CONTRACTS OUTLINE
Prof. Triantis
Fall 2008
Ethan Kent
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Table of Contents
Chapter 1 – Introduction .................................................................................................................... 5
§1.01 – Rule v. Standard ................................................................................................................................. 5
[A] – Rule .......................................................................................................................................................................... 5
[B] – Standard ................................................................................................................................................................. 5
§1.02 – Definition of a Contract ................................................................................................................... 5
§1.03 – Purposes and Considerations ....................................................................................................... 5
[A] – Incentives .............................................................................................................................................................. 5
[B] – Objectives of Courts in Contracts ................................................................................................................ 5
§1.04 – Intent to Contract............................................................................................................................... 6
[A] – Objective test ....................................................................................................................................................... 6
[B] – “Meeting of the Minds”..................................................................................................................................... 6
[C] – Intent to be Legally Bound.............................................................................................................................. 6
[D] – Negligent Assent................................................................................................................................................. 6
Chapter 2 – When Is a Promise Legally Enforceable? ............................................................... 8
§2.04 – Consideration...................................................................................................................................... 8
[A] – Gratuitous Promises ......................................................................................................................................... 8
[B] – Definition ............................................................................................................................................................... 8
[C] – Restatement Definition .................................................................................................................................... 8
[D] – As a Formality...................................................................................................................................................... 9
[E] – Adequacy of Consideration ............................................................................................................................ 9
[F] – Sham and Nominal Consideration ............................................................................................................... 9
[G] – Pre-existing Duty Rule ..................................................................................................................................... 9
[H] – Requirements and Output Contracts ....................................................................................................... 10
[I] – Relaxing Standards ........................................................................................................................................... 11
§2.05 – Option Contracts ............................................................................................................................. 11
[A] – Without Consideration .................................................................................................................................. 11
[B] – Partial Performance ........................................................................................................................................ 11
[C] – Termination of an Option.............................................................................................................................. 11
[D] – Reliance and Options ...................................................................................................................................... 11
§2.06 – Reliance .............................................................................................................................................. 12
§2.07 – Restitution (cause of action) ...................................................................................................... 12
§2.08 – Statute of Frauds ............................................................................................................................. 12
Chapter 3 – Negotiation and Formation of the Contract........................................................ 14
§3.01 – Offer ..................................................................................................................................................... 14
[A] – Distinguished from Preliminary Negotiations ..................................................................................... 14
[B] – Expiration of an Offer ..................................................................................................................................... 14
§3.02 – Acceptance ........................................................................................................................................ 16
[A] – Knowledge of the Offer .................................................................................................................................. 16
[B] – Intent to Accept ................................................................................................................................................. 17
[C] – Who May Accept? ............................................................................................................................................. 17
[D] – Notice Requirements for a Unilateral Contract ................................................................................... 17
[E] – Acceptance of an Offer Looking to a Series of Contracts .................................................................. 18
[F] – The Necessity of Communicating Acceptance of an Offer to a Bilateral Contract ............. 18
[G] – Acceptance by Silence—Implied-in-Fact Contracts ........................................................................... 18
[H] – Acceptance by Conduct or an Act of Dominion ................................................................................... 19
§3.03 – Battle of the Forms ......................................................................................................................... 19
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[A] – Common Law ..................................................................................................................................................... 19
[B] – UCC ......................................................................................................................................................................... 20
§3.04 – Software Problem and Rolling Contracts ............................................................................... 21
§3.05 – Negotiation and Closure ............................................................................................................... 22
§3.06 – Good Faith in Contract Formation ............................................................................................ 22
Chapter 4 – The Contents of the Contract ................................................................................... 24
§4.01 – The Parol Evidence Rule .............................................................................................................. 24
[A] – Is the Writing Integrated?............................................................................................................................. 24
[B] – Is the Writing a Total Integration? ............................................................................................................ 24
[C] – Approaches to the Parol Evidence Rule .................................................................................................. 24
[D] – Advantages and Disadvantages of the Parol Evidence Rule........................................................... 26
§4.02 – Interpreting the Terms of the Contract .................................................................................. 26
[A] – Plain Meaning Rule .......................................................................................................................................... 26
[B] – Reasonable Expectation Approach ........................................................................................................... 27
[C] – Canons of Contractual Interpretation ...................................................................................................... 27
[E] – Omitted Terms................................................................................................................................................... 28
§ 4.03 – Implied Terms and the Implied Covenant of Good Faith ................................................ 28
Chapter 5 – Remedies ........................................................................................................................ 29
§ 5.01 – Non-Compensatory Damages .................................................................................................... 29
[A] – Nominal Damages ............................................................................................................................................ 29
[B] – Punitive Damages............................................................................................................................................. 29
§ 5.02 – Expectation Damages ................................................................................................................... 29
[A] – General Measure............................................................................................................................................... 29
[B] – Alternative Measures...................................................................................................................................... 29
§ 5.03 Foreseeability .................................................................................................................................... 30
§ 5.04 Certainty .............................................................................................................................................. 30
[A] – Reliance Damages ............................................................................................................................................ 30
[B] – Restitution Damages ....................................................................................................................................... 30
§ 5.05 – Mitigation ......................................................................................................................................... 31
§ 5.06 – Specific Performance ................................................................................................................... 32
[A] – Restatement Provisions................................................................................................................................. 32
[B] – Specific Circumstances................................................................................................................................... 32
§ 5.07 – Liquidated Damages ..................................................................................................................... 33
[A] – Determining Whether Liquidated Damages are Enforceable ........................................................ 33
[B] – Draftsmanship ................................................................................................................................................... 34
§ 5.08 – Damages in Particular Actions.................................................................................................. 34
[A] – Employment ....................................................................................................................................................... 34
[B] – Damages Available for Buyers .................................................................................................................... 34
[C] – Damages Available for Sellers ..................................................................................................................... 34
[D] – Construction Contracts .................................................................................................................................. 35
Chapter 6 – Conditions and Self-Help Remedies ...................................................................... 36
§ 6.01 – Express Conditions........................................................................................................................ 36
§ 6.02 – Implied or Constructive Conditions ........................................................................................ 37
[A] – Order of Performance in a Bilateral Contract....................................................................................... 37
[B] – Material Breach ................................................................................................................................................. 37
[C] – Substantial Performance ............................................................................................................................... 38
§ 6.03 – Anticipatory Breach and Repudiation ................................................................................... 38
[A] – Anticipatory Breach ........................................................................................................................................ 38
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[B] – Anticipatory Repudiation ............................................................................................................................. 39
Chapter 8 – Excuse .............................................................................................................................. 40
§ 8.01 – Impossibility / Impracticability ............................................................................................... 40
§ 8.02 – Frustration ....................................................................................................................................... 41
§ 8.03 – Unconscionability .......................................................................................................................... 41
Chapter 9 – Third Party Rights and Responsibilities ............................................................. 42
§ 9.01 – Third party beneficiaries ............................................................................................................ 42
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Chapter 1 – Introduction
§1.01 – Rule v. Standard
[A] – Rule
Rules are formal, predictable, certain, and cheap to enforce. However, writing them is more expensive, and they allow little flexibility in enforcement. A stoplight is a rule, for example.
[B] – Standard
Standards are contextual, cheap to produce, and allow flexibility in enforcement. However, they
are expensive to enforce and make predicting the law more difficult. An unmarked intersection
would be an example of a standard.
§1.02 – Definition of a Contract
Several definitions are possible. “A promise or set of promises, for breach of which the law
gives a remedy, or the performance of which the law in some way recognizes as a duty.” “A legally enforceable agreement.” “The relations among parties to the process of projecting exchange into the future.”
§1.03 – Purposes and Considerations
[A] – Incentives
A contract helps to align parties’ incentives. Sometimes parties’ incentives are already complementary, and a contract is not necessary. For example, in attending HLS, it is unnecessary to
sign a lengthy contract because I am motivated to do my best, and HLS is motivated to provide
me with a quality education.
Other times, parties’ incentives are not well aligned. For example, a franchisee can externalize
costs to the franchisor by stealing secrets or skimping on maintenance or cleaning.
[B] – Objectives of Courts in Contracts
[1] – Enforcing the Parties’ Intent
Courts aim to hold the parties to their agreements. When the parties’ intent is easily discerned,
this isn’t so hard. However, when this isn’t the case, the court may either attempt to figure it out,
fill in gaps from the UCC and industry standards, or find the contract in part or in whole unenforceable.
[2] – Furthering Public Policy Goals
Courts may also seek to enforce contracts in such a way as to further public policy goals. An
example is placing the risk on the lowest cost avoider, or on the party best able to withstand the
loss by purchasing insurance.
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§1.04 – Intent to Contract
[A] – Objective test
The objective manifestations of the parties are what count. Courts have gone back and forth on
this throughout history, but modern courts enforce what a reasonable person in the shoes of the
other party would interpret.
The acts that manifest the intent must be done either intentionally or negligently. It doesn’t matter if a party is joking if the objective manifestation of assent would appear to a reasonable person to indicate a desire to make a binding promise.
The superior knowledge of a party is taken into account. A and B are joking about selling a car.
To everyone within earshot, it sounds as though they are serious, but each knows the other is joking. A legally enforceable promise will not occur.
The objective test is a question of fact, not of law.
[B] – “Meeting of the Minds”
Because of the objective test, it is not necessary that there be a true meeting of the minds.
[C] – Intent to be Legally Bound
It is not required that both parties be cognizant that a legally binding promise will result from
their agreement. It is possible for parties to specify that they don’t intend to be legally bound;
however, this must be expressed by the objective standard.
For example, if A posted a television on Craig’s List, and B called and made an offer that A accepted, A could not contend that she didn’t realize that the agreement could be enforced.
If A and B were negotiating for the sale of a house, and A wrote a proposition in which he wrote,
“This writing is a proposition only and is not legally enforceable,” B could not attempt to enforce
the terms of the writing.
