2-305[1])
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3)
4)
5)
6)
iii) The more important the uncertainty, the stronger the indication that parties do not intend to be
bound
Termination of Power of Acceptance
a) Termination of offeree's power of acceptance (Restatement §36)
(1) Rejection or counteroffer by offeree
(2) Lapse of time
(3) Revocation by offeror
(4) Death or incapacity of either party
ii) Offer terminated by non-occurence of any terms of acceptance specified in the offer
b) Rejection (Restatement §38)
i) Rejection of offer terminates power of acceptance (offer no longer exists)
(1) Offer is no longer valid or available
(a) Manifestation of an intention not to enter into proposed contract
(i) unless offeree manifests intent of further advisement
c) Counter-offer (Restatement §39)
(1) Counter-offer terminates power of acceptance
(2) Promoting a different bargain is a counter offer
ii) Power of acceptance does not terminate if offeror manifests a different intention explicitly or
through counteroffer
d) Lapse of Time (Restatement §41)
i) Reasonable time
ii) Power of acceptance terminates at the end of time specified in the offer
iii) If no time is specified, a “reasonable time”
Revocation
a) Restatement §42
i) Power of acceptance terminates when offeree receives offeror's manifestation of intent not to
enter the contract
b) Restatement §43
i) Power of acceptance terminates
(1) offeror takes definite actions inconsistent with intention to enter proposed contract
(2) offeree receives reliable information of it
ii) Some courts apply Restatement §90
(1) Irrevocable (“firm”) offers
(2) Offeror loses power to revoke when offeree relies on promise not to revoke
Acceptance
a) Restatement §50
i) Manifestation of assent to terms in a manner invited or required
ii) Acceptance by performance requires at least part performance or tender of performance
(1) Includes acceptance by a performance that operates as a return promise.
(i) Requires completion of every act essential to the promise
iii) Silence is not acceptance
(1) It may be in continuing relationships (i.e., regularly renewal)
Advertisements as Offers
a) Restatement §26
i) Manifestation of willingness to enter a bargain is not an offer if
(1) the person addressed knows or has reason to know
(2) that the person making the manifestation does not intend to conclude a bargain
(3) without further manifestation of assent
ii) Comment b
(1) Advertisements generally not intended or understood as offers
(a) Applies to catalogs, etc., despite specific terms
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(2) Advertisement as offer requires “language of commitment” or “invitation to take action
without further communication.”
b) Lefkowitz v. Great Minn. Surplus Store
Man shows up in response to advertisement for $1 fur coat. Offer was open only to ladies
i) Court holds that an advertisement is an offer if it is “clear, definite, and explicit, and leaves
nothing open for negotiation.”
(1) Exception?
c) Special meanings
i) Courts interpret contracts under reasonable person standard
ii) May interpret special meanings (departure from normal meaning) if shared by both parties
7) Policy Approaches To Judicial Intervention
i) “stangle-hold” – parties are being wronged but for other reasons must stay in the relationship
ii) “dismal swamp” –court is treading on unstable ground
iii) “hot potato”-court can only aggravate the problem
iv) “living tree”-court doesn’t want to interrupt the relationship
b) Olsen – law has a limited capacity to change things –to make powerless parties powerful-to
change society. Ks can’t make bad people into good ones. Hard to change cultural influences.
CONTRACT IN THE FAMILY SETTING
1) Legally Enforceable Promises
a) Husband and wife
i) Balfour v. Balfour (p. 247) Man returns to Ceylon, wife stays in England. Man promises to
pay support.
(1) Court declines to enforce promises between husband and wife
(a) No consideration (court does not want to address love and affection)
(b) Despite consideration, parties did not expect legal consequences
(c) Agreements between husband and wife “are not contracts because the parties did not
intend that they should be attended by legal consequences.”
ii) Mehren v. Dargen (p. 250) Written and notarized agreement: wife agrees to continue
relationship, gains full possession of all marital property if husband reverts to drug use.
(1) Court: “Commercial contracts have a specific object, and parties to such contracts
generally enter into them intending that the objects be achieved. Marital contracts, on the
other hand, are generally entered into in the expectation that they will never be invoked.”
(2) Contrary to California policy: no-fault divorce
(a) Contract is an attempt to avoid rules and is therefore void
(3) Miller v. Miller “Judicial inquiry into matters of that character, between husband and
wife, would be fraught with irreparable mischief, and forbidden by sound considerations
of public policy.”
b) Cohabitation contracts
i) Marvin v. Marvin (p. 259)
Woman alleges oral contract to combine efforts and resources and to share property equally. Woman
gives up career to provide services as homemaker, companion, etc.
