Contracts Outline – Fall 2016

Chapter 1: Intro................................................................................................................................2
Section 1: Simple Donative Promises..........................................................................................2
Section 2: Form............................................................................................................................3
Section 4: Promises Based On Past Benefit Conferred: Past Consideration...............................6
Chapter 2: Bargain Principle And Its Limits...................................................................................9
Section 1: The Bargain Principle.................................................................................................9
Section 3: The Problem Of Mutuality.......................................................................................20
Section 4: Performance Of A Legal Duty; Modification...........................................................24
Chapter 4. An Introduction To Contract Damages, Service Contracts 1.......................................30
Chapter 5. The Expectation Measure.............................................................................................33
Section 1: Damages For Breach Of Services.............................................................................33
Section 2: Damages For Breach Of Contract For Sale Of Goods.............................................37
Section 3: Mitigation: Contracts For Employment....................................................................43
Section 4: Forseeability.............................................................................................................47
Section 5: Certainty...................................................................................................................50
Section 6: Damages For Mental Distress...................................................................................53
Section 7: Liquidated Damages.................................................................................................55
Chapter 6. Specific Performance...................................................................................................57
Chapter 7. The Reliance And Restitution Measures......................................................................60
Section 1: Reliance Damages In A Bargain Context.................................................................60
Section 2: Restitution Measure..................................................................................................62
Chapter 8: Interpretation................................................................................................................69
Section 1: Subjective And Objective Elements On Contract Interpretation..............................69
Section 2: Problems Of Interpreting Purposive Language........................................................74
Chapter 9: The Mechanics Of A Bargain (I) – Offer And Revocation.........................................76
Section 1. What Constitutes An Offer.......................................................................................76
Section 2: Termination Of The Offeree’s Power Of Acceptance..............................................79
Chapter 10 The Mechanics Of A Bargain (II) – Transacting At A Distance................................84
Section 4. Silence As Acceptance.............................................................................................86
Section 5. Restitution For Benefit Conferred In Mistaken Belief of Existence of Contract.....91
Chapter 11 Indefiniteness, Preliminary Negotiations, and Duty To Bargain In Good Faith.........92
Chapter 14: The Parol Evidence Rule: Textualism V. Contextualism..........................................99
Section 1: The Parol Evidence Rule..........................................................................................99
Section 2: The Role Of Usage, Course Of Dealing, and Course Of Performance..................107
Section 3: Waiver....................................................................................................................111
Chapter 16. Interpretation And Unconscionability In A Form- Contract Setting.......................113
Section 3. The Reasonable Expectations Doctrine..................................................................117
Chapter 17. Mistake.....................................................................................................................120
Section 1: Mechanical Errors / “Unilateral Mistakes”............................................................120
Section 2: Mistakes In Transcription; Reformation.................................................................121
Section 3: Mutual Mistakes (Shared Mistaken Assumptions).................................................122
Section 4. Nondisclosure.........................................................................................................127
Chapter 18. The Effect Of Unexpected Circumstances...............................................................129
Chapter 20: The Obligation To Perform In Good Faith..............................................................138

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Chapter 21: The Doctrine Of Substantial Performance...............................................................142
Section 1. The General Principle.............................................................................................142
Section 2: Contracts For The Sale Of Goods...........................................................................145
Chapter 22: Express Conditions..................................................................................................149
Section 2. The Distinctions Between Operation Of Promise & Operation Of Condition.......149
Section 4. Prevention; The Implication Of A Duty To Fulfill A Condition............................152
Chapter 23: The Powers To Withhold Performance / Terminate In Response To Breach..........155

Chapter 1: Intro
SECTION 1: Simple Donative Promises

 Gift promises generally unenforceable except in specific instances (e.g., form, reliance, etc.)
 Gifts are not bargained for. Promises to make gifts, therefore, have no consideration and
are unenforceable under the bargain principle.

Dougherty v. Salt, p. 9, New York, 1919

 Aunt Tillie gave Charley a $3,000 promissory note
 She died and her estate refused to pay Charlie so he sued
 Tillie didn’t know correct form to make gift legal, so filled out a form that judge (Cardozo)
held was unenforceable for lack of consideration
 Gift promises are generally unenforceable if they lack consideration

Arg’s For/Against: Socially fraught, etc.

§ 1. Contract Defined
A contract is a promise or a set of promises for the breach of which the law gives a remedy, or
the performance of which the law in some way recognizes as a duty.

§17. Requirement of a Bargain

(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which
there is a manifestation of mutual assent to the exchange and a consideration.
(2) Whether or not there is a bargain a contract may be formed under special rules applicable
to formal contracts or under the rules stated in §§82-94.

§71. Requirement of Exchange; Types of Exchange

(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.

§ 79. Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is no additional requirement of
(a)  a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to the
promisee; or
(b)  equivalence in the values exchanged; or
(c)  “mutuality of obligation.”

SECTION 2: Form

 A [gift] promise can be enforceable if in proper form (will, trust, inter vivos transfer, seal)
 Reasons for relying on form to determine enforceablility:
- Evidentiary (correct form provides proof that a promise was made);
- Cautionary (complying with form cautions people that promise is legally enforceable);
- Channeling (helps court determine what promises should be enforced);
- Deterrence (helps prevent rash contracts / inadequate consideration)
 Seals
- Classical concept – promises under seal are enforceable.
- Seal became less and less of a thing.
- Finally (as in Schnell) people just put L.S. after a contract to show that it is sealed.
- Most states have gotten rid of sealed docs as special documents
- What should replace seals?
 Accept nominal consideration
 Witnesses
 Notary
 Many states are starting to adopt statutes that make written instruments
presumptive evidence of consideration
 Nominal consideration usually not binding (form but not substance of a bargain)
- Narrow exception to general rule that court does not look at adequacy of consideration
- A transaction is said to have nominal consideration when it has the form of a bargain,
but not the substance of a bargain (because the promisor did not view what he got as
the price of his bargain)
 RS requires a bargain in fact rather than in form in order for it to be enforceable
(bargain in form only is mere pretense)
 1st Restatement says nominal consideration is sufficient to enforce a promise.
 2nd Restatement reverses, and says it isn’t ok.
 Consequence of elimination of the special status of seals: “There is no longer any legal
device that can be employed with the certainty that it will bind a promisor to a donative
promise” (21)
- Statutes have been adopted in some states that state that a written promise is
presumptive evidence of a consideration and thus generally legally enforceable

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 - A [gift] promise can be enforceable if in proper form (will, trust, ect)
- Schnell v. Nell (14), even though sealed agreement, court did not enforce.

Schnell v. Nell, p. 18, Indiana, 1861

 Schnell promised three gifts of $200 in exchange for consideration of a cent
 Court held that inadequacy of consideration will not normally vitiate an agreement, but in
this case the one cent is “merely nominal, and intended to be so”
 Had one cent been almost anything non-monetary it likely would have counted
 Contract based on nominal consideration not legally enforceable

Argument: Nominal Consideration Should Not Be Enforceable (Substance over Form):

 Bargain must be a bargain in fact rather than just in form – justice, etc.
 Must be patently inadequate to be nominal – does not affect the vast majority of contracts

Argument Nominal Consideration Should Be Enforceable (Form over Substance):

 Would make consideration doctrine easier to apply
 Nominal consideration is an effective replacement for the abandoned device of the seal
 Not the role of the courts to determine the adequacy of consideration

What should Charlie have done? (Give aunt Teddy bear, painting, etc. for consideration)
 Are these nominal since Aunt Tillie may not view them as the price of the $3,000?
 No. The court doesn’t want to go into each case (except where obvious e.g., penny for
$200)

Conditional Donative Promises vs. Conditional Bargain Promises:

 Bargain if parties view performance of the condition as price of promise (T-Shirt example)

Kirksey v. Kirksey, p. 28, Alabama, 1845

 Brother-in-law says “if you come down and see me, I will give you place to raise family”
 Sister sold her land, traveled 60 miles and lived on land for two years before asked to leave
 Court held that the house was a gift so no consideration
 Dissent says the 60-mile trip was consideration
 Could be perceived as a conditional donative promise since she would have to come down
to live on the land so the trip is not the price she pays for the land
 There is also a question as to what exactly was promised (does two years satisfy)?
 Results in cases like this overthrown in 1932 with creation of §90 – reliance

The reliance principle (R2nd §90)

 A promise the promisor should reasonably expect to induce action or forbearance
(reliance) on the part of the promisee and which does induce some action or
forbearance is binding (enforceable) if injustice can be avoided only by enforcement of
such promise (promissory estoppel)

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 o I.e., promise is binding if promisee has relied on promise (and promisor should
reasonably expect promisee would rely on promise)
o Reasonableness of reliance is important
o Relief in such situation, however, may be limited to damages measured by
extent of the reliance rather than the terms of the promise

 Estoppel in pais (equitable estoppel)

o If A makes a false statement of fact to B and B has reasonably and foreseeably
relied on that statement, A is prevented (“estopped”) from denying the truth of
that statement in court
o Doctrine that prevents a person from denying the truth of a statement of fact
given to another person and that that person has foreseeably relied upon. Not a
contract theory but rather a way of preventing people from misrepresenting
facts about themselves
 Promissory Estoppel (R2nd §90)
o A promise which the promisor should reasonably expect to induce action or
forbearance of a definite and substantial character on the part of the promisee
and which does induce such action or forbearance is binding if injustice can be
avoided only by enforcement of the promise
o In such a case, the promisee’s reliance is treated either as consideration or as a
substitute for consideration
o Alternative to the bargain theory – no need for consideration, etc.

Argument for Reliance:

 Fairness – prevents injustice – a person shouldn’t be injured for justifiably relying on
another’s promise, which was then broken
 Consequentialist – it will make people think twice about making / breaching promises

Argument against Reliance:

 Hard to tell what injured party would have done if hadn’t been promise – hard to
quantify
 Promisee’s duty to ensure promise enforceable (bargain theory, etc.) before relying on it

Feinberg v Pfeiffer Co., p. 34, Missouri, 1959

 After years of working for D, P promised pension and benefits from retirement until death
 P soon retired because of promised pension; after 7 years, company stopped paying
pension
 Promise of pension is enforceable because of §90 reliance
- P relied upon pension in deciding to retire when she could have conceivably continued
working – would not have had the funds to retire otherwise
- Promise not enforceable if one looks only to the bargain theory – no consideration
- Potential problem—would this allow employer’s to repudiate unrelied-on pension
promises?

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Times-Mirror, p. 26, California, 1935
 City of Los Angeles planned a civic center that would embrace land used by newspaper
plant
 Times-Mirror chose to expand operation in a new plant because city instituted
condemnation proceedings under power of eminent domain to secure Times-Mirror
property
 Later city decided it did not want to purchase Times-Mirror property because of high value
 CA Supreme Court held that City estopped by its conduct from abandoning the proceedings
- Not estoppel in pais since no misrepresentation of fact
- Not promissory estoppel since bringing of proceedings was not a promise.
- Suggests a broader reliance principle that transcends these two

Hayes v. Plantation Steel Co., p. 40, Fed. District Ct. of RI, 1982
 Π announced his retirement from ∆
 A week before π was to retire, ∆ promised to “take care” of π
 After π retired ∆ made several years of payments to π, but then stopped
 Holding: π announced his retirement before ∆ promised to pay pension benefits, so ∆’s
pension promise did not induce π to quit his job. Therefore, ∆’s promise to pay pension
benefits does meet the requirements of RS §90 (promissory estoppel)
 A promise by an employer to pay pension benefits to an employee is not enforceable if that
promise to pay is not what induces the employee to quit his job

Katz v. Danny Dare [not in CB]

 Katz fought off robber and saves store, boss gives him pension. Is there reliance?
o No bargain
 Reliance b/c no other options?

FEG 43-52, 55-73, 81-109

SECTION 4: Promises Based on Past Benefit Conferred: Past

Consideration

Past Consideration: A past promise or act which forms the basis of a future promise.
 i.e., A saves B’s life and following the incident, B promises to pay A $8,000.

Past Consideration as No Consideration – Classical Exceptions:

 1. A promise to pay a debt barred by statute of limitations.
 2. A promise to pay a debt made by a now adult before they were 18.
 3. A promise to pay a debt discharged in bankruptcy.
o Restatement (Second) of Contracts [R2nd] §83: express promise to pay part/all of
debt in bankruptcy proceedings is binding.

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  There is debate whether these exceptions could ever be considered consideration – ie,
is it void, or simply voidable? R2nd argues they are simply not consideration at all.

Two Justifications
 Moral reason to fulfill obligation, when debtor realizes this and agrees to pay it becomes
binding
 Not creating a legal right in the creditor, but waiving a defense against the right which
already exists.

 Moral obligation (stated as an explicit promise) to perform certain otherwise unenforceable

contracts makes such contracts enforceable – debt discharged by bankruptcy, SOL, etc.
- Often this is explained by saying that the new promise does not create a legal right
where none existed before (which would require consideration) but to remove from the
promisor a defense against the assertion of an existing legal right. This is distinguished
from cases where there is solely a moral obligation w/out a legal right, where the moral
obligation alone is usually not sufficient consideration

Big Picture:
Four things under the question of “what promises should the law enforce?” banner:
 Bargains (Consideration)
 Seals
 Reliance (§90)
o Not bargains, an alternative theory
o E defends this on fairness, consequentialism, and role of the courts grounds
 Moral Obligation (§86)
o Frug: There’s no such thing as past consideration.
o This is another thing entirely. It’s promises that should be enforced due to a
moral obligation.
o This leads to the bull/boy distinction! (see below)
o Cases can be sometimes understood as both gifts and reliance. Not obvious that
sometimes when you give something away for free that it’s not a gift.

Mills v. Wyman MA Sup Judicial Ct. 1825

Issues
 Wyman’s estranged son returned from an overseas trip and became very sick. A
concerned stranger, Mills, cared for him and incurred significant costs in the two weeks
the adult son was ill. Son dies from illness, Wyman offers to pay Mills for the cost and
then changes his mind.
Procedural History
 n/a

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Judgement
 There was no consideration, so no obligation to pay the medical expenses for his son.
Ruling (Principle)
 Past consideration isn’t a thing here. Wyman didn’t ask Mills to care for his son. It was
only after the fact out of moral duty/gratitude that he offered money.
 Moral obligation is sufficient consideration for an express promise only in cases where a
good or valuable consideration existed in the past
o I.e., there must be some pre-existing legal obligation to make the promise
enforceable
 Frug: Bull/boy (property/non-property) distinction
o Bull escapes, stranger takes care of it. Bull owner promises to repay stranger for
caring for bull.  enforceable

Webb v McGowan Ct of App of AL 1935

Issues
 Webb saves McGowans life and gets permanently injured in the process (because he
was moving a cinder block that would have fallen on MG). W can’t work anymore.
 MG agrees to pay W $15/2 weeks for rest of W’s life
 MG dies and estate stops payments. W sues.
Judgement
 (Bricken) Reversed dist ct opinion. Estate of MG has to continue paying W – received a
material benefit from Pl’s saving his life (human life worth more than mere sentimental
value)
Ruling (Principle)
 MG became morally obligated to W when life saved, and then when he promised to pay,
became valid and enforceable contract. Fact that MG agreed to pay and W accepted the
payments shows evidence of consideration.
 A moral obligation is sufficient consideration to support a subsequent promise to pay
where the promisor has received a material benefit, although there was no original duty
or liability resting on the promisor (modern position, like R2nd §86)

p. 55-73
Past Consideration and R2nd
 Examples:
o If you help to save someone’s life, as bystander you cannot be compensated and
fairly limited for paramedics etc also.
o However, if you find someone’s wild bull and care for it before returning it to
owner, can be compensated…
 Writers basically admit it’s ambiguous and hard to prove neatly

Note on Past Consideration

 By using the phrase “unjust enrichment” in R2nd the writers left open possibility of
additional “unjust enrichment” test.

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R2nd §86 – Promise for Benefit Received
 A promise made in recognition of a benefit previously received by the promisor is binding to
the extent necessary to prevent injustice
 A promise is not binding under Subsection (1)
- if promisee conferred benefit as a gift or for other reasons promisor unjustly enriched;
or
- to the extent that its value is disproportionate to the benefit

R2nd §82 – Promise to Pay Indebtedness; Effect on Statute of Limitations

 “A promise to pay all or part of an antecedent contractual or quasi-contractual
indebtedness owed by promisor is binding if indebtedness still enforceable or would be
except for SOL”
 The following facts operate as such a promise: a voluntary acknowledgement of the obligee,
admitting the existence of the antecedent indebtedness; a voluntary transfer of money; a
statement that the statute of limitations will not be pleaded as a defense

R2nd §83 – Promise to Pay Indebtedness Discharged in Bankruptcy

 “An express promise to pay all or part of an indebtedness of the promisor, discharged or
dischargeable in bankruptcy proceedings begun before the promise is made, is binding”
- Promise to pay a debt discharged by the statute of limitations can be implied; promise
to pay a debt discharged by bankruptcy cannot be implied

CHAPTER 2: Bargain Principle and Its Limits

SECTION 1: The Bargain Principle

The Doctrine of Consideration—The Bargain Principle

 Historically bargain principle is how question “what promises should the law enforce”
was answered.
 Bargain principle is laid out in Section 17, 71, 72, and 79 of the Restatement.

R2nd §17. Requirement of a Bargain.

(1) … the formation of a contract requires a bargain in which there is a manifestation of
mutual assent to the exchange and a consideration

 Key: Contract requires consideration. Consideration is something that is bargained for.

 Question is generally whether the agreement looks like a bargain (a trade).
 There is no requirement of adequacy of consideration, equivalence in values exchanged
(§79) – courts will not look into the values exchanged, because parties are in best
position to measure what things are worth to them.

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 o Though courts often do look at adequacy of consideration (nominal
consideration, unconscionability)
o Competing theories – only form matters v. substance matters

Hamer v Sidway Ct App NY 1891

Issues
 Uncle promised nephew he would give him$5k if he refrained from
alcohol/tobacco/gambling. Uncle dies but nephew holds up his end. Nephew sues
estate.
Procedural History
 Originally rejected, appealed.
Judgement
 Nephew is entitled to the $.
Ruling (Principle)
 There is consideration, as the nephew had to do something. Different from a donative
gift, because nephew had to do something.
 Would have been easy for Aunt Tilly to have done this for Charlie!
 Court held that the promise was enforceable since “consideration means not so much
that one party is profiting as that the other abandons some legal right in present, or
limits his legal freedom of action in future, as an inducement for the promise of the
first”
 Frug: this makes no sense considering that court supposedly don’t look at the adequacy
of consideration. More importantly, if giving up a legal right is enough to constitute a
bargain, that’s a very expansive view of consideration.
 Frug: this works better under reliance

Statute of Frauds (Appendix A)

§71 Requirement of exchange; Types of exchange

 To constitute consideration, a performance or return promise must be bargained for,
that is, sought by the promisor in exchange for his promise and given by the promisee in
exchange for that promise (bargain theory of consideration)
 Consideration can be:
o An act other than a promise
o A forbearance
o The creation, modification, or destruction of a legal relation
 Consideration induces the making of the promise, and promise induces the furnishing of
the consideration

R2nd §72: Exchange of Promise for Performance

Except as stated in 73 and 74, any performance that is bargained for is consideration.
Comments:

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  When one party has already performed, there is even more case for enforcement to
reimburse the seller, prevent unjust enrichment of the buyer, and encourage all parties
to make socially useful bargains
 Consideration establishes a substantive rather than a formal basis for the enforcement
of a promise. Formality is irrelevant

R2nd §79 Adequacy of consideration; mutuality of obligation

If the requirement of consideration is met, there is no additional requirement of:
(a) A gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to
the promise
(b) Equivalence in the values exchanged
(c) Mutuality of obligation

Comments:
 Parties are free to fix their own values because they are in a better position to evaluate
their own circumstances and valuations
 The exchange can be of unequal values, though disparity in value without other
circumstances can indicate pretended exchange
 Gross inadequacy “such as shocks the conscience” can signal fraud, lack of capacity,
mistake, misrepresentation, duress, or undue influence. Such inadequacy can justify a
denial of specific performance

Klockner v Green NJ - 2nd Ct A 1969

Issues
 Stepson does lots of work for elderly stepmother, she tells him she will leave him $ in
her will but doesn’t sign the final updated copy. He sues.
Procedural History
 Trial Ct found no consideration
Judgement
 He does deserve the money, because he worked for it and there was consideration in
that regard.
Ruling (Principle)
 Consideration and money need not be the only reason one may do things, but still count
as consideration. Example being a reward for capturing a criminal—you may report it for
safety/moral reasons but still deserve the reward.

Carlisle v T&R Excavating OH 3rd Ct A 1997

Issues
 Ex-wife prior to divorce wants to build preschool and husband’s company, T&R, agrees
to do it with $40k labor for free and having the preschool reimburse for parts. They
divorce and ex-wife sues because she has to pay another contractor to do it.
Procedural History

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  Trial court had awarded $36k to Carlisle (ex-wife)
Judgement
 There was no consideration for the agreement to do the labor for free. Perhaps under
reliance/promissory estoppel could have worked, but she didn’t argue that at trial.
 No reasonable expectation that T&R bargained away the $40k for labor in exchange for
the reimbursement for parts.
Ruling (Principle)
 No consideration.

Pennsy Supply v American Ash Corp PA Superior Ct 2006

Issues
 Ash gave free ash to Pennsy because they didn’t want to dispose of it and it could be
used in road construction. Due to defect in the ash the road cracks and Pennsy had to
redo the road. They sued alleging Ash was responsible for damages.
Procedural History
Judgement
 It was consideration (a bargain) because even though it was provided for free and Ash’s
disposal cost savings not included specifically in contract, Ash got something out of it,
clearly, and thus it was consideration.
Ruling (Principle)
 Promise and consideration in reciprocal convention– “Promise induced the detriment
and the detriment induced the promise.”

Hancock Bank & Trust v Shell Oil Company, MA S Ct 1974

Issues
 Shell has lease which is 15 years long with only 90 days’ notice of leaving on landlord’s
end. Landlord has property seized by bank due to foreclosure, bank sees contract as “so
lacking in mutuality as to be void against public policy” and sues.
Procedural History
Judgement
 Contact valid. There was consideration. Shitty bargains are still enforceable – don’t be
an idiot when signing them (like the landlord was).
Ruling (Principle)
 If there was consideration, contracts – even uneven ones – are valid.
 Courts have traditionally declined to relieve a party from the terms of a contract merely
because he made what he regards as a bad or uneven bargain

Duress

Batsakis v Demotsis TX Ct Appeals 1949

Issues
 During a time of starvation and rapid inflation in Greece, while stuck there, TX resident
Demotsis borrowed 500,000 Greek drachmae (at the time only $25 but typically and

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 now again worth $2,000) from Betsakis. D paid Batsakis only $25 back even though the
contract explicitly said D owed B $2,000 USD plus 8% interest.
 D argued she owed restitution remedy ($25) not expectation remedy ($2,000)
Procedural History
 Lower court found D owed $750.
Judgement
 Appeals found for D owed even more (lol) – $2,000 plus annual interest since 1942.
Ruling (Principle)
 Contract was valid due to consideration – she received "exactly what she contracted for
according to her own testimony."
 Court held “mere inadequacy of consideration will not void a contract”
 Not duress because there is no threat and “my terms or no deal” not considered a
threat
 Jury ended up awarding plaintiff $750 (agrees with Eisenberg’s compromise theory)
 Isn’t this really giving the court the right to rewrite contracts?

Consideration and Remedies

 Expectation Remedies – what was owed (above, $2000)
 Reliance – amount other person is out, or opportunity cost (if you don’t pay someone
for an hour of work, that hour they could have spent working another job)
 Restitution – if you received x amount (ie, you got an hour of services at $50/hr, so $50).

R2nd §175(1)
When Duress by Threat Makes a Contract Voidable
 “If a party’s manifestation of assent is induced by an improper threat by the other party
that leaves the victim no reasonable alternative, the contract is voidable by the victim”
 Frug: we’re making this up. No hard and fast rule on this!

R2nd §176
When a Threat is Improper
 (1) A threat is improper if
- what is threatened is a crime or a tort, or the threat itself would be a crime or a tort if it
resulted in obtaining property,
- what is threatened is a criminal prosecution
- what is threatened is the use of civil process and the threat is made in bad faith, or
- the threat is a breach of the duty of good faith and fair dealing under a contract with the
recipient (contract must already be in place)
 (2) A threat is improper if the resulting exchange is not on fair terms, and
- the threatened act would harm the recipient and would not significantly benefit the
party making the threat
- the effectiveness of the threat inducing the manifestations of assent is significantly
increased by prior unfair dealing by the party making the threat, or
- what is threatened is otherwise a use of power for illegitimate ends

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p. 81-109

Andreni v Hultgren Utah 1993

Issues
 Medical malpractice. After atrophy of hands following knee surgery, Andreni got a
second opinion and ultimately went back to same surgeon for corrective surgery that
was unsuccessful. Immediately prior to second surgery, asked to sign a waiver which
released Beck and Holy Cross Hospital from liability.
Procedural History
 Trial court granted motion to dismiss on the waiver grounds.
Judgement
 Possible that he was under duress when signing the form due to constantly weakening
hands and the statement from the doc via phone when he became upset prior to signing
waiver that if he didn’t sign, they would have to “play hardball.” It is a factual matter as
to whether he had other options or not due to misleading information on outcomes he
was given by the doctor, and thus motion reversed so it can proceed to trial.
Ruling (Principle)
 Contacts made under duress are potentially a fact-finding matter left to a jury.
 In class: key in this case was that doctor guaranteed it was going to work?

Chouinard v Chouinard 5th Cir 1978

Issues
 Dispute in family business over how much each person has ownership shares. When
they desperately need money and creditor needs everyone’s ownership amounts
settled, 2 of the 3 owners ask for settlement of dispute on that piece then also. 3 rd guy,
Fred, signs agreement giving them stake via promissory notes but after getting the loan
from the creditor, brought suit to put promissory notes aside.
Procedural History
Judgement
 Held for the 2 others.
Ruling (Principle)
 Neither “threat of considerable financial loss” nor “impending bankruptcy” establish
economic duress.
 Threat of considerable financial loss and impending bankruptcy held not economic
duress since threat must be attributable to party against whom duress is alleged
 “Duress may not be implied merely from the making of a hard bargain”

Big Picture:
Traveler in Desert Hypo – Is this Duress?
 One party rescues another starving in the desert on condition that he pay an obscene fee
 If duress, where is the improper threat induced by the other party? – no public duty to help

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 Restatement’s “physically compelled by duress” is twisting other’s arm, not just in bad
shape
 Eisenberg holds such a contract unenforceable on grounds of duress, as it violates the
fundamental principles of the bargain theory (fairness and efficiency)

Two sides of argument:

Batsakis and Desert Hypo—no threat, so no duress; maybe Batsakis had reasonable alternative
Post and Desert Hypo—using power for illegitimate ends, so there is duress; no reasonable
alternative

Argument For Law of Duress:

 Different levels of education, language barrier, etc.
 Want to preserve system where people treat each other fairly
 Courts can’t take a neutral position—so they shouldn’t be able to enable unfairness

Argument Against Law of Duress:

 Promisors will worry that contracts won’t be enforced
 Any sort of bargain situation can turn into duress

Eisenberg, the Bargain Principle and Its Limits, Harv Law Rev 1982
E uses example of stranded traveler saved by someone who demands $100k to drive him to
civilization to point out the shortcomings of existing contract law, as that contract wouldn’t fall
under any of the current statutes (but is morally questionable). Cost to rescuer is near zero but
without effective law giving specific recovery to rescuer, no incentive to rescue without
significant financial contract/morally questionable but legal contract.
 Argues for adopting laws of maritime law that would allow for specific adjudication of
rescuer recovery.
 Note: this isn’t the law!

Post v Jones US S Ct 1856

Issues
 Ship, Richmond, breaks down with a bunch of whale oil on board, the ones that come to
save it hold an “auction” for the oil, buy it cheaply, instead of getting a salvage fee.
Owner of Richmond sues for oil back. Other ship owners argue that they lost significant
resources going out of their way to salvage that oil.
Procedural History
Judgement
 Can’t keep the oil.
Ruling (Principle)
 Judges argue that the contract wasn’t valid – owner was helpless in the situation.
 They also argue that they cannot find it valid even if given the circumstances, not
allowing contract may disincentivize folks from salvaging things in the future which is a
big picture net loss, because it would allow for all potential saviors to be justified in
price gauging.

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Unconscionability and Price Gouging

Big Picture: Unconscionability and duress aren’t denying there was consideration, just ignoring
it.

Williams v. Walker-Thomas Furniture Co US Ct Apps DC Circuit 1965

Issues
 Poor appellant purchases a number of home furniture items on layaway. Contract
written such that when you buy more things, you cannot pay off individual items until
everything paid off (so adding one more thing means everything still on loan—making
interest nuts).
 Appellant argues that contracts are unconscionable and thus unenforceable.
Procedural History
 Trial and District courts reject this argument.
Judgement
 Skelly Wright: Now that Congress enacted the UCC, and that there is common law
precedent for this, create test for unconscionability. This is potentially unconscionable
and should be remanded to trial court for factual analysis.
 In this case there was absence of meaningful choice, gross inequality of bargaining
power, etc.
Ruling (Principle)
 "Test” (no specific rules though, lol) for unconscionability based on circumstances when
contract made in terms of general commercial background and needs of particular
trade/case.
 A contract is unconscionable when there is an absence of meaningful choice on the part
of one of the parties together with contract terms that are unreasonably favorable to
one party
Dissent
 Danaher: I’m upset this happened, too, but we need to be cautious about declaring this
—there are many potential contracts that could be considered unconscionable and it
will be very hard to adjudicate

Review of Willams v Walker-Thomas

Skilton & Helstad, Mich Law Rev
 What was the unconscionability of this? Is it simply the indirectness of the contract
controlling all of the goods’ ownership? Appellants appear to argue that to allow the
store to use the pro-rata clause upon so many goods would effectively subvert DC
statutes exempting household goods from attachment.

Uniform Commercial Code

 Created from 1940-1952, and has now been adopted by 49 states and DC (not LA).

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  Covers all transactions in goods, defined as all things movable at time of sale that aren’t
money or “things in action.
 Section 1-103
o Does it displace common law?
o How does it define its terms?
 Comments sometimes are used by courts as enforceable, but not always. Generally
deferential to them, though.