[D] – Negligent Assent
[1] – One of the Parties at Fault
“The manifestations of the parties are operative in accordance with the meaning attached to them
by one of the parties if that party has no reason to know of any different meaning attached by the
other, and the other has reason to know the meaning attached by the first party.” R2C § 20.
A and B are negotiating the sale of a house. A thinks that the lawnmower will be included. B
realizes that A thinks he’s getting the lawnmower, but B doesn’t plan for A to get it. A gets the
lawnmower because of B messing around with the situation.
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[2] – Neither or Both Parties at Fault
“There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations, and (a) neither party knows or has reason to know the
meaning attached by the other; or (b) each party knows or each party has reason to know the
meaning attached by the other.”
In the example in [1], supra, if A thought he was getting the lawnmower, and B thought A was
not getting the lawnmower, there is no agreement. If A knew B didn’t intend to give the
lawnmower, and B knew A expected to get the lawnmower, there’s no agreement.
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Chapter 2 – When Is a Promise Legally Enforceable?
§2.04 – Consideration
[A] – Gratuitous Promises
Donative/gratuitous promises are generally not enforced. There are several reasons: it’s difficult
to prove such a promise; the injury is slight due; the promise may be entered without deliberation; the promise may have been made improvidently or the promisor may show ingratitude.
An informal, unrelied-on, gratuitous promise generally will not be enforced.
[B] – Definition
[1] – The promisee must incur legal detriment.
The promisee must do or promise to do something that s/he is not legally obligated to do. Sometimes this is described in terms of the promisor receiving a legal benefit. This is basically the
same thing, because if A promises to pay B $10, A loses $10 (a detriment) and B gains $10.
Even if A agrees to burn the $10, B’s benefit is in having A burn the $10.
Additionally, the detriment need not run from the promisee to the promisor. If A agreed to help
B’s brother move, that would still be a detriment to A. If A agreed that his brother would help B
move, that would still be a benefit to B.
[2] – The detriment must induce the promise.
The promise must be made to induce the conduct of the promisee. If A offers B $10 to mow the
lawn, there is consideration. If A gratuitously offers B $10, and B accepts the $10 and gratuitously promises to mow the lawn, there is no consideration.
[3] – The promise must induce the detriment
The promise must induce the promisee to exchange the promisee’s conduct for the promise. If A
writes a note to B saying that A will pay B $10 to mow the lawn and B mows the lawn without
ever discovering the note, there is no consideration.
[C] – Restatement Definition
R2C § 71:
(1) To constitute consideration, a performance or a return promise must be bargained for.
(2) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.
(3) The performance may consist of
(a) an act other than a promise, or
(b) a forbearance, or
(c) the creation, modification, or destruction of a legal relation.
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(4) The performance or return promise may be given to the promisor or to some other
person. It may be given by the promisee or by some other person.
[D] – As a Formality
Consideration, like other formalities (e.g. the statute of frauds), helps establish the intent of the
parties to be bound by the promise: it serves as a threshold for finding that promises are serious.
Further, much as with a writing, exchanging formalities informs the parties that the discussion
has entered a legal realm.
[E] – Adequacy of Consideration
Courts typically do not review the adequacy of consideration. However, other doctrines, such as
unconscionability, mistake, or fraud may invalidate the contract.
[F] – Sham and Nominal Consideration
[1] – Sham Consideration in the Common Law
The majority view is that sham consideration, if it can be proved that there was no actual consideration, means there is no consideration. A minority view says that either parties are estopped
from introducing evidence of the sham consideration or that the recital of consideration is a
promise to pay the consideration.
[2] – Sham Consideration under Restatement (Second) of Contracts §§ 87 &
88
For option contracts and guaranties, the Restatement says that consideration may be recited.
This is because the Restatement recognizes the economic utility of options and guaranties unsupported by consideration. See option contracts.
[3] – Nominal Consideration
Nominal consideration is where a party exchanges a detriment only to circumvent the necessity
of consideration, and is distinct from an investigation of the adequacy of consideration. Some
courts (and R2C, § 71 ill. 5) take the view that because nominal consideration attempts to thwart
the rule and render a gratuitous promise enforceable, it is not consideration. Other courts (and
R1C) take the view that there is consideration.
[G] – Pre-existing Duty Rule
The pre-existing duty rule is a logical consequence of the doctrine of consideration that says
there is no detriment if where a person does something he is required to do or refrains from doing
something she could not do.
There is debate about this rule because it can thwart the intent of the parties.
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[1] – Legal Duties
A promises B not to murder C, in exchange for B giving A a Pop-Tart. There is no consideration
because A is required by law not to murder C.
[2] – Contractual Duties and Renegotiation
[a] – At Common Law
The pre-existing duty rule has consequences for the renegotiation of a contract. If A has an
agreement to dig a trench in B’s yard for $500, renegotiation to $600 for the same job may be
ineffective for want of consideration. This is because A was already contractually required to
dig the trench for $500, so A has not given any consideration for the extra money. There is a
minority rule that allows this.
If A agrees to dig the trench one inch deeper than the original contract specified, there is consideration. A and B may try to circumvent the rule by rescinding the original contract (which is a
detriment to both of them) and simultaneously entering a new contract (which is a detriment to
both of them). However, the Restatement rejects this.
Courts sometimes strain to find a detriment for the policy purpose of fulfilling the parties’ intent.
For example, if a creditor allows a debtor to pay a lesser fee and the debtor pays it before the due
date, this may be consideration. So too may be a lesser payment in lieu of declaring bankruptcy.
Courts sometimes allow renegotiation to be binding if there are unforeseen difficulties, even
though there is no consideration.
[b] – Under UCC §2-209(1)
“An agreement modifying a contract within this Article needs no consideration to be binding.”
[H] – Requirements and Output Contracts
In a requirements contract, a buyer agrees to buy all his requirements (or perhaps a fixed percentage) from the seller. In an output contract, the seller agrees to sell all her output (or perhaps
a fixed percentage) to the buyer.
UCC § 2-306 has (like other sections of the Code) influenced common law. The § 2-306(1)
states that “A term which measures the quantity by the output of the seller or the requirements of
the buyer means such actual output or requirements as may occur in good faith, except that no
quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or
demanded.”
Thus, the parties are required to act in good faith, which constitutes a detriment.
Similarly, an exclusive dealing contract imposes mutual detriment, as described in UCC § 2306(2): “A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of
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goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts
to supply the goods and by the buyer to use best efforts to promote their sale.”
[I] – Relaxing Standards
The law seems to be going in the direction of relaxing the standards for consideration. This is in
part influenced by the UCC, and also because courts are increasingly sensitive to fulfilling the
intents of parties, unhindered by overly rigid formalities.
Many cases that could be supported by promissory estoppel can also be supported by a court going out of its way to find consideration.
§2.05 – Option Contracts
Option contracts, sometimes called “irrevocable offers,” are offers that cannot be revoked by the
offeror for a specific period of time or until a specific occurrence.
Generally, option contracts must be supported by consideration. Indeed, an option may be conceptualized as a subsidiary contract: the exchange of irrevocability for consideration.
[A] – Without Consideration
Under some circumstances consideration is not necessary for an option contract. Under R2C §
87(1)(a), reciting consideration is sufficient. In some jurisdictions an option under seal does not
require consideration. Some statutes allow the creation of an option without consideration. UCC
§ 2-205 allows merchants to provide a free option, provided it is in writing, and is limited to
three months.
[B] – Partial Performance
If A offers to pay B $5 to climb a tree and B can accept the offer by performance, A cannot
withdraw the offer once B has started climbing the tree. Thus, B has an option to complete the
performance and be paid, or stop his performance and reject the offer.
[C] – Termination of an Option
The same rules that invalidate a contract apply to an option—for example, death or incapacity
will terminate the option if the contract could no longer be performed. However, death or incapacity does not necessarily terminate an option. Supervening legal prohibition does.
Modern courts typically view rejection as not terminating an offer. Reliance on the rejection
may estop the offeree from exercising the option, however.
[D] – Reliance and Options
Reliance on an offer can create an option. This is especially so in the case of a general contractor
relying on a subcontractor’s bid in preparing its own bid to a customer. The subcontractor may
be estopped from withdrawing the offer. See Reliance.
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§2.06 – Reliance
Promissory estoppel is a doctrine that allows reliance to fill in for problem in a contract, such as
lack of consideration, indefiniteness, failure to comply with the Statute of Frauds, noncompliance with the parol evidence rule, and more. Most typically, promissory estoppel is used
to enforce a promise made without consideration.
R2C § 90(1) lists the following elements
1. A promise
2. which the promisor should reasonably expect to induce action or forbearance on the
part of the promisee or a third person and
3. which does induce such action or forbearance is binding
4. if injustice can be avoided only by enforcement of the promise.
And adds “The remedy granted for breach may be limited as justice requires.”
Critically, promissory estoppel only applies where there is a promise. Thus, promissory estoppel
does not apply if the parties never made a promise to one another.
As courts have been increasingly willing to find consideration in contracts, the doctrine of promissory estoppel may be necessary in fewer contracts. Prof. Triantis frequently remarks that finding a contract is preferable to promissory estoppel.
§2.07 – Restitution (cause of action)
Restitution (sometimes referred to as quantum meruit—“what he is due”), is an equitable remedy
for dealing with unfair situations in which there was no contract. Generally, courts will provide
restitution only where it would be hard to bargain. For example, restitution will not be due to a
street musician who plays for a passerby, because the musician could easily have negotiated a
contract (low transaction costs). However, an unconscious patient may be ordered to pay restitution to a doctor who treats her, due to the high transaction costs.
Quantum meruit may be pleaded in the alternative to breach of contract. If the court finds a contract, it will award damages on the basis of the contract. However, if there is no contract, the
plaintiff may still be able to recover for restitution.
§2.08 – Statute of Frauds
The Statute of Frauds dates to 1677. It requires that certain types of contracts be in writing:
1.
2.
3.
4.
5.
A promise by an executor or administrator to answer damages out of his own estate
A promise to answer for the debt, default, or miscarriage of another person
An agreement made in consideration of marriage
Any contract for the sale of land or interests in land
Any agreement that is not to be performed within the space of one year from the making
thereof.