(1) Court recognizes implied contracts between cohabiting couples
(a) Same rights for cohabiting couples as married couples
(b) Contract law, not family law
(2) Before Marvin:
(a) Recognition for express contracts only
(b) Courts recognize value of funds and property, not services. Absent express contract,
partners share in property only to extent of contribution (Vallera)
(c) Cary: erases difference between cohabitants and putative spouses
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(i) “Putative spouse”: remedy under implied contract or quantum meruit
(ii) Marvin court rejects decision because it resurrects common law marriage
c) Meretricious contracts
i) Void to the extent that it explicitly rests on consideration for meretricious sexual services
(1) Severable portions of contract supported by consideration are enforceable
d) Implied contract (actions/deeds)
i) Absent implied contract, companion receives quantum meruit value of services
e) Common law marriage
i) Abolished in most states
ii) Utah statute (welfare fraud)
(1) Recognition as spouses
(a) legal age/capable of consent
(b) legally capable of entering marriage
(c) have cohabited
(d) mutually assume marital rights, duties, obligations
(e) hold themselves out to the public as married (public recognition)
2) Doctrine of Form
a) Specified requirements to create a binding legal transaction
i) Costs
(1) frustrated expectations (people unintentionally fail to make binding transactions)
ii) Benefits
(1) cautionary
(2) evidentiary
(3) channeling
b) Wills
i) in writing;
ii) signed by the testator or in the testator's name by some other individual in the testator's
conscious presence and by the testator's direction; and
iii) signed by at least two individuals, each of whom signed within a reasonable time after he
witnessed either the signing of the will as described in Subsection (1)(b) or the testator's
acknowledgment of that signature or acknowledgment of the will.
c) Gifts
i) Delivery + donative intent = gift
d) Trust
i) transfer of property to another person as trustee during the settlor's lifetime or by will or other
disposition taking effect upon the settlor's death;
ii) declaration by the owner of property that the owner holds identifiable property as trustee; or
iii) exercise of a power of appointment in favor of a trustee.
e) Contracts
i) Distinguished from other promises by consideration
ii) .
3) Consideration
a) To constitute consideration, a performance or a return promise must be bargained for.
b) Restatement §71
i) Bargained for: sought in exchange for promise or performance and given in exchange for
promise or performance
(1) Does not mean haggled over
(2) Inducement for other party’s promise/action
c) Common law
i) Right, interest, profit or benefit accruing to one party or
ii) Forbearance, detriment, loss, responsibility, given, suffered or undertaken by other party
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d) Holmes
i) Reciprocal conventional inducement
ii) Given and accepted as motive or inducement of the promise by terms of agreement
e) Williston’s Tramp – difficult to distinguish between a request for consideration or a mere
condition in a gratuitous promise.
i) Condition will benefit to the promisor?
ii) Merely for the purpose of enabling the promise to receive a gift?
iii) Promisee has incurred a detriment on faith of the promise? (however there are times that a
conditional gift was intended that even though the promise has incurred detriment, the
promise has been held unenforceable, i.e. go to New York and receive sports tickets)
f) Hamer v. Sidway (p. 286) – Uncle promises money if nephew does not drink, smoke, etc.
i) Consideration need not benefit other party
ii) Only need to refrain from doing something you are otherwise entitled to do
g) Preexisting duty is not consideration
i) Baggs v. Anderson – Wife releases husband from child support for one-time payment
h) Past actions are not consideration
4) Promissory Estoppel – not a contract action, assumes there is no contract, instead equitable solution
for detrimental reliance
a) Detrimental reliance
i) Promise enforceable despite lack of consideration after the promisee relies on the promise
ii) Equity, not contract
b) Restatement §90
i) Promises are enforceable under doctrine of estoppel when:
(1) Reasonably expected to induce action or forbearance
(a) on the part of the promisee or a third person
(2) Does induce such action or forbearance
(3) Injustice can be avoided only by enforcing the promise
(4) Remedy may be limited “as justice requires”
c) Courts generally focus on inducement rather than injustice
d) Kirksey v. Kirksey (p. 304)
Defendant promises plaintiff land to raise her children if she will move to his estate. Kicks her off the
property after she leaves her home and moves.
i) Court finds that promise was a “mere gratuity” and not binding
e) Ricketts v. Scothorn (p. 306)
Grandfather promises plaintiff money. Says she does not have to work. Plaintiff quits job.
i) Court: “grossly inequitable” not to enforce promise after promisor “intentionally influenced
the plaintiff to alter her position for the worse” in reliance on promise
ii) Estoppel in pais – a right arising from acts, admissions, or conduct which have induced a
change of position in accordance with the real or apparent intention of the party against
whom the are alleged.
5) Statute of Frauds (disfavored by courts)
a) Requirement of writing:
i) Contracts not to be performed within one year
(1) technical possibility, not actual expectation or practical possibility
ii) Promises to answer for debts of another
(1) Except where promisor's main purpose is his own financial interest
iii) Wills
iv) Agreement, promises, undertakings made upon consideration of marriage
(1) Except mutual promises to marry
(2) Breach of promise to marry
(a) Financial damages rather than emotional
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(b) Hess v. Johnston
(i) Writing can be overlooked if there is part performance (reliance) may be able to
compel specific performance.
b) Sufficiency of writing
i) Restatement §131
(1) Reasonably identifies subject of contract
(2) Sufficiently indicates that contract has been made or offered
(3) States unperformed terms with reasonable certainty
(a) Writing need not specify all terms
c) Part Performance Doctrine (Exception to Statute of Frauds)
i) Acts may be evidence of an agreement (similar to writing) if:
(1) Clear and definite oral contract with clear and definite terms;
(2) Clear and definite acts in performance of the contract
ii) Acts must be in reliance on the contract.