R2nd §208 – Unconscionable Contract or Term

 “If a contract or term thereof is unconscionable at the time the contract is made a court
may refuse to enforce the contract, or may enforce the remainder of the contract without
the unconscionable term, or may so limit the application of any unconscionable term…”
- Gruesomeness or just a bad bargain does not necessarily mean unconscionability
- Unconscionability determined in light of:
 Setting
 Purpose
 Effect

 Procedural unconscionability:
o Concerned with “unfair surprise” (fine print clause, mistakes or ignorance of
important facts, or other things that mean bargaining did not proceed as it should)
 Substantive unconscionability (overly harsh terms):
o Involves an unjust or one-sided contract (imbalance of obligations)
o Sometimes seems sufficient in and of itself to void a term of a contract
o Sometimes helps confirm or provide evidence of procedural unconscionability
o Clues to Procedural Unconscionability (§208, Comment D)
 “Belief by the stronger party that there is no reasonable probability that the
weaker party will fully perform the contract”
 “Knowledge of the stronger party that the weaker will be unable to receive
substantial benefits from the contract
 “Knowledge of the stronger party that the weaker party is unable reasonably
to protect his interests by reason of physical or mental infirmities, ignorance,
illiteracy or inability to understand the language of the agreement…”

UCC §2-302 – Unconscionable Contract or Clause

 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
the other options listed in RS §208)
 Parties can present evidence about commercial setting, purpose and effect
- Time and place where contract made are important
 Two tests for determining whether hybrid goods (part “good,” part “service,” i.e., carpet-
laying) fall within the UCC
- Predominant factors test:

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 Whether the contract’s “predominant factor”—its thrust or purpose, reasonably
stated—is the rendition of a service with goods incidentally involved (e.g., painting
of a portrait) or the transaction of a sale with labor/services incidentally involved
(e.g., installation of a water heater in a bathroom)
- Severance test:
 Severs the contract into different parts (goods, services) and applies the UCC to the
goods but not to the non-goods in the contract
 Defects with goods covered by UCC; defects with non-goods not covered by UCC
- Majority in Pittsley v. Houser follows the predominant factors test

Pittsley v Houser Idaho Apps 1994

Issues
 Dispute related to carpet sale involving purchase of carpet and installation. Is that a
good and thus covered by UCC?
Procedural History
Judgement
 Yes—devise two tests for this:
o 1st, best: predominant factor test. What’s the bigger item, service or good?
o 2nd, second option: sever contract into different parts (hard to do in practice)
Ruling (Principle)
 Based on predominant factor test, yes it is covered by UCC. Carpet cost way more than
installation and the buyer didn’t choose the carpet because it would be installed, he
chose the carpet.

Maxwell v Fidelity Financial Services Inc AZ Sup Ct 1995

Issues
 Maxwell took out two loans at very high interest rates from Fidelity to pay for a water
heater that never worked. Second loan had many additional changes and both loans
included a lien on the home, as well. The total Maxwell would pay according to the
contract for the water heater would be about $17,000. Her home was worth $40,000 in
total.
 Maxwell brought suit after 6 years of paying for the water heater seeking to have 1984
contract considered unconscionable and unenforceable.
Judgement
 The water heater company (National) and Fidelity, by the contract, are linked, so Fidelity
could have to have loan unenforceable.
 Detailed consideration of Unconscionability is thus warranted to consider this contract
o Rely on Leff’s article distinguishing between process unconscionability (unfair
surprise fine print clauses) and substantive unconscionability (unjust, one-sided
contract).
 They find examples of court decisions where only one type is necessary
for a contract to be unenforceable.

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  Also statute language which uses the word “or”
Ruling
 Contract was unconscionable because $15,000 for a water heater is a grossly excessive
price when the home itself is worth only $40,000 (setting and purpose considerations)
o Substantive unconscionability established in grossly excessive price
 They argue it is a fact-based question which trial courts should decide, and remand it.
 Contract terms so one-sided as to oppress or unfairly surprise an innocent party, an
overall imbalance in the obligations, or a significant cost-price disparity all evidence
unconscionability

Martin v. Allianz, [in-class example]

 Plaintiff injured in auto accident and leg amputated 196 days later (policy covers up to
90 days after accident)
 P sued for unconscionability – on 89th day has to decide between leg and payment
 Holding: Court disagreed. Insurance companies create risk tables and offer plans. He
accepted one of these plans. Better for insurance companies to use market facts to
create plan for more than 90 days than to have the courts do it (role of the courts
argument)
o What would be conscionable? 100 days? 200 days?

Big Picture:
Arguments for Doctrine of Unconscionability:
 Morality as well as the argument that certain people (poor, uneducated, those in
trouble) have unequal bargaining power – no meaningful choice, and hence contract not
truly consensual
 Prevent those with bargaining power from abusing that advantage (protect rights weak,
etc.)
 Courts should protect the weak, and further courts are able to draw line to limit
unconscionability (and duress) and still protect right to contract

Arguments against Unconscionability:

 Intent of parties / freedom of contract should be determinative. Further, shouldn’t
treat the poor differently because of unequal bargaining power, etc – same right to
contract as others
 Slippery slope till point where all contracts based on unequal bargaining power are
unenforceable; threat of unconscionability makes businesses less likely to contract with
poor
 Why should the court judge the value of consideration after the fact?

SECTION 3: The Problem of Mutuality

Both parties must be bound or neither party is bound

Bilateral vs. unilateral contracts

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  Bilateral contract: exchange of a promise for a promise
 Unilateral contract: exchange of a promise for an act (outside the principle of mutuality)
o Any bargained-for act or forbearance will constitute adequate consideration for
a unilateral contract
 Illusory promise rule applies only to bilateral contracts
o Contra: fallacy of the illusory-promise rule is that it treats transactions involving
illusory promises as failed bilateral contracts, when they are properly
understood as unilateral contracts designed to increase the probability of
exchange.
o Harris v. Time, Inc: Any bargained-for act or forbearance will constitute adequate
consideration for a unilateral contract. Calculator watch case.

Conditional Promise:
Scott v Moragues Lumber Co, S Ct of AL 1918
Issues
 Scott agreed to charter cargo from ML Co on a boat if he bought it. He bought it, but
then chartered it to someone else. ML Co sued.
Judgement
 Scott argues the contract had no consideration or “mutuality of obligation,” since it was
conditional on him buying the boat.
 ML Co argues it did, and he bought the damn thing!
Ruling
 ML Co is right. Scott loses, and conditional contracts are binding.
 Acceptance on the part of one party of a conditional promise by another converts the
promise into a binding contract, such that the other party must perform his obligation
when the condition is met

However: see also

 UCC §2-306(1): Output / Requirement Contracts: Allows agreements where quantity is
measured by the output of the seller or the requirements of the buyer as long as they
are in good faith and the quantity is not unreasonably disproportionate to a stated
estimate or to normal outputs or requirements
o Both parties have made real promises to the other by shrinking their realm of
choice so they fulfill the bargain principle and are enforceable

Illusory Promises
 Things that sound like promises but aren’t: “I’ll buy from you at $3/pound as much as I
want” but then they don’t buy any.
 Frug: ignore the phrase “mutuality” which E uses. Not the law – plenty of times where
one side bound and not the other!
o But, a real promise in exchange for an illusory one is called something – no
consideration!

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Wood v. Lucy, Lady Duff-Gordon, Court of Appeals of New York, 1917.
Issues
 Lady DG is a fashion icon who hired Wood to be her agent and get her label on
merchandise. She promised to give him half the profits of whatever he got her label on,
if he did the work to get her label on it. She then also put her label on other things on
the side and didn’t share the profits. He sues. She claims it’s not a contract as she didn’t
promise to give him anything, thus, no consideration.
Judgement
 this is a contract, and “The defendant gave an exclusive privilege” and then broke it.
Principle
 In general, illusory contracts may still be contracts if there is something given in
exchange.
 Cardozo: claimed that there was an implicit promise in their understanding. Stronger
case for implication given that it was exclusive.
 Cardozo argues we should look at what the parties were doing.

Miami Coca Cola v Orange Crush 1924

Issues
 CC signs agreement to distribute OC indefinitely, while OC can stop at any time. CC
stops. OC sues.
Judgement
 Because the contract was void for lack of mutuality, OC could not be bound to the
portion of the contract that remained executory following CC’s cancellation.
Principle
 In this case, trademark exclusivity isn’t mutual, so contract lacks mutuality and thus,
isn’t valid.
 To be enforceable, a promise must limit the promisor’s freedom of choice in the future;
performance of a promise cannot be optional
 Williston: often parties make illusory promises because they are so eager to obtain
possible work, etc. that they gladly trade an absolute promise for an optional one
o Lady Gaga store example

Frug: house hunting example

UCC §2-306
 Now enforces “requirements and output” contracts – I’ll agree to sell you my product Y
at X price, if you agree that you’ll buy all of your Y’s from me.
 “Since both parties have made real promises—have shrunk their realms of choice—and
each has exchanged its promise as the price of the other’s, courts that refused to
enforce requirements contracts because the buyer might have no requirements violated
the bargain principle.”
 UCC §2-306(1): Output / Requirement Contracts: Allows agreements where quantity is
measured by the output of the seller or the requirements of the buyer as long as they

21
 are in good faith and the quantity is not unreasonably disproportionate to a stated
estimate or to normal outputs or requirements
 Both parties have made real promises to the other by shrinking their realm of choice so
they fulfill the bargain principle and are enforceable

Mattei v Hopper CA 1958

Issue
 Developer wants to buy land from occupant, and in contract they agreed to, included a
clause of “subject to [real-estate broker]’s “obtaining leases satisfactory to the
purchaser” (the developer). Occupant changes mind and tries to get out of contract by
claiming illusory promise.
Judgement
 Contract is valid
 Satisfactory Clauses, they discuss two types:
o Ones with objective industry standards (not this)
o Ones where someone agrees to objectively evaluate their satisfaction at some
point (seriously!?)
 It’s valid, and the second type of satisfactory clause.
 “satisfactory” clause—doesn’t mean ‘whatever he wants to do,’ means reasonably
satisfied – not illusory

Harris v Time Inc CA Apps 1987

Issue
 3 year old son of prominent attorney gets letter from Time that promises him a free
watch thru partial window in envelope just for opening it. When he opens, reveals the
catch that he has to subscribe to Fortune, etc.
 Joshua’s father demanded the calculator watch without subscription. Time refused.
Class action for $15 million. Time argued there was no contract because opening the
envelope was valueless, and therefore did not constitute adequate consideration.
Judgement
 any bargained-for act or forbearance will constitute adequate consideration for a
unilateral contract. 
 It was a contract.
 Act of opening was inconsequential to opener but consequential to Time.

Helle v Landmark 1984

Court acknowledged that mutuality is now a weak defense for getting out of a contract.

Illusory promise rule (R2nd §77)

 Illusory promise:
o A promise that does not limit the party’s future actions (something for nothing)

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 o A promise is not illusory if promisor’s options limited in some way, no matter
how slight
 Illusory promise rule:
o A real promise in exchange for an illusory promise is not an enforceable bargain
because is lacks consideration (even if it’s bargained-for)
 To be valid, a promise must constrict the scope of potential choice – it
must foreclose the actor’s future possibilities in order to be a promise at
all.
 If a promisor makes a commitment that does not shrink the boundaries
of choice (R2nd §77) or if the alternate performances are not sufficient as
consideration, the person has made an illusory promise and there cannot
be mutuality
Big Picture:
 Illusory promise test (limit others’ future actions) formal test similar to seal
 If courts want to enforce a contract, they find that there is consideration; if not, they
find there was an illusory promise – substantive reading of the law
 Reasons why illusory promises are unenforceable include not wanting people to make
unfair deals, chase illusions or take advantage of others’ weak bargaining positions

Two theories of illusory promises

1. something/nothing distinction—have to give something up—any amount is something
2. does the deal look binding? Did the parties by implication bind themselves to something?

Lindner v Mid-Continent Oil 1952

Issue
 Lindner leased a filling station to Mid-Continent for three years, with an option in Mid-
Continent to renew for two more. Mid-Continent could terminate at any time on ten
days’ notice. Linder tries to cancel, MC sues. Lindner claims lease lacked mutuality.
Judgement
 Timeline doesn’t have to be exactly mutual. Held for MC.
Principle
 Contracts can be one-sided without lacking mutuality. 10 days is enough.
 Mutuality does not mean that obligations of both parties must be “exactly coextensive”

Difference b/t Lindner and Coke Hypo:

 10 days?
 How long is enough for consideration?

Gurfein v Worblensky
 similar cancellation clause prior to shipment doesn’t affect mutuality. Could have
shipped it immediately!
 Court holds that there was consideration—G would have been bound if W shipped
before he cancelled

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Office Pavilion S. Florida, Inc. v. Asal Prods., Inc., District Court of Appeal of Florida, 2003.
Issue
 After a successful contract for office keyboard trays, they do another one for chairs
which the supplier fails to deliver on. They sue.
Judgement
 Chairs contract has no minimum number to purchase or price requirements. Thus, it
doesn’t require them to do anything. It is an illusory promise as there is no
consideration.
Principle
 In some cases, without any specific terms, according to UCC, no consideration.
 Under UCC, req/output contracts are valid, but here they didn’t have an element of
exclusivity (ie, I buy all the chairs I need from you, or I buy all the chairs you make).

Otherwise, Wood v Lucy

SECTION 4: Performance of a Legal Duty; Modification

Legal Duty Rule and Modifications

 Legal duty rule: cannot contract to do something you’re already legally required to do.
o like illusory promise, is an exception to the idea that bargain = contract
 Legal Duty promises are not enforced because they are against public policy
o Vulnerability of promisor to threats (hold-up job)
o Potential for unequal protection under the law (monetary tips for police officers)
o No additional consideration because already obligated to do what is being
offered

R2nd §73
 Performance of a legal duty owed to a promisor which is neither doubtful nor the
subject of honest dispute is not consideration; however, a similar performance is
consideration if it differs from what was required by the duty in a way which reflects
more than a pretense of bargain

Gray v. Martino, Supreme Court of New Jersey, 1918.

Issues
 Atlantic City police officer enters into verbal contract to find the thieves for some lost
jewelry. Using his police knowledge/connections, he gets their names and then sues to
get his $500 reward.
Judgement
 No. He had a public duty to serve and find the thieves, and cannot “receive a special
quid pro quo” for doing his job.

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  Says that this reward/duty can be relaxed only in special circumstances by the
legislature.
Principle
 Legal duty principle.
 Court held no contract since Gray performing legal duty as police officer – no
consideration
 Allowing monetary tips for police officers could threaten equal protection under the law
(consequentialist arg)

Similarly, there is a ban on tipping public servants, and on them receiving them.

Denney v Reppert, KY Apps Ct 1968

Issue
 Bank robbed. $500 reward sought for help that leads to each of 3 criminals. They’re
caught. Tons of folks claim the reward $.
Judgement
 Bank employees eliminated, two state officers eliminated, but the deputy sheriff of the
neighboring county was under no obligation to help, and thus got the reward
Principle
 Above and beyond can sometimes be accepted, but not for doing prescribed duty.

Hold Up Job
Lingenfelder v. Wainwright Brewery Co., Supreme Court of Missouri, 1891.
 L was architect for brewery while also being heavily invested in a refrigeration company.
During building (while he’s already under contract), the brewery hired another ice
company to build their refrigerator. He got pissed and threatened to leave, so they
offered to pay him 5% on the cost of refrigerating the plant for him to continue as they
needed an architect, quickly. He agreed, and died 8 years later. His estate sued for the
money they believed they were owed, the 5%.
Proceed Hist
 Lower Ct agreed and demanded it.
Judgement
 No. This is not valid, the requirements on his contract didn’t change and he didn’t
include any clauses pushing for his refrigeration company in his contract. No evidence
that the brewery exercised consideration by keeping him on instead of suing him, and
no evidence this changed the contract in terms of requiring him to do more work of any
sort.
Principle
 You can’t demand more for the same work if you’re already under contract to do it!
 A promise to pay someone more for doing something he already has a legal duty to do is
not consideration
 Contractor’s threats amounted to a hold-up job and to enforce would put premium on
bad faith

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But see: Schwartzreich v. Cauman-Basch, Inc. [in class]
 P entered into a written agreement with D for year’s employment at $90 a week
 P received a higher offer from another firm a month before services to begin
 After conversation with D, both tear up old contract and write identical one at $100 a
week
 Holding: New contract is enforceable

Big Picture:
How to reconcile decisions in Lingenfelder and Schwartzreich?
 Good faith requirement to modify contract (also stated in UCC) – substantive
requirement
 Students like formal requirements so can just have a rule (even if we don’t like that rule)
 Examples of formal requirements: ripping up contract, time of conversation, etc.
 You can define the duty narrowly or broadly though.
 Frug: §73 (legal duty) and §89 (modifications ok if fair/equitable) are in conflict. Two
sectios are looking at the same problem in a totally different way!
o Could see it as court reading into power dynamics?

In-Class example
 Ship’s sailing around the world; two sailors jump ship
 Captain promises to split abandoning sailors’ wages among rest of sailors if they’ll do
the work abandoning sailors were supposed to do  enforceable?
 Yes: Each sailor has specific duties; in covering they take on new ones
 No: Sailors’ duty is to bring ship home safely; doing the extra work is part of that duty

Arguments for not enforcing legal-duty promises

 Vulnerability of promisor to threats (hold-up job)
 Potential for unequal protection under the law (monetary tips for police officers)
 No additional consideration because already obligated to do what is being offered

Foakes v. Beer, In the House of Lords, 1884.

Issues
 Dr Foakes owes Beer a bunch of $. They agree to a lower number if he pays a big sum
upfront. Question at trial is whether their later agreement is enforceable, or if B is
entitled to the full amnt.
Judgement
 Though the agreement did not contemplate the interest owed, it could still be implied
given an enforceable agreement. However, the promise to pay a debt was deemed not
to be sufficient consideration as there was no additional benefit moving from Foakes to
Beer that was not already owed to her.
Principle

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  Can’t pay less than owed in a contract without changing what you’re doing, either.
Note
 Absence of consideration is NOT grounds for reversing a modification where the
modification has been performed.
 If you have already been extorted (ie, if the brewery had already paid the architect) you
could argue duress to get it back, but not illusory promise/lack of consideration.
 A promise to pay a lesser sum than one owes is not consideration
 Court says it doesn’t like this outcome (because bird in hand better than two in bush),
but feels compelled by precedent

Modification

 Modification of a contract usually does not require consideration (and cannot be

rescinded)

 R2nd §89: A promise modifying contract duty not fully performed is binding:
o If fair/equitable in view of circumstances not anticipated by parties when
contract made
o To extent provided by statute; or
o To extent that justice requires enforcement in view of material change in
position resulting from reliance on promise
 Tension between §89 (fair & equitable modification) and §73 (legal duty rule):
o Can read §89 as limiting §73 by the “fair & equitable” rule or as an alternative to
§73. Obviously need to speak both languages. Consider Angel v. Murray where
there is the tension
o Key q: when is it a hold-up job and when is it reasonable to modify if promised?

Accords are part of modifications

Angel v. Murray, Supreme Court of Rhode Island, 1974.

Issue
 Citizens filed suit after the City of Newport, RI voluntarily paid an additional $10k over
two years to the garbage collection services head, after an unanticipated increase of 400
new housing units. They had modified the contract and voluntarily paid him more after
he explained why it was necessary at a City Council mtg.
Judgement
 They go thru a history of this scenario:
o Definitely not okay for coercion or duress (example of construction and ship
sailors)
o But, this doctrine lately has allowed for contracts in which both parties agree
voluntarily to modify are valid.
Principle

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  Garbage man gets his $20k, since they voluntarily agreed. Valid. No duress, based on
specific unanticipated new burden.
 Modification binding because it was (1) voluntary, (2) fair/equitable given unforeseen
circumstances, and (3) preceded full performance
 Here, they use §89 and not §73 because the change was fair/equitable. Similar to
good faith.

But see McCallum Highlands, Ltd. v. Washington Capital Dus, 5th Cir Apps 1995
Issue
 WC offer Susman, employee of MH, a loan, and then Fannie Mae criticized a loan they
had previously given S. They then changed the terms of the loan, and S felt he had no
choice but to accept the lower offer to avoid bankruptcy. Susman sues, and trial ct finds
it doesn’t meet TX econ duress standard, thus is valid.
Judgement
 On appeal, found to be lacking consideration, as Susman didn’t have opportunity to
bargain.
Principle
 Based on language of R2nd, it wasn’t “fair and equitable” to S. While they allow for
adjustment for unforeseen circumstances, the Fannie Mae criticism isn’t enough to
argue against unfair surprise.

UCC §2-209 – Modification, Rescission and Waiver

 An agreement modifying a contract within UCC needs no consideration to be binding
 Signed agreement which excludes modification or rescission except by signed writing
cannot be otherwise modified or rescinded
 Party who had made a waiver affecting an executory portion of contract may retract waiver
by reasonable notification received by other party unless unjust in view of reliance on
waiver

Sugarhouse Finance Co v Anderson, Utah 1980

issue
 Anderson owes $2,423.86 plus interest to S. When they meet, he lets them know of
challenges financially and that he is contemplating bankruptcy, which could mean their
judgement against him is discharged. They agree he will pay $2,200 to settle the deal,
and he agrees to borrow money from a 3rd party to do so. He does, but asks them to
delay in cashing the check for 2 days and in the meantime, they change their minds and
tell him they’re going to court.
Judgement
 Held for A. Promissory Estoppel and the fact that he had to go to a 3 rd party – SF by law
could only compel him/seize his existing assets to get him to pay. He agreed to
additional indebtedness in order to accept their deal.
Principle

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  In this case, the alternative contract sufficed for consideration. They both got something
out of it.
 Court found it was binding: act of borrowing from a third party is consideration
o Court holds that this was a substituted contract “underlying claim is liquidated
and certain to amount”=substitute contract, so company must accept the money
 Also, promissory estoppel – Anderson relied on Sugarhouse’s offer by seeking loan from
someone else.

McMahon Food Corp. v. Burger Dairy Co., 7th Cir. 1996

Issue
 MFC got milk from BDC on weekly basis. Dispute over payments for invoices. MFC meets
with someone from BDC, they agree to settle most of debt and MFC writes out check as
full balance to be paid, BDC holds it pending confirmation it was all set. New BDC
manager takes over after other guy leaves company. Turns out it wasn’t all set, but after
some ambiguity, the new guy is slow-played by MFC. He cashes the check, with an
updated note on the check that the balance moving forward is now not correct. MFC
argues that his cashing of the check makes it a valid contract. Trial court finds MFC to be
acting in bad faith and misleading BDC.
Judgement
 Held trial court’s judgement
Principle
 Must act in good faith
Frug: this case is incomprehensible and about a different issue.

Note on the Legal Effect of an Executory Accord

Often, you’ll take a different thing instead of what you originally contracted for, and that’s ok.
It’s an accord:
Assume that A and B have a contract that requires B to render performance P to A. A
and B then enter into an agreement under which B will provide, and A will accept, some
other performance, Q, as full satisfaction of B’s obligation under the original contract.
Such an agreement is known as an accord. For example, suppose B owes A $1000 under
a contract. B promises to give her car to A in settlement of the debt, and A agrees to
accept the car in settlement of the debt. This new agreement is an accord, and until the
accord is performed, it is an executory (unperformed) accord.

Old common law did not consider breaches of these to be protected and claimed they lacked
consideration (but that doesn’t really make sense).

Now, usually enforceable but there’s a distinction between an accord and a substituted
contract. Now, essentially:
 the courts are likely to find that an accord is a substituted contract if the duty under the
original contract was disputed, unliquidated, had not matured, and involved a
performance other than the payment of money

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  if before the date of service and not in $, SC.

Frug: this is really a preview of the problem of interpretation.

Accords are different because if you breach the accord, you go back to original contract.

PART 2: REMEDIES FOR BREACH OF CONTRACT

Chapter 4. An Introduction to Contract Damages, Service

Contracts 1
Three Types, but Expectation is the big one.

Hawkins v McGee, S Ct of NH 1929

Issue
 Doctor wants to practice skin grafts, and promises defendant a new perfectly good hand
after surgery (to get rid of scar tissue from past injury)
Proced Hist
 Lower court threw out the $500 remedies because they only considered the pain and
suffering and ill effects of the operation
Judgement
 Prior ruling thrown out, because the relevant counterfactual is key here – difference
between value to him of a perfect hand (as promised) and value of hand in its present
condition
 Appellate court charged expectation damages: Difference between value of what he got
(hairy hand) and what promised (perfect hand)
 Can make the damage awards large or small:
o Expectation:
 Frug: expectation interest is a concept – he expects a perfect hand
 Big: Loses gainful employment for life (maybe would have been a hand
model?), misery, pain (BUT, how do you separate out the pain and
suffering from the operation and the pain and suffering that resulted
from the botching of the operation?).
 Small: Hand was already abnormal and can shave/wax hand or wear a
glove (a little hair on his hand? big deal!)
o Reliance:
 Big: Valued old hand more, and pain is relevant. Nothing can be done for
victim now, so to put him in position he would have been in had the
contract never been made would take a lot of money
 Small: Out of pocket expenses and pain
o Restitution:

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  Big: Doctor got valuable experience and fee.
 Small: Disgorge the fee
 Point is that varying outcomes can result from each of the measures (not a single
formula)

McQuaid v Michou NH Ct 1932

Issue
 Similar issue of breach of contract for supposed cure
Judgement
 Essentially, while the plaintiff argued that she had experienced far more suffering than
expected, impossible to know the counterfactual, and thus, impossible to separate out.
Can’t be just that by itself.

Van Zee v Witzke SD 1989

Issue
 Court reporter gets surgery on finger, it gets infected, and ultimately is nearly useless
Judgement
 Doctor had discussed all risks with her, and she was aware the doctor couldn’t
guarantee that the finger would be alright. Fail the clear proof of an express contract to
heal the finger.
 The statement was insufficient as a matter of law to constitute an express contract to
heal Van Zee’s finger; rather, it falls into a category of statements constituting
“therapeutic reassurance” of a good result

Start here!

Sullivan v O’Connor MA 1973

 Debate about what is best in considering damages for medical malpractice
o Hawkins method: treat it like a commercial contract
o Common practice in NY:
 not a restitution
 not an expectancy
 but the tendency is to put the plaintiff back in the position he was in just
before the agreement, to compensate him for reliance on the agreement
o Following NY logic, they recommend:
 applying a reliance measure
 including pain/suffering that goes beyond expected for treatment, since
that’s effectively “wasted” pain and suffering
 Frug: this is in the book because it was novel that Kaplan argued for reliance damages
 Court advocated more lenient reliance damages without clear proof of guarantee;
Otherwise doctors will be frightened into practicing “defensive medicine”

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  Reasoning: The best remedy method in patient-physician cases where there’s a breach
of an agreement to cure may be the “reliance interest.” This would compensate the
patient for the detriments he suffered in reliance upon the agreement (payment of
doctors fees, pain and suffering (damages) resulting from worsening of patient’s
condition due to breach of agreement to cure)
o Restitution interest would be too little compensation: only payment of fee back,
ignores other expenses and pain in suffering incurred
o Expectancy interest would be too much compensation

Big Picture: Efficient Breach Ideas

Eisenberg: Expectation damages create efficient incentives for performance, since it forces the
potential breaching party to take other parties’ interests into account (must make them whole
if breach) when deciding whether to breach. Protecting expectation interest is good for society.

Posner (Law and Econ.): Breach of contract is efficient, and therefore desirable, if the
promisor’s gain from the breach, after payment of expectation damages, will exceed the
promisee’s loss from breach. Breach is perfectly acceptable as long as the breaching party
takes expectation damages into account and thus puts other party in position he would have
been in with no breach (i.e., ∆ shouldn’t be stuck to a bad deal, that’s bad for the economy; as
long as ∆ pays damages, if ∆ can get better deal (taking into account expectation damages), ∆
should breach). Main issue is how potential breaching party confidently knows expectation
damages in real world.

Friedmann (anti-Posner): Transaction costs and litigation result from breach. “Efficient breach”
undermines confidence in bargains and security for promise better than efficient breach. No
one indifferent to breach (people tend to want performance, not breach), so breaching party
should pay profits from breach to other party.

Cooter and Eisenberg, Damages for Breach of Contract, CA Law Rev 1985
 In Breach of Contract cases, should you go with reliance or expectation damages?
o often basically the same either way
o but in non-perfect markets, can be significantly different
 in abstract terms, an ideal contract would have the perfect amount of cost-for-breach
clause versus risk that the buyer and seller are willing to take. This isn’t actually the case
because transactional contracts are expensive to write so they would just leave that to
the courts.
o we want efficiency here because we want incentives against breaches to be
internalized.
 Best way to internalize these incentives against breaches is expectation damages, not
reliance damages.

The Expectation Measure

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  Simple version: measure expectation damages by the difference between price of
substitute and the unpaid balance of the contract price
 usually price of getting it from third party (or what would have been if they don’t buy
more)
o if bigger damages to buyer, they may have failed in their “duty to mitigate”
o problems arise if there isn’t a suitable substitute transaction
 ie, property that’s left with a defect

Chapter 5. The Expectation Measure

SECTION 1: Damages for Breach of Services

Determining Damages: Cost of completion vs. Diminution of Value

 Damages measured either by (1) diminution in value or (2) reasonable cost of
completion
 Cost of completion generally favored unless:
o (1) Cost is disproportionate to benefit, and
o (2) Breached contract provision is incidental
 Good faith is not taken into account since intention is not to punish for
breach
 Why choose diminution of value over cost of completion? When there’d be windfall

Louise Caroline Nursing Home v Dix Construction, S Jud Ct of MA, 1972

Issue
 D was delayed and didn’t complete the home in time, but no loss was actually suffered
by LCNH.
judgement
 lol no damages. You can’t claim compensation for what you didn’t lose!
Principle
 it’s not just that you didn’t get a great bargain – the measure of the damages can only
be in “the amount of the reasonable cost of completing the contract and repairing
defective performance.”
 To give the full market value would be to put them in a better position than had the
contract been performed. “The plaintiff is entitled to be made whole and no more.”
 Here, market value is more than cost of completion (opposite of Peevyhouse)

Peevyhouse v Garland Coal, S Ct of OK 1962

Issue
 contract dispute with strip-mining company that agrees it screwed up results in land
worth <$5k needing $29k in repairs according to experts. Plaintiffs argue that as the
contract stipulated the repairs would occur and they didn’t, they deserve more than the
$5k (more than the land is worth) that they got in trial ct.

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  Is it “cost of performance” or “cost of performance limited to market value before and
after the work was completed”
Judgement
 Actually lowered their rewards to only $300
Principle
 They refer to R1st, and argue that the goal of the contract was not either a) to
rehabilitate the land or b) to mine it, but a mining contract with an additional provision.
Referring to R1st, they find that the goal is cutting “economic waste” and thus, at the
end, “relative economic benefit.”
 Frug: Are we in expectation damages here?
 Court said normally cost of completion would be standard of damages, however
appropriate damages in this case were instead diminution of value of land b/c:
 Contract provision was “incidental” to the main purpose of the contract
 Cost of performance “grossly disproportionate” to the benefit conferred (economic
waste)

Dissent
 Irwin: defendant knew what the cost could be when it entered into the contract and
there was clearly consideration. The measure should not be the economic value of
performance to the plaintiffs and not the cost of performance.
 should also consider the benefits received under the contract by the party who breaches
 the def reaped the benefits and now doesn’t want to do what they are expected to do!
We’re granting benefits to the defendant without a resulting obligation.
Note
 as it turned out, really wasn’t done in bad faith—they just stopped once they found out
there was very little coal underground
 but they had specifically negotiated for the fix clause because the current common
provision was an up-front per-acre payment that wasn’t worth it. They gave up what
would have been a $3000 per acre payment for the contract they got.
Discussion
 Both sides want to put π’s in position they have would been in if contract never existed,
however there is a difference of opinion on how to define that “position”
 Court sides with contractors that position should be defined as value of property (i.e.,
economic position)
 Owners don’t care about value and want to be put in position with a nice backyard (i.e.,
physical position)
 Parties could have written contract more effectively to ensure repair work not
“incidental”

HP Droher v Toushin MN 1957

Issue

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  House built incorrectly such that it would cost $20k to repair for a house that cost $44k
to build. Diminution in value of the house was much less than $20k.
Judgement
 Court held that the diminished-value rule should be applied
 Good-faith performance distinguished from willful failure to perform at all
o Implication is that if the breaching party did not make a good-faith effort, the
cost of completion standard would apply (and the diminution of value standard
would not be applicable)

Estrn Steamship v US
 Ship company tried to get govt to pay $4m to repair a ship that at the end would be
worth $2m, that they had leased during WWII with clauses to fix.
 Court rejected claim—they wouldn’t have actually spent it on the ship and it’s clear
neither party anticipated that the market for old ships would tank and market for new
materials and labor would be good
 government must pay shipowner cost of ship after restoration rather than cost of
restoration, b/c:
o Economic waste concerns
o It’s unlikely shipowner would actually spend the $4 million to fix the ship (since
its return would be only $2 million)

Elmira School Dist v McLane Const Co NY 1981

 W/MLC used support beams for swimming pool building it knew would discolor and look
ugly
 School Dist has specitically wanted a fancy design with the beams as a prominent
feature
 $357k (cost to replace beams) versus $3k (difference in value of building)
Judgement
 Held for school dis
o knowingly changed them
o wasn’t a like-substitute that would have been fine to pay the difference in value.
It was an aesthetic loss.
 McLane likely acted in bad faith (mistake likely not the result of innocent oversight or
inattention)

Fox v Webb AL 1958

 difference between house where aesthetics matter and commercial buildings

Grossman Holdings v Hourihan

 back and forth over house built with southeast exposure instead of SW.
 economic waste argument supported for damages, but only at time of completion. Fact
that house had increased in value since construction didn’t matter.