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The one-year rule as been interpreted to apply only to contracts that cannot be completed within
a year. If a construction project will take 15 months to complete and the contract allows 20
months for the construction, this does not fall under the one-year rule. The inquiry is whether
completing the contract within a year would be a breach. If not, the one-year rule does not apply.
Under the UCC (§ 2-201), a writing must accompany goods costing more than $500 ($5,000 in
the revision). This does not apply if the goods are to be manufactured specifically for the buyer
and are not suitable for sale to others, if the disputant admits a contract, or goods received or paid
for.
The record can be pieced together from several writings and extrinsic evidence. Under the Restatement (§ 131) is enforceable if “it is evidenced by any writing, signed by or on behalf of the
party to be charged, which (a) reasonably identifies the subject matter of the contract, (b) is sufficient to indicate that a contract with respect thereto has been made between the parties or offered by the signer to the other party, and (c) states with reasonable certainty the essential terms
of the unperformed promises in the contract.”
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Chapter 3 – Negotiation and Formation of the Contract
§3.01 – Offer
“An offer is the manifestation of willingness to enter into a bargain, so made as to justify another
person in understanding that his assent to that bargain is invited and will conclude it.” R2C § 24.
[A] – Distinguished from Preliminary Negotiations
It can be murky when negotiations become an offer. R2C § 26 says “A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a
further manifestation of assent.”
Preliminary negotiations include any communications prior to the operative offer. These may
include statements of opinion, statements of intention, hopes and desires, estimates, inquiries,
invitations to make offers, advertisements, catalogs, circular letters, invitations to make bids, and
price quotations.i
“In determining whether a communication is an offer or not, some of the important factors are:
1. Whether the communication is an initial communication as opposed to an answer to an
inquiry. An answer to an inquiry is more likely to be an offer. The language of the inquiry is also important. Does the inquiry ask for an offer? …
2. The words used. Are the words generally associated with promise or are they noncommittal?
3. Are the terms detailed or are only a few terms included? Do they include the quantity
and quality terms?
4. Selectivity of Communication—is it clear that the party who sends the communication is
treating with other people with respect to the same subject matter?
5. Does the case involve real property or goods? Courts are less likely to interpret a message about real property as an offer than a similar message about goods.
6. Relationship of the parties: husband and wife or other close bond.
7. Surrounding circumstances; for example, whether a physician is treating a patient under
emergency conditions or not.
8. Usages of the trade, prior practices of the parties (“course of dealing”).”ii
[B] – Expiration of an Offer
Offers expire under a number of situations.
[1] – Lapse of Time
[a] – Lapse of Time
An offer may specify the period of time available for acceptance. Even this may require interpretation. For example, does “ten days” refer to ten business days? Does it refer to calendar
days or to the hour at which the offer was made?
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Some commentators propose resolving the ambiguity in favor of the offeror, others in favor of
the offeree.
An offer may be held open until a particular event occurs. The offeror need not communicate
that the event has occurred to the offeree. A contract can thus specify that the offer is valid,
“subject to prior sale.”
If the duration is not stated, the offer is to be held open for a reasonable time. The question of
what constitutes a reasonable time is usually one of fact. Factors in determining what period of
time is reasonable include whether the transaction is speculative, the manifest purpose of the offeror, and whether the offeree is acting good faith.iii
[b] – Late Acceptance
The classical view of a late acceptance is that it is an offer, which may then be accepted by the
initial offeror.
Another view is that the offeror may treat the late acceptance as an offer by waiving the lateness.
However, in order to do so, the offeror must manifest objective intent to be bound (and the existence of the contract should be communicated).
A third, intermediate view is that if the acceptance was arguably timely, the offeror has the burden of informing the offeree that the time for acceptance lapsed.
[2] – Death or Lack of Capacity of the Offeror or Offeree
The majority view is that the death of the offeror or offeree terminates the offer. A minority
view holds that death only terminates the offer if the offeree is aware of the offeror’s death prior
to acceptance.
If an offeror is adjudicated mentally ill, the majority view is that this terminates the offer. A minority view holds that, as with death, adjudication of mental illness only terminates the offer if
the offeree becomes aware of the adjudication prior to acceptance.
If the offeror is not adjudicated to be mentally ill, mental incapacity terminates the offer only if
the offeree becomes aware of the mental incapacity prior to acceptance.
Because only the offeree may accept an offer, his representative may not accept an offer the offeree cannot accept due to mental incapacity or death.
[3] – Revocation
An offer may be revoked at any time prior to acceptance, provided it is not an option or firm offer. An equivocal revocation is still a revocation.
A revocation is generally effective upon receipt, although in some jurisdictions it is effective
when sent. An offer may specify that it can be terminated without notice. Such an offer cannot
be revoked after being accepted, however.
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If an offer is made to unknown persons, as through an advertisement, it can be revoked by placing another advertisement of the same prominence in the same source. If this is impossible, the
offeror may make her best effort under the circumstances.
An offer may be revoked indirectly, where the offeree becomes aware through reliable information that the offeror no longer wishes for the offer to be operative. For example, if A offers to
sell his house to B, but then sells it to C, the offer to B is revoked if B hears from a reliable
source that C bought the house, sees C moving into the house, etc.
“This raises the question of what information should lead a reasonable person to conclude that
the offeror wishes to terminate the offer.” If, in the example above, B merely learned that A had
offered his house to C, this would probably not terminate the offer. This is because the reasonable interpretation for B is that A didn’t mind having two offers open.iv
[4] – Counteroffer
A counteroffer is an implicit rejection and new offer. Thus, it has the effect of terminating the
initial offer, and extends an offer to the original offeror.
The mirror-image rule in common law says that an acceptance with different terms is a counteroffer.
“Neither a rejection nor a counter-offer will operate to terminate an offer if the offeror or offeree
manifests such an intention. Thus, if the counteroffer states that the offeree is ‘keeping the offer
under advisement’ the power of acceptance is not terminated. There is no implicit rejection in
that statement. A rejection or a counteroffer does not terminate the power of acceptance until it
is received.
“One can distinguish a counteroffer and a rejection from a counter-inquiry, a comment on the
terms, a request for a modification of the offer, a request for a modification of a contract, an acceptance plus a separate offer, and even what has been referred to as a ‘grumbling assent.’ The
overarching question is whether the offeror can reasonably understand that the offer is no longer
alive.”v
[5] – Supervening Death, Destruction, or Illegality
If the object or a necessary person dies or is destroyed, the offer is terminated. For example, if A
offers to use his cement truck to make a driveway for B and A’s cement truck explodes (or A
explodes), the offer is revoked. If driveways become illegal, the offer is revoked.
§3.02 – Acceptancevi
[A] – Knowledge of the Offer
While it is not strictly true that an offeree must know of an offer in order to accept it (e.g., A
sends a letter containing an offer to B; B, without reading A’s letter, whimsically sends a letter
that says, simply, “I accept.”), this is usually the case.
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As discussed in Consideration, if A sends a letter to B offering $10 to mow the lawn and B mows
the law without reading the letter, A need not pay.
Identical cross-offers do not create a contract. If A mails a letter to B offering to sell his car for
$1000, and on the same day B sends a letter to A offering to by her car for $1000, no contract
results unless one of them accepts.
If A finds B’s dog, then notices a sign offering a reward for finding and returning the dog, the
authorities are split over whether this constitutes a contract. Some say that A’s performance began before she was aware of the offer. The more modern view is that A is owed the award so
long as she became aware of the offer prior to completing her performance.
[B] – Intent to Accept
The offeree must manifest the intent to accept the offer, with modern courts using an objective
test. Thus, if a professor offers a student $10 to come to class and the student attends, the student
has accepted the offer. It doesn’t matter that the student may have attended anyway, and modern
courts will not require testimony to demonstrate subjectively that the $10 is what induced the
student to come.
[C] – Who May Accept?
The offeror determines who has the power to accept the offer. An offeree cannot transfer the
power of acceptance. If A makes an offer to B and C jointly, B or C cannot accept individually.
“Ordinarily the identity of the offerees will be determined by the reasonable person test.” If A
offers a $10 million reward to a private person who can build a plane that flies in space, once B
has accepted the offer through performance, C and D cannot. If X, a manufacturer of radar detectors, offers to pay for a speeding ticket that a driver using its product receives, Y and Z can
both accept through performance.
If a person offers to buy a product from a store and the store changes ownership with the new
owner accepting, the reasonable person test must be used to determine whether the offer was
made to the store irrespective of ownership, or only to the store as operated by that owner.
[D] – Notice Requirements for a Unilateral Contract
If A offers to pay B $20 to mow her lawn, B can simply show up and start mowing. If A can
easily see that B has started mowing, there is no need for B to tell A that he has performed. It is
also clear-cut if A told B not to worry about letting her know that he has performed.
The situation is more difficult if A is unable to see that B has completed mowing. One approach
is that B has accepted through performance, but must communicate his acceptance to A in a reasonable time if he has reason to know that she has no adequate means of learning of performance.
Another approach is that no contract exists in that situation until A communicates having begun
performance.
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In the first situation, A cannot revoke her offer once B has started to perform even if she has not
yet been informed. Only if A fails to inform her of his performance in a reasonable time is B not
obligated. In the second situation, A can revoke her offer even after B has commenced performance, provided B has not informed her of having commenced performance.
A third view is that B is not required to inform A of his acceptance unless A requests that he do
so. The Restatement takes the first view (§ 54); the third view is a minority view.
[E] – Acceptance of an Offer Looking to a Series of Contracts
A divisible offer is one that contemplates a series of independent contracts formed by separate
acceptances.
A unilateral divisible offer might read “I authorize you to pick apples in my grove anytime over
the next month, taking a maximum of 50 pounds during the month, and leaving $1 per pound in
my mailbox.”
A bilateral divisible offer might read “I will sell you between 10 and 20 pounds of apples at my
store, from time to time, for the next month, at $1 per pound.”