(1) Would not have been performed had the contract not existed
iii) Failure to perform by one party would result in fraud on the other
6) Unilateral Contracts
a) Invites acceptance by performance only
i) Unilateral contract – must have some performance for acceptance
ii) We don’t want a promise, we want a performance
iii) Performance is acceptance
iv) Can revoke any time before full performance
v) Promise to perform is not acceptance
vi) No contract until performance
b) Bilateral contract – a promise to perform is enough for acceptance
i) Courts presume a contract is bilateral
ii) Distinction between unilateral/bilateral removed from Restatement (Second)
c) Davis v. Jacoby (p. 331) Promise – Caro will inherit everything. Accepted in a (lost) letter (no
doubt the letter was received, some question as to the contents)
i) Court finds bilateral contract
(1) Parties not dealing at arm's length—promise to perform sufficient
(2) Man sought assurance of help
(3) Contract may have required performance beyond man's death
d) Option contract – is a contract, but limits the promisors power to revoke an offer
i) Promises irrevocable if there is:
(1) Seal (common law form: requirement of writing)
(2) Consideration
(3) Reliance (estoppel)
e) Restatement §45
i) Option contract created when offeree tenders or begins invited performance or tenders a
beginning of it
ii) Offeror's contractual duties tied to adequate completion of performance
f) Reward Offers
i) Restatement §23: Manifestation of mutual assent
(1) Offer applies only to those who act with knowledge of the offer
ii) Restatement § 29
(1) Offeror may specify those who may accept
g) UCC §2-206 (Closing a Loophole)
i) An order or offer to buy goods for prompt or current shipment can invites acceptance
(1) A prompt promise to ship or by prompt or current shipment of nonconforming goods
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(2) Shipment of nonconforming goods is not acceptance if seller seasonably notifies buyer
that the shipment is offered only as an accommodation to the buyer
(a) Unless otherwise unambiguously indicated by language or circumstances
h) Conditional Contracts
i) Restatement §224
(1) A condition is an uncertain event that must occur before performance is required
ii) Restatement §225
(1) No contractual duty when the condition can no longer occur
(2) No breach if the condition is not met
iii) Restatement §228
(1) If condition is promisor's satisfaction, courts use reasonable person standard to determine
if condition is met
7) Extended Family
a) Gratuitous Services
i) Family members seeking restitution must overcome presumption of gratuitous service
ii) Est. of Steffes (p. 348, FN) Cohabiting couple. Woman takes care of sick man who promises
to leave her proceeds of farm sale but fails to make will. Woman seeks value of services. Son
claims services were gratuitous.
(1) Court finds a deal implied from the facts
(2) Woman entitled to compensation, despite role of affection, etc., in motivating service
iii) Miller v. Est. of Bell (p. 349) Daughters care for parents, who both say they intend to will all
property to the daughters. Father dies first and wills all property to wife (to daughters if wife
dies first). Wife dies with no will. Estate divided equally among two daughters and two sons.
(1) Court: mother never made promise; therefore, services were gratuitous.
iv) Est. of Grossman (p. 350) Daughter provides services for mother after father asks her to
return home. Court grants quantum meruit restitution. On subsequent visits, daughter
provides care for father. Court denies claim for quantum meruit restitution.
(1) Father did not ask daughter to come home.
(2) Parents do not expect to pay for services when their children visit.
v) In re Goldricks Will (p. 351) Neighbor performs various services for elderly neighbor
(1) Court: strong temptation to magnify “trifling services” into large claims after the
beneficiary is dead. Such claims are not favored in law.
FRANCHISE AND EMPLOYMENT RELATIONS
1) Franchises
a) In General
i) Complex, long-term commercial relationships
(1) Franchisor
(a) Provides intangibles (intellectual property, trade secrets, business format & system,
site selection, training, promotion, bookkeeping, compliance with laws and system
standards, insurance, etc.)
(2) Franchisee
(a) Franchise Fee ($25,000 for Krispy Kreme)
(b) Royalties (4.5% of gross sales for area developers, and 3% of gross sales for
associates)
(c) Site development (usually several hundred thousand dollars)
(d) Sweat Equity
ii) Arm's length, not fiduciary
(1) Arm's length: party's may serve self interest (in good faith)
(2) Fiduciary: Duty of loyalty to beneficiary
(3) This is NOT an employment relationship or agency relationship
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(4) This is an independent contractor relationship
b) Hoffman v. Red Owl (p. 377) – Plaintiff incurs numerous expenses/detriments in reliance on
defendant's agent's assurance that plaintiff will get a franchise
i) Court finds estoppel necessary to prevent injustice
(1) Did defendant make a binding promise?
(2) Court focuses on plaintiff's reliance rather than on defendant's promise
ii) No lost profits for sale of grocery store
(1) Estoppel: liability based on induced reliance
(2) Lost profits are expectation remedy
c) Terms of Agreement
i) Franchisee typically may renew on terms in place at end of contract
(1) Some state laws prohibit “unreasonable” withholding of consent
d) Termination
i) Franchisor may terminate agreement for franchisee’s material breach, not at will
ii) Requires notice of specified events of default
(1) Franchisees usually has opportunity to cure within specified time, some not curable
iii) Some agreements provide for liquidated damages in termination
iv) State statutes often require cause and notice, some require opportunity to cure
e) Transfer
i) Franchisor often limits right to transfer (sell the franchise to someone else)
ii) Franchisee
(1) Wants to obtain full “going concern”
(2) Limitations on transfer depress transfer value
iii) Franchisor
(1) Restrict transfer to approved franchisees
(2) Usually reserves option to purchase, a right of first refusal, or a right to approve any
transferee
(3) May encourage franchisee to transfer rather than terminate
f) Post-franchise
i) Location goodwill – people begin to associate a particular location with a particular business.