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  Damages for breach of contract should be measured as of the date of the breach, not as
of the date of delivery. Relevant b/c damages were awarded based on diminution of
value.

Advanced Inc v Wilks

 fact finder in best position to figure out whether aesthetic stuff matters, ie, if property
has special significance to the owner

Note
 When Pl pays to complete work not finished by Def, courts routinely award those costs
to Def without considering reasonableness.

Ruxley Construct v Forsyth, House of Lords 1996

 Swimming pool all functional just slightly not deep enough. Still able to dive. Would
have cost £21k to fix and it worked fine as is.
 Pl: pools are for fun. There’s no economic number here. I’ve just lost some fun.
Judgement
 Awarded him loss of amenity damages of £2,500.
Principle
 Other damage: loss truly suffered by the consumer, which is incapable of precise
valuation
o test of reasonableness
o judges should consider it (according to house of lords)

Big Picture: Diminution of Value versus Cost of Completion/Objective ∆

Arguments
 subjective value versus objective ∆
 C of C
o For
 You should get what you asked for!
 Expectation: put in position they would have been?
 Why not enforce bad contracts? We do for lots of others.
 Why is its court’s position to consider it economic waste? B/c they’re
bound to some number
o Against
 Economic waste is bad for everyone
 SpecPref (as here) is rare in US
 D of V
o For
 to avoid absurb outcomes
o Against
 incentivizes empty promises? (Good faith req tho)

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Other idea, not in US: what of market value of comparable other boat/land/etc? 3 rd idea.
 Is this that diff than D of V, though?

p. 224-246
SECTION 2: Damages for Breach of Contract for Sale of Goods
(A) Breach by Seller: Buyer’s Remedies

UCC – Intro/Overview
 Only covers goods, all things movable besides $.

Sales of Goods, Service Contracts 2

Damages for the Seller’s Breach of a Contract for Goods
 UCC
o specific relief (buyer gets the goods)
o damages
1. when seller fails to deliver or buyer properly rejects
2. when buyer has accepted but product is defective

 UCC §2-711 – Buyer’s Remedies in General

- When seller fails to deliver or repudiates, or buyer rightfully rejects or revokes
acceptance, buyer may cancel and in addition to recovering the price already paid he
can:
 “cover” and have damages under §2-712; or
 recover damages under §2-713 (market price)

 §2-712 (“Cover”): Following a breach a buyer may “cover” by making in good faith and
without reasonable delay any reasonable purchase of goods or services in substitution
for those due from the seller
o The buyer who has so “covered” may recover as damages from the seller the
difference between the cost of cover and the contract price together with any
incidental or consequential damages resulting from the breach, minus any
expenses saved as a result of the breach  [cover] – [contract price] +
[consequential damages] – [expenses saves as a result of the breach]

 §2-713 (Damages for non-delivery or repudiation): The measure of damages for non-
delivery or repudiation by the seller is the difference between the market price at the
time when the buyer learned of the breach and the contract price together with any
incidental and consequential damages [market price] – [contract price] +
[consequential damages]
o Market price is to be determined as of the place for tender or, in cases of
rejection after arrival or revocation of acceptance, as of the place of arrival

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 o Damages are to be assessed as of the time the buyer learned of the breach
(because that’s when the buyer first has the opportunity to seek cover or
alternative relief)
o §2-723: If no prevailing price, reasonable substitute (as to time and distance
from the place of performance) may be used (need to give fair notice)
o §2-724: Published reports of prices can also be used to determine the prevailing
market price at the time of repudiation
o This § applies when the buyer has not “covered”

 §2-714 (Damages for breach in case of acceptance of goods): If buyer accepts goods
that do not conform to the contract, the buyer may recover for “breach of warranty”
o Damages for breach of warranty are measured as the difference at the time and
place of acceptance between the goods accepted and the value they would have
had if they had been as warranted, plus any incidental or consequential damages

 §2-715 (Incidental and consequential damages): Incidental damages resulting from the
seller’s breach include expenses reasonably incurred…in connection with effecting cover
and any other reasonable expense incident to the breach
 Prevailing Market Price
o §2-723: Timing of market price in anticipatory repudiation; reasonable
substitutes for pricing purposes
o §2-724: Admissibility of market quotations for determining market price of
goods

Debate: If you cover, can you still get Market?

 Are they mutually exclusive? Hart & Sacks say yes.
 Peters says this is unfair. If you’re forced to cover, you shouldn’t be penalized. You
should get the market differential if need be. (ie, if you get market goods at higher price
(?) than you bought at, you should get the difference)
 Eisenberg: If the breaching seller cannot prove that the buyer’s new purchase is in fact a
replacement for the one not delivered under the contract, the “cover” purchase should
not foreclose the buyer’s recovery under §2-713 (damages assessed based on market
value at the time of breach)
 Comment to UCC says depends on the facts of the individual case, so it is possible;
there is no “or” in the statute

Continental Sand & Gravel v. K&K Sand & Gravel

 $50k in equipment as part of $650k contract with warranty breach ended up with $104k
in damages.
 This is just like Peevyhouse but for goods. Answer is different – they get C of C – because
that’s what the UCC says.

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  Court ok with this as “to limit recoverable damages by the purchase price as defendants
suggest would clearly deprive the purchaser of the benefit of its bargain in cases in
which the value of the goods as warranted exceeds that price.”
 §2-714: Damages generally should represent the difference between the value of the
goods at the time of acceptance and the value they would have had if they had been as
warranted

Egerer v CSR West WA Apps 2003

Issue
 CSR breached contract for land-fill material (gravel) in 1997. E wanted it, contracted
with them for it at $.50/cubic yard, but then the DOT changed their standards and could
use it instead so they breached their contract.
 Prior to that, he had bought it for $1.10/c/y, but both times it was only through
happenstance of construction in the area. In 1998, he got quotes for it at $8.25-
$9.00/c/y. He didn’t buy as it was too expensive. He didn’t file suit until 1999, when he
bought it at $6.39/c/y.
Judgement
 CSR admitted breach but argued best price would be the $1.10/c/y, but the court found
that the only price he could have reasonably obtained when CSR breached was
$8.25/c/y. Damages calculated based on that.
 Question between “cover” and “hypothetical cover,” and in this case the market
determines it.
o it’s okay that the type of material that he bought at $8.25 was slightly different
than the $1.10, because it was based on what’s available and what is a
“reasonable substitute.”
 Where a seller fails to deliver to a buyer a product contracted for and the buyer does
not cover, in assessing damages the court may look to the price of reasonable substitute
at a time reasonably close to the time of breach as evidence of the prevailing price,
despite quality differences between the product contracted for and the substitute
product
o This rule grants courts significant leeway in measuring prevailing price b/c it
says a court may use a market price for goods different in quality from the ones
the buyer contracted for

Failure of a buyer to effect cover does not bar from other remedy.

Big Picture:
Frug: Egerer and HWH in conflict. Why did Egerer get more but HWH not?
Frug’s answer: courts disagree on whether to write an “or” into the UCC.

If you say “stick with cover,” very hard to determine what exactly is cover. Frug: code is
uncertain on these issues.
 Choice b/t market and cover is a subset of expectation damages.

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  Both sides can argue this. Important to uds both sides. No real answer.

Lettuce Seller v Lettuce Buyer [not in CB]:

 Buyer covers, asks for market
 Court says, you’re just a middleman selling things at a higher cost for profit.
 Opposite of HWH cattle outcome.

HWH Cattle v Schroeder, US Apps 8th Cir 1985

Issue
 Breach of contract for HWH to buy cattle from S, resulting in related contract from HWH
to another company, and lost commission
Judgement
 HWH only gets the cost of the lost commission back, because under UCC §106 court
should avoid unexpected windfall, which is not needed as they only bought cattle as
needed and the other company shared the same ownership with them and ultimately
didn’t file anything against them.
o don’t get damages based on cost of cattle at the time
o which makes sense because while they were slightly wronged, would be easy to
set up subsidiaries to make each group judgement-proof while also extremely
able to sue!
 Don’t get market differential when don't lose money - damages for non-delivery would
give P unfair windfall

Kearsarge Inc v Acme Staple Company, S Ct of NH 1976

Issue
 Computer data company, K, fired, contract breached (not included specifically how
judgement confirmed K was unjustly fired). Question is, how much money can they
recoup?
Judgement
 A argues K got other contracts and those savings should be deducted. Court finds that as
a company with three employees, there weren’t layoffs/etc that they could do to save
money. Drastic voluntary wage cuts to stay in business which they did don’t count
against them.
o perhaps some trivial costs were saved (paper, etc) but A (defendant) has burden
of proving savings and didn’t present anything so they lose on that point.
 followed norms of building contractors: when builder is refused to allow to work on a
project, profits on other contracts after the breach don’t count against the damages
unless the prior project would have precluded builder from working on another project.
o not the case here
o thus, full damages
 minor cut for the specific documented mistakes K made which the contract had them
liable for.
 the win was for ~$12k, after presumably three trials. Was it worth it?

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R2nd § 347

(B) Breach by the Buyer: Seller’s Remedies

Seller’s Damages under UCC

 §2-706 typically only for when item is in limited quantity (crops, for ex)

§2-703 (Seller’s remedies in general): Where buyer breaches and breach is of the whole
contract, seller can choose the remedy (not mutually exclusive):
 Withhold delivery of the goods
 Resell the goods and recover damages
 Recover damages for nonaccpetance (§2-708) (or in some cases the price (§2-709))
 Cancel

§2-706 (Resale):
 If made in good faith and in a commercially reasonable manner, the seller may recover
the difference between the resale price and the contract price together with any
incidental damages, less expenses saved in consequence of buyer’s breach
 Opposite of cover

§2-708 (Damages for nonacceptance): Measure of damages for non-acceptance or repudiation

by the buyer = [unpaid contract price] – [market price at time and place of tender] + [incidental
damages] – [expenses saved in consequence of buyer’s breach]
 If the above measure of damages is insufficient to put the seller in as good of a position
had the contract been fully performed, however (usu. relevant with “lost volume
sellers”), then the measure of damages is profit (including reasonable overhead) which
the seller would have obtained from full performance, together with incidental damages
 This § applies when the buyer doesn’t resell the goods

§2-709 (Action for the price): When the buyer fails to pay the price as it becomes due the seller
may recover (together with incidental damages) the price of:
 (1) any goods buyer has accepted, and
 (2) any goods seller cannot resell

So, seller has three remedies in case of breach by buyer:

 [contract] – [resale(cover)]
 [contract] – [market]
 Lost profits

Wired Music v Clark IL Ct Apps 1960

 Streaming music service (over phone line in 1960 lol) does not lose potential damages
that they get from suing someone under contract who quits early just because they

41
 were able to sign up the next resident of that same place for a higher rate. Because they
can have potentially unlimited customers (not like real estate), the “contract in its
place” situation does not apply.

Lost Volume Sellers

Who is a LVS?
 Could sell more but has limited market.
 Different but similar ones don’t count (used cars)
 If waiting list to buy one, doesn’t count
 Typically limited demand items at large margin.

Neri v Retail Marine Corp NY Ct Apps 1972

Issue
 RMC, boat dealer, contracts to sell boat to Neri. Neri deposits $4250 to rush it to him,
but then cancels order after boat has already been ordered.
Judgement
 It cost $674 to upkeep boat for four months until it was sold at the same price to
another customer. RMC finds its profit would have been $2,579 on the sale.
 While it was eventually sold, court finds that because it’s an individual item and Neri
effectively cost them a sale, Neri owes them 674+2579. That’s deducted from the
deposit and that remained is returned to Neri.
o retail seller entitled to profit
 Second sale is not a resale but rather a lost volume sale. In other words, without
breach, seller would have made two sales, not just one. Thus, [market price] – [contract
price] insufficient to put seller in as good a position as he would have been in had the
contract been performed b/c doesn’t account for lost profit from the first sale. Thus,
under §2-708 damages for breach of first sale should be [lost profit] + [incidental
damages].

§2-708 (2) understood to mean that for lost-volume sellers, even if they resell the goods, those
proceeds don’t count against them.

Lazenby Garages Ltd. V. Wright, p. 296, English Ct. App.,1976

 Holding: Lost-volume sales don’t apply to used cars because not all used cars are the
same, even of the same model and year
 I.e., new car dealers are lost-volume sellers because a new car can be replaced with one
exactly the same; a used car, on the other hand, cannot be replaced with one exactly
the same, because no two used cars are exactly the same.
o Because each is different, do not get this “lost-sale” remedy deduction-
restriction.

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SECTION 3: Mitigation: Contracts for Employment

Employment and the Duty to Mitigate (exception to the general rule)

 Employee who is wrongfully discharged has duty to search for another job; if he takes
another job then earnings are subtracted from damages
- Employee need only look for and take comparable job (but this begs the question of
what’s comparable?)
- Not required to take an inferior job, but if you do then it is taken out of your damages

Big Picture: Employment Mitigation is Different

 It all hinges on comparability, and it’s high stakes.

 Why don’t you have to cover but you DO have to look for comparable work?
- Frug suggests class prejudice
 Social organization at a powerful level in employment law

 What’s comparable?
- “Floor lady and designer” vs. “floor lady?”
- CEO of small company vs. Exec VP or COO (higher-paying) of large company?
- McDonalds vs. BK?
- One firm vs. another?
- This is a problematic question
- This is also an important question: If you make very few things comparable, you raise
the cost of breach; if you make many things comparable, you lower the cost of breach

 Rationale for the employee exception to general mitigation rule:

- It’s in the public’s interest to get people back to work rather than have them
inefficiently sitting around
- Whereas a contractor or landlord does not need incentives to go out and find a new
source of income, an employee does not necessarily have this incentive. Courts
therefore force employee to mitigate by taking a comparable job (efficiency concerns)

Other note: contractors don’t have to find new job but employees do. Law assumes contractors
can work on multiple projects at once.

Shirley MacLaine Parker v. Twentieth Century-Fox Film Corp.

California Supreme Court, 1970
Issue
 20CF breached contract to have SP star in their upcoming musical, “Bloomer Girl,” to be
filmed in LA and instead offered her the lead in a drama, “Big Country” to be filmed in
Australia.
 She declined and sued for breach.

43
  They claim she had reasonable alternative and unreasonably turned alternative offer
down.
Judgement
 “the employer must show that the other employment was comparable, or substantially
similar, to that of which the employee has been deprived; the employee’s rejection of or
failure to seek other available employment of a different or inferior kind may not be
resorted to in order to mitigate damages”
Dissent
 First, this is a factual issue, not an appellate one
 Second, question is “not be whether differences between the two jobs exist (there will
always be differences) but whether the differences which are present are substantial
enough to constitute differences in the Kind of employment or, alternatively, whether
they render the substitute work employment of an Inferior kind.”
 Pl did not have to take different or inferior employment, so she can recover wages .
Basically, π gets paid to sit home and do nothing since contract not deemed
comparable.
 The general rule for damages in wrongful discharge cases is the amount of salary agreed
upon for the period of service, minus the amount the breaching employer can show the
employee (1) has earned or (2) might with reasonable effort have earned from other
employment.
o Before projected or unsought earnings can be used to mitigate damages,
however, the employer must show that the other employment was comparable
or substantially similar to that of which the employee has been deprived.
o Thus, small distinctions in criteria for assessing comparability can drastically
affect mitigation
 Frug: Any way you cut it, person is unlikely to be put in same position as if contract
upheld

Mr Eddie Inc v Ginsburg (TX)

 If after wrongful dismissal, you work another job, that $ reduced from damages, but if
you spend $1,300 looking for another job, you can add that onto the damages

Southern Keswick, Inc. v. Whetherholt (FL)

 Not obligated to look for a worse job but if they take it that $ is taken from the damages

Rockingham County v. Luten Bridge Co., 1929

Issue
 After county breached contract and stopped the building of a bridge, the builders kept
going.
Judgement
 They had a duty to stop when the contract was breached. Don’t be an idiot – you can’t
just keep building to rack up damages!

44
  Company thus awarded [expenses incurred before breach] + [expected profits] but not
expenses incurred after the breach when the company continued to build the bridge
 Mitigation would reduce economic waste and not put P in any worse position
 Not entirely true since P now has no bridge to show off and less work for employees
 See also Madsen v. Murrey & Sons (pool tables) – D could have, and should have, resold
in order to mitigate / salvage was not commercially reasonable
 Frug: he may have had to show the completed bridge to win future contracts.

Bomberger v. McKelvey, CA 1950

Issue
 Def was trying to build a new store, and bought property from Pls/bought out lease of
one of Pl’s lessees. Had agreed to give Pl’s the old materials when they demolished the
old building.
 Defendant was unable to get materials to construct the store and parking lot, so it
instructed plaintiffs not to demolish the old building.
 Plaintiffs disregarded this instruction, asserting they needed the plate glass and skylights
to complete the new store they were constructing for the Hills. Plaintiffs removed the
plate glass and skylights from the old building, and then after the Hills vacated,
demolished the old building. Def’s then refused to pay.
Proced Hist
 Trial Ct gave $ to Pls
Judgement
 Pl must mitigate when possible. Yes, you shouldn’t leave a structure that will break if
you don’t do basics in the middle (and it’s ok to get add’l damages in that case), but
that’s not the case here as both had an interest going in different directions
 All of these various options were considered by trial court, and aren’t legal questions as
much as factual ones. We can’t say that Pls were required to do any of these things in
this case.

Madsen v Murray UT 1987

 Pool table supplier made custom tables to put electronic pieces in, the electronics entity
breaches, and they scrap the tables, use some parts, and use the rest for firewood.
 Judgement: did not adequately mitigate. Expert testimony that they could have sold the
custom tables for full or discounted price, even if the holes for electronics would have
been different (doesn’t really sacrifice quality).
 The pool table manufacturer (seller in this case) had a duty to mitigate its damages to
buyer and failed to do so, b/c dismantling the pool tables and using them as firewood,
rather than attempting to sell them at a full or discount price, was not commercially
reasonable
 Frug – this case is wrongly decided—selling tables with holes in them would affect
seller’s reputation, etc.

Clark v. Marsiglia [not in CB]

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  A hires painter, B, to mke portrait. A ∆ mind, B gets out of pocket costs, but nothing
else. Seems wrong since doesn’t get more for his portfolio than half a portrait!
 Not really in position he would have been

In Re Kellet Aircraft
 Cabinet-maker, K, breaches contract with Ameriform which had cabinets made at
$13.18/unit. A then has new bids from two companies, C, who had previously made
them for A and had done well, for $18/unit; and L who hadn’t and would take 4 weeks
to get the parts to make them, at original price of $13.18. A gave contract to C.
 Court ruled that to be reasonable mitigation and not excessive.

MBank v Taylor
 Taylor not required to use her personal jewelry and savings to problem-solve when
account incorrectly frozen.

Groves v Warner
 You can’t claim they failed to mitigate by claiming that after a while you were so bad the
boss should have hired your subcontractor directly when you should have done that!
o Both parties equally capable of reducing damages by hiring other supplier
 Duty to mitigate not applicable when party whose duty it is to perform has equal
opportunity for performance

Big Picture: Damages for Loss of Reputation and Loss of Opportunity to Practice One’s
Profession

 This is courts lowering the cost of breach

 Why put a burden on the innocent party to mitigate?

 Claims for loss of reputation:

- Generally, general loss of reputation claims resulting from contract breaches (e.g., loss
to bridge builder of increased reputation from successfully completing bridge, loss to
artist who doesn’t increase her reputation by completing a portrait) are denied
- BUT, courts have allowed employees whose reputations were impaired by breach of
contract to recover specific losses that resulted from the injury to the π’s reputation

 Claims for loss of opportunity to practice one’s profession:

- An employer generally may utilize his employee’s services when and how he wishes,
provided the employer pays the employee the agreed-upon price
- BUT, where the employee’s reputation will suffer if he is not allowed to practice his
profession or when the “anticipated benefit” to the employee from doing the work is a
“material part” of the advantage to be received by the employee from the employment
(as in the case of a radio announcer), discharged employee may recover damages

46
SECTION 4: Forseeability

 Basic Rule: Can only get damages if foreseeable at time contract was made
o Limits damages party can recover and introduces a tension between
consequential damages and expectation idea of putting aggrieved party in as
good a position as if contract upheld
o The foreseeability doctrine is about lowering the cost of breach (∆-centered
doctrine)
 Arguments
o Argument for foreseeability doctrine: No one would agree to contract if they
knew that had to pay all consequential damages
o Argument against foreseeability doctrine: Why would π ever enter into a
contract if, when ∆ breached, ∆ wouldn’t be responsible for the damages?

Hadley v. Baxendale
In the Court of Exchequer, 1854.
Issue
 Valve broke that stopped a flour mill from operating. They sent it to get fixed but it took
a week longer than expected. They sued the shipper for damages from the mill not
operating for a week, and originally got a lot of $.
Judgement
 Should have been to the jury, but the jury should have been specifically instructed to
only allow for damages for what the shipper could have reasonably expected at time of
contract. So, no crazy damages – just for the valve not getting shipped on time.
 As Posner later stated in another case, if they had wanted special treatment to make
sure it got there, they should have specified that!
o Same for gambler who would have won money if it was sent in time – he can’t
get that back, since Western Union didn’t know and couldn’t have guaranteed it,
and would have charged more for that guarantee!
 Where two parties have made a contract which one has broken, damages should be
such as may fairly and reasonably be supposed either (1) to have arisen naturally (i.e.,
according to the usual course of things) from such breach of contract itself or (2) to have
been in the contemplation of both parties (“reason to know”), at the time they made
the contract, as the probable result of the breach of it

Victoria Laundry (Windsor) Ltd. v. Newman Indus. Ltd.

British 1949
Issue
 Laundry company buys a boiler, 3rd party breaks it after contract signed, they refuse
delivery until fixed. They get it, but not until 5 months later. They sue for breach. They
lost two big contracts that they could have taken with a larger boiler. Damages?

47
Judgement
 Mostly. Clarifies H v B.
 Add’l Rules
o (1) Generally put back in place they were but that’s sometimes seen a too harsh.
o (2) Reasonably forseeable
o (3) What’s foreseeable depends on Def’s knowledge at time of signing
o (4) special circumstances re: add’l knowledge outside the “ordinary course of
things,” of such a kind that a breach in those special circumstances would be
liable to cause more loss.
o (5) Hypothetical question of if at time of signing they had considered a breach,
would a reasonable person have concluded that loss in question could result?
o (6) Previous sentence is could not would!
 For a particularly lucrative one of VL’s contracts that was unforeseen, they can get a
reasonable amount, but it’s not reasonable to assume they would have gotten that
otherwise.
 π entitled to lost profits b/c ∆ knew of intended use and that π wanted boiler ASAP;
therefore ∆ had reasonably possessed imputed knowledge of foreseeable damages to π

Koufos v. C. Czarnikow, Ltd. [The Heron II]

British 1969
Issue
 Ship delayed by 9 days so when it arrives, sugar price is lower and they have to sell for
less. Sugar merchant sues for damages.
 Court finds ship captain has to pay for difference in price as determined by fact-finder,
even if he didn’t know for sure they were selling the sugar. The House of Lords held that
the loss was not too remote, he should have contemplated that they’d sell the sugar.
Judgement
 Further clarifies between the other two British cases. If there’s a 25% chance of
something happening, fair to include as damages. 2%? Not so much. Here, pretty likely
they could be selling the sugar.

Note on HvB Scope

 Victoria Laundry said that even if a type of loss is reasonably foreseeable, the plaintiff
can recover only the amount of loss of that type that was reasonably foreseeable.
o i.e., reasonably foreseeable loss is limited not just by content but by
scope/amount
 in the case of Wroth v. Tyler (1974), opposite conclusion
o husband contracted to sell house, but wife legally prevented him from selling.
The husband paid “damages, but argued that he could not have foreseen a
dramatic increase in property values.”
o Def “cannot escape liability because the amount of damages was unforeseeable.
Once a contracting party is held liable for a type of damage, the party will be
liable for the full extent of those damages”

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Critique of Limitation of Damages
 Fuller and Perdue argue that HvB may also find that “that it is not always wise to make
the defaulting promisor pay for all the damage which follows as a consequence of his
breach”

Causation
 damages when cause is part of other factors: must be “A substantial factor”
o Has to be a major factor but doesn’t have to be sufficient in itself

S.J. Groves & Sons Co. v. Warner Co., 3d Cir. 1978

Issue
 Defective slab on road. Warner in charge of concrete, Groves in charge of project.
 G sues W.
 W did screw up:
o Wrong times, inadequate amnt of retarder in the concrete,
 But also, bad weather and G’s crew also screwed up
Judgement
 25% of damages awarded. As it was a contributory factor.
 Where both parties have contributed to the breach, the damages are divided up among
the parties (i.e., Pl can’t recover all his losses)
 Duty to mitigate not applicable when party whose duty it is to perform has equal
opportunity for performance

R2nd §351
Unforeseeability as a Limitation on Damages
 Damages are not recoverable for loss that party in breach did not have reason to
foresee as a probable result of the breach when the contract was made
 A loss may be foreseeable as a probably result of breach because it follows from the
breach:
o In the ordinary course of events, or
o As a result of special circumstances that party in breach had reason to know of
 The court may limit damages for foreseeable loss, if such damages would be
disproportionate to the aggrieved party’s losses, by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, etc.
 Comment: The mere circumstances that some loss was foreseeable, or even that some
loss of the same general kind was foreseeable, will not suffice if the loss that actually
occurred was not foreseeable. It is enough, however, that the loss was foreseeable as a
probable, as distinguished from a necessary, result of the breach
 You have to tell people about the special circumstances (specially communicate), and if
you don’t, they’re not liable

UCC §2-715 (Buyer’s Incidental and Consequential Damages)

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  Consequential damages resulting from the seller’s breach include any loss (1) resulting
from general or particular requirements and needs of which the seller at the time of
contracting had reason to know, and (2) which could not reasonably be prevented by
cover or otherwise
o (Seller’s consequential damages in case of breach by buyer are his lost profits)

Discussion in class
 No expectation to cover, BUT can only get consequential damages if you cover.
 Seller’s version of consequential damages: lost profits.

UCC 2-713: Buyer’s Damages for Non-delivery or Repudiation

(1) Subject to the provisions of this Article with respect to proof of market price (Section 2-723),
the measure of damages for non-delivery or repudiation by the seller is the difference between
the market price at the time when the buyer learned of the breach and the contract price
together with any incidental and consequential damages provided in this Article (Section 2-
715), but less expenses saved in consequence of the seller's breach.
[Formula = market price at the time the buyer learned of the breach, at the place of
tender –
contract price + incidental damages]

(2) Market price is to be determined as of the place for tender or, in cases of rejection after
arrival or revocation of acceptance, as of the place of arrival.
[The place of tender is the place where the seller released the goods.]

***Big Picture:
-Instinct in Contract Law is Expectation Damages
 you don't get Atty's fees if you sue for breach of Contract
o so you're never really on the position on you were in!
 4 Rules on this:
(1) Mitigation
(2) Forseeability
(3) Certainty
(4) Mental Distress

SECTION 5: Certainty

Basic Rule: You can only get damages that you can prove with reasonable certainty
 If you can’t prove damages with reasonable certainty, then your damages might be zero
(this rule is another burden on π)

Eisenberg doesn’t like this all-or-nothing rule, would assess based on probability
 Frug: But this would empty the certainty rule of meaning]

50
Uncertainty as Limitation on Damages (R2nd §352)
 Damages are not recoverable for loss beyond an amount that the evidence permits to
be established with reasonable certainty

UCC §1-106(1) (Remedies to be liberally administered)

 Remedies shall be liberally administered to the end that the aggrieved party may be put
in as good a position as if the other party had fully performed, but neither consequential
or special damages may be had except as specifically provided in this Act or by other
rule of law

Doctoral Student Case [not in CB]

 PhD contract to publish dissertation. Does studies to show comparable $, expert
witnesses, etc.
 Author lost, got $0.06. Ouch.

Hypo: Law Student hired at will by a firm. Fired. Make case for breach. How prove income for
employee at will?
 Avg salary?
 Salary before fired?
 We need to establish against the certainty rule the idea that the idea that employer has
to pay damages
 difficult burden on plaintiff.

Kenford Co. v. Erie County

New York Court of Appeals, 1986.
Issue
 Buffalo Bills dome stadium is never built. Kenford and DSI were supposed to build it, and
sue. 10 years later, they finally get an answer
Judgement
 The estimates aren’t sufficient to know the damages, so they don’t get them
 Argue the two things that matter for considering loss of future profits as damages are:
o must be demonstrated with certainty that such damages have been caused by
the breach
o the alleged loss must be capable of proof with reasonable certainty
 because this was a new venture and thus super hard for anyone to know, they do not
find that:
o the particular damages were fairly within the contemplation of the parties to the
contract at the time it was made
 For Pl to recover, the damages must be reasonably certain and directly traceable to the
breach, not merely speculative

Discussion
 “Previously, a major application of the uncertainty principle was the new-business rule.”

51
 o “This rule prohibits recovery of lost profits that a plaintiff claims would have
been generated by a proposed new business, on the ground that in such cases
profits are too speculative.”
o “The new-business rule still surfaces in some cases, but there is a definite trend
toward abrogating the rule and reconstruing the older cases as resting only on
the particular facts involved, rather than on a special rule”

Rombola v. Cosindas, Mass 1966

Issue
 Horse trainer, R, has contract with C, horse owner, to race and train the horse, for which
R gets 75% of winnings/C:25%. After 8-9 months of racing her in which she won ~$12k,
owners take her back prematurely. R sues.
Proced Hist
 Trial court says no damages based on uncertainty principle
Judgement
 Horse’s consistent performance has created a pattern. While it’s possible she wouldn’t
have earned anything, a small amount of uncertainty is true in any business venture. R
deserves damages.