Each of these offers may be accepted repeatedly (within their terms), creating a new contract
each time. The overall offer may be revoked, but all of the contracts formed by each acceptance
of the offer is binding and cannot be revoked.
Difficulties of interpretation may arise in deciding whether a particular offer looks to a series of
acceptances, or instead is to be accepted once and result in a series of performances.
“A, a newspaper, requests B to discontinue distribution of a rival newspaper and promises to pay
B $100 a week as long as B abstains from such distribution while A remains in business. It is
conceivable that this offer could be viewed as an offer looking to a series of unilateral contracts.
However, the court held that the offer looked to one unilateral contract with a series of performances.”vii
[F] – The Necessity of Communicating Acceptance of an Offer to a Bilateral Contract
“A unilateral contract arises on performance, but for the creation of a bilateral contract, the general rule is that the offeree’s promise must be communicated to the offeror.” While there are
some roundabout exceptions to this rule, it’s good enough except as discussed in [G], infra.
R2C § 56: “Except as stated in § 69 or where the offer manifests a contrary intention, it is essential to an acceptance by promise either that the offeree exercise reasonable diligence to notify the
offeror of acceptance or that the offeror receive the acceptance seasonably.”
[G] – Acceptance by Silence—Implied-in-Fact Contracts
In general, acceptance of a bilateral contract must be communicated (see [F], supra). If the relationship between the parties and the circumstances lead the offeror to believe that an offer must
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be expressly rejected, a contract may arise through silence. “[T]here is a duty to speak [burden
to reply] when silence ‘would be deceptive and beguiling.’”viii
R2C § 69(1) gives an exclusive list of three circumstances under which silence is acceptance:
1. Where an offeree takes the benefit of offered services with reasonable opportunity to reject them and reason to know that they were offered with the expectation of compensation.
2. Where the offeror has stated or given the offeree reason to understand that assent may be
manifested by silence or inaction, and the offeree in remaining silent and inactive intends
to accept the offer.
3. Where because of previous dealings or otherwise, it is reasonable that the offeree should
notify the offeror if he does not intend to accept.
If A sends a letter to B out of the blue saying, “We have a deal unless you reply to say we don’t,”
there is no acceptance even if B doesn’t reject the offer. However, most cases hold that B can
accept by remaining silent.
If A offers to sell B his car and B says, “If you haven’t heard from me by next Tuesday, we have
a deal,” silence will accept the offer.
If A has routinely sent products to B without B’s request and for which B has routinely paid, B
will not be allowed to testify to his subjective intent if he refuses to pay, and it will be left to the
factfinder to decide if his silence was an acceptance.
[H] – Acceptance by Conduct or an Act of Dominion
“A, on passing a market, where he has an account, sees a box of apples marked ‘25 cts. each.’ A
picks up an apple, holds it up so that a clerk of the establishment sees the act. The clerk nods,
and A passes on. A has promised to pay twenty-five cents for the apple.”ix This is an offer and
acceptance by conduct. The interpretation is factual.
R2C § 69(2): “An offeree who does any act inconsistent with the offeror's ownership of offered
property is bound in accordance with the offered terms unless they are manifestly unreasonable.
But if the act is wrongful as against the offeror it is an acceptance only if ratified by him.”
A offers goods to B. “Although B takes possession of them, B declares that ‘I reject the offer. I
am a converter.’”x In this situation, if A’s terms are reasonable, A can sue to enforce the contract
or can sue under the tort of conversion.
§3.03 – Battle of the Forms
[A] – Common Law
Under the common law, the “mirror image rule” applied. This required that an acceptance that
changed the terms of the offer was a rejection and counteroffer (see §3.01[B][4]). The reasoning
of the mirror image rule meant that the “last shot” was effective if the parties went on to behave
as though a contract existed. This is because the acceptance/counteroffer was deemed accepted
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by the performance or exercise of dominion over the goods by the other party. Thus, the “last
shot” in the correspondence was controlling.
[B] – UCC
UCC § 2-207 now governs (at least with respect to sales) the effect of different terms in the offer
and acceptance.
§ 2-207. Additional Terms in Acceptance or Confirmation.
(1) 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.
(2) The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a
contract. In such case the terms of the particular contract consist of those terms on which
the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act.
[1] – Subsection (1): Is There a Contract?
Subsection (1) repudiates the mirror-image rule. It has two parts – definite expression of acceptance, and whether acceptance is expressly conditional on assent to additional or different
terms.
[a] – Definite Expression of Acceptance
Usually there is no issue as to whether an expression of acceptance is definite. However, if the
acceptance specifies a different quantity, this probably indicates a lack of acceptance. A term
that “diverges significantly as to a dickered term” is not a definite expression of acceptance.xi
However, courts sometimes find a definite expression of acceptance even where terms are different than the dickered term.
[b] – Is the Acceptance Expressly Conditional on Assent to the Additional or Different Terms?
Even if the terms of the purported acceptance are definite enough, language that indicates that
makes the acceptance expressly conditional on the offeror accepting the offeree’s additional or
different terms renders the acceptance ineffective. Courts err in the direction of finding a contract unless the terms very clearly make acceptance conditional on the offeror’s assent, particularly on a standard-form contract.
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[2] – Subsection (2): What are the Terms?
If a contract is found under subsection (1), courts must interpret the effect of the additional
terms. Note: the letters in the headings of the following sections do not correspond to the numbering scheme in UCC § 2-207(2).
[a] – A Non-Merchant
Additional (or different) terms are treated as an attempt to modify the contract. If one of the parties is not a merchant, the additional terms do not become part of the contract without the assent
of the offeror.
[b] – Additional Terms Between Merchants
If both parties are merchants, the additional term becomes part of the contract unless the original
offer expressly limited the terms to those made in the offer; the new terms “materially alter” the
contract; or the offeror objects in a reasonable time.
Material alteration has to do with surprise to the offeror. If the term would cause a surprise or
hardship to the offeror, it is considered a material alteration. For example, most courts have
ruled that arbitration clauses are a material alteration.
[c] – Different Terms Between Merchants and the Knockout Rule
While the text of § 2-207(2) is silent with respect to “different terms.” Courts have taken three
different approaches: “first-shot,” “last-shot,” and “knockout.”
“First-shot” says that the offeror’s terms control. “Last-shot” says that absent objections by the
offeror and between merchants, the offeree’s terms control.
Court tend to prefer the “knockout” rule, which says that the different terms knock each other
out, and industry practices and gap-fillers from the UCC fill in.
[3] – Subsection (3): If The Records Don’t Create a Contract
Even if the records don’t create a contract, performance can create one. Then the courts must
determine what terms are controlling. The terms are those where the parties’ writings do agree,
and gap filler from the UCC and industry practice.
§3.04 – Software Problem and Rolling Contractsxii
Cases are divided as to the effect of warranties in a box, “shrinkwrap,” and “clickwrap.” A direct seller could inform a consumer that there are terms and conditions contained in the box, and
that the consumer should be able to return the product if he disagrees with the terms and conditions.
The situation is less clear where the direct seller doesn’t mention the additional terms. The court
may throw out the additional terms under UCC § 2-207(2), which applies only to merchants.
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Under the common law, the additional terms might be seen as proposals for addition to the contract. By failing to accept these terms, the consumer may not be bound by them.
Alternatively, the buyer may be held to accept the additional terms by opening the box, using the
product, or taking advantage of the “extended product”—technical support, warranties, etc. Indeed, it might be assumed that a consumer understands the offer to be the sale of the item and
reasonable terms to be sent later.
In this vein, an argument can be made that warranty terms are no different from other unknown
characteristics of a product that only come to light through usage—how loud is this stereo, how
fast is this computer? Further blurring the line, an insurance policy is the contract terms.
In working through this, courts tend to interpret the additional terms with an eye toward fairness,
and will fudge the results. This may be an inferior approach to articulating a consistent rule and
then using doctrines like unconscionability or mistake to reach the fair result.
Software is a slightly different situation. The consumer may not be able to install or run a program unless she agrees to the licensing agreement (so there can be no argument that the consumer was unaware of the agreement). Cases are split, but the enactment of UCITA would make
these binding.
§3.05 – Negotiation and Closure
See § 3.01, on Offer, supra. The doctrine regarding assent (see supra at § 1.04) controls in cases
of negotiation and closure. The objective theory of contracting applies in determining whether a
statement or action was meant as an offer / acceptance or not. See § 3.04, supra, for a list of
characteristics to be weighed in determining whether a communication is an offer.
Because the parties’ superior knowledge is relevant (as in unilateral mistake), there is no contract
if A expresses the desire to contract with B, but B knows that this is not meant to be an offer.
Conversely, if A and B plan to memorialize a contract in writing but otherwise express assent
sufficient to conclude a contract, there is a contract notwithstanding the absence of a writing.
Restatement § 26 and 27.
A statement of intent meant as an offer, but that is too uncertain to determine a breach, is not an
offer. Restatement § 33. An offer is not uncertain simply because it allows the parties a choice
of the course of performance. Part performance can remove uncertainty for the purposes of subsequent enforcement. Restatement § 34.
The policy tension in negotiation and closure is between non enforcement thwarting the parties’
ex ante intent and overenforcement creating a chilling effect in the free exchange of ideas, proposals, etc in contract negotiation.
§3.06 – Good Faith in Contract Formation
“There is no obligation to deal fairly or in good faith absent an existing contract. If there exists a
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pliance with the express terms of the contract, and cannot be extended to create obligations not
contemplated in the contract.”xiii
Tort law offers some remedies if parties act in bad faith during negotiation. Additionally, there
are consequences to some pre-contract actions: contracts may be voided for fraud, and promissory estoppel provides a remedy in some instances of bad faith.