Don’t want to have to reorient (move to a new location) if relationship with franchisee
doesn’t work out
(1) Franchisor may continue business if it owns the site
(2) Franchisor may seek option to purchase/lease if franchisee owns/leases the site
g) Collins Drugs v. Walgreen (p. 400)
Walgreen terminates agreements with all independent retailers. Provides advance notice, offers to help
retailers find new suppliers.
i) Retailers agreement: allows termination for any cause with 30-day notice
ii) Wisconsin Fair Dealership Law; Intended to give franchisees bargaining power
(1) Franchisor may not terminate, cancel, fail to renew without good cause
iii) Franchisor may terminate only for dealer's bad faith or failure to perform duties
(1) Franchisor must prove good cause
iv) Remedies
(1) Money (lost profits)
(2) Injunctive relief
v) Unintended consequence: detailed agreements (increases likelihood of breach)
vi) Later interpretations of Collins
(1) Prohibits expropriation of goodwill created by dealers (7th Cir.)
(2) Economic circumstances may constitute good cause to alter business methods if changes
are essential, reasonable and nondiscriminatory (Wisc. Sup. Ct.)
2) Employment
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a) McIntosh v. Murphy (p. 430) – Plaintiff moves to Hawaii to work for car dealership. Defendant
dismisses plaintiff after 2.5 months for inadequate performance. Plaintiff claims contract was for
one year of work. Defendant claims contract was at will.
i) Court uses Restatement §139 to avoid requirement of writing
ii) Dissent: no proof of contract—exactly the type of claim SOF is intended to prevent
iii) Is there a duty to mitigate in estoppel cases?
3) Restatement (Second) §139
a) A promise reasonably expected to induce action or forbearance is enforceable notwithstanding
the Statute of Frauds if injustice can be avoided only by enforcing the promise
i) Remedy limited as justice requires
(1) Relevant circumstances:
(a) Availability and adequacy of other remedies
(i) i.e., cancellation and restitution;
(b) Definite and substantial character of the action or forbearance in relation to the
remedy sought
(c) Clear and convincing evidence of the making and terms of the promise
(d) Reasonableness of the action or forbearance
(e) Foreseeability of the action to the promisor
4) At-Will Employment
a) Case for at will
i) Law is not necessary because employment relationship contains its own sanctions for
employers who behave badly
ii) Market for employer reputations
iii) Easy exit by employees
iv) Workplace norms limit employer power
v) Legal intervention has high costs
(1) Sacrifice cooperative culture and replace it with rights-conscious culture
(2) Proof in courts
(3) Undercuts workpace discipline
(4) Increase the costs of supervision
vi) Economic development (“high velocity labor market”)
b) Against at will
i) Norms of the workplace are inadequate
(1) Racial and gender discrimination
(2) Large businesses are impersonal
ii) Exit is not a practical remedy for many employees
(1) Loss of friends, status, know routines
(2) Benefits are often tied to employment
(3) Alt options may be limited especially as one ages
iii) Costs of legal intervention are easily exaggerated
c) Employment contract may be terminated for any reason (good, bad, none) at any time
d) At-will contract presumed unless:
i) Contract (explicit and implicit)
ii) Discrimination laws
iii) Public policy considerations
e) CA courts and limits to at-will doctrine
i) Petermann:
(1) Firing employee for refusing to commit perjury is against public policy
ii) Tameny:
(1) Employee fired for refusing to commit criminal activity has a tort claim for wrongful
discharge
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iii) Cleary: Court finds estoppel
(1) Longevity of employment (implies covenant of good faith and fair dealing)
(2) Company's internal procedures for settling disputes
iv) Pugh:
(1) Commendations, promotions, lack of criticism, and company policies may create an
implied contract
v) Foley:
(1) Implied contract is a contract (so no promissory estoppel, which is not a contract action).
(2) Wrongful discharge: public policy, not private interests
(3) Termination guidelines, non-compete agreement, implied contract of employment
(4) Good faith and fair dealing applies only to contract—not tort
vi) Guz
(1) handbooks, policies, memoranda may imply contract
f) Wagenseller v. Scottsdale Memorial Hospital (p. 447) – Employee fired shortly after refusing to
participate in debauchery on vacation with fellow employees, including refusing to moon
audience as part of a skit.