Contemporary Mission, Inc. v. Famous Music Corp., 2d Cir.1977

Issue
 FM serves as producer/distributor for rock opera Virgin created by CM. Under Wood v
Lucy doctrine, agent in good faith.
 Contract breached, CM sues FM. CM presents some stats that of songs that previously
reached #61 on billboard soul chart, (which their song already had): 76% reach top 40,
51% reach top 20, etc.
Proced Hist
 They also were going to present add’l info from expert but trial judge didn’t let that
testimony in, considering it speculative
Judgement
 Actually, this isn’t speculative. It’s about a real record with real data. And it’s clear there
were real losses. FM really did screw up and CM really did lose out here. Damages.

E’s Unsigned Note on Uncertainty

 Kenford uses all-or-nothing rule – the idea that if something is 50% or more to happen,
all of the damages
 Argues for alternative rule: apply probability to winnings (ie, if wrongfully denied 50%
chance to win $10k, you’re awarded $5k.)
o Comes from Chaplan v Hicks, sketch British beauty contest

Damages for Mental Distress

Valentine v. General American Credit, Inc., Supreme Court of Michigan, 1984.
Issue

52
  V wrongfully terminated by GAC. Brought breach suit for mental distress damages
(beyond the other money owed)x
 Argues H v B: reasonably could have been foreseen by breach
Judgement
 No $ for mental distress. That’s definitely something that will often come from breach,
but “the general rule, with few exceptions, is to “uniformly den[y]” recovery for mental
distress damages although they are foreseeable”
o The denial of mental distress damages has analogy in other areas: Recovery is
denied for attorney’s fees, etc.
o Won’t be awarded where there is a market standard by which damages can be
adequately determined.
 Frug: If you're upset at being fired unfairly, wouldn't you be upset? But wouldn't you
always be upset@breach?
 Judgement argues primary goal is economic and only secondary is the satisfaction of
employment

Lane v. Kindercare Learning Centers, Inc., Mich.App. 1998

Issue
 Pl trusted Def to watch her kid.
 Pl had add’l req: give kid medication.
 Def’s didn’t initial to give kid medication and thru communications mixup, accidentally
left napping kid alone in building after leaving for the day. Pl called the police and
eventually broke in with them to get her kid back.
Judgement
 This is a contract of a more personal nature – her kid – rather than a purely monetary
transaction, so mental distress and anguish reasonable in this case.
 “At the time the contract was executed, it was foreseeable that a breach of the contract
would result in mental distress damages to plaintiff, which would extend beyond the
mere “annoyance and vexation” that normally accompanies the breach of a contract.”

B&M Homes, Inc. v. Hogan, Ala. 1979

Issue
 House built with huge issue in concrete slab. Back and forth trying to fix but it’s
essentially permanently a problem and testimony that it makes the house “worthless.”
Judgement
 Exception to normal rule – yes this is an extreme case that would allow damages for
mental anguish b/c reasonable to foresee extreme anguish if someone’s house is
worthless.
o “although in Alabama the general rule is that mental anguish is not a recoverable
element of damages arising from breach of contract, there was an exception
where the contractual duty or obligation is so coupled with matters of mental
concern or solicitude, or with the feelings of the party to whom the duty is owed,

53
 that a breach of that duty will necessarily or reasonably result in mental anguish
or suffering, and this case fell within the exception:”

R2nd §353
Loss Due to Emotional Disturbance
 Normally not allowed and hard to prove, but two exceptions:
o Bodily injury
o Contract was of such a kind that emotional disturbance was a particularly likely
result.
 Other things may be worse (ie, create sudden bankruptcy) but if not
expected at time of contract signing, not covered here.

Entertainment and Mental Distress

Jarvis v. Swan Tours, Ltd., British 1972

 Can get emotional distress damages for trips/entertainment: “a contract for a holiday, …
If the contracting party breaks his contract, damages can be given for the
disappointment, the distress, the upset and frustration caused by the breach”
 “The right measure of damages is to compensate him for the loss of entertainment and
enjoyment which he was promised, and which he did not get.”

Jackson v. Horizon Holidays, Ltd., British, 1975

 Same applies for a family of four even if only one made the contract for the package.

Deitsch v. Music Co. OH Mun.Ct.1983

 Wedding band failed to show up, the couple ended up getting a stereo. They did get
$750 for emotional stress.

Policy Discussion: Non-Compete Clauses

 Can't work in some industry. Can this be specifically enforced?
 McD's in central can't take employees from McD's on Park St.
o Effect is that people can't leave.
 Do these force people to do things, though?
o Theoretically traditional spec-pref gives you literally exactly one option, even
here you have >1.
 Fast Food companies + Poaching: somehow not seen like the opera singer and somehow
it isn't unconscionable
 If contract provides you can't do certain things, you have to mitigate
o Can't enforce injunctions if they would force ppl to go back to employer: R2nd
§367(2)
 if they can't find comparable job, then not enforceable

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SECTION 7: Liquidated Damages

Big Picture:
o Frug: Difference between liquidated damages and penalties is that if we strike it, it’s a
penalty, and if we keep it, it’s liquidated damages.
o Frug suggests this system is contradictory: compare this outcome with R2nd §356:
o it is inherently contradictory that if has to be difficult to prove loss but it has to
have a reasonable forecast of damages
o Frug: It all comes down to interpretation, then the court names it what it wants
based on its decision.
o Frug: rationale:
 Idea is that this is a way of the parties themselves agreeing as to what the
costs would be… You're moving idea of damages from the courts to the
parties. But it could be really unfair if one party just dictates it this way!
o Liquidated Damages sometimes enforced. Question of proof is, essentially, can you
put it in a formula?

 Liquidated damages clause: Sets out the damages for contract breach ahead of time
 General rule seems to be that they’re enforceable only insofar as they come close to
what the damages would have been calculated at when the contract was formed and
aren’t unconscionable later
o Court calls them “liquidated damages clauses” when valid; “penalties” when
invalidate
 Courts thus limit freedom of parties to contract outside of the legal system
o Why does the court know more than the parties about the appropriateness of
certain damages (liquidated damages as calculated allocation of risk)? The court
looks only at legally recognized harms (narrow), whereas parties might have
wanted to contract for other kinds of harm
 When forecasting damages, should parties forecast the legal loss (i.e., what the courts
will think your loss was) or actual loss (there’s a lot of harm not covered by the legal
system)? If parties try to forecast legal loss, options much narrower
 Fairness arguments in support of judicial oversight of liquidated damages clauses:
o We don't want to make π better off after breach (if unreasonably high damages)
o High liquidated damages is evidence the parties underestimated chance of
breach; had they thought it out beforehand they would not have agreed to these
terms
o To allow such high damages would be oppressive or point to coercion, duress,
etc. (i.e., concern about uneven bargaining power)
 Why we might like liquidated damages clauses:
o Efficient (don’t have to go to court)
o Maybe the parties are in a better position to determine damages than a court is
 [Frug: Paradox: If you estimate something that’s difficult to prove and come close to
actual damages, then it’s probably not difficult to prove (is a penalty). On the other

55
 hand, if your estimate ends up being way off-base, then it’s probably not reasonable (is
a penalty). This seems to be a Catch-22. Either way the liquidated damages clause is a
penalty.]

R2nd §356
 Damages for breach may be liquidated but only reasonable in terms of
actual/anticipated loss
 Unreasonably large liquidated damages unenforceable by public policy as a penalty.
 Comment: Parties to a contract are not free to provide penalties for its breach. The
central objective behind contract remedies is compensatory, not punitive.

UCC §2-718(1) (Liquidation or limitation of damages)

 Damages for breach by either party may be liquidated in agreement but only at an
amount which is reasonable in light of (1) anticipated or actual harm caused by breach,
(2) the difficulties of proof of loss, and (3) the inconvenience or non-feasibility of
otherwise obtaining an adequate remedy
o Actual damages in the clause must be reasonable (Wasserman’s)
o It must be hard to determine what the actual remedy is (Lee Oldsmobile)
 A term fixing unreasonably large liquidated damages is void as a penalty

NPS, LLC v. Minihane, Supreme Judicial Court of Massachusetts, 2008.

Issue
 Pats fan  pays for 1st year in 10 year contract for club seats with the Pats, then stops
paying. Contract has “liquidation” clause – which requires all of the balance for the next
10 years immediately once you miss a payment and breach the contract (ie, so now he
owed $65k). Is that ok?
Judgement
 He has to pay.
 Overturns lower court ruling that the liquidation clause was “grossly disproportionate”
and unconscionable as that burden is on the Def, and he didn’t argue it adequitely
 A liquidated damages clause usually enforced if
o 1. at sign of contract the actual damages of potential breach difficult to
ascertain;
o 2. liquidated damages represent a “reasonable forecast of damages expected to
occur in the event of a breach.”
 B/c the new stadium and ticket prices were somewhat in flux in 2002, 1 st one satisfied,
and b/c the clause is a reasonable amount of damages if Pats/NPS couldn’t resell tickets,
2nd clause also good.
 If liquidation clause is enforceable, don’t need to consider mitigation.

Lee Oldsmobile, Inc. v. Kaiden,Md.App. 1976

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  Customer who sends in $5k deposit and then doesn’t buy the car gets their deposit back
minus actual damages, despite liquidation clause, because it was clear at time of signing
what damages would be if K didn’t actually buy the car.
 Liquid clause can’t be there if it’s clear what actual damages would result.
 Frug: when must it be clear? Theoretically it’s supposed to be at time of contracting but
implicitly they’re looking also at later on.

Norwalk Door Closer Co. v. Eagle Lock and Screw Co. Conn 1966
 Contractor clause has ownership change liquidation clause of $100k. Suit, but no
damages awarded because no damages sustained – the new owners kept same local
leadership and all services.
 Supposedly, there’s no burden on the Pl to prove damages, but basic equitable
principles will be used to not award for what at signing were anticipated potential
wrongs that didn’t result in any actual damages

Chapter 6. SPECIFIC PERFORMANCE

 General Rule: Specific performance will not be ordered unless other damages are
inadequate, usually because the goods involved are unique
o In the US, generally, damages are the rule and specific performance the
exception
o Unidroit and CISG take opposite approach, favor specific performance over
damages
o U.S. strategy lowers the cost of breach
 Specific performance is really about changing the price of damages, since it forces
negotiation between the parties and the price settled on is likely to be higher than
damages determined by court (negotiation is different when one party has a decree
entitling them to performance)
 The only time courts will never order specific performance is in a personal service
contract (RS §367: A promise to render personal service will not be specifically
enforced)
 Pl can, however, get an injunction preventing someone from doing something

R2nd §359
o Specific performance or an injunction will not be ordered if damages would be adequate
to protect the expectation interest of the injured party
o Not automatic in terms of breach, but discretionary

R2nd §360
o Key things for determining whether damages are adequate:
o Difficulty of proving damages with reasonable certainty
o Difficulty of procuring a reasonable substitute performance via $

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 o Likelihood that damages couldn’t be collected
o Comment: Examples where damages may not be able to be proved with reasonable
certainty: loss of heirlooms, works of art with strong sentimental attachment, shares of
stock that result in loss of control of corporation, etc.

Courts of Law and Equity in the US

 Used to be that only equity courts, not normal common law courts, could force specific
performance
 Mostly all the same now, but suits in equity in most states are NOT jury trials.
 Pl who establishes inadequacy of damages is not entitled to specific performance.
Discretionary:
o Undue burden on Def
o Undue burden on court
o Contrary to public policy
o Unconscionable

London Bucket v Stewart KY 1951

Issue
o Motel appeals for SpecPerf for S to install heating system correctly in large motel
Judgement
o General rule that SpecPerf for building construction not a thing – damages are adequate
and court is incapable of superintending the performance.

Walgreen v Sara Creek Property, 7th Cir 1992

Issue
o Walgreen’s contract in Southgate Milwaukee mall owned by Sara Creek has clause that
another pharmacy chain couldn’t come in. Sara Creek informed them they were
planning on having another one come in.
Judgement
o Posner: more reasonable to have injunction here. We need not say it always should be
for these negative enforcement cases, but makes a lot of sense.
o In terms of harm, this will have some cost as it will potentially create a bargaining chip,
but the more Phar-mor wants to come un, the more they’ll pay, and the more Sara
Creek can then negotiate with Walgreen.
Class Discussion
 Posner: spec prf won't really make people do things, but will lead to negotiation. ∆
nature of negotiation
o Will Walgreens take $ now?
 Spec-Pref & Supervision: mostly reducing cost of breath, more than cost of supervision.

Big Picture:

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  Benefits of injunctive relief: Shifts burden of determining costs of ∆’s conduct from court
to the parties (as parties would then enter negotiations to dissolve injunction), and
prices more accurately determined by the market than by government
 Negatives of injunctive relief: Many injunctions are costly b/c they require continuing
court supervision, and injunctions may impose costs on third parties.
o Also, in case of a bilateral monopoly, parties have incentive to push towards the
limits (maybe to develop relationship as a “hard bargainer”), even to the point of
causing negotiation to break down
 Benefits of damages: Avoids costs of continuing court supervision and third-party effects
and also avoids costs and potential problems w/bilateral monopoly effects
 Negatives of damages: Diminished accuracy in determination of value, and costs of
parties’ preparing and presenting evidence to court and time of court in evaluating the
evidence

Ed Bartholet v Stefanko, IN Apps 1998

Issue
o Contract for employee not to compete and to have injunction if he does. He quits and
works for competitor.
Judgement
o Court held it could exercise discretion on that injunction, despite the contract words.

SpecPref For Goods:

UCC §2-709. Action for price.

(1) When the buyer fails to pay the price as it becomes due the seller may recover, together
with any incidental damages, the price
(a) of goods accepted or conforming goods lost or damaged within a commercially
reasonable time after risk of their loss has passed to the buyer
(b) of goods identified to the contract if the seller is unable after reasonable effort to
resell them at a reasonable price…
Comment: Action for price is now generally limited to those cases where resale of the goods is
impracticable except where the buyer has accepted the goods or where they have been
destroyed after risk of loss has passed to the buyer.

UCC §2-716. Buyer’s Right to Specific Performance or Replevin.

(1) Specific performance may be decreed where the goods are unique or in other proper
circumstances.
..
(3) Buyer has a right of replevin for goods identified to the contract if after reasonable effort he
is unable to effect cover for such goods or the circumstances reasonably indicate that such
effort will be unavailing…
o Comments: This article seeks to further a more liberal attitude than some courts have
shown in connection with the specific performance of contracts of sale.

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 o Article focuses on the commercial feasibility of replacement… uniqueness is not the
sole basis for remedy under this section for the relief may also be granted in “other
proper circumstances” and inability to cover is strong evidence of “other proper
circumstances.”

SpecPref Elsewhere

Note on SpecPref for Sale of Goods

o Largely governed by UCC §2-716 provision that goods be unique, but slightly more
liberal in that now – slightly more open to discretionarily saying must be SpecPerf for
rare or time-limited goods

Note on SpecPref for Land

o Land is something buyer can get SpecPerf for
o Traditional rationale
 No defined market price
 Land is unique, so $ not the same
o Some pushback now as things get mass-produced
o Seller also has SpecPerf
o If buyer doesn’t claim, eventually seller has it back and has a judgement for the
purchase price.

Note on SpecPref for Employment

o Not SpecPerf. B/c it could lead folks to perform in a forced/coerced way against any
other options.

Alternative Damage Measures

Reliance Measure
o Really, it’s cost

Chapter 7. THE RELIANCE AND RESTITUTION MEASURES

SECTION 1: RELIANCE DAMAGES IN A BARGAIN CONTEXT

Big Picture: Reliance damages are smaller. Practically, you start with expectation damages and
reliance is your fallback. Hawkins v. McGee may make more sense under reliance damages.

Can also get it when there’s unjust enrichment on the other side.

Security Stove v. American Railways Express, MO 1932

Issue

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 o D didn’t ship furnace in time from MO to NJ for American Gas Assoc. Convention.
o Carrier had been given specific notice regarding the convention, etc.
Judgement
o Even though expectation damages were $0, and specific amounts they could have
earned were unclear, reliance damages (cost to travel to the convention) were ~$1k.
Reliance damages were ordered.
o Expectation damages are uncertain (and would likely be $0); however we can assume
that Pl would have made money from demonstration, so by giving Pl reliance damages
the court is actually giving Pl less (Pl breaks even rather than profits)

Anglia TV v. Reed
Issue
o Anglia hired Reed to be star of their film, he repudiated, they sued him for the $ that
they had spent to set up the film, even $ before the contract was made, for $582,750.
Judgement
o He must have known how expensive it was, he’s liable.
o π gets damages for all expenses incurred b/c it’s reasonable to impute to ∆ the
knowledge that if he broke his contract, the funds π had spent in pre-producing the film
would be wasted

Beefy Trail v. Beefy King, FL Apps 1972

o Reliance rationale is that w/out breach, contract would have been profitable for Pl.
Since we can’t know the gain (profit and $ back for prior expenses) as there was no
contract, profit cannot be determined and thus can’t be included in the recovery. But
the $ in prep can be determined and should be used instead.

L Albert & Son v Armstrong Rubber, 2nd Cir 1949

Issue
o Seller breached contract for machines and buyer had already laid foundation to put
them there.
Judgement
o They can get the $, but could theoretically be reduced if the seller can show that the
buyer would have lost any $. Basically, when appropriate, reliance is ok.
o Learned Hand: if def can prove you wouldn't have gotten anything out of this event, you
don't get any $

CCC Films v Impact Films

o when Pl wants to use reliance damages because expectation damages too uncertain,
onus of proof of expectation damages shifts from plaintiff to defendant

Sullivan v O’Connor (from before)

Issue
 Debate about what is best in considering damages for medical malpractice

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 o Hawkins method: treat it like a commercial contract
o Common practice in NY:
 not a restitution
 not an expectancy
 but the tendency is to put the plaintiff back in the position he was in just
before the agreement, to compensate him for reliance on the agreement
o Following NY logic, they recommend:
 applying a reliance measure
 including pain/suffering that goes beyond expected for treatment, since
that’s effectively “wasted” pain and suffering

Westside Galviniing v Georgia-Pacific, 8th Cir 1990

Issue
o Southeastern gives steel to W, who galvanizes, and sends to G-P. S pays W for the
processing part.
o S defaults, W stops sending stuff. G-P convinces W to send remaining stuff and that it
will ensure W gets paid. They send but don’t get paid. They sue G-P
Judgement
o W can sue G-P, but only for reliance damages for last shipments after G-P’s promise, not
for the full balance that S owes them.

Restitutionary Damages for Breach

o Unlike reliance, in that it’s value of performance rendered, not cost of performance
o Unsettled when/if Pl can get restit when Def can prove that the award of restit would
put Pl in a better position than performance

Big Picture:
o Mills v. Wyman: did father owe $ to person who cared for his son?
o Sometimes you can pay w/out a contract. Example: unconscious person in hospital

SECTION 2: RESTITUTION MEASURE

(A) Restitutionary Damages for Breach of Contract

Restitution Interest
 Substantively, refers to the recapture of a benefit conferred on ∆ by π
 Remedially, refers to recoveries that are measured by the amount of the defendant’s
unjust enrichment (idea of disgorging benefit)
o An action for restitution of the benefit π conferred is often effectively measured
by π’s costs
 Quantum meruit: reasonable value of work, labor and services; refers to both the
doctrine and the form of complaint (claim against unjust enrichment)
 Implied in fact promise: A real promise, but implicit rather than express

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  Implied in law promise (quasi-contract): Promise created by the courts where it’s in the
interests of justice that ∆ pay π, even though there was no legal contract
o I.e., Law reads a promise into a situation where in fact no promise
o Two requirements for court to read implied-in-law promise:
 ∆ has received a benefit
 Retention of that benefit is inequitable (e.g., π paid ∆ money by mistake)

Osteen v Johnson, CO Apps 1970

Issue
o O hired J to promote her music. They did record songs for her and did the first record,
but put another author of the song with her for listing (she did not like that). It was
played a lot and was successful, and the contract had been for another record if the first
one was successful; they didn’t do a 2nd one.
Judgement
o What O is entitled to is restitution damages, a partial amount back from the $2,500 she
got equal to $2500 subtracting reasonable amount for the value of the services the def
provided to her.
o In receiving restitution damages, π must return to ∆ the value of the services π has
received as part-performance

Determining Restitution Damages

R2nd §344
o 3 types of remedies
o (more here than just Restit Interest)
o Restit Comments:
o way to prevent disgorging of benefit; if one party does part of something, this is
sometimes taken away from any damages.
o usually smaller than reliance inst. b/c it includes neither lost profit or
expenditures
R2nd §345
o Judicial Remedies avail:
o $ due under contract as damages
o SpecPref
o Restoration of specific item
o $ to prevent unjust enrichment
o declaring rights of parties
o enforcing arbitration award

R2nd §370
o party only entitled to restit to the extent that he has conferred a benefit to another
party via past performance
o Key Illustrations:

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 o A puts $40k into building machine contracted to sell to B for $100k. B repudiates.
A can’t get restit from B for $40k b/c no benefit conferred to B.
o A, social worker, promises to render services to C in return for B’s promise to
educate A’s kids. A renders some services, but B repudiates. A can get restit from
B for the services, even tho not rendered to B, b/c they conferred a benefit to B.

R2nd §371
o money to measure restit interest can be measured by either…
o reasonable value to other party of what he received in terms of what it would
have cost him to obtain from someone else in claimant’s position
o extent to which the other party’s property has been increased in value or other
interests advanced
o you’re asking for $ back you could have paid someone else who wouldn’t have breached,
for example.

Quantum Meruit
Quantum meruit: Seeks recovery for the reasonable value of work, labor, and services
performed at ∆’s request
 One who is wrongfully discharged and prevented from further performance of his
contract may elect to treat the contract as rescinded and may sue upon a quantum
meruit as if the special contract of employment had never been made and recover the
reasonable value of the services performed even though such reasonable value
exceeds the contract price
 Under this doctrine, a π that has only partly performed is granted restitution for services
rendered even if that restitution (i.e., the value of the services rendered) is an amount in
excess of the contract price for full performance

US v Algernon Blair Inc, 4th Cir 1973

Issue
o Subcontractor, C, ceased to perform after contractor refused to pay; contractor, AB,
breached. However, had subcontractor finished working, he would have lost substantial
amount of money.
o If Coastal had kept going, it would have lost $
Judgement
o Holding: Pl can recover for his services rendered to Def, minus what Pl has already paid,
despite the fact that π would have lost money had the contract been performed.
o Pl is entitled to recover restitution damages, in other words, even though he would be
unable to recover expectation damages
o Reasoning: Otherwise Def would have received benefits without paying for them, and π
would have incurred expenses with no compensation
o Key: Quantum meruit recovery is undiminished by any loss which would have
been incurred by complete performance

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R3rd of Restitution §37
o Pl entitled to remedy for repudiation/breach may choose recission as alternative to
enforcement if further requirements are met
o Exceptions: not if obligation is just to pay $

R3rd of Restitution §38

o Pl entitled to a remedy for material breach or repudiation may recover damages
measured by cost or value of performance
o Measured by…
 Uncompensated expenditures made in reasonable reliance on contract
 Market value of uncompensated performance, not exceeding price in
agreement
o Can still recover other damages also

Campbell v. TVA (not in CB)

 Contract for C to microfilm documents for TVA for $30,000. But the person from TVA
wasn't auth to make contracts.
o Campbell does the microfilming
 Sues for amount of value of contract. But, he can't get expectation damages b/c there
was no contract!
 Could he get restit $? Is it a benefit if they don't want them?
Judgement
 They have to pay the cost of having them on a shelf for a week
 Had they stopped b/f delivery: reliance case
 Judge Roger Trainor: line b/t reliance and restit is minor. It’s reasonable to pay him.

Note on Restit/Reliance Damages

o R3rd has a new focus, which is not based on what the other party receives, but on the
market value of what the uncompensated party did
Note on Expectation as Cap on Reliance and Restitutionary Damages
o Typically, there’s a cap and you can’t recover for more via Restit than you would have
under Expectation Damages.
o Algernon Blair result did this – R3rd repudiates it and sets a cap.
o ? Expectation damages as cap on reliance damages:
o If Def can prove amount Pl would have lost through performance, Def can have
that amount subtracted from Pl’s reliance damages (i.e., expenses incurred in
reliance of the contract)
o ? Expectation damages not cap on restitution damages:
o As in Algernon, a Pl who has entered into a losing contract in which he has
conferred a benefit on Def (breaching party) can recover the market value of the
benefit even if it exceeds the contract price

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 o In other words, the expectation measure does not set a cap on restitution
damages in a suit in unjust enrichment against a breaching promisor
o Thus, in case of a losing contract the promisee may be better off suing for
restitution damages than for expectation damages

Restitution in Favor of a Plaintiff in Default

Briton v. Turner (not on CB)

 Employee works for year, he is to be paid in lump sum @end.
 He works for 9.5 months w/out pay, quits.
 then what? Sued for breach, for quitting. But, he should be paid for the work he did!
Stuff left over, the benefit.
 short answer: yes he should. Breaching party, having paid damages, should get paid in
restitution (benefits in the hands of other party now).
 This principle is imp. for down-payments, too. You should get some back (but you still
pay damages).

Kutzin v Pirnie, S Ct of NJ 1991

Issue
o Buyers repudiate on house after deposit of $36k. House later sells for $12,500 less. With
various taxes, full costs to sellers is ~$19k but they try to keep entire deposit.
Judgement
o Explicitly on common law and R2nd §374(1).
o The breaching buyers get their $17k back, based on restitution less injury. To allow full
amount would unjustly enrich sellers and penalize the buyers contrary to the policy
behind law of contracts
o A breaching party is entitled to restitution for any benefit he has conferred on another
party by way of part performance or reliance in excess of the loss he has caused by his
own breach

R3rd Restit, §36

o Performing party whose material breach prevents a recovery on a contract has a claim
in restitution against the recipient of performance, as necessary to prevent unjust
enrichment
o Enrichment compared to contract fully performed
o Can be displaced by contract clauses
o That claim can be denied if fraud is involved
o R3rd §36 Illustrations
o Contract to paint house for $20k. Painter demands more and quits having done
$18k worth of work, owner has only paid $15k. Owner gets someone else to do it

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 for $2k. Painter could argue for enrichment in the amount of $3k (owner got
house done for 17, instead of 20), but costs for breach would get taken out.
o Builder to build for $25k, has bought $20k in supplies. Stops having been paid
$15k, but shoddy work means Owner needs to fix. Will cost owner max of $8k to
fix. Builder is entitled to $2k.

RJ Berke v Griffin
o Generally quantum meruit (restit) recovery not good if conduct was “willful.”
o Not willful if there is an honest dispute about contract terms.

R3rd of Restit, §39

o Alternative remedy: if deliberate breach results in profit to the defaulting promisor and
the available damage remedy affords inadequate protection to the entitlement,
promisee has claim to the profit.
o Typical cases for the second clause above: would be ones where damages don’t
permit full equivalent of promised performance in a substitute transaction
o Breach considered profitable (1st clause above): when it results in gains for def.
wouldn’t have realized but for the breach.
o Comments and Illustrations (detailed note in CB)
o Similar to trespass and other profitable torts
o Not just to frustrate conscious wrongdoers but to stabilize contract itself
o Only applicable if not adequately protected by $ damages
o Illustrations
o Specifically repudiates Peevyhouse here with a pointed example
o Services you knowingly oversell and then don’t actually offer, even if no actualy
damage occurs (ie, sell to overstaff fire dept but don’t actually)
o Contract to buy land for $100k, they breach and sell to someone else for $110k.
You can sue for that $10k difference.

Kansas v. Nebraska, S Ct 2015

Issue
o N and K had a water contract, and N was negligent in tracking how much water was
used by N, and K sued. N likely saved $11.1m in it, but K only got $3.7m in damages and
$1.8m in partial disgorgement
o Enough disgorgement to serve to stabilize the compact according to the court

Note on Theory of Efficient Breach

Posner: Economic Analysis of Law

o 1st Ed of book argues that if you have incentive to breach, including damages, you
should, and it’s better for society that way
o Relies on faulty assumptions:
 That you’d be indifferent to breach as other party

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  Legal fees, etc
 Also it’s a pain!
 That the promisor knows the value that the promisee places on the
promisor’s performance
 No one is going to tell you how much you need a product or how
much profit you’re getting from it; it’s a negotiation!
o Also issues with efficiency
 People will always overbid just to ensure you get the product, or contract
will simply be a commodity itself; you’ll negotiate directly with the
contracted party in some cases
 Inefficiently reduces rewards for planning and investing
 Weakens the contract system – people won’t trust them if they’re
constantly outbid

Greer v LaSalle 1989

Issue
o Initial contract with LS to sell real estate for $1.1m to SC with clause to terminate if
there’s environ waste. SC consultant says there is which would cost $500k
o LS then tried to sell to G for $1.25m, if they removed the environ waste first. LS
consultant thought it would only cost $100k to clean soil.
o LS went back to S to try to sell at $1.4m, terminated G contract.
Judgement
o By entering into agreement with G, LS agreed to pay them a specific price for a property.
Can’t get out of contract for other reasons if in bad faith.

Punitive Damages
o Not supposed to exist much in breach of contract cases, really more for torts. But often
awarded, according to Galanter.

Now, out of nowhere, fight blt Eisenberg + Posner

o Theoy of Efferent Breach (simple idea, really)
o Def can breach, pay exp. damages and it's all ok
 basically an idea all along but Posner argues there
 Should be incentive to breach because it allows everything to keep rolling
 E says the whole thing is wrong. Why should seller profit from the breach? they
shouldn't.
o Innocent party should make the money. Seller who breaches is unjustly enriched
in Posner’s example.
o Restatement of Restitution is the key addition of above
o Peevyhouse is on this, the other way.
o is Posner right that the market needs beach, or is the Restitution crowd right?
 E's idea is NOT the law. (Frug says this).
 idea based on different look at cases.

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  would ∆ many results to do it this way.
o Frug’s Example
o Using P's hypo. Under the UCC, what are buyer's remedies?
 Expectation:
 Diff b/t market and contract
 Diff b/t cover and contract
o Frug: Posner made up a number in his own hypo to lower the cost of breach.
Why'd he do that?
 Another way to think about it is "stealing"

PART 3: ASSENT

Chapter 8: Interpretation
Section 1: Subjective and Objective Elements on Contract
Interpretation

On Exam:
Is there a contract/not?
What are the terms?
What do the terms mean?

R2nd §20
Effect of Misunderstanding
 There is no mutual assent if parties attach different meanings to their words AND
o Neither party has reason to know the meaning attached by other OR
o Each party knows the meaning attached by the other
 Different definitions operate based on one of the party’s understanding if:
o The party doesn’t know of any different meaning attached by the other, and the
other does know their meaning
o They have no reason to know the alternative definition and the other does have
reason to know
 Frug: This is divided into contract + no contract
o on first example, no basis for choosing between the parties; both or none have
reason to know, no contract.
o if one had reason to know and other didn't, there’s a way to decide what it
means: one side as means to mislead!

R2nd §201
Whose Meaning Prevails
 When they agree you use that
 In different meanings situation, It’s interpreted with the meaning of the party A if:

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 o Party A doesn’t know of any different meaning attached by the other, and the
other does know their meaning
o Party A has no reason to know the alternative definition and the other does have
reason to know
 Except here, neither party is bound by the meaning attached by the other. Possible it
just won’t be mutual assent.
 Same as §20 but for meaning

Frug: not a big difference here between contracts and torts! we're really figuring out who was
at Fault
 This is a strange place to be. Based on the objective intention of parties. Outward
manifestation of intent.