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Chapter 4 – The Contents of the Contract
“[T]here is no unanimity as to the content of the parol evidence rule or the process called interpretation, and … the rules are complex, technical and difficult to apply. It would, however, be a
mistake to suppose that the courts follow any of these rules blindly, literally, or consistently. As
often as not the court chooses the standard or the rule that it thinks will give rise to a just result in
the particular case. We shall also see that, often under a guise of interpretation, a court will actually enforce its notions of good policy and justice.”xiv
§4.01 – The Parol Evidence Rule
The parol evidence rule is designed to exclude extrinsic evidence where a contract is intended as
the complete and final expression of agreement between the parties.
In order for the parol evidence rule to operate, the last expression must be in writing and must be
a binding contract. It serves to exclude only prior or contemporaneous agreements. There is debate as to whether contemporaneous terms are excluded, but this is the Restatement’s position.
The rule is a question of law, and by “legal alchemy”xv allows the judge to rule on questions of
intent, which are usually factual. This reflects the idea that jurors would be unable to bias out the
extrinsic evidence, and so simply prevents them from seeing it in the first place.
[A] – Is the Writing Integrated?
The parties must intend for their writing to be integrated. If they do, the writing is at least a partial integration; if not, the parol evidence rule does not apply.
[B] – Is the Writing a Total Integration?
An incomplete final statement is a partial integration; a writing that is both final and complete is
a total integration.
R2C § 210. Completely And Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the parties as a
complete and exclusive statement of the terms of the agreement.
(2) A partially integrated agreement is an integrated agreement other than a completely integrated agreement.
(3) Whether an agreement is completely or partially integrated is to be determined by the
court as a question preliminary to determination of a question of interpretation or to application of the parol evidence rule.
[C] – Approaches to the Parol Evidence Rule
Under all the approaches, a separate agreement is not excluded. Thus, if A offers to sell B a car
in a totally integrated writing, and they agree orally to allow B to keep the car in her garage for
$50 / month, this second agreement is an independent contract.
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[1] – “Four Corners” Rule
One test for whether a contract is completely integrated is for the judge to look at the writing exclusively. This method is in decline, and is thought to give harsh results.
[2] – The “Collateral Contract” Concept
This approach allows even totally integrated contracts to be modified by “collateral agreements,”
provided these agreements do not contradict the contract itself. If A sells B a car for $1,000 and
the two have agreed, although not in the totally integrated writing, that B can keep the car in A’s
garage, evidence of this “collateral agreement,” although not independently supported by consideration, would be allowed in.
The problem with this approach is that no contract can be assumed totally integrated. A refinement of this approach is to allow parol evidence of “collateral agreements” only when the
agreement relates “to a subject distinct from that to which the written contract applies.”xvi
[3] – Williston’s Rules
A merger clause is dispositive unless the contract is obviously or the merger clause can be set
aside for fraud, mistake, or the like. In the absence of a merger clause, the court evaluates the
writing. If the writing is obviously incomplete or complete only as to one party, the contract is
not a complete integration.
The key to Williston’s rule is that if the allegedly additional term would be the sort of thing reasonable people would enter into a separate agreement for, the contract is an incomplete integration. If the additional term would naturally be part of the contract, it is excluded by the rule.
This is probably the majority rule and was adopted by the first Restatement.
[4] – Corbin’s Approach
Corbin seeks to determine whether the parties actually intended the writing to be a total integration. His approach uses the extrinsic evidence to determine whether the extrinsic evidence can
be admitted. The court first views the extrinsic evidence to determine whether the parties intended a total integration. On that basis, the court then allows or disallows the evidence.
[5] – Restatement Approach
The Restatement incorporates Corbin’s idea of allowing in extrinsic evidence to determine the
admissibility of extrinsic evidence. It also allows consistent additional terms to be admitted if
those terms are not within the scope of the writing (à la the “Collateral Agreement” doctrine) or
if the offered terms would reasonably be omitted from the writing. “The bottom line … is that it
is impossible to have more than a partial integration.”xvii See R2C § 213 cmt a.
[6] – UCC Approach
UCC § 2-202. Final Written Expression: Parol or Extrinsic Evidence.
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Terms with respect to which the confirmatory memoranda of the parties agree or which are otherwise set forth in a writing intended by the parties as a final expression of their agreement with
respect to such terms as are included therein may not be contradicted by evidence of any prior
agreement or of a contemporaneous oral agreement but may be explained or supplemented
(a) by course of dealing or usage of trade (Section 1-205) or by course of performance (Section 2-208); and
(b) by evidence of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the agreement.
Thus the UCC is more permissive, allowing courts to look at course of performance, course of
dealing, and usage of trade. It mixes and matches from among the approaches outline above.
[D] – Advantages and Disadvantages of the Parol Evidence Rule
The Rule aims to prevent perjury, unreliable testimony, and faulty memory. It is also based upon
allowing the parties to merge the contract and destroy all previous or tentative agreements.
As with most formalities, the parol evidence rule provides certainty, lowers drafting costs, and
lowers litigation costs. Parties are able to have less inhibited negotiations because they are not
concerned that preliminary agreements and proposals will be used in interpreting the final contract.
However, the parol evidence rule can frustrate the intent of the parties. Words have multiple
meanings, and surprising results may ensue. The parol evidence rule can also raise drafting
costs. Additionally, parties may be able to “play games” both at the time of drafting and at the
time of litigation.
When courts interpret the parol evidence rule strictly, parties can attempt to contract out of the
strict interpretation. They can omit a merger clause, and perhaps write in language like, “This is
a record of our agreement, but it should be interpreted in light of the negotiations from July 10 –
15.”
When courts interpret the parol evidence rule loosely, it’s difficult to contract into stricter interpretation. Parties can include a merger clause and attempt to disclaim extrinsic evidence, but
courts may still look at additional information.
§4.02 – Interpreting the Terms of the Contract
Most commentators say that the parol evidence rule applies to contract construction, not interpretation. Thus, while extrinsic evidence may be excluded when it comes to determining the terms
of the contract, it will be allowed in to clarify the meaning of terms in interpretation.
[A] – Plain Meaning Rule
“[W]hen parties set down their agreement in a clear, complete document, their writing should as
a rule be enforced according to its terms. Evidence outside the four corners of the document as to
what was really intended but unstated or misstated is generally inadmissible to add to or vary the
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lent claims, perjury, death of witnesses, infirmity of memory, and the fear that the jury will improperly evaluate the extrinsic evidence…. Whether or not a writing is ambiguous is a question
of law to be resolved by the courts.”xviii
There remains the question as to whether extrinsic evidence may be omitted to show that the
term is ambiguous; plain meaning courts are divided on this. In a plain meaning jurisdiction, if
the term is ambiguous on its face, the court will allow extrinsic evidence.
The plain meaning rule is the majority rule, but academics, the UCC, the Restatement, and courts
have decried it.
[B] – Reasonable Expectation Approach
“[A]ll relevant extrinsic evidence is admissible on the issue of meaning, including evidence of
subjective intention and what the parties said to each other with respect to meaning…. us[ing] a
standard based on the balance between the standard of reasonable expectations and the standard
of reasonable understanding. A contract exists in accord with the meaning the promisee could
rely upon, provided the promisor had reason to foresee that the promisee had reason to attach this
meaning. Actually this means that the issue is who is more responsible for the difference in
meaning attached to the language in question.”xix
This may be tempered with a threshold determination that the language is reasonably susceptible
to the proffered meaning. In the most liberal application, courts may refuse to enforce provisions
“even though painstaking study of the policy provisions would have negated those expectations.”xx
A minority of courts apply this standard, albeit with varying levels of liberality.
[C] – Canons of Contractual Interpretation
R2C § 202 Rules in Aid of Interpretation
(1) Words and other conduct are interpreted in the light of all the circumstances, and if the
principal purpose of the parties is ascertainable it is given great weight.
(2) A writing is interpreted as a whole, and all writings that are part of the same transaction
are interpreted together.
(3) Unless a different intention is manifested,
(a) where language has a generally prevailing meaning, it is interpreted in accordance
with that meaning;
(b) technical terms and words of art are given their technical meaning when used in a
transaction within their technical field.
(4) Where an agreement involves repeated occasions for performance by either party with
knowledge of the nature of the performance and opportunity for objection to it by the
other, any course of performance accepted or acquiesced in without objection is given
great weight in the interpretation of the agreement.
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(5) Wherever reasonable, the manifestations of intention of the parties to a promise or
agreement are interpreted as consistent with each other and with any relevant course of
performance, course of dealing, or usage of trade.
R2C § 203 Standards of Preference in Interpretation. In the interpretation of a promise or
agreement or a term thereof, the following standards of preference are generally applicable:
(a) an interpretation which gives a reasonable, lawful, and effective meaning to all the terms
is preferred to an interpretation which leaves a part unreasonable, unlawful, or of no effect;
(b) express terms are given greater weight than course of performance, course of dealing, and
usage of trade, course of performance is given greater weight than course of dealing or
usage of trade, and course of dealing is given greater weight than usage of trade;
(c) specific terms and exact terms are given greater weight than general language;
(d) separately negotiated or added terms are given greater weight than standardized terms or
other terms not separately negotiated.
R2C § 206 Interpretation Against the Draftsman. In choosing among the reasonable meanings of
a promise or agreement or a term thereof, that meaning is generally preferred which operates
against the party who supplies the words or from whom a writing otherwise proceeds.
[E] – Omitted Terms
R2C § 204 Supplying an Omitted Essential Term. When the parties to a bargain sufficiently defined to be a contract have not agreed with respect to a term which is essential to a determination
of their rights and duties, a term which is reasonable in the circumstances is supplied by the
court.
The UCC provides many gap-filling terms, and allows course of performance, course of dealing,
and usage of trade to fill gaps. The only type of term that the UCC will not allow to be filled is
quantity.
§ 4.03 – Implied Terms and the Implied Covenant of Good Faith
R2C § 205 Duty of Good Faith and Fair Dealing. Every contract imposes upon each party a duty
of good faith and fair dealing in its performance and its enforcement.
This duty is not waivable under the Restatement. The UCC also commands good faith in contractual performance or execution.
UCC § 1-201(20) “Good faith” … means honesty in fact and the observance of reasonable commercial standards of fair dealing.