i) Possible exceptions to at-will doctrine:
(1) Public policy
(a) based on indecent exposure statute
ii) Personnel manual
(1) Manual's disciplinary procedures may prove implied contract
(2) Party need not show reliance to enforce contract (not estoppel)
iii) Good faith and fair dealing
(1) Implied in contract for at-will employment
(2) Applies only to benefits earned, not prospective benefits
(a) e.g., violation if employer fires employee to avoid paying commission
SOCIAL CONTROL OF FREE CONTRACT
1) Illegal Contracts
a) Contracts to commit crimes are crimes
i) Courts will not enforce such contracts or grant relief if both parties are equally at fault
ii) Illegal contracts cannot be enforced under doctrine of promissory estoppel
iii) Illegal contract contracts need not openly state an objective to commit crimes
(1) Everet v. Williams (p. 493) “Highway Man's Case” – Agreement between two highway
men to split costs of crime, in different language
(a) If part of the consideration for a contract is illegal then the contract is void
b) Comparative Fault
i) Traditional rule: court leaves parties to illegal contract as it finds them
(1) May benefit defendant by allowing him to keep the fruits of the crime
(2) May penalize plaintiff by denying recovery for costs incurred
ii) Not in pari delicto
(1) Courts rely on discretion to adjust situations in which parties are not equally guilty
(2) Innocent parties recover value of services if they repudiate contract
(a) with reasonable promptness
(b) before illegal action takes effect
c) Edna Carroll v. Agnes Beard (p. 494) – Plaintiff seeks foreclosure on sale of property. Both
parties operated the property as a brothel. Sale price greatly exceeded value of land, contract
provisions imply sale of business concern rather than land.
(1) No defense of illegality where the fault and illegality are unilateral
(a) Defense of illegality requires active participation by both parties
(b) Court: “bare knowledge of the purpose for which the property is sold is not enough”
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d) Coma Corp. v. Kansas Dept. of Labor (p. 499) – Employer fails to pay undocumented worker.
Argues that breach of contract does not warrant punitive damages because contract to hire
undocumented laborer was illegal.
(1) Illegal activity was the employer's hiring, not the employee's labor
(2) Enforcing contract protects workers rights, creates disincentive to hire illegal laborers
e) Public Policy and Enforcement of Illegal Contracts
i) Restatement §178: unenforceable on grounds of public policy if legislation provides that it is
unenforceable or the interest in its enforcement is clearly outweighed in the circumstances by
a public policy against the enforcement of such terms.
(1) Examples
(a) A and B bet on outcome of game
(i) Unenforceable because public policy against gambling outweighs parties' interest
in enforcing the contract
(b) if A asks C to pay B and promises to repay C, policy does not outweigh interest in
enforcing A's promise to C.
(c) Contract for sale and delivery of goods in which seller parks illegally during delivery
is enforceable
(i) Public policy against illegal parking does not outweigh seller's interest in
enforcing buyer's promise
2) Contracts Against Public Policy
a) Non-compete Clauses
i) Must not impose undue hardship on employee
(1) Generally, any unreasonable restraint invalidates the entire contract
(a) Blue penciling (divisible contracts) changes that part that is divisible (changes in
territory)
(2) Reasonable in terms of
(a) Time
(b) Geographic restriction
(c) Subject Matter
(i) Ex: contract preventing car salesman from selling clothing is unreasonable
b) Fullerton Lumber (p. 511) – Former employees sets up competing lumber business in same town
as former employer.
i) Court holds that 10-year term of contract is unreasonable
(1) Reduces the 10-year term: only the excess of a restrictive term is invalid (blue pencil)
(2) Not the rule anywhere (overturned by legislature)
c) California: non-compete clauses are void
SOCIAL CONTROL, CONTRACT, AND CHOICE
1) Capacity
a) Traditional rule: if a person could understand what he was doing, choices were binding
b) Restatement (Second) of Contracts § 12
i) No one can be bound by contract who has not legal capacity to incur at least voidable
contractual duties.
(1) Capacity to contract may be partial
(2) May depend upon the nature of the transaction or other circumstances.
ii) Person has full legal capacity to incur contractual duties unless
(1) under guardianship, or
(2) an infant, or
(3) mentally ill or defective, or
(4) intoxicated.
c) Mental Illness:
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i)
Restatement (Second) of Contracts §15
(1) Contracts are voidable for party's mental defect only if:
(a) Disabled is unable to understand nature and consequences of the transaction or
(b) Disabled is unable to act reasonably in relation to transaction and the other party has
reason to know
(2) If contract is made on fair terms and other party has no reason to know of mental illness,
avoidance is terminated to the extent that
(a) contract has been performed in whole or in part
(b) avoidance would be inequitable
ii) Utah Rule
(1) Were mental facilities so deficient or impaired that there was not sufficient power to
comprehend the subject of the contract, its nature and its probable consequences, and to
act with discretion in relation thereto, or with relation to the ordinary affairs of life.
(2) Less stringent standards apply to wills then to contracts
iii) Ortelere v. Teachers' Retirement Board (note p. 526) – Teacher on leave for mental illness
elects generous retirement plan with no death benefits and died two months later. Surviving
husband had retired to care for her.
(1) Defendant had reason to know of plaintiff's condition; satisfies requirement for avoidance
iv) Pentinen v. New York State Employees' Retirement System (p. 528) – Plaintiff attempts to
change retirement election, claiming impairment similar to Ortelere
(1) Defendant had no notice of plaintiff's impairment
(2) Defendant had purchased annuity for plaintiff; thus, changing election would be
inequitable
v) Keith v. New York State Teachers' Retirement System (p. 528) – Plaintiff seeks to overturn
election of retirement benefits on grounds of incompetency. Defendant had no notice of
plaintiff's impairment.