R1st §227
Standard of interpretation for Words of Contracts:
1. General usage of the word
2. Limited usage/locality
3. Mutual standard (agreed-upon definition)
4. Individual standard (what the person saying meant to express)
5. Reasonable expectation standard (what someone reasonably thought they were
conveying)
6. Reasonable understanding (what someone reasonably thought they were
understanding based on words)

Lucy v Zehmer, S Ct of Appeals of VA, 1954

Issue
o While drunk, man sells his farm. He haggled for 40 minutes, re-wrote some clauses, and
ultimately had both him and his wife sign the document. Is it valid?
o Lots of bluffing/bragging according to him.
Judgement
o Yes. Whether he really thought it was fake and wasn’t saying or really thought it was
legit we don’t know, but regardless, the other party had no way to know it wasn’t legit.
Thus, it was legit.
o A person cannot set up that he was merely jesting when his conduct and words would
warrant a reasonable person in believing that he intended a real agreement

Hawkins v. McGee (again!)

-Frug: do we have a contract at all?
 Did Hawkins have reason to know that McGee wasn't being contractual? Does McGee
have reason to know Hawkins may have thought it was contractual?
 Patent has reason to know that doctors always can't presume every instance? Or that
doctors say reassuring things?

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  Dialog:
o Pl, Hawkins: “100%” was the final inducement to operate.
o McGee: “100%” is just a figure of speech, just for reassurance (there’s no way to
achieve “perfection”).
o Hawkins: “3-4 days” sounds like an explicit promise and affected π’s decision to
have surgery
o McGee: Pl should have known time is relatively uncertain
 Court holds time isn’t a contract, but “100% perfect” is. Understanding
of the parties (“reason to know”) is crucial to this determination.
Whether there is a contract is never a neutral position!

R 2nd §12
Capacity to Contract
 No one can contract unless they are able to at least enter voidable contracts. Capacity
to contract may be partial and ability to contract in that case may depend on the nature
of the transaction
 Reasons why not
o Guardianship
o Infant
o Mentally ill
o Intoxicated

R 2nd §16
Only voidable duties if the other party has reason to know by reason of intoxication that
 He’s unable to understand reasonably
 He’s unable to act reasonably

Illustrations
 Explicitly include Zehmer as valid
 The standard of competency in intoxication cases is the same as that in cases of mental
illness. A contract made by a person who is so drunk he does not know what he is doing
is voidable if the other party has reason to know of the intoxication. Where there is
some understanding of the transaction despite intoxication, avoidance depends on a
showing that the other party induced the drunkenness or that the consideration was
inadequate or that the transaction departed from the normal pattern

Raffles v. Wichelhaus, In the Court of Exchequer, 1864.

Issue
 It so happened that there were two British ships named Peerless arriving in Liverpool
from Bombay, one departing in October and another departing in December. The
defendant, according to statements presented in court, thought the contract was for
cotton on the October ship while the claimant thought the contract was for the cotton

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 on the December ship. When the December Peerless arrived, the claimant tried to
deliver it, however the defendant repudiated the agreement, saying that their contract
was for the cotton on the October Peerless.
 It was an example of mutual mistake. The court tried to figure out who made it, but it
was truly mutual.
Judgement
 Since there was no way to figure out intent as to which ship, the court threw out the
lawsuit
 Holding: Contract unenforceable since there was a “latent ambiguity” in the contract
that prevented a “meeting of the minds”
 Model example of R2nd §20—neither side knew or had reason to know—so equally
reasonable

E’s note on section:

 Lucy v. Zehmer illustrates the law’s usual way of handling a misunderstanding, which is
to adopt the understanding of the party who is less at fault; this is the party who holds
the more reasonable understanding. The label mutual misunderstanding is reserved for
cases in which neither party is more at fault. Raffles illustrates the law’s usual response
in such cases.

In a modern version, Judge Friendly found for the Pl’s because they accepted the first shipment,
but had they argued in the first place that it was all a mutual misunderstanding, they likely
wouldn’t have had to pay.

Oswald v. Allen, 417 F.2d 43 (2d Cir.1969)

Issue
 Misunderstanding over category of coins included in purchase.
Judgement
 No contract. Raffles v Wich applicable.
 If there is no reasonable basis for choosing between conflicting understandings, contract
is held unenforceable

Falck v. Williams [1900] Appeal Cases 176

Issue
 Ambiguous telegram leads to misunderstanding. Court says no matter who had sued
they would find for the other side, effectively dismissing it.

“If neither party can be assigned the greater blame for the misunderstanding, there is no
nonarbitrary basis for deciding which party’s understanding to enforce, so the parties are
allowed to abandon the contract without liability. . . . These are not cases in which one party’s
understanding is more reasonable than the other’s.”

Sprucewood Investment Corp. v. Alaska Housing Finance Corp., 33 P.3d 1156 (Alaska 2001)

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Issue
 AHFC hired Northern Construction to demolish buildings. Mutual unds that they would
be demolished
 NC then tried to remove the buildings and resell them
 AHFC injuncted them, sued for breach
Judgement
 For AHFC as there was mutual unds of the term demolish.
 Frug: this case is wrong because there is an industry standard that would have ∆ the
result!

Embry v. Hargadine, McKittrick Dry Goods Co., St. Louis Court of Appeals, Missouri, 1907.
Issue
 Ambiguous conversation. Did what was said constitute a contract of re-employment on
the previous terms irrespective of the intention or purpose of McKittrick?
 Employee acted as though he had been employed
Judgement
 The answer was unambiguous, and we rule that if the conversation was according to
appellant’s version, and he understood he was employed, it constituted in law a valid
contract of re-employment, and the court erred in making the formation of a contract
depend on a finding that both parties intended to make one. . . .
 Frug: this case doesn’t add much to our understanding

UNDROIT 4.1
 Contract shall be interpreted in terms of common intention
 When not possible, according to reasonable person

Morales v. Sun Constructors, Inc., 541 F.3d 218 (3d Cir. 2008)
Issue
 Spanish-speaking contractor in US Virgin Islands attends 2.5-hour seminar in English and
is made to sign a 13 page doc in English. Employer asked another trainee who spoke
okay English and understood 80% of words to translate for him, and he then signed it.
Translator didn’t explain the arbitration piece to him. He later was fired and tried to sue
and argued couldn’t be via arbitration
Judgement
 Morales, in essence, requests that this Court create an exception to the objective theory
of contract formation where a party is ignorant of the language in which a contract is
written. We decline to do so.
 Essentially, he could have figured out a way to read in English the thing he signed
 Reasonable expectations of the parties
Dissent
 Add’l duty because they asked someone to translate for him, and they were pressured
to hire him quickly
 You don’t expect them to include something unreasonable/unfair/indecent

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  Reasonable expectations of the parties when there’s a convo in advance (Darner)?

SECTION 2: PROBLEMS OF INTERPRETING PURPOSIVE LANGUAGE

Courts will generally enforce consequences logically implied in the language of contracts.
Judges also read into documents and transactions many terms which are not logically implied in
them, including:
1. terms that the parties probably had in mind but did not trouble to express
2. terms that the parties, whether or not they actually had them in mind, would probably
have expressed if the question had been brought to their attention.
3. terms that are implied by the Court because of its view of fairness or policy or in
consequence of rules of law.
Contractual terms are given meaning by the situation in which they were drafted and the
purpose they were intended to serve.

[Literal-meaning vs. intent/purpose-of-the-words approach]

E’s Note
 Modern contract law is okay with some subjectivity
 Under modern contract law, that is just the case, as illustrated by four central modern
principles of interpretation:
 Principle I: If the parties subjectively attach different meanings to an expression, neither
party knows that the other attaches a different meaning, and the two meanings are not
equally reasonable, the more reasonable meaning prevails.
o Principle I is adopted in Restatement Second § 201(2)(b)
 Principle II: If the parties subjectively attach different meanings to an expression, neither
party knows that the other attaches a different meaning, and the two meanings are
equally reasonable, neither meaning prevails.
o Principle II is adopted in the Restatement Second § 20(1)
 Principle III: If the parties subjectively attach the same meaning to an expression, that
meaning prevails even though it is unreasonable.
o Principle III is adopted in Restatement Second § 201(1).
 Principle IV: If the parties, A and B, attach different meanings, Alpha and Beta, to an
expression, and A knows that B attaches meaning Beta, but B does not know that A
attaches meaning Alpha, the meaning Beta prevails even if it is less reasonable than the
meaning Alpha.
o Principle IV is adopted in Restatement Second § 201(2)

Note on Intention as Law

 People don’t always act normally in specific law ways: a joint-business venture with a
former spouse, say.
 Interpretation is always key, whether implicit or explicit

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Supplying/Imputing a Reasonable Term

R 2nd §204
When parties have a contract but haven’t agreed to a term which is deemed essential, a
reasonable term given the circumstances is supplied by the court
 Ie, “needs to be completed in a reasonable time” could be added by the court

Spaulding v. Morse, Supreme Judicial Court of Massachusetts, 1947.

Issue
 In divorce settlement, dad pays to a trust for his son $100/month until the son attends
college. Kid joins the army from HS, and the dad is forced to pay. First court makes him
pay, he appeals
Judgement
 In light of the circumstances, it’s clear the purpose of the contract was to take care of
Richard.
 No longer needs to pay. Kid is taken care of by the govt, not his mom now, also.
 Holding: Proper construction of the agreement, then, is that ∆ is not required to
perform provision for maintenance and education of son while he’s in the military b/c
father could only have intended to pay son if he went to college and needed $$.
 An omission to express an intention cannot be supplied by conjecture. But, if the
instrument as a whole produces a conviction that a particular result was fixedly desired
although not expressed by formal words, that defect may be supplied by implication and
the underlying intention . . . may be effectuated, provided it is sufficiently declared by
the entire instrument.”

Beanstalk Group, Inc. v. AM General Corporation, United States Court of Appeals, Seventh
Circuit, 2002.
Issue
 BG sold licenses for Hummer brand for AM General, and then AM General got a monster
deal with GM, and stopped working with BG. BG argued they deserve not just a 35% cut
of that deal (they didn’t negotiate it) but 100% of it because of the way the contract was
written.
 BG argued their case using literal language of the statue
Judgement
 Language would likely cover transaction, but it’s absurd. Threw that clause out.
 BG didn’t show any reason AM General acted in the same understanding, apart from
trying to head off the lawsuit.
 “With our conclusion that there was no breach of contract, Beanstalk’s other claims
collapse”
 Two key principles from Posner:
o 1. a contract will not be interpreted literally if doing so would produce absurd
results, in the sense of results that the parties, presumed to be rational persons

75
 pursuing rational ends, are very unlikely to have agreed to seek (unless they
explicitly spelled out ridiculous terms)
o 2. a contract must be interpreted as a whole (interpretation is a cultural and
linguistic undertaking)
 Frug: slippery slope of line with using word like “absurd”

Lawson v. Martin Timber Co., 238 La. 467, 115 So.2d 821 (1959)
Issue
 It’s a language of contract interpretation question
 Contract to get timber off land. If there’s high water during the 2-yr period, they get an
extension. There was at some points some high water but they definitely had enough
time to clear the timber in the 2 yrs. They kept going for another year.
Judgement
 On rehearing, judges found that clearly the meaning of the terms was implying that the
year-long extension was only if they were stopped due to high water from cutting it.
 Court ruled against clear words of a contract and looked at context to determine parties
meant that π would get another year if high water and it prevented from removing
timber

p. 417-434

Chapter 9: The Mechanics of a Bargain (I) —Offer and

Revocation
SECTION 1. WHAT CONSTITUTES AN OFFER

R 2nd §24
Offer is manifestation of willingness to enter a bargain, made such that if someone else assents,
it will conclude the offer. Judged by what the oferee things they mean.
 NOT a conditional gift

Preliminary Negotiations (RS § 26)

 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
 Comment:
o Advertisement of goods by display, sign, handbill, newspaper, radio, or television
are not ordinarily intended or understood as offers to sell
o There must ordinarily be some language of commitment or some invitation to
take action without further communication to count as offer
o A price “quote” is commonly understood as inviting an offer rather than making
one

UNDROIT 2.1.2

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Proposal constitutes an offer if it’s sufficiently definite and indicates the intention of offeror to
be bound if accepted.

Lonergan v. Scolnick, California Court of Appeal, Fourth District, 1954.

Issue
 Ad in paper selling land
 Via letter, exchange asking for some info, including the escrow agent, “should I desire to
purchase the land.”
 Seller than sells it to someone else before the Plaintiff gets the return letter
 Pl upon receipt opens an escrow account.
Judgement
 Wasn’t an offer.
 “The advertisement in the paper was a mere request for an offer. The letter of March 26
contains no definite offer, and clearly states that it is a form letter. It merely gives
further particulars, in clarification of the advertisement, and tells the plaintiff how to
locate the property if he was interested in looking into the matter. The letter of April 8
added nothing in the way of a definite offer. It merely answered some questions asked
by the plaintiff, and stated that if the plaintiff was really interested he would have to act
fast.”
 ∆’s second letter manifests intention to find out whether π was interested, not intention
to make definite offer. Language of letter sufficient to advise π that some further
manifestation of assent was necessary. So, ∆ never made offer, so no contract

Regent Lighting Corp. v. CMT Corp.

1997 WL 441297 (M.D.N.C. 1997)
 “no order shall be binding on SELLER until and unless accepted by SELLER in writing.” Is
valid to make something not an offer
 a proposal that reserves a right not to accept is not an offer, but rather an invitation to
submit an offer

Advertisement as Offer
 The general rule is that ads are not offers; based on policy considerations
 But see: Lefkowitz

Lefkowitz v. Great Minneapolis Surplus Store, Supreme Court of Minnesota, 1957.

Issue
 Ad in paper advertises “$1.00 1 Black Lapin Stole Beautiful, worth $139.50. . . .
$1.00 First Come First Served”
Judgement
 Ad for items to the first one in line constitutes an offer and can’t be revoked. Also can’t
be changed by arbitrary conditions.
 Pl gets $138.50, which was value of the item minus the purchase price.

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  “The plaintiff having successfully managed to be the first one to appear at the seller’s
place of business to be served, as requested by the advertisement, and having offered
the stated purchase price of the article, he was entitled to performance on the part of
the defendant. We think the trial court was correct in holding that there was in the
conduct of the parties a sufficient mutuality of obligation to constitute a contract of
sale.”
 “The defendant contends that the offer was modified by a “house rule” to the effect
that only women were qualified to receive the bargains advertised. The advertisement
contained no such restriction. This objection may be disposed of briefly by stating that,
while an advertiser has the right at any time before acceptance to modify his offer, he
does not have the right, after acceptance, to impose new or arbitrary conditions not
contained in the published offer”

Sateriale v. R.J. Reynolds Tobacco Company, United States Court of Appeals, Ninth Circuit, 2012.
Issue
 RJR had a catalog of C-Cash which was a rewards program. Pls kept thousands of their
tickets
 RJR ended program in Oct 2006 with letter saying they could continue to redeem their
stuff until Mar 2007, but the stuff was quickly gone.
 “The issue here is whether the C-Notes, read in isolation or in combination with the
catalogs, may have constituted an offer.”
Judgement
 It was a unilateral contract: “Here, the plaintiffs have identified an alleged promise by
RJR (to allow customers to redeem Camel Cash certificates for rewards), but they have
not pointed to any promise they made to RJR… We reach a different conclusion as to the
plaintiffs’ theory that RJR made an offer to enter into a unilateral contract. In contrast to
a bilateral contract, a unilateral contract involves the exchange of a promise for a
performance. See Harris v. Time, Inc
o Cites Corbin: “It is very common, where one desires to induce many people to
action, to offer a reward for such action by general publication in some form. A
statement that plausibly makes an offer of this kind must be reasonably
interpreted according to its terms and the surrounding circumstances
o “we conclude that the plaintiffs have adequately431alleged the existence of an
offer to enter into a unilateral contract, whereby RJR promised to provide
rewards to customers who purchased Camel cigarettes, saved Camel Cash
certificates and redeemed their certificates in accordance with the catalogs’
terms.”
 Question of what their right is to terminate? They can’t without notice: “if RJR reserved
an unrestricted right to terminate the Camel Cash program at any time and without
notice, then RJR’s promise to perform could be deemed illusory, and hence
unenforceable”
o “We conclude this element is satisfied: the C-Notes promised consumers that if
they saved C-Notes and redeemed them434for rewards merchandise in

78
 accordance with the catalog, RJR would provide the merchandise. These terms
are neither unclear nor ambiguous.”

SECTION 2: TERMINATION OF THE OFFEREE’S POWER OF ACCEPTANCE

R2nd §36: Methods of Terminating the Offeree’s Powr of Acceptance

 An offeree’s power of acceptance may be terminated by:
o Rejection or counter offer by offeree
 Trying to balance shifting exposure
o Lapse of time
o Revocation by offeror
o Death or incapacity of either party (this rule is harsh towards offerees)
o Non-occurrence of any condition of acceptance under the terms of the offer

R 2nd §38
Rejection
 power of acceptance is terminated by rejection of the offer, unless offeror has
manifested a contrary intention
 manifestation of intention to not accept an offer is a rejection unless the offeree
manifests an intention to take it under further advisement

R 2nd §41
Lapse of Time
 an offeree’s time ends at the specified time or after reasonable time
o reasonable time is a factual q
 if mailed, any acceptance sent the day offer received is ok.

E’s Note on Rejection:

 A rejection terminates the power of acceptance, not because a rejection must logically
terminate the power of acceptance, but because giving that effect to a rejection is
justified by prudential considerations.

R 2nd §39
Counter-Offers
 It’s from offeree to offeror relating to same subject matter and proposing a substituted
bargain
 Offeree’s power of acceptance terminates by making counter-offer unless offeror has
manifested contrary intention or unless the counter-offer manifests a contrary
intention.
 Slippery slope between inquiry and counter-offer

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Illustrations
 Unless you explicitly keep the old offer open when you counter-offer, it’s been
terminated:
o 1.A offers B to sell him a parcel of land for $5,000, stating that the offer will
remain open for thirty days. B replies, “I will pay $4800 for the parcel,” and on
A’s declining that, B writes, within the thirty day period, “I accept your offer to
sell for $5,000.” There is no contract unless A’s offer was [an option supported
by consideration], or unless A’s reply to the counter-offer manifested an
intention to renew his original offer.
o 2.A makes the same offer to B as that stated in Illustration 1, and B replies,
“Won’t you take less?” A answers, “No.” An acceptance thereafter by B within
the thirty-day period is effective. B’s inquiry was not a counter-offer, and A’s
original offer stands.
o 3.A makes the same offer to B as that stated in Illustration 1. B replies “I am
keeping your offer under advisement, but if you wish to close the matter at once
I will give you $4800.” A does not reply, and within the thirty-day period B
accepts the original offer. B’s acceptance is effective.

Price v. Oklahoma College of Osteopathic Medicine and Surgery, Okla. Ct. App. 1986
Issue
 Job offer signed as asked for to indicate acceptance, but with an additional line he typed
on: “Signed under protest that salary does not reflect guarantees under present and
past Personnel Policies and that proper evaluation procedures were not followed.”
 They ended the agreement and he sued for breach.
Judgement
 Held for employee. He did accept the offer just as they asked him to.
 RS §59 doesn’t apply here because this wasn’t an added condition
 Employee’s signing constituted acceptance, since the protest language did not purport
to alter any term of the offer, but merely articulated employee’s opinion of one of the
terms (i.e., “I don’t like your offer, but I accept it.”)

R 2nd §59
Purported Acceptance Which Adds Qualifications
 Offer that accepts but only on additional conditions is a counter-offer.

BUT SEE UCC §2-207: In sale of goods, an acceptance with conditions is still an acceptance and
sometimes the conditions become part of the actual agreement

Mirror Image Rule

 R2nd §59 and such are a response to a mirror-image rule which said that if even one
word was different it wasn’t valid.
 normally is applied only to forms

80
  leaves open how a court is to determine whether in any given case the acceptance is or
is not made to depend on assent to the additional or different terms.

Livingstone v. Evans, Alberta Supreme Court

 A telegrams for $1800 to buy land, B asks for reduction, A says no, B, hearing no accepts
the original offer, which the court found to be an implied re-offer.
 A counter-offer was given, terminating the ability of the offeree to accept but then the
offeror answered, renewing the offerthere is a contract here

Culton v. Gilchrist, 92 Iowa 718, 61 N.W. 384 (1894)

 Landlord offers tenant another year, tenant says “yes and I’d like to build a cookroom”
 Court finds that to be an acceptance and separate question
 contract is complete, conditions are extra

??? R 2nd §37

Termination of Power Acceptance Under Option Contract
 Notwithstanding §§ 38-49, the power of acceptance under an option contract is not
terminated by rejection or counter-offer, by revocation, or by death or incapacity of the
offeror, unless the requirements are met for the discharge of a contractual duty

E’s unsigned note

 If offeree accepts rule from someone who dies or becomes incompetent, the contract is
void
o Only people, not corporations
 E’s suggestion: they can only get reliance damages but not expectation damages.

R 2nd §45
Option Contract Created by Part Performance
 When an offer invites offeree to accept by rendering a performance and doesn’t invite
promissory acceptance, an option contract is created when the offeree tenders or
begins the invited performance
 Offeror’s duty of performance is conditional on completion in accordance with terms of
offer

Ragosta v. Wilder, Supreme Court of Vermont, 1991.

Issue
 Seller advertised to sell The Fork Shop, said if they could meet him at a bank with
$88,000 before Nov 1, he’d sell it to them provided he didn’t sell to someone else. They
arranged for it but he changed his mind before that date.
 (They had tried to give him a $2k check to start it year before, but he changed his mind.)
 They arrange financing and show up at the bank but he doesn’t show. They sue for the
costs of getting all the finances
Proced Hist

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  Trial court claimed it was re: equitable estoppel and an option contract: Plaintiffs argue
that the actions they undertook to obtain financing, which were detrimental to them,
could constitute consideration for the promise to keep the offer to sell open.
Judgement
 Court disagrees and argues that they may be able to get their $ back under promissory
estoppel but not as consideration for a legit contract. They hadn’t given the seller any
money, they only prepared to give him money. Thus, they hadn’t begun to tender their
side of a potential bargain.

Hypo: Brooklyn Bridge / Offers for Unilateral Contracts

Offers for Unilateral contracts
 Option/unilateral contract is a binding contract that can’t be revoked – binding
obligation under the contract.
o to be binding, has to be what?
 you can pay (pay to leave house open)
 there's reliance (bridge walker relied on it).

Note on Section 45
 Controversial
 Essentially, they make it bargain-based, and say that while it’s true that as soon as you
start the action required on an option contract, you’ve completed the option contract,
they emphasize that a big portion of it is “preparing” to start it.
 This is still unsatisfying.
 §45: Flips the vulnerability
o Under classical rules, you can revoke
o offeror bound, offeree can do it or not.

 Brackenberry v. Hodgkins, in-class example

o Mom says, “You can have my place if you take care of me for the rest of my life.”
Daughter comes and takes care of mom
o Classical rule: Mom can revoke until the moment of her death (scary for offeree)
o Modern rule: Under RS §45, mom can’t revoke (even if daughter’s really mean),
and daughter can cease performance at any time (reliance), UNLESS there is
some question as to whether it’s a unilateral or a bilateral contract (RS §32), in
which case if daughter ceases performance she breaches (RS §62)

 IMPORTANT: If offer is clearly for a unilateral contract, RS §45 governs (and offeree may
cease performance without breaching); If, however, there is doubt as to whether offer is
for a unilateral or a bilateral contract (i.e., when offeree can accept either by promise or
by performance), then RS §§32 and 62 governs (meaning that if offeree ceases
performance, she breaches)

§32/62 Trick

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  In case of doubt over whether it’s unilateral or bilateral, offeree can choose whether it's
unilateral or bilateral.
o §32 vs. §62.

Drennan v. Star Paving Co., Supreme Court of California, 1958.

Issue
 General contractor relied on an inaccurately low bid in his estimate to get a larger bid
 Court ruled that it was an option contract and thus the errant subcontractor was liable
for damages.
o They use §45 to say that the program need not be finished to be binding and §90
to discuss promissory estoppel.
 **Key: Uses §90 reliance twice!
o Implies promise not to revoke due to reliance
o That promise is binding also due to reliance
 Here, it’s a workaround to apply §45 to bilateral contracts.
 This case leads to §87(2)
 Reliance creates an option contract as necessary to prevent injustice.

R 2nd §87(2)
 An offer which the offeror should reasonably expect to induce action/forbearance of a
substantial character on the part of the offeree before acceptance and which does
induce such action is binding as an option contract as necessary to prevent injustice.

R2nd §88
 Form: it’s an option contract if in the form of one.

Comments
 Differs from §45 in that it’s about the extent to which damages are applied – this one
would go all the way to expectation damages as needed to prevent injustice.
 Eisenberg: In comparing §87(2) with §45, it appears that the framers of RS believed that
where offeree has actually begun to perform pursuant to an offer for a unilateral
contract, he’s automatically entitled to expectation damages, while in other cases of
reliance on an offer (preparation), the offeree may appropriately be limited to reliance
damages
 “where an offeree has actually begun to perform pursuant to an offer for a unilateral
contract, he should automatically be entitled to expectation damages, while in other
cases of reliance on an offer, the offeree may appropriately be limited to reliance
damages.”
o According to the Comment to Section 87(2), “[i]f the beginning of performance is
a reasonable mode of acceptance, it makes the offer fully enforceable under § 45
. . .; if not, the offeror commonly has no reason to expect part performance
before acceptance. But circumstances may be such that the offeree must
undergo substantial expense, or undertake substantial commitments, or forego

83
 alternatives, in order to put himself in a position to accept by either promise or
performance. . . . Full-scale enforcement of the offered contract is not
necessarily appropriate in such cases.

Pavel Enterprises, Inc. v. A.S. Johnson Co., 342 Md. 143, 674 A.2d 521 (1996)
 Pushback on Drennan decision as propping up general contractors against
subcontractors

Preload Technology, Inc. v. A.B. & J. Construction Co., Inc., 696 F.2d 1080, 1089 (5th Cir.1983)
 Response to prior case: the prohibition against ‘bid shopping,’ ‘bid chiseling’ and related
practices sometimes engaged in by general contractors” allows for denial of “recovery
by the general contractor under § 90:
o that the general contractor did not in fact rely on the subcontractor’s bid, or
failed to accept it within a reasonable time, or rejected 478 it by a counter-offer,
o or, perhaps more persuasively, because in such circumstances there is a failure
to meet § 90’s requirement that ‘injustice can be avoided only by enforcement
of the promise.’ ”

Allen M. Campbell Co. v. Virginia Metal Industries, Inc., 708 F.2d 930 (4th Cir.1983)
 Same as above, held under theory of promissory estoppel.
 Although the bid was oral, the UCC Statute of Frauds was not a defense, because under
North Carolina law promissory estoppel overcomes the Statute of Frauds.

FEG 488-492, 500-524

CHAPTER 10 THE MECHANICS OF A BARGAIN-

TRANSACTING AT A DISTANCE
WHEN AN ACCEPTANCE IS EFFECTIVE (THE MAILBOX RULE)
 General rule (mailbox rule): Acceptance becomes effective upon dispatch (when mailed)
and revocation becomes effective upon receipt
o Under this rule, an offeree can safely begin to perform as soon as he dispatches
his acceptance: pushes up the beginning of performance to the earliest possible
o Rule applies even in cases of delay or failure of transmission (i.e., contract still
exists)
 But more b/c there’s a rule than a good rationale
o where the offeror gives the offeree a fixed period in which to accept the offer,
the period begins to run from the date the offer is received, not from the date it
is posted

R2nd §30
Form of Acceptance Invited

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  Offer can invite acceptance to be made by an affirmative answer in words, by
performing or refraining from performing a specified act, or by offeree’s choice
 Unless language or circumstances say otherwise, offeree may accept by any means
reasonable

R2nd §49
Effect of Delay in Communication of an Offer
 If there’s a delay in the communication of an offer, the period within which contract can
be accepted is not extended if the offeree knows (or has reason to know) of the delay.
 BUT, if the delay is the offeror’s fault, and the offeree doesn’t know of delay (nor has
reason to know), then offeree gets time to accept
 Very sensible – if you know of the delay and don’t do anything, you can’t accept it

R2nd §60
Acceptance when offer states Place/Time/Manner
 If the offer states explicitly a place, time, or manner of acceptance, these terms must be
complied with in order to create a contract (but if these things are merely suggested,
another method of acceptance is not precluded)
o If an offer prescribes the only way in which the offer can be accepted, an
acceptance in any other way is a counteroffer

R2nd §64
Acceptance Effective Upon Dispatch
 An acceptance takes effect as soon as it leaves offeree’s possession (i.e. upon dispatch),
even if it never reaches offeror
 Exception: acceptance under option contract is not valid until receipt
 Frug: This rule makes no sense; in the rest of the world acceptance is effective upon
receipt
 Comment: Revocation of acceptance after acceptance is dispatched is generally NOT
operative. Rather, it will amount to an offer to rescind the contract, or to a repudiation

R2nd §64
 Phones and other instant communication is governed as though it’s in-person

R2nd §65
 Reasonable medium is one used by offeror or one typically used in similar transactions

R2nd §66
 Acceptance by mail only takes effect upon dispatch if properly addressed, stamped, etc.
But see §67.

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R2nd §67
 Improperly dispatched acceptance still treated as operative upon dispatch if received
within the time in which a properly dispatched acceptance would normally have arrived

R2nd §68
 Written revocation is received when it’s received by the person or someone authorized
on their behalf to receive it, or it’s deposited into an authorized place for this or similar
communications.

UCC §2-206(1)
 Unless otherwise unambiguously indicated by language or circumstances, a contract
invites acceptance in any way reasonable under the circumstances
 Option contracts invite folks to send the goods

CISG 15
 Contract effective when it reaches offeree
 An offer even if irrevocable may be withdrawn if withdrawal reaches offeree first (this is
different)

Notes
 Send acceptance by mail and change mind so revoke by a faster medium. Not effective.
 General rule is that acceptance becomes effective upon dispatch (when mailed) and
revocation becomes effective upon receipt
o Issue when letter mailed never reaches destination – contract still exists under
this rule
o Contract can be worded to make acceptance only upon receipt

CISG 18 changes mailbox rule and makes it valid upon receipt by offeror, but still protects the
interest if the acceptance is sent before the revocation is received (still a valid contract). There
is just no contract if the acceptance is never received.

“Electronic tools” (like email, lol)

 It is an open question whether the dispatch rule will be applied to electronic
acceptances.

SECTION 4. SILENCE AS ACCEPTANCE

This section concerns the rules that treat an offeree’s silence in response to an offer as
acceptance of the offer.

 Doesn’t appear to require belief that other person would ever want to pay for services
rendered

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  Enforced policy against officious intermeddlers (shouldn’t be paid for unsolicited
services)

Diff b/t contract implied in fact (there is a contract) and implied in law (we impose liability even
though there is no contract!)