The implied covenant of good faith does not override express contract terms; it instead informs
the interpretation of the contract. The more explicit the contract, the less important the implied
covenant of good faith is. Good faith is often based upon industry practices.
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Chapter 5 – Remedies
§ 5.01 – Non-Compensatory Damages
[A] – Nominal Damages
Courts will award nominal damages if the plaintiff was wronged but has suffered no compensable damages. The typical award is either 6¢ or $1. This is sometimes used to establish a precedent, either with a test case or in a continuing relationship.
[B] – Punitive Damages
Punitive damages are generally not awarded in contract law. Where the breach of a contract also
entails a tort cause of action, punitive damages may be awarded. Under some circumstances,
there are statutes that award punitive damages for the breach of certain types of contracts.
§ 5.02 – Expectation Damages
Expectation damages seek to place the non-breaching party in the same financial party she would
have found herself had the contract not been breached.
[A] – General Measure
R2C § 347 Measure of Damages in General. Subject to the limitations stated in §§ 350-53, the
injured party has a right to damages based on his expectation interest as measured by
(a) the loss in the value to him of the other party's performance caused by its failure or
deficiency, plus
(b) any other loss, including incidental or consequential loss, caused by the breach, less
(c) any cost or other loss that he has avoided by not having to perform.
Farnsworth offers the following formula: general measure = loss in value + other loss – cost
avoided – loss avoided. (Loss in value = difference in value between what the injured party
would have received under the contract and what the party has received; Other loss = injured party’s costs arising from the breach, justified reliance, substitute performance, etc; Cost avoided =
what injured party does not have to pay as a result of the breach; Loss avoided = savings the injured party may make after the breach).
Expectation damages force the breaching party to internalize the costs of his breach. Once that
party has internalized those costs, it incents breaching when that is efficient and performing
when that is efficient.
[B] – Alternative Measures
R2C § 348 Alternatives to Loss in Value of Performance
(1) If a breach delays the use of property and the loss in value to the injured party is not
proved with reasonable certainty, he may recover damages based on the rental value of
the property or on interest on the value of the property.
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(2) If a breach results in defective or unfinished construction and the loss in value to the
injured party is not proved with sufficient certainty, he may recover damages based on
(a) the diminution in the market price of the property caused by the breach, or
(b) the reasonable cost of completing performance or of remedying the defects if
that cost is not clearly disproportionate to the probable loss in value to him.
(3) If a breach is of a promise conditioned on a fortuitous event and it is uncertain whether the event would have occurred had there been no breach, the injured party may recover
damages based on the value of the conditional right at the time of breach.
§ 5.03 Foreseeability
In order to collect expectation damages, those damages must be reasonably foreseeable. The
onus is on the party that is unusually sensitive to breach to communicate the consequences of
that breach. This rule isn’t applied blindly, as where a businessman informs a cabby that a $10
million deal will fall through if the businessman arrives late.
This rule incents the party with the unusual needs to transmit the information to the other party.
The parties will likely then contract at a higher cost, reflecting the true cost of the contract (consistent with the idea that breach is an alternative course of performance to that contracted for).
§ 5.04 Certainty
Contract damages must be reasonably certain to be enforced. Where expectation damages are
too uncertain, the court may instead award reliance or restitution damages.
[A] – Reliance Damages
R2C § 349 Damages Based on Reliance Interest. As an alternative to the measure of damages
stated in § 347, the injured party has a right to damages based on his reliance interest, including
expenditures made in preparation for performance or in performance, less any loss that the party
in breach can prove with reasonable certainty the injured party would have suffered had the contract been performed.
This provision is based on the expectation that performance would at least have covered costs. If
the breaching party can prove that the non-breaching party would have lost money by performing, the reliance damages are reduced by that amount.
[B] – Restitution Damages
§ 371 Measure of Restitution Interest. If a sum of money is awarded to protect a party's restitution interest, it may as justice requires be measured by either
(a) the reasonable value to the other party of what he received in terms of what it would
have cost him to obtain it from a person in the claimant's position, or
(b) the extent to which the other party's property has been increased in value or his other
interests advanced.
Illustration 1 of § 371 explains how the calculation should be applied against the breaching party: “A, a carpenter, contracts to repair B’s roof for $ 3,000. A does part of the work at a cost of $
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2,000, increasing the market price of B’s house by $ 1,200. The market price to have a similar
carpenter do the work done by A is $ 1,800. A’s restitution interest is equal to the benefit conferred on B. That benefit may be measured either by the addition to B’s wealth from A’s services
in terms of the $ 1,200 increase in the market price of B’s house or the reasonable value to B of
A’s services in terms of the $ 1,800 that it would have cost B to engage a similar carpenter to do
the same work. If the work was not completed because of a breach by A and restitution is based
on the rule stated in § 374, $ 1,200 is appropriate. If the work was not completed because of a
breach by B and restitution is based on the rule stated in § 373, $ 1,800 is appropriate.”
R2C § 373 Restitution When Other Party Is in Breach
(1) Subject to the rule stated in Subsection (2), on a breach by non-performance that gives
rise to a claim for damages for total breach or on a repudiation, the injured party is entitled to restitution for any benefit that he has conferred on the other party by way of part
performance or reliance.
(2) The injured party has no right to restitution if he has performed all of his duties under
the contract and no performance by the other party remains due other than payment of a
definite sum of money for that performance.
R2C § 374 Restitution in Favor of Party in Breach
(1) Subject to the rule stated in Subsection (2), if a party justifiably refuses to perform on
the ground that his remaining duties of performance have been discharged by the other
party's breach, the party in breach is entitled to restitution for any benefit that he has conferred by way of part performance or reliance in excess of the loss that he has caused by
his own breach.
(2) To the extent that, under the manifested assent of the parties, a party's performance is
to be retained in the case of breach, that party is not entitled to restitution if the value of
the performance as liquidated damages is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss.
§ 5.05 – Mitigation
A party who has suffered a breach must make reasonable efforts to mitigate the damages.
R2C § 350 Avoidability as a Limitation on Damages
(1) Except as stated in Subsection (2), damages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.
(2) The injured party is not precluded from recovery by the rule stated in Subsection (1)
to the extent that he has made reasonable but unsuccessful efforts to avoid loss.
Comment g adds that in “some situations, it is reasonable for the injured party to rely on performance by the other party even after breach. This may be true, for example, if the breach is accompanied by assurances that performance will be forthcoming. In such a situation the injured
party is not expected to arrange a substitute transaction although he may be expected to take
some steps to avoid loss due to a delay in performance. Nor is it reasonable to expect him to take
steps to avoid loss if those steps may cause other serious loss. He need not, for example, make
other risky contracts, incur unreasonable expense or inconvenience or disrupt his business. In
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ly the aggrieved party is not expected to put himself in a position that will involve humiliation,
including embarrassment or loss of honor and respect.”
§ 5.06 – Specific Performance
[A] – Restatement Provisions
R2C § 359 Effect of Adequacy of Damages
(1) Specific performance or an injunction will not be ordered if damages would be adequate to protect the expectation interest of the injured party.
(2) The adequacy of the damage remedy for failure to render one part of the performance
due does not preclude specific performance or injunction as to the contract as a
whole.
(3) Specific performance or an injunction will not be refused merely because there is a
remedy for breach other than damages, but such a remedy may be considered in exercising discretion under the rule stated in § 357.
R2C § 360 Factors Affecting Adequacy of Damages. In determining whether the remedy in
damages would be adequate, the following circumstances are significant:
(a) the difficulty of proving damages with reasonable certainty,
(b) the difficulty of procuring a suitable substitute performance by means of money
awarded as damages, and
(c) the likelihood that an award of damages could not be collected.
Specific performance may be ordered notwithstanding a provision for liquidated damages. A
contract must be certain enough for a court to order specific performance. Courts have discretion
to refuse specific performance if it would be unfair or contrary to public policy or difficult for
the court to oversee; or to enforce specific performance contrary to the agreement if fairness so
requires.
Courts will not enforce personal services will not be enforced (because it’s basically indentured
servitude). Courts will also not issue an injunction preventing a person from performing personal services if that will deprive the person of his ability to make a living.
[B] – Specific Circumstances
[1] – Real Property
Courts regard real property as unique and consequently order specific enforcement as a matter of
course. Property contracts include a an implied term that the title is marketable. If the property
is not, the court will still allow specific enforcement, and order an abatement in the price.
[2] – Personal Property
Generally sales of personalty are not specifically enforceable. However, where the personalty is
unique, the court will order specific performance: heirlooms, paintings, etc. Courts will also order personal performance where there is an inability to cover, as in market shortages.
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[3] – Insolvency
There is some authority for ordering specific performance where a party is judgment-proof due
to insolvency. However, courts exercise care not to prejudice other creditors by allowing the
promisee to jump to the front of the line. If A agrees to sell stock to B, the court may order the
sale be performed if A is insolvent: B’s payment will then be available to A’s creditors. However, if B has already paid, A will not be ordered to deliver the stock; B will simply be another
creditor.
§ 5.07 – Liquidated Damages
Courts, once hesitant to enforce liquidated damages, now do so. However, courts will not enforce penalty clauses; this is based on unconscionability, and is considered somewhat peculiar by
commentators.
R2C § 356 Liquidated Damages and Penalties
(1) Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in the light of the anticipated or actual loss caused by the
breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.
(2) A term in a bond providing for an amount of money as a penalty for non-occurrence
of the condition of the bond is unenforceable on grounds of public policy to the extent
that the amount exceeds the loss caused by such non-occurrence.
[A] – Determining Whether Liquidated Damages are Enforceable
[1] – Intention
This does not seem to enter into courts’ determinations. Courts have upheld liquidated damages
labeled “penalty” and struck down those parties have indicated provide only for compensatory
damages. Neither the UCC nor Restatement mention intention.
[2] – Injury Uncertain or Difficult to Quantify
Traditionally liquidated damages were upheld only where injury was uncertain. The Restatement and UCC instead speak of “difficulties of proof of loss.” While it’s unclear that this is a
dispositive factor, liquidated damages are most likely to be enforced where the damages are difficult to prove, as in a non-competition agreement.