(1) Court allows plaintiff to change election if nullification would not be inequitable
d) Intoxication
e) Restatement §16
i) A person incurs only voidable contractual duties by entering into a transaction if the other
party has reason to know that by reason of intoxication
ii) He is unable to understand in a reasonable manner the nature and consequences of the
transaction, or
iii) He is unable to act in a reasonable manner in relation to the transaction.
f) Infancy Defense (contracts with minors)
i) Contracts with minors are voidable at minor's election until the beginning of the day before
the 18th birthday
(1) Firm rule
(2) Minor need only prove his or her age
(3) Minor may seek restitution; required to restore only that which is available
(4) Some states have statutes requiring restoration of consideration received as a condition of
disaffirmance
ii) Minors may be liable for misrepresenting age
(1) Tort liability—may still disaffirm contract
iii) Minors cannot avoid liability on contracts for necessaries
(1) Food, shelter, clothing
2) Duress
a) Elements
i) Unlawful or wrongful act or threat
ii) Act deprives victim of free will
iii) As a direct result, victim makes disproportionate exchange or gives up something for nothing
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iv) Driving a hard bargain is not duress
b) Restatement §174: Duress by physical compulsion
i) Void contract if manifestation of assent is physically compelled
c) Restatement §175: Duress by threat
i) Voidable by victim if:
(1) improper threat
(2) no reasonable alternative
ii) Voidable for duress by third party
(1) Unless other party gives value or relies materially on the contract in good faith and with
no knowledge of the duress.
d) Mitchell v. C.C. Sanitation (p. 533) – Employer threatens to fire employee if he does not sign
insurance cos. document waiving liability. Employer cannot recover insurance claim until
employee signs
(1) Unequal bargaining positions
(2) Threat may be wrongful even if threatened conduct is legal
(a) Wolf v. Marlton Corp. (p. 538) – Duress when homeowners threaten to sell house to
undesirable owners
(i) Threat is wrongful when sole purpose is to injure other party
e) Restatement §176: Improper threats
i) Improper on its face
(1) threat to commit crime or tort, or the threat is a crime or tort
(2) threat of criminal prosecution
(3) threat of civil action in bad faith
(4) threat is breach of good faith and fair dealing
ii) Improper if exchange is not on fair terms and
(1) threat harms victim without significantly benefiting threatening party
(2) effectiveness is increased by prior conduct of threatening party
(3) threat is a use of power for illegitimate ends
f) Economic Duress
i) Selmer Co. v. Blakeslee-Midwest (p. 541) – Plaintiff agrees to perform contract following
defendant's breach if defendant pays additional costs. Defendant makes firm offer of half
demanded payment. Plaintiff accepts because of economic hardship.
(1) Party may not use threat of breach to modify contract, knowing other party must accept
or incur costs for which he has no remedy
(2) Financial difficulty alone is not duress
(3) May be duress when other party causes victim's financial difficulty
g) Contract Modification
i) Preexisting duty is not consideration
ii) Restatement §89
(1) Modification of unperformed contract is binding if fair and equitable in view of
circumstances not foreseen at the time of contract
iii) UCC §2-209(1)
(1) Agreements modifying contract do not need consideration to be binding
3) Undue Influence
a) Restatement (Second) §177
(1) Unfair persuasion of a person who is under the domination of the other party or who by
special relationship is justified in assuming the other person will act for his welfare
(2) Voidable contract if assent is obtained through undue influence
(3) Voidable for undue influence by third party unless other party acts in good faith and
without knowledge and gives value or relies materially
ii) Relationships include parent/child, husband/wife, priest/parishioner
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(1) Age, infirmity or weakness of one party are considerations but do not prove undue
influence
iii) Undue influence provides relief where duress and misrepresentation do not.
b) Odorizzi v. Bloomfield School District (p. 552) – Principal visits teacher late at night after arrest
for homosexual activity. Tells teacher he is there to help and that teacher must retire to avoid
publicity.
i) Court finds no fraud, misrepresentation or duress
(1) No threat of criminal prosecution or civil action—threat not “improper”
ii) Court finds undue influence
(1) Coercive persuasion or overpersuasion
(2) Confidential or authoritative relationship between parties
4) Misrepresentation
a) Policy
i) Values of free contract adhere only when the parties have complete and accurate information
ii) Ex Ante self-help is cheaper than ex post legal intervention
iii) Misrepresentation should not be used as a pretext to avoid bad deals
b) Restatement
i) False assertion (§159) A misrepresentation is an assertion that is not in accord with the facts
ii) Concealment (§160) (preventing another form learning of a fact) is equivalent to
misrepresentation
iii) Non-disclosure without concealment is equivalent to a misrepresentation only in special
situations (§161)
(a) failure to correct previous statement
(b) known mistake concerning assumption
(c) known mistake of writing
(d) relation of trust or confidence (non-fiduciary)
iv) Void for misrepresentation (§163):
(a) misrepresentation of character or essential terms of contract
(b) induces assent
(c) by someone who does not know or have reasonable opportunity to know of character
or essential terms
v) Voidable for misrepresentation (§164)
(a) assent is induced by fraudulent or material misrepresentation
(i) fraudulent—intent to deceive
(ii) material—important to the other party
(iii) fraudulent is material, but material is not always fraudulent
(b) other party is justified in relying upon misrepresentation
c) Obde v. Schlemeyer (p. 557) – Owners sell house with termites. Do not know of termites, but
have reason to know of termites because of their incomplete efforts to fix previous infestation.