McGurn v. Bell Microproducts, Inc., United States Courts of Appeals, First Circuit, 2002.
Issue
 Bell Microproducts, Inc. (Bell) mailed George R. McGurn a signed offer of employment.
He handwrote an edit on the severance package and initialed it. They didn’t mention it.
Valid?
Judgement
 the district court granted summary judgment for McGurn, finding that Bell’s silence in
response to McGurn’s counteroffer constituted an acceptance of the 24-month
termination clause. We find that conclusion premature. The import of Bell’s silence
cannot be decided as a matter of law on a motion for summary judgment because of
genuine issues of material fact about whether Bell knew or should have known of
McGurn’s counteroffer. 
 Haggling over clause
o On June 29, McGurn requested a termination clause that would remain in force
as long as he worked for Bell. However, he also said to Donald Bell that he would
consider one that was limited to the first twenty four months of his employment.
According to McGurn, Donald Bell replied that a twenty-four month termination
clause would be acceptable.
o Upon learning of his termination on August 3, 1998, after approximately 13
months at Bell, McGurn conveyed to Clark his belief that his contract included a
two-year termination clause. Clark disagreed, and Bell refused to pay the
amounts specified in the termination clause.
 The parties agree that McGurn’s alteration of Bell’s offer letter constituted a rejection of
that offer and created a counteroffer. 
o We distill from the Restatement and the Gateway and Kidder precedents the
legal rule in Massachusetts that silence in response to an offer may constitute an
acceptance if an offeree who takes the benefit of505offered services knew or
had reason to know of the existence of the offer, and had a reasonable
opportunity to reject it.
o The disputed term was added to the offer after Bell had signed it. The relevant
question is why, as a matter of law, Bell should be expected to re-read an offer it
had written and signed, upon its return with McGurn’s countersignature.
 Obviously they could have seen it but it’s not so obvious that it should be decided on
summary judgement
Dubinitante Opinion (not quite a dissent)

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  when an offeree fails to reply to an offer yet takes the benefit of the offered services
with reasonable opportunity to reject them and reason to know that they were
tendered in the expectation of a particular consideration.
 Were the law otherwise and the majority’s view taken to its logical extreme, an offeree
could completely redefine its responsibilities by the simple expedient of claiming that it
was not aware of what its own records plainly showed.

R2nd §69
When Silence Operates as Acceptance
 Where an offeree fails to reply to an offer, silence or inaction operates as acceptance if:
o The offeree takes the benefit of the offered services with reasonable opportunity
to reject them and reason to know that they were offered with expectation of
compensation
o The offeror has stated or given 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
o Because of previous dealings or otherwise it is reasonable that offeree should
notify the offeror if he does not intend to accept
 An offeree is bound in accordance with the offered terms if he acts inconsistently with
the offeror’s ownership of the property (unless offered terms manifestly unreasonable)

CISG ART. 18(1), (3)

 Statement made is acceptance. Silence/inactivity does not in itself amount to
acceptance
 If by virtue of the offer or as a result of the practices, the offeree can indicate assent by
performing an act, the acceptance is effective when the act is performed, if it’s
performed in the correct time laid out.

UNIDROIT PRINCIPLES OF INTERNATIONAL COMMERCIAL CONTRACTS ART. 2.1.6(3)

 If by principles established between parties the offeree can indicate assent by
performing an act, the acceptance is effective when the act is performed.

PRINCIPLES OF EUROPEAN CONTRACT LAW ART. 2.204(2)

 Silence/inactivity does NOT in itself amount to acceptance

Kukuska v. Home Mutual Insurance Co., WI, 1931

 Farmer applied for hail insurance on July 3, required to include check to pay in advance,
so limited his ability to shop around. It’s well known that hail risk is worst in July-August.
 Insurance company did not reject until the morning of August 1st, day a huge storm
destroyed farmers’ crops.
 “Does not the very nature of the transaction impose upon the insurer a duty to act? It is
considered that there is a duty.”

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  Holding: Insurer had duty to inform farmer within a reasonable time whether it had
accepted his application so that he could protect himself elsewhere. Not rejecting him
within that reasonable time was silence amounting to acceptance
 Could also argue under: unjust enrichment. He paid in advance!

Louisville Tin v. Lay, KY 1933

 The husband had bad credit so he ordered items for his own shop in his wife’s name;
She directed her employee to take the items to her husband; Seller sues for
compensation
 Court holds that contract had been formed when the wife took possession of the goods.
 Taking control = acceptance
o R2nd 69(a)

Officious Intermeddlers

Hypo: painter working on house / not correcting him.

 Is silence acceptance?
 Relative weight of factors: Frug rejects this idea
o painter had no reason to think the guy wants on his house- Should it be
mentioned?
 nothing agreed on!
o key: officious intermeddler: someone who performs labor w/out request /
implied consent.
 They then cannot recover

Big Picture: Employment at Will / Silence / Handbooks

 -Firing in conflict w/ procedures w/in handbook
 -assuming it was created post-hiring, handbook is offer, and employee silently
continuing to work is acceptance
o so you can sue for breach
 What if employer ∆ handbook and takes out all of the protections?
o is silence still acceptance?
o what is its legal status?
o Perhaps no consideration. Maybe the modification isn't fair and reasonable
under R2nd §89.
 Frug: Key Q: these raise conventional contracts thinking as well as potential restitution.

Moroney v. Moroney (not on CB)

 Not married but lived together. She supported him while he was on dental school; he
became dentist and she dropped out of job market. One day he left. She sues him for
breach of contract.
 did they have a deal?
o one way to uds.-it's like they're married

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 o Challenge of interpretation: what is the reasonable expectation? What is a
potential contract?
 Should there been distinction b/t implied + express contracts!
 Actual answer: not restitution but saw it as implied marriage contract

Austin v. Burge, MO, 1911

Issue
 Def had newspaper subscription gifted to him that expired
 He directed that subscription be stopped, but newspaper co. kept sending papers and
he kept getting them from post office and reading them until he moved
Judgement
 He accepted and used the newspaper, with no pretense by the newspaper that it was a
gratuity. In receiving this benefit, an obligation arose to pay for it, notwithstanding his
direction to stop sending.
 “One who accepts the paper, by continuously taking it from the post office, receives a
benefit and pleasure arising from such labor and expenditure as fully as if he had
appropriated any other product of another’s labor, and by such act he must be held
liable for the subscription price”

USC §3009: Mailing of Unordered Merchandise (enacted 1971)

 except for free samples and charity solicitations, mailing free stuff and requiring folks to
pay for it constitutes an unfair method of competition and unfair trade practice.
 Any merchandise sent to someone can be treated as a gift. You can keep it!
 You can’t bill anyone for any of this

E’s Unsigned Note

 “Three kinds of cases in which an offeree remains silent after receiving an offer may be
distinguished: (1) Cases where the offeree enriches himself by silently appropriating the
benefit of something offered to him. (2) Cases where the offeror changes her position
either because she assumes that her offer has been accepted, or because, as in Kukuska,
supra, the very act of making the offer requires her to forgo other opportunities to
covering her needs. (3) Cases where there is no enrichment of the offeree, and no
detrimental reliance by the offeror, but where the offeror forms an expectation of profit
on the assumption that a contract has been concluded through the offeree’s silence”

Day v. Caton, Supreme Judicial Court of Massachusetts, 1876.

Issue
 Neighbor builds wall between two houses and claims his neighbor agreed to pay for
half. Builder sues for half.
Judgement
 Maybe, it’s a fact question we’ll send to a jury, and jury finds for Pl.

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  fact that the plaintiff expected to be paid for the work would certainly not be sufficient
of itself to establish the existence of a contract, but silence in some cases may be
reasonable.
o For ex: day after day a laborer at work in his field doing services knowing that the
laborer expected pay, it might fairly be inferred. 
o Thus, circumstances of each case would necessarily determine whether silence
with a knowledge that another was doing valuable work for his benefit would
give rise to the inference of a contract.

Section 5. Restitution for a Benefit Conferred in Mistaken Belief of

Existence of a Contract
 claim in the law of restitution or unjust enrichment when A confers a benefit on B in the
mistaken belief of the existence of a contract with B

Emergency Aid / Continued Aid

Nursing Care Services, Inc. v. Dobos, FL, 1980 (p.504)

Issue
 Def received nursing services after accident but never signed or orally agreed to them
Judgement
 Though she never assented, there was a contract implied-in-law b/c it would be
unconscionable to deny the Pl recovery for the value of the nursing services
 “Officious intermeddler doctrine”: Where a person performs labor for another without
the latter’s request or implied consent, the person providing the service cannot recover
therefrom
o Exception: When the service provided is emergency aid (if supplier of the benefit
has no reason to know the person being benefited would not consent to
receiving them if mentally competent) (policy-based exception)
Discussion
 Two different types of restitution and unjust enrichment are involved in Dobos:
o 1.The two weeks of in-hospital care. This claim is covered by the rule of
Restatement, Third, Restitution and Unjust Enrichment § 20, which allows a
claim for the reasonable market price of “professional services required for the
protection of another’s life or health
o 2.The two weeks of at-home care. under the law of restitution. The plaintiff’s
claim would be that it provided Dobos this care in the mistaken belief it had a
contract with Dobos to pay for the service. The trial court found that Dobos did
not know that she was expected to pay for the at-home care. Thus this is a case
of misunderstanding. As you have seen, when there is a misunderstanding about
the existence or terms of an agreement, the objective principle of interpretation
resolves the misunderstanding against the party who is more at fault

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  but there’s more. There are other principles on restitution that may have
slightly different numbers (if mutual mistake, or add’l restrictions
imposed by R3rd).

Chapter 11 Indefiniteness, Preliminary Negotiations, and

the Duty to Bargain in Good Faith
Academy Chicago Publishers v. Cheever, Supreme Court of Illinois, 1991.
Issue
 Widow of short story writer enters contract to publish his unpublished works in a
collection, and signs initial contract that says “on a mutually agreeable date one copy of
the manuscript” will be given and that “Within a reasonable time and a mutually
agreeable date” they’ll publish it
 Shortly thereafter, Mrs. Cheever informed Academy in writing that she objected to the
publication of the book and attempted to return her advance.
Judgement
 Although the parties may have had and manifested the intent to make a contract, if the
content of their agreement is unduly uncertain and indefinite no contract is formed
 Was never a valid contract, had tons of omissions, ambiguities, unresolved essential
terms and illusory terms
Discussion
 A contract may have open terms, but there must be enough to show court the intent of
the parties and give it a basis for deciding whether the agreement has been kept or
broken
 But, it’s impossible to identify every term in a contract
 Why are they insisting they have to have critical terms to have a contract? Role of courts
problem. If they don’t include them, courts will have to write them in.

Spectrum: can’t have an agreement to agree, but also can’t put literally everything in a
contract.

Ridgway v. Wharton, British 1856

 An agreement to enter into an agreement upon terms to be afterwards settled between
the parties is a contradiction in terms

Rego v. Decker, AK, 1971

 “On the one hand, courts should fill gaps in contracts to ensure fairness where the
reasonable expectations of the parties are fairly clear”
o Contracts tend to be skeletal, because the amount of time and money needed to
produce a more complete contract would be disproportionate to the value of the
transaction to the parties.

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 o Courts would impose too great a burden on the business community if the
standards of certainty were set too high.
 “On the other hand, courts should not impose on a party any performance to which he
did not and probably would not have agreed”
o A greater degree of certainty is required for specific performance than for
damages

AROK Construction Co. v. Indian Construction Services, AZ 1993

 “The enforcement of incomplete agreements is a necessary fact of economic life…
Refusing the enforcement of obligations the parties intended to create and that
marketplace transactions require hardly seems the solution”

Saliba v. Allen, CA, 1971

 Subcontractor, A, refused to perform bid at stated price, saying the bid was too
indefinite to form the basis for a contract, since it stated only price (left many other
matters like insurance, how payments would be made, etc. to be determined)
 Holding: General Contractor, S, wins b/c price is the principal item of the contract, and it
is customary for bids to be made by a brief telephone call in which price only is stated
 Price is enough; that’s how the business runs

R2nd §33
Certainty
 A manifestation of intention cannot be accepted so as to form a contract unless the
terms of the contact are reasonably certain
o Terms of a contract are reasonably certain if they “provide a basis for
determining the existence of a breach and for giving an appropriate remedy”
 The fact that one or more terms of contract is left uncertain may show that
manifestation of intention is not intended to be understood as an offer or acceptance

R2nd §34
Certainty and choice of terms; effect of performance on reliance
 Terms may be reasonably certain even though they allow one or both parties to make a
selection of terms in the course of performance
 Part performance may remove uncertainty and establish an enforceable contract
 Reliance may make a contractual remedy appropriate even though uncertainty isn’t
removed

UCC §2-204
Formation in General
 Conduct by parties that recognizes the existence of a contract is sufficient to show a
contract exists

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  Even though one or more terms are left open a contract for sale doesn’t fail for
indefiniteness if parties have intended to make a contract and there’s reasonable basis
for giving an appropriate remedy (even if moment of making of contract is
undetermined)

UCC is far broader about what constitutes a contract even if it contains general terms

UCC 2–305
Open Price Term
 If the parties so intend, they can conclude a contract for sale even though the price is
not settled
o Then, the price is a reasonable price at the time of delivery

UCC 2–308
Absence of specific place of delivery
 Unless otherwise agreed, the place for delivery of good is the seller’s place of business
or if he has none, his residence

UCC 2–309
Absence of specific time provisions
 Time for shipment or delivery, if not specified, shall be a reasonable time

UCC 2–310
Time for payment
 Unless otherwise agreed, payment is due at the time and place at which the buyer is to
receive the goods, even if the place of shipment is the place of delivery

E’s Unsigned Note

 The UCC provisions cross-referenced above are generally referred to as gap-fillers,
because they fill gaps that parties may leave in a contract for the sale of goods. They’re
default rules.
 problems of determining what is reasonable. One could define it as the terms
reasonable parties in that position would have wanted or as what the actual parties
would have agreed to had they bargained on the issue. Eisenberg says UCC seems to
take second position, but he believes former is better “because it is so difficult to
determine what terms specific parties would have agreed to on the basis of their
relative bargaining power, degree of risk aversion, and the like”

Sateriale v. R.J. Reynolds Tobacco Company, United States Court of Appeals, Ninth Circuit, 2012
(again)
Issue

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  argues that, even if there was an offer, any contract arising from it would be too
indefinite to be enforced
 Two Requirements:
o 1. First, yes there was a breach. RJR was required to make reasonable quantities
of rewards merchandise available during the life of the Camel Cash program
o 2. Second, requirement that the contract provide a basis for giving an
appropriate remedy. That’s harder.
 But, RJR’s internal documents assigned C-Notes values, such as 15 cents
per $1 note, that might afford a basis for assessing damages
 Also, reliance seems to serve as basis for substantivity:
o RJR documents, treated outstanding C-Notes as a binding obligation and an
outstanding financial liability
o plaintiffs’ substantial reliance on RJR’s promises
o For these reasons, dismissal for indefiniteness is unwarranted
o Reliance as a thing to help prove definiteness, ~Drennan

Arbitron, Inc. v. Tralyn Broadcasting, Inc., NY 2d Cir. 2005

Issue
 Analytics company had 5-yr agreement to give data to radio station, T. If they were to
get more stations in the same market, there was an escalation clause. They were bought
out and from that, effectively did have more stations, but didn’t T didn’t tell A.
 Arbitron sued for breach, seeking the quintupled fee from June 1999 to the end of the
contract’s five year term
Judgement
 Compared to another case of NY unenforceably indefinite contracts.
 The escalation clause, unlike the promise to set a future rent rate collectively in
Delicatessen, does not require the parties to reach an “agreement” on price at some
point in the future. That is, the escalation clause is not an “agreement to agree.”
 Not sure if it’s covered by UCC, but regardless the contract is enforceable.

Moolenaar v. Co-Build, VI, 1967

Issue
 Tenant signed five-year lease with option to renew for an additional 5 years; renewal
clause provided the rent for the renewal period “shall be renegotiated.” Tenant had
been paying $375/mo, in renewal, new landlord wanted $17,000/mo
Judgement
 Market conditions are ascertainable with sufficient certainty to determine a “reasonable
rent” and thus make the clause specifically enforceable
 (Minority rule, which court adopts): A renewal clause that doesn’t specify a renewal rate
intends renewal at a “reasonable” rent
 Majority rule): A clause that doesn’t stipulate the rent is void for uncertainty and
indefiniteness
 Filling in blanks with reasonable terms

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Channel Home Centers v. Grossman, United States Court of Appeals, Third Circuit, 1986.
 Def wanted Pl to execute a letter of intent that def could show to banks in order to
obtain leasing. In letter, Def promised to negotiate in good faith and withdraw premises
from marketplace. After Pl had made considerable expenditures, Def pulled offer on
technicality/timeline miscommunication to lease to other party.
Judgement
 A letter of intent that was of significant value to the property owner (allowed def to
secure financing) and also to prospective tenant (binding to them) is enforceable as a
mutually binding obligation to negotiate in good faith (duty to go forward in good faith
once a deal is struck but before the actual contract is drafted); liability before contract
o “Fully aware of Grossman’s desire to obtain financing, Channel sought to solidify
its bargaining position by requesting that Grossman also sign the letter of intent
and promise to ‘withdraw the store from the rental market’”
 Parties may be bound by a letter of intent to negotiate in good faith where:
o Both parties manifest an intention to be bound
o The terms are sufficiently definite to be enforced
o There is consideration (i.e., letter of intent of substantial value to both sides)
o R2nd §205 comment (c) (1979) (“Good faith in negotiation”)
 Liability before contract!
o Repudiates “magic moment” theory
o Groundbreaking case

Big Picture: Preliminary Negotiations and the Duty to Bargain in Good Faith
 Magic Moment Theory. Theories acting in opposition to this idea:
o Duty to go forward in good faith once a “deal” is struck (abide by the general
terms of the deal), but b/f actual contract drafted (Channel Homes)
o Reliance (Hoffman)]
 When are you liable? Controversy.
 Courts want people to know when they enter into negotiation that you can’t just
walk way in bad faith – you can at some point disagree, but can’t just ∆ mind w/out
material disagreement.

Garwood Packaging, Inc. v. Allen & Company, Inc., United States Court of Appeals, Seventh
Circuit, 2004.
Issue
 Company in lots of debt, Garwood, gambled/relied on a last-ditch financing effort from
Martin. Martin told GPI that Allen (Martin’s employer) would consider investing $2
million of its own money in GPI if another investor could be found. Allen decided not to
invest, the deal collapsed, and GPI was forced to declare bankruptcy.
 Allen had told them that he would get the deal done “come hell or high water”
 GPI claimed that under promissory estoppel Allen/Martin were bound to a legally
enforceable promise.

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Judgement
 Posner considers PE:
o reasonable reliance is seen as nearly as good a reason for thinking there really
was a promise as bargained-for reliance is. Normally, the doctrine penalizes the
defendant for inducing the plaintiff to incur costs of reliance, unless the Pl was
unreasonable.
 Reliance v expectation damages:
o usual measure of damages under a theory of promissory estoppel is the loss
incurred by the promisee in reasonable reliance on the promise, or ‘reliance
damages.’
o The only problem with this explanation is that its premise is mistaken; if the
promise giving rise to an estoppel is clear, the plaintiff will usually be awarded its
value, which would be the equivalent of the expectation measure of damages in
an ordinary breach of contract case (R2nd §90)
 Specificity and PE
o the vaguer the alleged promise the less likely it is to be found to be a promise
(R2nd §33(3))
o if it is really vague, the promisee would be imprudent to rely on it
o but in this case they were dealing with a former investment banker who should
have known what Martin meant when he said what he said
o the essence of the doctrine of promissory estoppel is not that the plaintiff have
reasonably relied on the defendant’s promise, but that he have reasonably relied
on its being a promise in the sense of a legal commitment
 The problem, thus, is not that Martin’s promises were indefinite, which they were not if
GPI’s evidence is credited, but that they could not have been reasonably understood by
the persons to whom they were addressed (mainly McNamara, the financial partner in
GPI) to be promises rather than expressions of optimism and determination.
o Lol so Posner was just writing all this shit for fun

Hoffman v. Red Owl Stores, Inc., WI SC, 1965

Issue
 Pl repeatedly relied upon promises from def, ROS, to let him open a grocery store (e.g.,
sold bakery and moved from Wautoma to Chilton). ROS then increased required
payment far beyond what had orally agreed to, ending negotiations
Judgement
 Even though no breach of contract (b/c no contract formed), Pl can recover reliance
damages
 There is thus Promissory Estoppel liability/risk opportunity even before a contract is
formed
o Key: Reliance is used here not as a substitute for consideration (as in RS §90), but
to find assent (to find liability before contract)

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 o An action grounded in promissory estoppel (reliance) doesn’t have to be so
comprehensive that it would meet all the requirements of an offer than would
ripen into a contract if accepted by the promise
 Establishes WI Criteria for PE:
o (1) Was the promise one which the promisor should reasonably expect to induce
action or forbearance of a definite and substantial character on the part of the
promisee?
o (2) Did the promise induce such action or forbearance?
o (3) Can injustice be avoided only by enforcement of the promise?
o They argue it fits under #3.
 Channel Homes looks at good faith. Alternatively, Red Owl looks at reliance. Two
different theories.
 Note: you can’t give expectation damages if there’s no contract. So remedy will have
to be different.

Big Picture: Reliance versus Channel Homes idea

 §90 Reliance is for when there is a contract
 CH is before!
o you can’t give expectation damages if there’s no contract. So remedy will have to
be different.

Gruen Industries, Inc. v. Biller, 7th Cir., 1979

Issue
 Def told Pl they had firm agreement, so Pl contracted attorney to draft deal; Def then
backed out
Judgement
 No damages since many other contingencies could have thwarted deal
o No allegation that Def’s were unjustly enriched because of Pl’s reliance
 Use the same 3 criteria for PE as WI S Ct used in Hoffman v Red Owl:
o (1) Was the promise one which the promisor should reasonably expect to induce
action or forbearance of a definite and substantial character on the part of the
promisee?
o (2) Did the promise induce such action or forbearance?
o (3) Can injustice be avoided only by enforcement of the promise?
 Pl not entitled to recover under promissory estoppel
 Unlike Hoffman, not the case that injustice can be avoided only by enforcement of
Def’s promise of a firm offer.
 the conditional promise alleged is not reasonable grounds for reliance
o Had Def’s kept their alleged offer, the deal may have fallen through for any other
number of reasons, and Pl would still have lost the expenses incurred in drafting
the written agreement. It would be unjust, in fact, to place Pl in better position
than they may have been in even had def’s promise been kept because, again,
had def’s promise been kept the deal might still not have gone through.

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p. 583-617

CHAPTER 14: THE PAROL EVIDENCE RULE: TEXTUALISM V.

CONTEXTUALISM
SECTION 1: THE PAROL EVIDENCE RULE

Big Picture: PER

 Re; prior agreements (written or oral)
 If integrated agreement, discharged prior agreements
 NOT rule of evidence. It’s a substantive rule of contract law.

Key Q’s to ask on an exam:

- Is the prior agreement an IA?
- Is the writing nullifying or not? Two answers.
- Supposedly you can tell an IA from looking only at the document
o Have to be a written, final agreement. (sensible – that’s when you have leverage)

R2nd §209
 IA is designed to be final expression of 1 or more terms
 Whether it’s an Integrated agreement (IA) or not is prelim step for Parol Evidence Rule
 When an agreement is in writing that looks complete, it should be seen as IA unless
evidence otherwise
 Frug: basically it’s Williston’s view unless it’s Corbin’s view. How helpful.

Corbin’s view is more dominant and is the one in R2nd; courts may look at both

the CISG lacks a parol evidence rule and allows a court interpreting a written contract to
consider not just trade usage, course of dealing, and course of performance, but even the
parties’ prior negotiations

UNIDROIT 4.3
 broad information considered to figure out meaning of a contract
 broader than R2nd §215

UCC §2-202
Final Written Expression: Parol or Extrinsic Evidence
 Terms set forth in a writing intended by the parties to be a “final expression” of the
agreement may not be contradicted by evidence of prior or contemporaneous oral
agreement, but may be explained or supplemented by:
o Course of performance, course of dealing, or usage of trade

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 o Evidence of consistent additional terms, unless court finds that the writing was
intended to be a “complete and exclusive” statement of the terms of the
agreement
 Comment:
o Comment adopts a very liberal standard: Parol evidence not allowed only if the
additional terms “would certainly have been included in the document”
o No requirement that the court find the language of the agreement ambiguous in
order to admit evidence to explain or supplement the meaning of terms used in
the agreement
o Course of actual performance by the parties considered to be the best indication
of what they intended the writing to mean

[UCC § 2–202] reflects Corbin’s influence

R2nd §210
 A completely integrated agreement is an IA adopted by the parties as a complete and
exclusive statement of the terms of the agreement
 A partially integrated agreement is an IA other than a completely integrated agreement
 Whether or not an agreement is completely or partially integrated is to be determined
by court prior to determination of a question of interpretation or to application of PE
rule
 Comment: A writing cannot of itself prove its own completeness, and wide latitude must
be allowed for inquiry into circumstances bearing on the intention of the parties (Corbin)

R2nd §213
Effect of an integrated agreement on prior agreements (PE rule)
 A binding (partially) integrated agreement discharges inconsistent prior agreements
 A binding completely integrated agreement discharges agreements that are in its scope
 Comment:
o PE rule renders inoperative prior written as well as prior oral agreements
o PE rule is not a rule of interpretation but rather defines the subject matter of
interpretation (i.e., what will and will not be interpreted)

R2nd §214
Evidence of prior contemporaneous agreements and negotiations
 Agreements and negotiations prior to or contemporaneous with adoption of a writing
are admissible evidence to show the writing is or is not an integrated agreement or is
completely or only partially integrated

R2nd §215
Contradiction of integrated terms
 Evidence of prior or contemporaneous agreements or negotiations is not admissible to
contradict a term of a writing that is completely or partially integrated

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  Comment: Additional evidence that is not contradictory may be used for interpretation

R2nd §216
Consistent additional terms
 Evidence of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds the agreement was completely integrated
 An agreement is not completely integrated if the writing omits a consistent additional
agreed term that is either agreed to for separate consideration or in the circumstances
might naturally be omitted from the writing

Braucher, Columbia Law Review 1981

 “The difficulties arise in determining whether there is an integrated agreement,
whether, if so, it is completely or only partially integrated, and whether the prior
agreement is consistent with the integrated agreement or within its scope. Those
determinations are made in accordance with all relevant evidence, and require
interpretation both of the integrated agreement and of the prior agreement. They are
made by the court, not by the trier of fact.”

 Williston’s view: Look only at the writing (“Four corners rule”): If the writing appears to
be complete, it is deemed a total integration, representing intent of the parties.
o Simplifies role of courts
o BUT, conversation can give context to written words, and what if the written
agreement doesn’t accurately reflect the true agreement of the parties (maybe
the “real deal” is the conversation)
 Corbin’s view: Court should focus on the true intent of the parties, which can be gleaned
both from the agreement and from relevant evidence of intent outside of the writing
itself.
 Both are worried about fraud. Williston, that the parties will fraudulently claim certain
promises that were never made. Corbin, that one party will make a fraudulent oral
promise to the other to induce a written agreement

Big Picture: Application to cases

- Even Williston allows for interpretation of words. I.e, by the word flour, I meant flour
without bugs.
- Corbin just expands it to mean, if I said that I didn’t want bugs, that’s good enough

Determining whether there is an integrated agreement is to be made in accordance with all the
relevant evidence and requires interpretation of both the integrated agreement and the prior
agreement. Such determinations are to be made by the court, not jury

Mitchill v. Lath, Court of Appeals of New York, 1928.

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Issue
 Pl claimed that in agreement to buy house, Def had orally agreed to remove ugly
icehouse across the street
Judgement
 Parol evidence not admissible to determine if icehouse was part of the agreement,
because agreement to move the icehouse is something that one would expect the
parties would normally put in the contract
o Idea comes from Williston’s conception
 Three specifications for parol agreement to vary a written contract entered into at the
same time:
o The agreement must be collateral in form
o The agreement must not contradict the express / implied provisions of written
contract
o The agreement must be one that the parties would not ordinarily be expected to
put into the written agreement (i.e., it must not be so connected with the
principal transaction so as to be “part and parcel” of it)
 Third condition not satisfied. If Def did indeed make the alleged promise, it would seem
most natural for it to be included in the written contract to sell the land. The written
contract shows a complete and full agreement, one that would lead one to conclude
that the reciprocal obligations of the parties were fully detailed.
Dissent
 Looking only at the written contract not sufficient; the court must examine prior
negotiations to determine integration. Disagrees on third principle: written contract for
conveyance of land doesn’t cover a field so broad as to include prior agreements to do
other acts on other property after conveyance was made (Corbinesque)
o You can’t determine if the written agreement was a final expression until you
figure out what they intended it to cover, and the way to figure out what the
parties intended it to cover it to look to circumstances outside the written
contract

Calamari & Perillo, A Plea for a Uniform Parol Evidence Rule, Indiana L.J. 333 (1967).
 Williston suggests where the writing appears to be a complete instrument expressing
the rights and obligations of both parties, it is deemed a total integration
 Corbin more concerned about the true intention of the parties

Hatley v Stafford OR 1978

 “parties with business experience are more likely to reduce their entire agreement to
writing than parties without” but…
 “The court should presume that the writing was intended to be a complete integration,
at least when the writing is complete on its face, and should admit evidence of
consistent additional terms only if there is substantial evidence that the parties did not
intend the writing to embody the entire agreement”

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Hunt Food and Industries, Inc. v. Doliner, NY, 1966
 Pl afraid def would use purchase offer to solicit higher bids, so got option to purchase
his stock. Pl claims Def orally agreed to use option only if Def solicited outside offer.
 Pl sued to exercise the option, claiming parol evidence rule prevents recognition of the
purported oral condition
Judgement
 Oral condition not inconsistent with written agreement, so evidence of the condition
may be considered (UCC §2-202)
 “To be inconsistent the term must contradict or negative a term of the writing”
o Narrow reading of “consistent.” Court makes bar impossibility, not merely
implausibility (i.e., the claimed condition must be impossible in light of the
writing, not merely implausible)

Alaska Northern Development, Inc. v. Alyeska Pipeline Service Co.

 Criticism of Hunt Foods: correct def of inconsistency should be “the absence of
reasonable harmony in terms of the language and respective obligations of the parties.”
 the proffered parol evidence limiting the owner committee’s right of final approval to
price is inconsistent with the integrated term that unconditionally gives the committee
the right to approval

Big Picture: Contradiction in PER

- Hunt Foods says it’s inconsistent as exactly the other info
- Alaska Northern criticizes HF and says it’s not about putting in direct contradiction, but
something you wouldn’t expect in there.
o Dissent criticizes this as overly broad

Boilerplate merger clauses

 muddiness
 that’s why R2nd §216 says that the clause may sometimes be used to exclude terms but
that it doesn’t guarantee it’s an IA, scope, or interpretation.
 Not ignored but a factor that can be overcome

ARB (American Research Bureau), Inc. v. E-Systems, Inc., D.C.Cir.1980

 Tamm: Follow the integration clause as it’s textual interpretation leaves no opportunity
for other interpretation; argue that consistent with non-U.C.C. Maryland law while
otherwise ignoring UCC language, and saying that furthermore the thoroughness of
contract means it’s an exclusive statement of their intentions.