[3] – Reasonableness
Reasonableness seems to be the dominant criterion by which courts judge liquidated damages.
The modern rule (UCC and Restatement) gives two windows for the determination of reasonableness: “…anticipated or actual loss…”. Thus, if the parties reasonably anticipated a particular
harm arising from breach, and that harm did not occur as a consequence of breach, the damages
would nevertheless be upheld. Other courts have refused to rule in this way, awarding only the
actual damages.
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[B] – Draftsmanship
Where a contract contains multiple agreements and there is a single liquidated damages clause,
courts will strike the damages down as punitive. For example, if A leases B a building and
agrees to pay the electric bill and mop the floor every week, failure to mop the floor is a breach,
but the single damages figure will be overcompensatory and thus punitive.
Court will not uphold a clause that allows liquidated damages and allows the non-breaching party nevertheless to sue for additional damages. Courts view these clauses as not attempting to
make an actual estimate of the damages.
Contracting parties can work around liquidated damages by creating either conditional bonuses
(e.g., rather than a late penalty, an early bonus), or by creating options. Professor Triantis’ example is for an airline to say that a $300 airline ticket with a $150 rebooking fee is instead a
$150 option to buy a $150 airline ticket on the day of travel.
§ 5.08 – Damages in Particular Actions
[A] – Employment
Wrongful Discharge: “the employee is entitled to the salary that would have been payable during
the remainder of the term reduced by the income which the employee has earned, will earn, or
could with reasonable diligence earn during the unexpired term.” This is tempered because the
employee isn’t required to take a job at a lower rank, lower pay, far from home, etc.xxi
Wrongful Termination by Employee: pretty much nothing.
[B] – Damages Available for Buyers
Seller’s Total Breach: traditionally, the rule is the difference between the market price and the
contract price. The UCC substitutes the option of a “cover price,” based upon the good faith
price the buyer secures. This better compensates the buyer who has had to cover the breach in a
rush: the breaching seller can’t Monday morning quarterback the decision provided it was reasonable.
Seller’s Breach of Warranty or Fraud: the difference between the value of the goods accepted
and the value they would have had if they had been as warranted. This can be shown by the reasonable cost of repair. The same rules apply to instances of fraud.
Buyer’s Consequential and Incidental Damages: if A buys paper for her store from B and B
breaches, the UCC allows A to sue for lost profits if there is no paper available on the market,
provided B knew what A’s purpose with the paper was. This is also true where B is the exclusive distributor of a type of product, or where B knows that A is using the product in a manufacturing process that will be delayed.
[C] – Damages Available for Sellers
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Seller’s General Damages: difference between market price and unpaid contract price. However,
if this does not put the seller in as good a position as if the sale had been made, the court can require that the lost profit be paid as damages.
Seller’s General Damages Following Resale: as in “cover price” for the buyer, the seller can, after informing the buyer, sell the items in a commercially reasonable way and collect as damages
the difference between the contract price and the sale price. Thus, the seller is required only to
make reasonable efforts to sell the item and not worry about the possibility of a lower market
cost being proved in court.
Seller’s Consequential and Incidental Damages: these are generally not recoverable. The exception is where the payment is owed to a third person.
[D] – Construction Contracts
Contractor’s Recovery: once construction is completed, the purchaser certainly owes damages if
he breaches. The contractor can recover damages in the instance of partial performance and
breach by the purchaser. If the buyer breaches before performance begins, the contractor can
recover the difference between the contract price and the expected construction costs. If the contractor is delayed, he may be able to recover the resulting costs—rental costs, overhead costs,
etc.
There are a variety of formulae used where performance has been started: unpaid contract costs
minus cost to complete; lost profit plus cost of work performed minus progress payments; or the
percentage of the cost of work to be done that the contractor completed times the contract cost,
plus profit for the work remaining. These formulae are usually the same when the contractor
would have profited, but different if the contractor would have experienced a loss. A contractor
working on a losing project usually does better to sue for restitution.
Owner’s Recovery: usually the value of fixing the deficiency. In Jacob & Youngs v. Kent, 230
N.Y. 239 (N.Y. 1921), the contractor installed the wrong brand of pipe, but pipe of equal quality
and that had no effect on the home’s value. The court awarded nominal damages rather than requiring the pipes be replaced at 15% of the home’s value. This is regarded as the correct result,
but the court may have ruled the other way if (1) the owner had indicated his idiosyncratic valuation of Reading pipes, or (2) the contractor had willfully installed the wrong pipes.
In Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okl. 1962), the court awarded diminution in value rather than expectation damages where a mining company failed to fill in, at
enormous expense, a hole it had dug, and where the damage to the property was far less. This is
a controversial exception to the expectation rule: “the breach is willful and the strip miner keeps
$29,000 that it had committed itself to expend.”
In cases such as this, law and economics proponents suggest ordering specific performance. This
would create a bargaining range and would allow the defendant to discharge its responsible to
perform its wasteful duty by settling with the plaintiff at an efficient value. However, courts do
not like ordering specific performance of a construction contract.
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Chapter 6 – Conditions and Self-Help Remedies
A condition is an act or event that qualifies a promised performance.xxii R2C § 224 Condition
Defined. A condition is an event, not certain to occur, which must occur, unless its nonoccurrence is excused, before performance under a contract becomes due.
An alternative definition: “an act or event, other than a lapse of time, which, unless the condition
is excused, must occur before a duty to perform a contractual promise arises (condition precedent), or which discharges a duty of performance that has already arisen (condition subsequent.”xxiii
A is a customer of B insurance company. The policy specifies that if a fire occurs, the insurance
company will pay $10,000. The policy also specifies that A foregoes her right to sue if she
doesn’t do so within one year. The fire is a condition precedent, and suing within one year is a
condition subsequent, for enforcement of the contract.
§ 6.01 – Express Conditions
Express conditions must be distinguished from promises. Failure to perform a promise is a
breach; failure to fulfill a condition is not.
Karen offers to sell Prof. Triantis a golf umbrella tomorrow for $10. She shows up the next day
with a miniature umbrella. If the specification of a golf umbrella is a promise, she is liable for
breach. If the golf umbrella is merely an express condition to the contract, she is not in breach,
but Triantis can walk away from the deal. If it is both a promise and a condition, Triantis can
both walk away and sue.
R2C § 227 Standards of Preference with Regard to Conditions
(1) In resolving doubts as to whether an event is made a condition of an obligor’s duty,
and as to the nature of such an event, an interpretation is preferred that will reduce the
obligee’s risk of forfeiture, unless the event is within the obligee’s control or the circumstances indicate that he has assumed the risk.
(2) Unless the contract is of a type under which only one party generally undertakes duties, when it is doubtful whether
(a) a duty is imposed on an obligee that an event occur, or
(b) the event is made a condition of the obligor's duty, or
(c) the event is made a condition of the obligor's duty and a duty is imposed on
the obligee that the event occur, the first interpretation is preferred if the event
is within the obligee's control.
(3) In case of doubt, an interpretation under which an event is a condition of an obligor’s
duty is preferred over an interpretation under which the non-occurrence of the event
is a ground for discharge of that duty after it has become a duty to perform.
Ill. 2: A, a mining company, hires B, an engineer, to help reopen one of its mines for “$10,000 to
be payable as soon as the mine is in successful operation.” $10,000 is a reasonable compensation
for B’s service. B performs the required services, but the attempt to reopen the mine is unsuc-
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cessful and A abandons it. A is under a duty to pay B $10,000 after the passage of a reasonable
time.
Ill 3.: A, a mining company, contracts with B, the owner of an untested experimental patented
process, to help reopen one of its mines for $5,000 paid in advance and an additional “$15,000 to
be payable as soon as the mine is in successful operation.” $10,000 is a reasonable compensation
for B’s services. B performs the required services, but because the process proves to be unsuccessful, A abandons the attempt to reopen the mine. A is under no duty to pay B any additional
amount. In all the circumstances the risk of failure of the process was, to that extent, assumed by
B.
Compare the following to unconscionability: R2C § 229 Excuse of a Condition to Avoid Forfeiture. To the extent that the non-occurrence of a condition would cause disproportionate forfeiture, a court may excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange.
§ 6.02 – Implied or Constructive Conditions
“Constructive conditions are created by courts in order to do justice. They are constructed in bilateral contracts…. Bilateral contracts are presumed to involve promises exchanged for an exchange of performances, and thus, involve constructive conditions of exchange.
“Where promises are exchanged looking toward an exchange of performances, the failure of one
party to perform may have an effect on the obligation of the other party to perform. If the parties
have not agreed to express conditions covering the matter, that effect is expressed in terms of
constructive conditions. Constructive conditions also determine, for example, the order of performance in a bilateral contract, whether one party’s performance of some but not all of the
promises undertaken entitles that party to performance by the other party, what effect failure or
delay in performing by one party has on the rights and duties of the other party, and the effect of
present or prospective inability or unwillingness to perform.”xxiv
[A] – Order of Performance in a Bilateral Contract
Unless otherwise agreed, a party who is to perform work over time needs to substantially complete performance before payment is due. Periodic payments are not implied, but if they are
agreed on, there are alternating constructive conditions precedent.
A is building a series of houses for B under a contract requiring periodic payments on completion of each house. B refuses to pay after the completion of a house. A can stop performing.
Whether A can treat the contract as cancelled is based upon when the material breach occurred.
This is a question of fact.
[B] – Material Breach
A material breach allows the non-breaching party to cancel the contract and sue for total breach.
Alternatively, the non-breaching party can continue with the contract and sue for partial breach.
If the breach is immaterial, the non-breaching party cannot cancel the contract but may sue for
partial breach.
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Whether a breach is material depends upon several factors:
1. To what extent if any, the contract has been performed at the time of the breach: the earlier the breach the more likely it will be regarded as material.
2. A willful breach is more likely to be regarded as material than a breach caused by negligence or by fortuitous circumstances.