i) Duty to disclose
(1) concealed defects
(2) dangerous to life, health or property
(3) not discoverable by careful examination
d) Theories of Disclosure
i) Kronman (efficiency)
(1) Duty to disclose information acquired casually, not deliberately
(2) Incentive to discover
ii) Schepelle
(1) Duty to disclose when parties have unequal access to information
5) Good Faith
a) General
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i)
Duty of good faith applies to performance, not negotiation/formation
(1) Attempt to approximate the terms the parties would have negotiated had they foreseen the
circumstances
(2) Forbids opportunistic behavior enabled by contractual relationships
(3) Not a fiduciary duty or a duty of candor
ii) Restatement §205: Duty of good faith and fair dealing imposed on all contracts
(1) faithfulness to agreed purposes
(2) consistent with justified expectations
(3) no bad faith
iii) UCC §1-201(19) “Honesty in fact” required in conduct or transaction
b) Market Street Associates v. Frey (p. 565) – Plaintiff does not call attention to contract provision,
defendant's breach of which benefits plaintiff under the circumstances
i) Taking deliberate advantage of one party's oversight is “sharp dealing”
ii) Cannot take deliberate advantage of an oversight by your contract partner concerning his
rights under the contract – this is sharp dealing. Like theft, it has no social product, and also
like theft it induces costly defensive expenditures
iii) To be able to correct contract partner's mistake at zero cost, and not to do so, is opportunism
that the parties would have expressly forbidden had they foreseen it
iv) The hypothetical bargain
(1) “The concept of the duty of good faith, like the concept of fiduciary duty, is a stab at
approximating the terms the parties would have negotiated had they foreseen the
circumstances that have given rise to their dispute.”
CHOICE AND FORM CONTRACTS
1) Form Contracts
a) McCutcheon v.MacBrayne (p. 583) – Plaintiff shipped car on defendant's boat, which sank.
Plaintiff had not signed liability waiver, although he had done so in the past. Plaintiff had never
read nor understood the terms, which were displayed on the wall in defendant's office
i) Party who signs contract is bound by terms whether he has read them or not
(1) No signature, not bound
ii) Previous dealings are only relevant if they prove actual knowledge of terms
b) Yauger v. Skiing Enterprises, Inc. (p. 592) – Father buys ski passes for family, signs form
contract waiving all claims against ski area, including claims for negligence. Daughter hits
unpadded pole and dies.
i) Adhesion Contract
ii) Enforceability is a matter of public policy
(1) Waiver must clearly, unambiguously, and unmistakably inform the signer of what is
being waived.
(2) The form, looked at in its entirety, must alert the signer to the nature and significance of
what is being signed
iii) ProCD, Inc. v. Zeidenberg (p. 599) – Defendant uses consumer version of plaintiff's software
for commercial purposes. Terms of user agreement were inside the package: unavailable
before purchase but noted on the box
(1) UCC 2-204 – may be made in any manner sufficient to show agreement
(2) UCC 2-206 – acceptance in any manner and by any medium reasonable
(3) Ordinarily contract is formed on purchase
(a) UCC provides for other formations
(i) Money now, terms later
(4) Agreement is binding if it provides opportunity to return the product
iv) Hill v. Gateway 2000 (p. 609) – Computer shipped with internal agreement said to govern if
computer is not returned within 30 days. Includes arbitration clause.
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(1) Court: Arbitration clause need not be prominently displayed
v) UCC §2-207
(1) Where both parties are merchants, party may unilaterally add non-material terms
(2) In consumer transactions, additional terms are proposals and enforceable only if recipient
accepts them.
WARRANTY DISCLAIMERS, AND REMEDY LIMITATIONS: THE UCC PATTERN
1) Steps for Analysis
a) Was there a warranty?
i) Express (UCC § 2-313)
ii) Implied
(1) Merchantability (UCC § 2-314)
(2) Fitness for particular purpose (UCC § 2-315)
b) Did the seller effectively disclaim the warranty? (UCC § 2-316)
c) Did the seller limit the remedies for breach of any warranties not disclaimed? (UCC § 2-317)
2) Express Warranties (UCC § 2-313)
a) Created by
i) Affirmation of fact or promise that becomes part of the basis of the bargain
ii) Description of goods made part of the basis of the bargain
iii) Sample or model made part of the basis of the bargain
iv) Affirmations of value and statements of opinion do not create express warranties
3) Implied Warranty of Merchantability (UCC § 2-314)
a) Implied in all sales for goods if seller is a merchant
b) Merchantability
i) pass without objection in the trade
ii) fair average quality (fungible goods)
iii) fit for ordinary purposes
iv) even kind, quality and quantity within each unit and among all units involved
(1) within specified range of variation
v) adequately contained, packaged, and labeled
vi) conform to any promise or affirmations of fact on the container or label
4) Implied Warranty of Fitness for a Particular Purpose (UCC § 2-315)
a) Implied in sales of goods if
i) Seller has reason to know of any particular purpose for which the goods are required
ii) Buyer relies on seller's skill or judgment to select or furnish suitable goods
b) Particular purpose is distinguishable from ordinary purpose
i) Ex: ordinary purpose of shoes is walking. Particular purpose may be climbing
5) Exclusion or Modification of Warranties (UCC § 2-316)
a) Express
i) Words or conduct relevant to the creation of an express warranty and words or conduct
tending to negate or limit warranty shall be construed wherever reasonable as consistent with
each other.
b) Merchantability
i) Language must mention “merchantability”
ii) If in writing, must be conspicuous
c) Fitness for a particular purpose
i) Must be in writing and conspicuous
ii) Need not mention fitness for particular purpose
(1) Ex. "There are no warranties that extend beyond the description on the face hereof."
d) Other Considerations
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Language such as “as is,” “with all faults,” other language that in common understanding
excludes, disclaims all implied warranties (this includes merchantability)
ii) No implied warranty for discoverable defects when buyer examines or refuses to examine
iii) Implied warranty may be modified or excluded by course of dealing or performance or trade
usage.