Seibel v. Layne & Bowler, Inc., Oregon Apps 1982

 Opposite of ARB. The boilerplate nature of the merger clause coupled with notion of
UCC §2-202 requirement that parties intend for the agreement to be their complete
expression means that it’s not binding.

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  “it would be unconscionable to permit an inconspicuous merger clause to exclude
evidence of an express oral warranty”

Snyder v. Lovercheck (1999):

- P buys farm which D said had rye problems on 100/1960 acres, put disclaimer clause in
contract, turns out to be extensive problem, P sues for fraud  P not precluded from
asserting fraud claim by merger/disclaimer clause, but must show fraud with clear and
convincing evidence
- Fraud vitiates all contracts – look for intentional efforts to mislead
- Here not fraud: seller owes no duty of care to buyer to ensure the accuracy of a
representation made by the seller, or to warn the buyer not to rely, when the contract
clearly and unambiguously allocates the risk in question to the buyer

Fraud would stop this also

- If intentional misrepresentation
- And fraud induced the document

UNIDROIT 2.1.17
 A contract in writing that contains a merger clause can’t be contradicted by evidence of
other agreements. But, those statements can be used to interpret the writing.

R2nd §214
Evidence of prior contemporaneous agreements and negotiations
 Agreements and negotiations prior to or contemporaneous with adoption of a writing
are admissible evidence to show the writing is or is not an integrated agreement or is
completely or only partially integrated

Sisneros v. Citadel Broadcasting Co., N.M. App. 2006

 Sisneros worked for defendant Citadel, was fired without cause.
 Contract had debate re arbitration clause. They took out of contract, but snuck in via
Employee Handbook
o “Sisneros demanded and Citadel agreed to eliminate a provision (paragraph
26(h)) requiring arbitration of disputes. Sisneros did not object to another
provision (paragraph 22) that required arbitration of disputes “in accordance
with, and to the extent provided in, the standard arbitration procedure in the
Company’s employee handbook.” The handbook included a term requiring
arbitration of all disputes between an employee and the company”
o they told him they removed it but only removed the direct clause
Judgement
 Three separate arguments to review

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 o 1. Extrinsic Evidence: Citadel says no via four corners rule. Court disagrees.
Extrinsic evidence ok to establish language in contract doesn’t rep full
agreement.
o 2. Duty to read before signing. Again, court says it isn’t absolute because
misrepresentations can make contract voidable.
 This is a question of fact for a jury
o 3. Intentional Fraud.
 recipient of a misrepresentation may void the contract regardless of
whether the misrepresentation was intentionally made to mislead.
 R2nd§164(1)
 if a misrepresentation is non-fraudulent, the recipient is entitled to void
the contract only if the misrepresentation is material. Id. cmt. c. Thus, the
question for the fact finder in the present case, assuming Citadel made a
misrepresentation, is whether the misrepresentation was material, not
whether it was intentional.”

Garden State Plaza Corp. v. S.S.Kresge, NJ, 1963

 The parol evidence rule doesn’t even come into play until it is first determined what the
true agreement of the parties is, i.e., what they meant by what they wrote down
o To interpret meaning, you have to look for context to understand the meaning of
what they meant.
o Thus, construing a contract of debatable meaning by resort to surrounding and
antecedent circumstances and negotiations for light as to the meaning of the
words used is never a violation of the parol evidence rule

11/1/18
The Interpretation of Written Contracts
Section 1. Textualism v. Contextualism
 The parol evidence rule does not preclude the use of extrinsic evidence (that is,
evidence that is outside the four corners of a written agreement) for the purpose
of interpreting a written agreement. However, classical contract law used another rule,
the plain meaning (or four corners) rule to limit the use of extrinsic evidence in
interpreting written agreements. Under this rule, extrinsic evidence cannot be
introduced to help interpret a written contract unless the contract is ambiguous on its
face.
o Some still use
o Others allow for all credible evidence
o R2nd adopts second, context/intent/everything appraoch

Williston v Corbin
 Williston: Possible to create a contract whose meaning is different from the intentions
of both parties!
 Corbin: no it shouldn’t ever be interpreted that way.

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R2nd adopts the intent approach
 R2nd §212: Interpretation of an IA must be made in light of the circumstances

Steuart v. McChesney, Supreme Court of Pennsylvania, 1982.

Issue
 S buys right of first refusal on property, with the amount S pays for property based on
what its value is according to county register of deeds.
 S attempts to exercise. House is bid by 3rd party for $35k, but register of deeds hasn’t
reassessed in a bit and the house is listed as worth only $7,820.
 M refuses; S seeks specpref for the house for $7,820
Judgement
 Goes thru plain meaning and why it is sometimes criticized
 Plain meaning as best for both:
o Role of courts
o Ascertainment of parties’ mutual interest
 They argue that the Court Common Pleas who had tried to make them pay $35k
shouldn’t have looked beyond the words as it subverts the point of contracts. There was
no ambiguity in the first place as the Right of First Refusal language was extremely clear
and clearly thought-out, given that it had a bunch of caveats written in to protect
against bad-faith offers.
Dissent
 appellant received bona fide offers of $30,000, $35,000, and $50,000 for her property.
Clearly actual value was higher than the outdated assessment on the Warren County tax
rolls.
 determination of what the proper assessed value of appellant’s property would have
been on October 25, 1977, the “date of valuation,” with directions to enter a decree of
specific performance in favor of appellees at a “market value” based upon that
determination.

Pacific Gas v. G. W. Thomas Drayage & Rigging, CA SC, 1968

Issue
 In turbine contract, Def agreed to indemnify Pl against all loss resulting from injury to
property arising out of the repairs. During work the cover fell and injured the exposed
rotor of Pl’s turbine; PL sued for repairs
 Can Def admit evidence showing that “damage to property” actually meant “damage to
3rd party property?”
Judgement
 Intent approach: Extrinsic evidence admissible “because of the imprecision of language
and because the plain meaning may not reflect the intentions of the parties”
o “Rational interpretation requires at least a preliminary consideration of all
credible evidence offered to prove the intention of the parties”

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  The test of admissibility of extrinsic evidence to explain the meaning of a written
instrument is not whether it appears to the court to be “plain and unambiguous” on its
face, but whether the offered evidence is relevant to prove a meaning to which the
language of the instrument is “reasonably susceptible”
 The trend is for juries, not judges, to look at extrinsic evidence to interpret an
agreement

Berg v. Hudesman, WA 1990 (en banc)

 Criticizes plain meaning, adopts context rule
 Adopts R2nd §212 and §214c
 Context: extrinsic evidence cannot change the plain meaning of a writing, but meaning
can almost never be plain except in a context
 general tenor of speech used in negotiations are admissible to show the conditions
existing when the writing was made

Section 2. The Role Of Usage, Course Of Dealing, And Course Of

Performance In Interpretation

Foxco Industries, Ltd. v. Fabric World, Inc., United States Court of Appeals, Fifth Circuit, 1979.
Issue
 DE nat’l supplier, Fox sold a bunch of fabric to AL company, FW. After years of selling,
yarn price drops, FW tries to not accept order by using terms in contract of “first
quality” by threatening not to accept entire order if even one flaw is found. Suit
Judgement
 Trade usage: Fox uses Knitted Textile Association, a large textile industry group, to show
it means top quality but can have ocassional flaws
 FW says its not a member so not admissible
o Ie, Parol Evidence Rule
 But UCC §2-202 explicitly provides that trade usages may help explain or supplement
contract terms

R2nd §222
Usage of trade
 A usage of trade is a usage have such regularity of observance in a place, vocation, or
trade as to justify an expectation that it will be observed with respect to a particular
agreement
 Unless otherwise agreed, a usage of trade in the trade in which the parties are engaged
or one which they know or have reason to know gives meaning to the parties’
agreement
 Comment:
o It is not required that a usage of trade be consistent with the meaning the
agreement would have apart from the usage

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 o When the usage consists of a system of rules, it’s not necessary that parties be
aware of a particular rule, so long as they have reason to know (1) the system
and (2) the particular rule is within the scheme of the system

Hurst v. W.J. Lake & Co, OR 1932

Issue
 Agree in contract to buy horse meat that minimum of 50% protein or they get discount.
They tried to take discount on 170 tons, but only 30 were below 49.5%.
Judgement
 Trade usage evidence that 49.5=50. Reversed

UCC §§ 1–201(3), (12), 1–303, 2–208

UCC §1-201(3): “Agreement means the bargain of the parties in fact as found in their language
or by implication from other circumstances including the course of dealing or usage of trade or
course of performance.”

UCC §1-303
Order of Power Assigned by Code
1. Express contract (writing)
2. Course of performance (those parties, this contract)
3. Course of dealing (other parties, other contracts)
4. Usage of trade (what trade says terms mean)
 [Cases don’t always follow: see Nanakuli]

Big Picture: Hierarchy of Trade Usage

 Best: Course of Dealing (how these parties have worked together on this contract)
 2nd: Course of Performance (how these parties have worked together generally)
 3rd: Course of Trade (how this trade interprets words)

Llewellyn: real people are the deal, and the contract document is a threat to it!

UCC §2-208
Course of performance
 Where the contract for sale involves repeated occasions for performance by either party
with knowledge of the nature of performance and opportunity for objection to it by the
other, any course of performance accepted or acquiesced in without objection shall be
relevant to determine the meaning of the agreement

R2nd §219
 Usage is habitual or customary practice

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R2nd §220
Usage relevant to interpretation
 An agreement is interpreted in accordance with a relevant usage if (1) each party knew
or had reason to know of the usage and (2) neither party knew or had reason to know
that the meaning attached by the other was inconsistent with the usage
o Interpretation is limited to meanings intended by at least one party. Neither
party is bound by a meaning unless he knows or has reason to know of it

R2nd §221
Course of performance
 An agreement is supplemented or qualified by a reasonable usage with respect to
agreements of same type if parties know or have reason to know of usage and neither
knows or has reason to know that other party has an intention inconsistent with the
usage

R2nd §222
Usage of trade
 A usage of trade is a usage have such regularity of observance in a place, vocation, or
trade as to justify an expectation that it will be observed with respect to a particular
agreement
o Unless otherwise agreed, a usage of trade in the trade in which the parties are
engaged or one which they know or have reason to know gives meaning to the
parties’ agreement
 Comment:
o It is not required that a usage of trade be consistent with the meaning the
agreement would have apart from the usage
o When the usage consists of a system of rules, it’s not necessary that parties be
aware of a particular rule, so long as they have reason to know (1) the system
and (2) the particular rule is within the scheme of the system

R2nd §223
Course of dealing
 A course of dealing is a sequence of previous conduct between the parties to an
agreement which is fairly to be regarded as establishing a common basis of
understanding for interpreting their expressions and other conduct
o Unless otherwise agreed, a course of dealing between the parties gives meaning
to or supplements or qualifies their agreement

UNIDROIT Art 1.9

 Parties are bound to any usage to which they have agreed and by any practices they’ve
established b/t themselves

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  Bound to usage widely known and regularly observed in int’l trade except when
unreasonable

Nanakuli Paving and Rock Co. v. Shell Oil Co., US Court of Appeals, Ninth Circuit, 1981.
Issue
 Shell, a relatively small player in the HI asphalt market, had contract to supply it to N.
 It was standard practice at the time to price protect buyers because all of the asphalt
was used for govt contracts and the government refused to honor price changes.
 Question is on price protection – is that part of the contract?
Judgement
 Shell’s acts on two occasions to price protect Nanakuli were not ambiguous and
therefore indicated Shell’s understanding of the terms of the agreement with Nanakuli
rather than being a waiver by Shell
 Accept express price terms
o UCC emphasizes commercial context
o Other court decisions
o Commentators allow for flexibility in definition of express terms
 Evidence of price protection
o Chevron, the big player always did it
o Nanakuli had language that they wouldn’t be charged more than other
customers
o Shell testified itself that it did this twice for N: “apparently offered this to
impress the jury with its good faith. In fact, it also may have reinforced the
impression of the universality of price protection”
 Waiver or Course of Performance: did Shell’s past price protect mean that’s how they
interpreted the contract?
o §2-208 Comment 4 vs. Comment 3.
o Court finds that performance is best way to interpret understanding, with waiver
only in the case of ambiguity.
 Contract is more than what’s written via UCC view
o Ambiguity was not necessary for the admission of evidence of usage and prior
dealings in another case, Columbia Nitrogen v Royster.
 “reinstate the jury verdict because we find that, viewing the evidence as a whole, there
was substantial evidence to support a finding by reasonable jurors that Shell breached
its contract by failing to provide protection”
 Key: Flips other findings: here, trade usage > express terms
 ALTERNATIVELY: The parties had a good faith obligation
Concurrence
 Key to ensure the parties knew or should have known of the trade practice at time of
making contract.

N.B.: Trade usage obliterates literalism; if 1,000 is one wall in the trade, we follow that, not the
literal meaning of the words. In line with Corbin’s idea of intent of the parties

110
p.668-676, 686
Section _: Waiver

Difference b/t waiver and condition:

- Waiver can be taken back if there’s no reliance on it
- Can’t take back a modification
- Waivers are of conditions; modifications are of promises
o Conditions are easier to get rid of, not material
o Ex: contract is really about building a house, not the architect who approves

No Oral Modifications
- Not a PER thing
- Clause that things cannot be modified except in writing
- Another way to see this is unjust enrichment: to ∆ something orally later would still
sometimes be enforced if unjust enrichment

Waiver
Clark v. West, Court of Appeals of New York, 1908.
Issue
 Book to write a book on contracts
 “Full performance of the agreement on plaintiff’s part is alleged, except that he “did not
totally abstain from the use of intoxicating liquor during the continuance of said
contract”
Judgement
 They decide a fair reading of the clause on alcohol is not that he was to write in order to
keep sober but that he was to keep sober to write well. Thus, they argue it isn’t the
material element of the contract. And from that, they are willing to entertain the def’s
idea of an “express waiver”
o “The defendant has had the work he bargained for, and it is alleged that he has
waived one of the conditions as to the manner in which it was to have been
done. He might have insisted upon literal performance, and then he could have
stood upon the letter of his contract. If, however, he has waived that incidental
condition, he has created a situation to which the doctrine of waiver very
precisely applies.”
o Essentially, if at time of breach they had insisted on condition might have been
upheld, but at this point they’ve waived their concern on that
 Distinction between waiver and estoppel
o A ‘waiver’ is the voluntary abandonment or relinquishment by a party of some
right or advantage

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 o The doctrine of equitable estoppel, or estoppel in pais, is that a party may be
precluded by his acts and conduct from asserting a right to the detriment of
another party who, entitled to rely on such conduct, has acted upon it.
 NOT modification, but waiver

R2nd §84
Promise to perform a duty in spite of non-occurrence of a condition
 A promise to perform a conditional duty under an antecedent contract in spite of the
non-occurrence of the condition is binding, unless the condition was a material part of
the agreed exchange for the performance of the duty and the promisee was under no
duty that it occur. But the promise can be revoked if done so in a reasonable time and
not unjust because of reliance of the other party
 Illustrations:
o (3) A employs B to build a house, promising to pay therefor $10,000 on the
production of a certificate from A’s architect, C, stating that the work has been
satisfactorily completed. B builds the house but the work is defective in certain
trivial particulars. C refuses to give B a certificate. A says to B, “My architect
rightfully refuses to give you a certificate but the defects are not serious; I will
pay you the full price which I promised.” A is bound to do so, and has no power
to restore the requirement of the condition.

Westinghouse Credit Corp. v. Shelton, 1981

Issue
 after routinely accepting late payments for a mobile home, creditor suddenly declared
default and moved for replevin
Judgement
 question is about the “anti-waiver clause in contract. Courts routinely rule for debtor
without, and are mixed with one in
 short answer in OK is an “anti-waiver” clause, like any other term in the contract, is itself
subject to waiver or modification by course of performance and that whether such
waiver or modification has occurred is a question for the factfinder
 “In Shelton’s case the question is whether Westinghouse, by accepting late payments as
it did, waived its right to strictly enforce not only the contract’s time terms, but also the
“anti-waiver” clause itself.

UCC §1-306
 A claim or right arising out of an alleged breach may be discharged in whole/part
without consideration by agreement of aggrieved party in authenticated record

UCC §2-209
1. An agreement ∆ contract within this article doesn’t need consideration

112
 2. A signed agreement which excludes modification or rescission except by signed writing
cannot be otherwise ∆ or rescinded, but except as when one merchant has a form that
must be separately signed by the other party
3. Req’s of Statute of Frauds must be satisfied after the ∆
4. Although an attempt at ∆ or rescission doesn’t satisfy req’s of (2) or (3), it can act as a
waiver
5. A party who has made a waiver affecting an executory part of a contract may retract the
waiver by reasonable notification of the other party that strict performance will be
required, unless retraction would be unjust due to ∆ in position in reliance on waiver.

Modification are two different things w/ same outcome but structured/ruled on differently.

UNDROIT 2.1.18
 A contract in writing which contains a clause req’ing any ∆ or termination by agreement
to be in a particular form may not be otherwise modified or terminated. However, a
party may be precluded by its conduct from asserting such a clause to the extent that
the other party has reasonably acted in reliance on that conduct.

FEG p. 717-719, 731-741, 747-772

Chapter 16. Interpretation and Unconscionability in a

Form- Contract Setting
Llewellyn, The Common Law Tradition: Deciding Appeals
 Forms make things cheaper/easier, but also make corps powerful.
 Why, then, can we not face the fact where boiler-plate is present? There has been an
arm’s length deal, with dickered terms. 
o any contract with boiler-plate results in two several contracts:
 the dickered deal,
 the collateral one of supplementary boiler-plate
 this one does not alter or impair the fair meaning of the dickered
terms when read alone,
 and its terms are not unreasonable and unfair

ProCD, Inc. v. Zeidenberg, 86 F.3d 1447 (7th Cir.1996)

Issue
 Def bought data of phone numbers and resold over internet, against terms. Claimed
because he didn’t get terms until he got software, invalid.
Judgement
 Easterbook: Zeidenberg has not located any Wisconsin case—for that matter, any case
in any state—holding that under the UCC the ordinary terms found in shrink-wrap
licenses require any special prominence, or otherwise are to be undercut rather than

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 enforced. In the end, the terms of the license are conceptually identical to the contents
of the package
 Economic arg that ProCD rivals may offer better licences at better prices, and those are
the choices Z has. So fucking flawed of an argument.

Hancock v. American Telephone & Telegraph, Inc., Tenth Cir Ct Apps, 2012.
Issue
 Pls bring suit against AT&T and challenge forum selection and arbitration clauses – claim
the didn’t knowingly accept the two terms
 They bring suit in OK and FL, but forum select for TV has Bexar County, TX and for
internet has arbitration clause
Judgement
 Go thru process
o TV: customer must click an “I Acknowledge” button below this statement to
accept the TV/Voice terms before technician will install it
o Internet: required to complete an online registration process to activate the
service
 For folks who already had it, email: ““[b]y continuing to use the Service,
[customers] signify [their] continued agreement”
 Clickwrap agreements
o Clickwrap agreements are increasingly common and “have routinely been
upheld.”
o Defendants’ clickwrap agreements do not conceal the U-verse terms of service.
o You have to click the “I Acknowledge” button
 Pls argue that cancellation after 3 days unreasonable
o Court rejects. This is a refund provision, not an imposed penalty.
 We conclude that Defendants’ standard practice gives U-verse customers sufficient
notice of the TV/Voice and Internet terms of service, as well as an adequate opportunity
to manifest assent to the terms. 

UCC §1-201(10)
Conspicuous Definition
 Whether or not something is conspicuous is a decision for a court. Conspicuous terms
include:
o A heading in capitals
o Language in larger type

UCC §2-302
Unconscionable Contract or Clause
 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 the other options listed in R2nd §208)
 Parties can present evidence about commercial setting, purpose and effect

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 o Time and place where contract made are important

UCC §2-314
Implied Warranty: Merchantability; Usage of Trade.
1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be
merchantable is implied in a contract for their sale if the seller is a merchant (§2-104) with
respect to goods of that kind.
2) Goods to be merchantable must be at least such as
a) pass without objection in the trade under the contract description; and
b) in the case of fungible goods, are of fair average quality within the description; and
c) are fit for the ordinary purposes for which such goods are used; and
d) run, within the variations permitted by the agreement, of even kind, quality and
quantity within each unit and among all units involved; and
e) are adequately contained, packaged, and labeled as the agreement may require; and
f) conform to the promises or affirmations of fact made on the container or label if any.
3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course
of dealing or usage of trade.
 Every contract has an implied warranty that the goods are merchantable—fit for the
ordinary purposes for which they are used.
 this is the opposite doctrine of caveat emptor.
 seller warrants that the goods sold are fit for ordinary use, or special purposes if the buyer
informs him of those purposes.

UCC §2-316
Exclusion of Modification of Warranties
 words or conduct relevant to creation or to limiting the warranty will be construed
where possible as consistent, but subject to PER of UCC
o negation inoperative if unreasonable
 subject to (3), to exclude or modify warranty must be conspicuous
 (3): notwithstanding (2)…
o all express warranties excluded by expressions such as “as is” or “with all faults”
o when examined or examination refused by buyer, no implied warranty of defects
that would have been noticed
o implied warranty can be excluded/modified by course of
dealing/performance/trade
 remedies can be limited as ok under UCC
 Frug: okay, so you have to make it conspicuous. This is about assent. But this is so easy
to do!
 Frug: this book rests o “knowledgeable people, informed, will act in their interest.”

UCC §2-719(2) & UCC §2-719(3)

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  (2) When circumstances cause an exclusive or limited remedy to fail of its essential
purpose, remedy may be had of this act.
 (3) Consequential damages may be limited/excluded unless limit is unconscionable.
o Limitation where there is injury is prima facie unconscionable, but commercial
loss isn’t.

 Frug: One way around warranties is a warranty-ridding clause. And those UCC sections are
written as a manual for the contract form writer.

Moscatiello v. Pittsburgh Contractors Equipment Co., Superior Court of Pennsylvania, 1991.

Issue
 limited warranty info in small print on back side of contract, when paver did not lay
pavement properly tried to fix and return but was rebuffed, led to increased labor costs for
Pls,
Judgement
 court invalidated clause b/c implied warrant of merchantability.
o “paver should act like a paver”
 §2-316 says to disclaim “no warranty beyond what is described here”
 So why does Moscatiello come out this way?
o They find that the buyers were not sophisticated in this area and despite numerous
conversations with the sellers, who knew their intentions and the contract clasues,
the sellers never drew their attention to the extraordinarily inconspicuous
paragraphs with no warranty
o And that they should not have expected that if the paver failed to perform as
promised, they, rather than the seller, would be responsible for the economic losses
which resulted.

Pierce v. Catalina Yachts, Alaska 2000

Issue
 Boat bought with limited warranty has water blisters. Catalina refused to honor the
limited warranty
Judgement
 Typically, a limited repair/replacement remedy fails of its essential purpose where (1)
the seller is unsuccessful in repairing or replacing the defective part, regardless of good
or bad faith; or (2) there is unreasonable delay in repairing or replacing defective
components.
 “[W]hen a warranty fails, a separate provision barring consequential damages will
survive under subsection 719(c) as long as the bar itself is not unconscionable.
 Trial court found that they acted in bad faith in failing to honor warranty. Thus, limited
remedy failed its essential purpose. So, it was unconscionable

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Section 3. The Reasonable Expectations Doctrine

R2nd §211
Standardized Agreements
1) Except as stated in Subsection (3), where a party to an agreement signs or otherwise
manifests assent to a writing and has reason to believe that like writings are regularly
used to embody terms of agreements of the same type, he adopts the writing as an
integrated agreement with respect to the terms included in the writing.
2) Such a writing is interpreted wherever reasonable as treating alike all those similarly
situated, without regard to their knowledge or understanding of the standard terms of
the writing.
3) Where the other party has reason to believe that the party manifesting such assent
would not do so if he knew that the writing contained a particular term, the term is
not part of the agreement.
 American law still gives a great deal of deference to the writing
 Terms in the writing control unless drafting party knows that other party would not
assent if he knew about them.

Comment: Customers do not in fact ordinarily understand or even read the standard terms.
They trust to the good faith of the other party using the form and to the tacit representation
that like terms are being accepted regularly by others similarly situated. But they understand
that they are assenting to the terms not read or not understood.
 Generally, does not matter if the party actually read the terms. Question is whether the
terms are objectively reasonable and consistent with the parties’ agreement.

UNIDROIT 2.1.19, 2.1.22

Darner Motor Sales v. Universal Underwriters, Supreme Court of Arizona, En Banc, 1984.
Issue
 Car rental/dealership renews policy and it gives them less coverage. They speak to
insurance policy exec, and he assures them that it does have coverage.
Judgement
 Goes thru Corbin and Llewellyn:
 Thus, Llewellyn concludes, “any contract with boiler-plate results in two several
contracts: the dickered deal and the collateral one of supplementary boiler-
plate.”
 Adopt R2nd §211:
 Missing has been the articulation or formulation of some general rule to explain
results of many past cases and to provide a pragmatic, honest approach to the
resolution of future disputes. Hopefully, the adoption of § 211 of the
Restatement as the rule for standardized contracts will provide greater
predictability and uniformity of results—a benefit to both the insurance industry
and the consumer
 Justifies the rule

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  The rule which we adopt today for interpretation of standardized contracts
recognizes modern commercial practice by business entities which use
automated equipment to effect a large volume of transactions through use of
standardized forms
  the rule stops short of granting the drafter of the contract license to accomplish
any result. It holds the drafter to good faith
 reverse the trial court’s summary judgment as to the counts of equitable estoppel,
reformation of the contract, negligent misrepresentation and fraud
 Corbin-esque view of PER

Gordinier v. Aetna Casualty & Surety Co., 154 Ariz. 266, 742 P.2d 277 (1987)
The Arizona Court here elaborated on Darner as follows: “ . . . As a synthesis of the cases and
authorities demonstrates, Arizona courts will not enforce even unambiguous boilerplate terms
in standardized insurance contracts in a limited variety of situations:
1) Where the contract terms, although not ambiguous to the court, cannot be understood
by the reasonably intelligent consumer who might check on his or her rights, the court
will interpret them in light of the objective, reasonable expectations of the average
insured (see . . .  Wainscott v. Ossenkop, 633 P.2d 237 (Alaska 1981) (application of
“resident of same household” definition, while not technically ambiguous, defeats
reasonable expectations of spouse));
2) Where the insured did not receive full and adequate notice of the term in question, and
the provision is either unusual or unexpected, or one that emasculates apparent
coverage . . . ;
3) Where some activity which can be reasonably attributed to the insurer would create an
objective impression of coverage in the mind of a reasonable insured . . . ;
4) Where some activity reasonably attributable to the insurer has induced a particular
insured reasonably to believe that he has coverage, although such coverage is expressly
and unambiguously denied by the policy. . . .

Note: Frug goes back to (pg. 436) Morales case

- Spanish-speaking man needs translator to explain contract, and is not told about
arbitration clause
- Why is there a rage in the United States now to put arbitration clauses in their
contracts?
o These companies clearly think this will benefit them—so would we not accept
this clause if we were able to negotiate?
o Their experience with arbitration has been more favorable than their experience
with juries
- Why are we allowing these terms to become ‘standard’ terms if they’re not
OK/reasonable/fair?
- You think the other party is within reasonable bounds, or at least court would enforce it
as such
o Writing v. intention

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 - Is conspicuousness even helpful when you can’t negotiate and you need/want the
deal/product (ex: iPhone)?
- What about hospital forms?
o Is there a reasonable middle ground in between no liability and chilling doctors?
And who is writing this? Courts? (§2-719(3))

11/8/18 FEG p. 774-786, 791-792, 802- 804, 806-833

Anderson v. Douglas & Lomason Company, Supreme Court of Iowa, 1995.

Issue
 Worker fired against policies distributed in handbook after he started. Is the handbook a
contract?
Judgement
 Many reasons point to yes but they have a disclaimer, so no.
 Looks at Employment at Will Doctrine
o Reflecting the perceived need to protect employees from the harshness of the
at-will doctrine, courts began to erode the doctrine with exceptions
 (1) discharges in violation of public policy,
 (2) discharges in violation of employee handbooks constituting a
unilateral contract, and
 (3) discharges in violation of a covenant of good faith and fair dealing.
 Previously: offeree’s performance “must have been induced by the promise made.”
o we decline to follow the traditional requirement that knowledge of the offer is a
prerequisite to acceptance in the limited context of employee handbook cases.
 the contract is not an individually negotiated agreement; it is a standardized agreement
between the employer and a class of employees
o Therefore, we hold it unnecessary that the particular employee seeking to
enforce a promise made in an employee manual have knowledge of the promise
 But even if they didn’t read it there must be a real offer:
o if an offer is indefinite there is no intent to be bound
 Disclaimer
o we have never considered whether a disclaimer in an employee handbook must
be clear and conspicuous
o we reject any special requirements for disclaimers; we simply examine the
language and context of the disclaimer to decide whether a reasonable
employee, reading the disclaimer, would understand it to mean that the
employer has not assented to be bound by the handbook’s provisions
o think a reasonable person reading the handbook could not believe that DLC has
assented to be bound to the provisions contained in the manual
 Thus, we hold DLC’s handbook is not sufficiently definite to constitute a valid offer.

In Class Discussion: Review of this case

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This case walks thru a bunch of elements of contract law and puts aside many issues. Nice
review for a potential exam Q.
 Can’t accept contract if you didn’t know offer
o Is it like a reward offer? Handbooks unrelated…
o Court rejects good faith here
 Not assent issue
 Not too vague
 Not doctrine of at-will anymore
 But there’s a sentence, and therefore, he loses
o What else could they have said?
 Not conspicuous enough?
 Interpretation: let them modify it. They’re just saying they can change
their minds at any time.

PART 5. MISTAKE AND UNEXPECTED CIRCUMSTANCES

Chapter 17. Mistake

Section 1: Mechanical Errors / “Unilateral Mistakes”
Definition: these are basically “physical or intellectual blunders that result from transient errors
in the mechanics of an actor’s internal machinery—may be thought of as mechanical errors.”
 Typos, etc.

Frug: reformation is a powerful idea. It is also a remedy.

Donovan v. RRL Corp., Cal 2001

Issue
 Ad copy issue leads to car worth $36k advertised for $25,995.
Judgement
 R1st endorsed idea that “unilateral mistake did not render a contract voidable unless
the other party knew of or caused the mistake” such that “price quotation erroneously
transcribed … could bind the seller to the incorrect price, unless the buyer knew or had
reason to suspect that a mistake had been made”
 New, “only where the mistake results from “a failure to act in good faith and in
accordance with reasonable standards of fair dealing” is rescission unavailable:
 No evidence presented at trial suggested that defendant knew of the mistake before
plaintiff attempted to purchase the automobile, that defendant intended to mislead
customers, or that it had adopted a practice of deliberate indifference regarding errors
in advertisements
 Reasonable for court to allocate risk to Def, and allow recission.
 Dealership not required to sell car at the advertised price because an error of price
constitutes a mistake regarding a basic assumption upon which the contract was made,
and the dealer’s mistake in this case made the contract far less desirable to him and far
more desirable to π.