3. A quantitatively serious breach is more likely to be considered material.
4. The consequences and degree of hardship on the breaching party, compared to the extent
the non-breaching party would benefit from the promised performance
5. The adequacy of damages in compensating for a partial breach
The key is providing the non-breaching party with what she bargained for—if this is unlikely due
to the circumstances of the breach, it is likely to be material. This allows her to cancel the contract and move on.
To the extent the performance is time sensitive, unreasonable delays are likely to constitute a material breach.
[C] – Substantial Performance
Substantial performance is the opposite of material breach. “The substantial performance doctrine provides that where a contract is made for an agreed exchange of two performances, one of
which is to be rendered first, substantial performance rather than exact, strict or literal performance by the first party of the terms of the contract is adequate to entitle the party to recover on
it. The intent of the doctrine is equitable: to prevent unjust enrichment or the inequity of one party's getting the benefit of performance, albeit not strictly in accord with the contract's terms, with
no obligation in return. The courts will allow recovery under the contract, less allowance for deviations, where a party in good faith has substantially performed its obligation.”xxv
Substantial performance is a question of fact. The unperformed part must not destroy the value
or purpose of the contract. Where a contract entails multiple obligations, substantial performance is adjudged by the whole, not with respect to each promise.
Many courts will not apply the substantial performance rule where breach was willful.
The UCC has a “perfect tender” rule. This requires that the goods delivered be precisely what
the buyer ordered. The UCC gives dispensation to cure the breach.
§ 6.03 – Anticipatory Breach and Repudiation
[A] – Anticipatory Breach
A contracts with mover B to help him move. B is injured the day before the moving date. A can
seek assurances from B that B can still perform. Similarly, if A learns that B has committed to
moving C all day on the same day, A make seek assurances. The UCC and Restatement provide
for demanding assurances of performance.
§ 251 When a Failure to Give Assurance May Be Treated as a Repudiation
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(1) Where reasonable grounds arise to believe that the obligor will commit a breach by
non-performance that would of itself give the obligee a claim for damages for total
breach under § 243, the obligee may demand adequate assurance of due performance
and may, if reasonable, suspend any performance for which he has not already received the agreed exchange until he receives such assurance.
(2) The obligee may treat as a repudiation the obligor's failure to provide within a reasonable time such assurance of due performance as is adequate in the circumstances
of the particular case.
[B] – Anticipatory Repudiation
A party can repudiate through a positive statement, through transferring the specific property that
is the subject of the contract, or through other voluntary acts that make performance impossible.
The positive statement must be clear and unambiguous. The failure to provide assurances where
the circumstances require them is also an anticipatory repudiation.
R2C § 250 When a Statement or an Act Is a Repudiation. A repudiation is
(a) 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 for total breach under
§ 243, or
(b) a voluntary affirmative act which renders the obligor unable or apparently unable to
perform without such a breach.
The non-breaching party can either accept the repudiation and sue for damages, or excuse the
repudiation. If she sues for breach, she must prove that she was ready and able to perform. If
she excuses the repudiation, the non-breaching party must nevertheless wait only a reasonable
time; she is not excused from mitigation.
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Chapter 8 – Excuse
Triantis argues that excuses usually should fail because parties can breach and pay damages.
The excuse doctrines are blunt instruments that shift the full burden of the unforeseen circumstance to the other party. Where parties breach, the damages are capped at what was foreseeable
by the parties, so the need to shift this liability to the non-breaching party often doesn’t make
sense.
§ 8.01 – Impossibility / Impracticability
Whereas the common law used to require that performance be impossible, courts now allow impracticability. The UCC considers impossibility to fall within impracticability. Nevertheless,
increased cost does not mean that something is impracticable—a court held a 300% increase did
not give rise to impracticability.
“The doctrine of impossibility of performance has gradually been freed from the earlier fictional
and unrealistic strictures of such tests as the ‘implied term’ and the parties’ “contemplation.” It
is now recognized that “A thing is impossible in legal contemplation when it is not practicable;
and a thing is impracticable when it can only be done at an excessive and unreasonable cost.”
The doctrine ultimately represents the ever-shifting line, drawn by courts hopefully responsive to
commercial practices and mores, at which the community's interest in having contracts enforced
according to their terms is outweighed by the commercial senselessness of requiring performance.
“When the issue is raised, the court is asked to construct a condition of performance based on the
changed circumstances, a process which involves at least three reasonably definable steps. First,
a contingency – something unexpected – must have occurred. Second, the risk of the unexpected
occurrence must not have been allocated either by agreement or by custom. Finally, occurrence
of the contingency must have rendered performance commercially impracticable.”xxvi
Elements of impracticability, Restatement § 261
1. Where, after a contract is made, a party’s performance is made impracticable
2. without his fault
3. by the occurrence of an event the non-occurrence of which was a basic assumption on
which the contract was made, his duty to render that performance is discharged,
4. unless the language or the circumstances indicate the contrary.
Some common categories of impracticability are
1. Destruction, deterioration or unavailability of the subject matter or the tangible means of
performance (e.g., crop failure, destruction of factories)
2. Failure of the contemplated mode of delivery or payment (e.g., impossible to deliver; but
see Suez Canal cases, which can be seen as requiring commercially reasonable substitutes)
3. Supervening prohibition or prevention by law
4. Failure of the intangible means of performance (e.g., international law, strikes)
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5. Death or illness
Force majeure clauses can be used to provide for eventualities that are foreseen. In a sense, they
operate like impracticability, but are express rather than default terms.
§ 8.02 – Frustration
A defendant will argue frustration where his purpose in contracting is thwarted by events similar
to those of impracticability. The defendant’s performance is not impracticable, but simply no
longer makes sense in light of a changed circumstance.
Elements of frustration, R2C § 265
1. Where, after a contract is made, a party's principal purpose is substantially frustrated
2. without his fault
3. by the occurrence of an event the non-occurrence of which was a basic assumption on
which the contract was made, his remaining duties to render performance are discharged,
4. unless the language or the circumstances indicate the contrary.
The standards for frustration (as with impracticability) are fairly stringent: if a bride breaks her
engagement, or even if the groom is killed, she cannot avoid paying for the completed dress with
frustration.
§ 8.03 – Unconscionability
The UCC’s standard has gained increasing currency even outside of sales of goods.
UCC § 2-302. Unconscionable Contract or Clause.
(1) If the court as a matter of law finds the contract or any clause of the contract to have
been unconscionable at the time it was made the court may refuse to enforce the contract, or it may enforce the remainder of the contract without the unconscionable
clause, or it may so limit the application of any unconscionable clause as to avoid any
unconscionable result.
(2) When it is claimed or appears to the court that the contract or any clause thereof may
be unconscionable the parties shall be afforded a reasonable opportunity to present
evidence as to its commercial setting, purpose and effect to aid the court in making
the determination.
Cmt. 1 adds, “The basic test is whether, in the light of the general commercial background and
the commercial needs of the particular trade or case, the clauses involved are so one-sided as to
be unconscionable under the circumstances existing at the time of the making of the contract.
Subsection (2) makes it clear that it is proper for the court to hear evidence upon these questions.
The principle is one of the prevention of oppression and unfair surprise and not of disturbance of
allocation of risks because of superior bargaining power.”
Courts typically look for both procedural and substantive unconscionability. This means that the
circumstances surrounding the contract must indicate disparities in bargaining power, sophistication, etc; additionally, the contents of the contract must be unconscionable.
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Chapter 9 – Third Party Rights and Responsibilities
§ 9.01 – Third party beneficiaries
A owes money to C. A agrees to loan B money on the condition that B pay the money back to C.
C is the third party beneficiary of the contract between A and B. C has standing to sue A, notwithstanding questions of contractual privity.
R2C § 302 Intended and Incidental Beneficiaries
(1) Unless otherwise agreed between promisor and promisee, a beneficiary of a promise
is an intended beneficiary if recognition of a right to performance in the beneficiary is
appropriate to effectuate the intention of the parties and either
(a) the performance of the promise will satisfy an obligation of the promisee to
pay money to the beneficiary; or
(b) the circumstances indicate that the promisee intends to give the beneficiary
the benefit of the promised performance.
(2) An incidental beneficiary is a beneficiary who is not an intended beneficiary.
Triantis says that “intended beneficiary” doesn’t refer to the intent that the person will benefit;
rather, it refers to the intent to confer legal power to the third party to enforce the contract against
the promisor.
i
Hornbook p. 46
Id. at p. 47
iii
Id. at p. 91
iv
Id. at 94 – 95
v
Id. at 96
vi
The organization, contents, and quotes from this section are from Hornbook, p. 72 - 120
vii
Hornbook p. 80
viii
Id. at p. 82
ix
Restatement (Second) Contracts § 4 ill. 2
x
Hornbook p. 88
xi
Id. at p. 100
xii
Id. at p. 74-75
xiii
Racine & Laramie v. Dep't of Parks & Rec., 11 Cal. App. 4th 1026, 1032 (Cal. App. 1992)
xiv
Hornbook p. 122-123
xv
Id. at p. 128
xvi
Id. at p. 133 citing Seitz v. Brewers’ Refrigerating Mach., 141 U.S. 510 (1891)
xvii
Id. at p. 139
xviii
W.W.W. Assoc., Inc. v. Giancontieri, 77 N.Y.2d 157, 162–163 (N.Y. 1990) (citations omitted)
xix
Hornbook p. 156–57
xx
Keeton, Insurance Law Rights at Variance with Policy Provisions, 83 Harv.L.Rev. 961 (1970)
xxi
Hornbook p. 589–92; § 5.08 is from pages 589 et seq.
xxii
Id. at 413
xxiii
Id. at 414
ii
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xxiv
Id. at 428; § 6.02 based upon p. 428 et seq.
Brown-Marx Associates, Ltd. v. Emigrant Sav. Bank, 703 F.2d 1361, 1367 (11th Cir. 1983)
xxvi
Transatlantic Financing Corp. v. United States, 124 U.S. App. D.C. 183 (D.C. Cir. 1966)
xxv
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