6) Conflicting Warranties (UCC § 2-317)
a) Warranties are considered consistent and cumulative
b) When such construction is unreasonable, intent determines which warranty controls
i) Exact or technical specs displace samples/models or general descriptions
ii) Sample from existing bulk displaces general descriptions
iii) Express warranties displace implied warranties (except fitness for particular purpose)
7) Remedies
a) Damages for breach of warranty (§ 2-714[2])
i) Difference between value at acceptance and value of warranted goods
ii) Unless circumstances show different proximate damages
b) Limitation of Remedies (§ 2-719)
i) Agreement may prescribe remedies in addition to or in place of remedies in UCC (contract
over remedies)
(1) Ex: limiting buyer's remedies to refund or repair or replacement
(2) Remedies are cumulative rather than exclusive unless expressly agreed otherwise
ii) UCC remedies apply where contract remedy fails to provide adequate relief
iii) Consequential damages may be excluded/limited unless unconscionable
(1) Limitations for personal injury in consumer goods are unconscionable
(2) Limitations for commercial damages are acceptable
(a)
i)
UNCONSCIONABILITY
8) Restatement § 208
a) Remedies
i) Refuse to enforce unconscionable contract
ii) Refuse to enforce unconscionable term(s)
iii) Limit unconscionable term to avoid unconscionable result
b) Unconscionability
i) Procedural (process by which the process was made)
(1) Gross inequality in bargaining power (most important here)
(2) No meaningful choice
ii) Substantive (terms of the deal)
(1) Gross disparity in value exchanged (consideration) (most important here)
(2) Terms unreasonably favorable to stronger party
iii) Strongest case for unconscionability includes both (very difficult for courts to proceed on
only one)
iv) Balance right to contract with concern for “victim of gross inequality” (Jones)
c) Application
i) Duress, misrepresentation, etc. may address procedural deficiences
ii) Unconscionability is the first choice for challenging “outrageous” terms
9) Predatory Lending
a) Payday loans, rent to own, etc.
i) High interest, short terms
ii) Access to credit for poor or high-risk customers
iii) Many states have disclosure requirements
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b) Williams v. Walker Thomas (p. 668) – Door to door sales contract allows store to hold interest in
previous purchases as collateral.
i) Procedural unconscionability: buyer had “no meaningful choice” – very little bargaining
power
ii) Substantive unconscionability: unreasonably favorable to seller
c) Jones v. Star Credit Corp. (p. 675) – Defendant sells $300 freezer for $1200. Plaintiff makes $600
in payments
(1) Substantive unconscionability
(a) Price disparity (alone may be enough to find unconscionability)
(2) Procedural unconscionability
(a) Limited financial resources of purchaser
(b) The meaningfulness of choice essential to making of a contract can be negated by a
gross inequality of bargaining power
(3) Court: buyer paid enough. Rewrites contract
(4) Sometimes can find only on substantive grounds but substantive + procedural = best shot
10) Arbitration Agreements
a) Many contracts provide that disputes must be resolved through arbitration
i) “Mandatory pre-dispute arbitration clauses”
ii) “Submission agreements”
b) Arbitration agreements sometimes include class action waivers
c) Why do companies use arbitration provisions?
i) Lowers the cost of dispute resolution
(1) Smaller awards … avoids jury risk
(2) Improves likelihood of a positive outcome for the company (?)
(3) Limits publicity of complaints
d) Federal Statute says arbitration clauses should be enforced. Courts use State law to make them
unconscionable
e) Payday loan business model
i) Short-term loans
ii) High interest rates
iii) Customers with impaired credit
f) Federal Regulation
i) Truth in Lending Act: conspicuous disclosure of finance charges and interest rates
g) State Regulation
i) Explicit Toleration: most common … statute expressly authorizes
ii) Underenforced Prohibition: also common … formal prohibition, but lack of enforcement
resources
iii) True Prohibition: outright ban + aggressive enforcement
h) Johnson v. The Cash Store – Payday lending, $500 short term loan, $75 each time she gets a new
loan
i) Procedural
(1) Johnson: absence of meaningful choice (no bargaining power)
(2) Cash Store: loan procedures consistently upheld elsewhere
ii) Substantive
(1) Johnson: exorbitant interest rates (court calls this procedural, but it’s really substantive)
(2) Cash Store: Short-term loans expressly approved by DFI and statute
iii) “Labeling roll overs as new loans is common in the payday loan industry. By paying back the
loan and immediately taking out a new loan for the same amount, the consumer enters a debt
treadmill, where the loan is nonamortizing and payment of a finance fee every two weeks is
necessary to prevent a default.”
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