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  Imposing liability on ∆ for ∆’s failure to proofread the advertising proof would amount
to strict liability for any typo in the price of an advertised car

The Nolan Ryan Baseball Card Case

Issue
 Kid asks new sales rep if card worth $1200 is $12, she sells it to him
Judgement
 Was settled, but likely shouldn’t have been settled
 Did kid actively mislead sales rep?
o If so, def doesn’t get it
 If not, he likely still would have known it was worth more since he owned 40,000
baseball cards
o Then wouldn’t get it via Donovan case

R2nd §153
When Mistake of One Party Makes a Contract Voidable
 Where mistake of one party as to a basic assumption of the contract has a material
effect on the exchange of performances that is adverse to him, the contract is voidable
if he does not bear the risk of mistake (§154) and effect of mistake would render
enforcement unconscionable or other party had reason to know.

R2nd §154
When a Party Bears the Risk of a Mistake
 A party bears the risk of a mistake when…
A. the risk is allocated to him by agreement of the parties, or
B. he is aware, at the time the contract is made, that he has only limited knowledge
with respect to the facts to which the mistake relates but treats his limited
knowledge as sufficient, or
C. the risk is allocated to him by the court on the ground that it is reasonable in the
circumstances to do so.
 Frug: isn’t operating on limited knowledge life itself?

Section 2: Mistakes in Transcription; Reformation

Travelers Ins. Co. v. Bailey, Supreme Court of Vermont, 1964.

Issue
 T mistakenly wrote insurance policy granting B much more than had actually bargained
for– $500/month instead of $500 annually. Neither party discovered the mistake for
over thirty years; then T sued to reform contract
Judgement

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  difference between a subsequent erroneous transcription of a contract already agreed
to by the parties, and a mistake or misunderstanding [which] occurs while the parties
are negotiating.
 Mutuality irrelevant in this case: where there has been established beyond a reasonable
doubt a specific contractual agreement between parties, and a subsequent erroneous
rendition of the terms of the agreement in a material particular, the party penalized by
the error is entitled to reformation, if there has been no prejudicial change of position
by the other party while ignorant of the mistake
 Can’t do reliance since he didn’t have the policy for many years.

R2nd §155
When Mistake of Both Parties as to Written Expression Justifies Reformation
 Where a writing embodying an agreement fails to express the agreement because of a
mistake of both parties as to the contents or effect of the writing, the court may at the
request of a party reform the writing to express the agreement, except to the extent
that rights of the parties such as good faith purchasers for value will be unfairly affected.

Chimart Associates v Paul, NY 1986

 Because this argues that the writing is wrong, generally not applying PER or Statute of
Frauds.
 But this is the exact danger the PER was concerned about – that someone would say
“that’s not what we agreed to!” and render the text moot.
 Substantively: reformation based upon mistake is not available where the parties
purposely contract based upon uncertain or contingent events
 Procedurally: So, there’s a heavy presumption that a deliberately prepared contract
does include their true intention.

Section 3: Mutual Mistakes (Shared Mistaken Assumptions)

 that a mistake is shared is relevant but it is not critical. What is critical is the character of
the shared mistake. That character is captured in the term shared mistaken factual
assumptions.
o Tacit=taken for granted
 Contracts never include every contingency!

Sherwood v. Walker, Supreme Court of Michigan, 1887.

Issue
 Pl bought what they all thought to be a barren cow at low price for meat, before
delivery the cow got pregnant and Defs tried not to sell her.
Judgement
 Is this substantive to the bargain?
o if the thing actually delivered or received is different in substance from the thing
bargained for, and intended to be sold,—then there is no contract; but if it be
only a difference in some quality or accident, even though the mistake may have

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 been the actuating motive to the purchaser or seller, or both of them, yet the
contract remains binding
o if it had been to quality of the cow, would NOT have been valid.
 Because they say it goes to substance of agreement, ok to rescind.
Dissent
 Nothing in the contract said it could be rescinded this way. Buyer took a risk and should
be rewarded for this. This is about quality of animal.

Nester v. MI Land and Iron Co, MI S Ct 1888

 Similar case – essentially says Sherwood is bad law.

Griffith v. Brymer, England, 1903.

Issue
 Renter agreed to rent room for king’s procession, both of them not knowing it was
already cancelled
Judgement
 Court ruled contract void
 a missupposition of the state of facts which went to the whole root of the matter”
 Court allocated the risk to the seller
 This is in mutual mistake b/c the parade was cancelled an hour earlier

Wood v. Boynton, WI S Ct 1885

Issue
 Person finds stone and sells for $1 since she needs the $ to a jeweler, neither of them
(supposedly) know what it’s worth. Turns out to be expensive diamond.
Judgement
 No recission. Material fact wrong, but they both could have checked.
 claiming that although both sides were ignorant, seller was responsible for failing to
further investigate the value
 Seller “cannot repudiate sale when it turns out that she made bad bargain;” (risk
allocated to seller)

Big Picture: What’s the difference b/t Sherwood and Boynton?

Four Boxes: Diff + Right / Same + Right vs Diff/Mixed/distinguished
 In Sherwood, mutual mistake t they could walk away
 In Boynton, unilateral mistake + they couldn't
 My answer (unclear what was the correct answer in class): diff and both wrong. It’s
about sophisticated knowledge or “should have known”

Firestone & Parson, Inc. v. Union League of Philadelphia, ED PA 1987

Issue
 Painting thought to be Bierstadt, bought in 1981 for $500k. Subsequently found to be
fake and only worth $50k. Recission possible?

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Judgement
 No: “in the arcane world of high-priced art, market value is affected by market
perceptions; the market value of a painting is determined by the prevailing views of the
marketplace concerning its attribution. Post-sale fluctuations in generally accepted
attributions do not necessarily establish that there was a mutual mistake of fact at the
time of the sale”
 Risk to buyer
 Question goes to what is a “material” mistake (§152) – similar to Wood, not Sherwood

Everett v. Estate of Sumstad, WA 1981

Issue
 Estate sale. Bought locked lockbox with no key. Then locksmith found $32,207 inside,
and a controversy arose whether the Mitchells were entitled to the money
Judgement
 . . .Under these circumstances, we hold reasonable persons would conclude that the
auctioneer manifested an objective intent to sell the safe and its contents and that the
parties mutually assented to enter into that sale of the safe and the contents of the
locked compartment.
 Risk to seller – intent was to sell with contents.

R2nd §151
 Mistake is a belief not in accord with the facts.

R2nd §152
When Mistake of both Parties makes a Contract Voidable
 “Where a mistake of both parties at time contract made as to basic assumption on
which contract made has material effect on agreed exchange of performances, contract
is voidable by adversely affected party unless he bears risk of mistake under rule in 154”
 “In determining whether mistake has material effect, account is taken of any relief by
way of reformation, restitution, or otherwise”

Lenawee County Board of Health v. Messerly, Supreme Court of Michigan, 1982.

Issue
 Pls bought land from Defs that had faulty sewage system installed without permit. Can
they rescind sale?
 Included in contract clause was that they agree to land in present condition.
Judgement
 Look at §151, and say it can’t be prospective, has to just be an error (ie, can’t be
something they just don’t anticipate)
o But they check, and “examination of the record reveals that the septic system
was defective prior to the date on which the land contract was executed.”
 Reject rule of whether it goes to the substance of the agreement or not – this is an edge
case in some ways but it clearly affected it a great deal!

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 o “We find that the inexact and confusing distinction between contractual
mistakes running to value and those touching the substance of the consideration
serves only as an impediment to a clear and helpful analysis for the equitable
resolution of cases in which mistake is alleged and proven.”
o Instead, “case-by-case analysis whereby rescission is indicated when the
mistaken belief relates to a basic assumption of the parties”
 Rescission is an equitable remedy which is granted only in the sound discretion of the
court
o the risk should be allocated to the purchasers
o §154(a) suggests that the court should look first to whether the parties have
agreed to the allocation of the risk between themselves
 and there is an “as-is” clause
o so, no they can’t rescind!
 Risk allocated to buyer due to phrase “as-is”

Big Picture: §153 Unilateral Mistake and Reason to know.

Two doctrines side by side: fraud and unilateral mistake
 if you had a reason to know the other person is making the mistake, you have duty to
correct them
 More "reason to know," not actually know
 how far down this road should we go?
o to what extent do you have to tell other person what's
o Do we want people to be wary or trusting?
o Obligation to tell?
o buyer/ seller distinction? No
 Frug: policy question. Should there be a duty to disclose?

Beachcomber Coins, Inc. v. Boskett, NJ 1979

Issue
 Pl bought counterfeit coin from Def. Both thought it was legit at the time.
Judgement
 Mistake was mutual
 Because they didn’t consider accuracy of the coin when allocating risk, risk to seller,
because they then didn’t include the coin’s sureness of authenticity when calculating
the cost.
o A different case would be presented if the seller were uncertain either of the
genuineness of the coin or of its value [if] genuine, and had accepted the expert
buyer’s judgment on these matters.”

UCC §2–312
1) Subject to section (2) there is in a contract for sale a warranty by the seller that…

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 a. The title shall be good and transfer right
b. Goods delivered free from lien which buyer has no knowledge of
2) Section (1) will only be excluded or ∆ by specific circumstances which give the buyer
reason to know that the person selling does not claim title in herself or is only
purporting to sell as he has.
3) A common merchant seller must sell things without any claims on them, but if there are
claims no one knows about, the buyer can’t hold seller responsible for them.

UCC §2–313
Express Warranties by Affirmation, Promise, Description, Sample
 Express warranties by the seller are created as follows:
o Any affirmation of fact or promise made by seller to buyer that relates to the
goods and becomes part of basis of bargain creates an express warranty that
good shall conform to the affirmation or promise
o Any description of good that is made part of basis of bargain creates an express
warranty that goods shall conform to the description
o Any sample or model that is made part of basis of bargain creates an express
warranty that whole of the goods shall conform to the sample or model
 It is not necessary to the creation of an express warranty that the seller use formal
words such as “warrant” or “guarantee” or that he have a specific intention to make a
warranty, but an affirmation merely of the value of goods or a statement purporting to
be merely the seller’s opinion or commendation of the goods does not create a
warranty
 Comment: The principles behind this rule need not be confined to sales contracts

UCC §2–314
Implied Warranty: Merchantability; Usage of Trade
 Unless excluded or modified (UCC §2-216), a warranty that the goods shall be
merchantable is implied in a contract for their sale if seller is a merchant with respect to
goods of that kind
 To be merchantable, goods must be at least such as
o (a) Pass without objection in the trade under the contract description, and
o (b) In the case of fungible goods, are of average quality within the description,
and
o (c) Are fit for the ordinary purposes for which such goods are used, and
o (d) Run, within the variations permitted by the agreement, of even kind, quality,
and quantity within each unit and among all units involved, and
o (e) Are adequately contained, packaged, and labeled as the agreement may
require, and
o (f) Conform to the promise or affirmations of fact made on the container or label
if any
 Unless excluded or modified (UCC §2-216), other implied warranties may arise from
course of dealing of usage of trade

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  Comment:
o A person making an isolated sale of goods is not a “merchant” within the
meaning of this §, and thus no warranty of merchantability would apply
o Sales of second-hand goods involves only such obligations as is appropriate to
such goods for that is their contract description (if second-hand goods are
“guaranteed” to be in a certain condition, though, that changes things)

UCC §2–315
Implied Warranty: Fitness for Particular Purpose)
 Where seller at time of contracting has reason to know any particular purpose for which
goods are required and that buyer is relying on seller’s skill or judgment to select or
furnish suitable goods, there is unless excluded or modified under the next section (UCC
§2-316) an implied warranty that good shall be fit for such purpose
 Comment:
o Buyer’s reliance on seller is a requirement here
o A “particular purpose” is one peculiar to the nature of the buyer’s interest in
buying the goods, whereas an “ordinary use” is one customarily made of the
goods in question (and goes instead to the implied warranty of merchantability)

p. 842-849, 851-875, 883-891

Section 4. Nondisclosure

Hill v Jones, AZ Apps 1986

Issue
 Must home seller disclose facts pertaining to past termite infestation?
Judgement
 during their numerous visits to the residence before close of escrow, buyers had
unrestricted access to view and inspect the entire house
 Duty to Disclose?
o R2nd §161. Disclose necessary when:
 1.Disclosure is necessary to prevent a previous assertion from being a
misrepresentation or from being fraudulent or material;
 2.Disclosure would correct a mistake of the other party as to a basic
assumption on which that party is making the contract and if
nondisclosure amounts to a failure to act in good faith and in accordance
with reasonable standards of fair dealing;
 3.Disclosure would correct a mistake of the other party as to the contents
or effect of a writing, evidencing or embodying an agreement in whole or
in part;
 4.The other person is entitled to know the fact because of a relationship
of trust and confidence between them.

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 o Thus, “Where the seller knows of facts materially affecting the value or
desirability of the property which are known or accessible only to him and also
knows that such facts are not known to, or within the reach of the diligent
attention and observation of the buyer, the seller is under a duty to disclose
them to the buyer”
 A matter is “material” if it is one to which a reasonable person would
attach importance in determining his choice of action in the transaction
in question
 The doctrine imposing a duty to disclose is akin to the well-established contractual rules
pertaining to relief from contracts based upon mistake
o When misrepresentation of material fact, we want to promote honest dealings
R2nd §164(1)
 Under the facts of this case, the question of buyers’ knowledge of the termite problem
(or their diligence in attempting to inform themselves about the termite problem)
should be left to the jury.
 A matter is “material” if it is one to which a reasonable person would attach importance
in determining his choice of action in the transaction in question

Weintraub v. Krobatsch, NJ 1974

Issue
 Similar to above case but with roaches
Judgement
 Similarly a material fact of which there was a duty to disclose.
 They can rescind the sale b/c the seller:
o She was aware and deliberately concealed it b/c she thought it could be material
o Buyers were repulsed and tried to rescind immediately so it was material

[Frug thinks the legal system should create (through the laws of mistake, disclosure, warranty,
etc.) a marketplace of trust, where one side cannot take advantage of the other. He contrasts
this with a negative (read, conservative) view of the marketplace where each side is out for his
own advantage and will cheat as much as they can get away with]

R2nd §159
“A misrepresentation is an assertion that is not in accord with the facts”
 Traditionally, the rule was “buyer beware,” that is, buyer had a duty to ask questions,
and seller had no duty to disclose anything that was not asked. Modern trend is away
from this.
 Argument for liberal disclosure rules:
o Moral obligation
o Contract system works best when parties have complete information
o Requiring disclosure may save socially wasteful costs of searching for
information the other party already has

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  The potential for mistake always (potentially) increases the resources which must be
devoted to the process of allocating goods to their highest-value users

R2nd §161
When Nondisclosure is Equivalent to an Assertion
A person’s non-disclosure of a fact known to him is an assertion that fact doesn’t exist when:
 He knows that disclosure of the fact is necessary to prevent some previous assertion
from being a misrepresentation or from being fraudulent or material
 He knows that disclosure of the fact would correct a mistake of the other party as to a
basic assumption on which that party is making the contract and if non-disclosure of the
fact amounts to a failure to act in good faith and reasonable standards of fair dealing
 He knows that disclosure of the fact would correct a mistake of the other party as to the
contents or effect of a writing, evidencing or embodying an agreement in whole or in
part
 The other person is entitled to know the fact because of the parties’ relationship of trust
and confidence
 Comment:
o Nondisclosure without concealment is equivalent to misrepresentation only in
the above situations
o This rule is broader than the rules on mistake in §152 and 153 because it does
not require a showing of a material effect on the agreed exchange and is not
affected by whether or not the party seeking relief bears the risk of mistake
(§154)
 Illustrations
o Essentially, if you fairly have more info than the other person, and don’t tell
them, ok as long as it isn’t the key material fact (ok to know thru publicly
available data that they may have, say, mineral deposits on their land, and buy
without telling them. Not ok if you trespass to test their soil tho).

Chapter 18. The Effect of Unexpected Circumstances

Intro
 comparable to the rules that govern mutual mistake, except that in unexpected-
circumstances cases the relevant circumstances usually become salient only after
performance has begun
 Three doctrines: impossibility, impracticability, and frustration.

Taylor v. Caldwell, British, 1863.

Issue
 Contract for Def to rent music hall for concert from Pl before it burned down
Judgement
 There are implied conditions in contracts that we simply take for granted

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  this impossibility (if not arising from the fault of the borrower or bailee from some risk
which he has taken upon himself) excuses the borrower or bailee from the performance
of his promise to redeliver the chattel.
 looking at the whole contract, we find that the parties contracted on the basis of the
continued existence of the Music Hall at the time when the concerts were to be given,
that being essential to their performance.
 We think, therefore, that the Music Hall having ceased to exist, without fault of either
party, both parties are excused. So, verdict for Defs.

Tacit Assumptions
 Things that are just assumed before you even consciously consider them
 Problem is it’s based on judge’s assumption of what we just know

Ocean Tramp Tankers Corp. v. V/O Sovfracht, British 1964

 “The theory of an implied term has now been discarded…for the simple reason that it
does not represent the truth” – there are always two sides.

Mineral Park Land Co. v. Howard, 172 Cal. 289, 156 P. 458 (1916)
Issue
 Pl gave Def right to haul gravel from his land if Def used all of the gravel on his land to
fill land elsewhere for a bridge.
 They used all the dry land/gravel but didn’t dredge the pond which would have cost a
lot of $ to get that gravel also, and got some gravel from elsewhere. Ok?
Judgement
 When [the parties] stipulated that all of the earth and gravel needed for this purpose
should be taken from plaintiff’s land, they contemplated and assumed that the land
contained the requisite quantity, available for use
 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.
 Cost great enough that alternative was impracticable, which is thus termed “legally
impossible” and thus discharged as a concern.
 Court drops language of implied condition and substitutes with excessive cost
 Frug: this considerably broadens the doctrine

United States v. Wegematic Corp., United States Court of Appeals, Second Circuit, 1966.
Issue
 Fed Reserve had contract w/ W to make computers based on new tech for it. They
continually delayed and ultimately could not deliver due to a problem they discovered
with their new technology.
 They defend against liquidated damages clause arguing “delivery was made impossible
by ‘basic engineering difficulties’ whose correction would have taken between one and
two years and would have cost a million to a million and a half dollars”

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Judgement
 Look at UCC §2–615:
o “Except so far as a seller may have assumed a greater obligation . . . delay in
delivery or non-delivery . . . is not a breach of his duty under a contract for sale if
performance as agreed has been made impracticable by the occurrence of a
contingency the nonoccurrence of which was a basic assumption on which the
contract was made”. . . .
 We see no basis for thinking that when an electronics system is promoted by its
manufacturer as a revolutionary breakthrough, the risk of the revolution’s occurrence
falls on the purchaser
 Also, this is a multi-million $ contract anyway – another $1-2m isn’t that big to them
 “Acceptance of D’s argument would mean a manufacturer is free to express what are
only aspirations and gamble on their fulfillment without any risk of liability”

Dills v Town of Enfield, CT 1989

Issue
 Contractor to create industrial park required to submit building plan to city as part of
contract.
 Also, they expressly consider that if he can’t get financing, he can rescind contract
 He fails to get financing and moves to rescind but also doesn’t submit plan (since at this
point it’s useless)
Judgement
 the contingency upon which fulfilling the contract allegedly depended was Dills’
obtaining the requisite financing. We cannot conclude, however, that Dills’ failure to
obtain financing was ‘an event the non-occurrence of which was a basic assumption on
which the contract was made
 he could only terminate for lack of financing after preparation of plans
 When the risk of future impossibility has been assigned by the parties in a contract,
courts should be slow to invent additional ways to excuse performance

Transatlantic Financing Corp. v. United States, United States Court of Appeals, District of
Columbia Circuit, 1966.
Issue
 TFC has boat to carry oil for US, but then the Suez Canal is closed. They fulfill contract
but take more $ to do it as they go via Cape of Good Hope.
 Transatlantic delivered the cargo by going around the Cape of Good Hope, in
compliance with the Government’s demand under claim of right, it conferred a benefit
upon the United States for which it should be paid in quantum meruit.
Judgement
 Adopts the price as unreasonable via Mineral Park (also UCC §2-615)
 Name specific requirements for impossibility:
o 1. Something unexpected must have happened (met here)
o 2. Risk not allocated ahead of time by agreement or custom.

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  nothing in contract one way or the other here. But if anything, TFC should
have known and likely was most likely holder of the risk, since they still
took contract despite known tensions in the area.
 Generally, foreseeability or even recognition of a risk does not necessarily
prove its allocation
o 3. Occurrence must have rendered performance commercially impracticable.
 Look at the balance of it all: extra $43k of the $305k contract
 performance of this contract was not rendered legally impossible
 Plus, they ask for a strange remedy!
o If the performance rendered has value, recovery in quantum meruit for the
entire performance is proper. But here Transatlantic has collected its contract
price, and now seeks quantum meruit relief for the additional expense of the trip
around the Cape.
o Transatlantic attempts to take its profit on the contract, and then force the
Government to absorb the cost of the additional voyage.

UNDROIT 6.2.3
 Hardship. Given this, you should renegotiate it. Now that we know all the things,
negotiate or the court will do it for you.

American Trading & Production Corp. v. Shell Int’l Marine Ltd., 2d Cir. 1972
Issue
 Another tanker in Suez canal issue
Judgement
 Held, against the tanker
 Similar to the other one except that here, the additional compensation sought here is
just under one third of the contract price
 But here, the ship captain was warned of possible Suez issues and went towards
Mediterranean anyway.
 While we may not speculate about the foreseeability of a Suez crisis at the time the
contract was entered, there does not seem to be any question but that the master here
had been actually put on notice before traversing the Mediterranean that diversion was
possible

R2nd §261 Illustration 10

 Unlike other Suez cases, if canal closes with ship inside it so they can’t complete voyage,
contract would be fairly rescinded.

Joskow, Commercial Impossibility, the Uranium Market and the Westinghouse Case, 6
J.Leg.Stud. 119, 153–162 (1977).
 the impracticability doctrine says that contracts will be enforced . . . unless it really
hurts. Other things being equal, the seller bears all of the risk unless performance is
extremely burdensome, in which case the buyer bears all of the risk

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  asymmetric but has to be tied to idea of bounded rationality

Mishara Constr. Co. v. Transit-Mixed Concrete Corp., 365 Mass. 122, 310 N.E.2d 363 (1974)
 The question is, given the commercial circumstances in which the parties dealt: Was the
contingency which developed one which the parties could reasonably be thought to
have foreseen as a real possibility which could affect performance? Was it one of that
variety of risks which the parties were tacitly assigning to the promisor by their failure to
provide for it explicitly? If it were, performance will be required. If it could not be so
considered, performance is excused. 

Tests (of impossibility / impracticability) in the cases above:

 Implied condition (presumed intentions): Taylor
 Costs excessive and unreasonable: Mineral Park
 Risk analysis (who should bear risk): U.S. v. Wegematic
 Balancing test to locate the risk: Transatlantic

UCC §2–509 and §2-510

Risk of Loss Under the UCC
 Eisenberg: “The assumption behind these sections is that the party in control will be in
the best position both to prevent loss and to insure the goods against loss.”
o These sections deal with the specifics of allocation of risk in a contract for the
sale of goods
 Past years: Frug said we are not responsible for knowing the specifics

UCC §2–613
Casualty to identified goods
In a contract for goods identified when the contract is made, if damages happen before the risk
of loss passes to the buyer, then:
 (1) If the loss is total the contract is avoided, and
 (2) If the loss is partial, the buyer can choose whether to accept [the goods] minus the
cost of the damage

UCC §2-614
Substituted performance
Where without fault of either party manner of delivery becomes unavailable/impracticable, but
a commercially reasonable substitute is available, the substitute performance must be tendered
and accepted
 Comment: This § deals with incidental matters (e.g., manner of delivery, method of
payment) that do not go to the heart of the matter

Impracticability:
UCC §2–615
Excuse by failure of presupposed conditions

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Delay in delivery or non-delivery is not a breach of duty if performance as agreed has been
made impracticable by:
(1) the occurrence of a contingency the non-occurrence of which was a basic assumption on
which the contract was made or by
(2) compliance in good faith with any applicable governmental regulation (whether or not such
compliance later proves to be valid)
Comment:
 Increased cost alone does not excuse performance unless the rise in cost is due to some
unforeseen contingency which alters the essential nature of the performance
 Neither a rise nor a collapse in the market is a justification for excuse, though a severe
shortage of raw materials or of supplies due to a contingency such as war, embargo,
crop failure, etc. is
 The exemptions of this section do not apply when the contingency in question is
sufficiently foreshadowed at the time of contracting to be included among the business
risks which are fairly to be regarded as part of the dickered terms (either consciously or
as a matter of reasonable, commercial interpretation from the circumstances)
ABA Task Force Report on Article 2, 1991
 “Should the unforeseen event occur, a court is to fill the gap. More specifically, the
court should allocate the risk of the event based on what is fair under the
circumstances, not on some supposed implicit agreement-based risk allocation which
never occurred.”

UCC §2–616
Procedure on notice claiming excuse
Where the buyer receives the notice under §2-615 and where the prospective deficiency
substantially impairs the value of the whole contract, the buyer may terminate the contract or
modify it by agreeing to take his available quota in substitutes

R2nd §261-272
General idea: if an occurrence was a basic assumption of the contract but did not occur, duties
are discharged

R2nd §261
 “Where, after a contract is made, a party’s performance is made impracticable without
his fault 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 the performance is
discharged, unless the language or the circumstances indicate the contrary”

R2nd §262
 death violates basic assumption

R2nd §263
 necessary thing being destroyed or never coming into being violates basic assumption

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R2nd §264
 new regulation that stops stuff violates basic assumption

R2nd §265
 Supervening frustration of an unexpected event that was a basic assumption wouldn’t
happen violates basic assumption

R2nd §266
 Fact no one knew or had reason to know making stuff impossible violates basic
assumption

R2nd §267
 If risk not assumed and assumptions violated above prevent performance, one party’s
failure to perform may affect the other parties duties

R2nd §268
 Prospective failure of performance may discharge other parties duties

R2nd §269
 Temporary impracticability suspends but doesn’t get rid of duty

R2nd §270
 When only part of duty affected, other part unaffected if:
o Still practicable
o Obligee promises to do it

R2nd §271
 Impracticability excuses a condition if the condition isn’t a key part of agreed-upon
exchange
 Illustrations
o i.e., on the satisfaction of a specific architect with that specific architect having
died

R2nd §272
 when the case is governed by impracticability, either side may have a claim for
restitution or reliance damages

Albre Marble & Tile Co. v. John Bowen Co., Supreme Judicial Court of Massachusetts, 1959.
Issue
 Subcontractor asked to order things for general contractor to review prior to building
hospital. Then, due to fault of general contractor, contract to build the hospital is
voided. Can subcontractor get their $ back for the stuff they ordered?

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Judgement
 plaintiff here may recover for those expenditures made pursuant to the specific request
of the defendant as set forth in the contract clause quoted above. 
 First, this is not a case of mere impossibility by reason of a supervening act. the
defendant’s involvement in creating the impossibility was greater than that of its
subcontractors
o specifically requesting the plaintiff to submit samples, shop drawings, tests,
affidavits, etc., to the defendant.
o This is not a case in which all efforts in preparation for performance were solely
within the discretion and control of the subcontractor
 We hold that the damages to be assessed are limited solely to the fair value of those
acts done in conformity with the specific request of the defendant as contained in the
contract
 “Normally, a party cannot recover expenses incurred in preparing for performance.
Where, however, those expenses were requested by the other party and later
impracticability arose through fault of the other party so as to preclude performance, a
party may recover such preparatory expenses”
 Frug: we can’t use expectation damages since the contract declared invalid. So what do
you get? You get what you ask for.

E’s Note on the Equitable Apportionment of Losses Following Impossibility

 Unlike R1st, R2nd allows for partial return based on reliance, subject to court’s
discretion.
 Reflected in both R2nd §272 and UCC 2-615.

Krell v. Henry, British, 1903.

Issue
 Parties contracted for room to watch the king’s coronation, which was later postponed
Judgement
 The procession’s happening went to the substance of the contract, Thus, when the
procession was cancelled, the purpose of the contract was frustrated and the contract is
thus void (i.e., no breach)
 Different from Griffith in past chapter since coronation had already been cancelled at
time of contract in that case (mutual mistake) whereas cancelled after contract here.
 Not a widely applied rule, only in limited cases.
 Application of the rule should be limited; “seller should not be guarantor of buyer’s
purposes”

Big Picture: Hardship

3 Things you could do:
 Balancing Test
 Remedy (like we see)
 If there’s hardship, renegotiate (Undroit)

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Or, look at risk (they don’t)
 Who could best insure? Tying to allocate risk. Why don't they talk re: risk here like they
do for mistake? Frug doesn't know. For whatever reason, they don't
 We could move more between no mistake/practicability doctrine but that’s not the law

Lloyd v. Murphy, 25 Cal.2d 48, 153 P.2d 47 (1944) (Traynor, J.)

 Question of risk to Pl or Def. Answer “depends on whether an unanticipated
circumstance, the risk of which should not be fairly thrown on the promisor, has made
performance vitally different from what was reasonably to be expected.”

Alfred Marks Realty Co. v. Hotel Hermitage Co., 170 App.Div. 484, 156 N.Y.S. 179 (1915)
Issue
 Souvenir of races that didn’t end up happening
Judgement
 advertiser cannot be forced to pay despite a small number of early copies
 the point of the souvenir was to remember the races. Thus it went to the heart of the
deal.

La Cumbre Golf & Country Club v. Santa Barbara Hotel Co., 205 Cal. 422, 271 P. 476 (1928)
Issue
 hotel contracted for country club access for its guests. Before end of contract, it burned
down. Must they keep paying?
Judgement
 basic assumption that there would be guests. They don’t have to keep paying.

Chase Precast Corp. v. John J. Paonessa Co., 409 Mass. 371, 566 N.E.2d 603 (1991)
Issue
 C, Pl agreed to supply JPJ, Def with median barriers for construction project
 public outcry stopped project partway through.
 Def paid for barriers used, but Pl sued to recover anticipated profit.
Judgement
 For Def. The parties didn’t foresee complete cancellation so hadn’t allocated risk,
according to fact finder (jury). Thus, both were excused from performance.

Power Engineering & Manufacturing, Ltd. v. Krug International, 501 N.W.2d 490 (Iowa 1993)
Issue
 Contractor makes parts for Iraqi Airways. Hires subcontractor for a part. Subcontractor
unaware eventual customer is in Iraq.
 Then, Gulf War – embargo against all shipments to Iraq.
 Subcontractor doesn’t ship the completed part; it sits in storage. Contractor sues for
purchase price.
Judgement

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  Held for subcontractor. The embargo does not prevent Krug, subcontractor, from
fulfilling its contractual obligations with Power Engineering, contractor.
 We do not believe that the stop order further up the chain of contracts in this case
constitutes an ‘occurrence of a contingency the nonoccurrence of which was a basic
assumption on which the contract was made.’
o Power Engineering was not privy to Krug’s planned use of the gear box. Under
the circumstances Krug must be found to have assumed the risk that its
purchaser would not, or could not, perform.”

11/15/18 – p. 947-985

Chapter 20, The Obligation to Perform in Good Faith

How are they defining good faith?

Spectrum:
Egoist (all self)
rational capitalist (not pro-suffering, but pro-$)
chivalry (holding out for others somewhat)
solidarity (we rise and fall toegher)
saint (no self at all)

Seggebruch v. Stosor, Appellate Court of Illinois, 1941.

 D leasing premises from P, erected gas station, then D opened another gas station on lot
next door and sales decreased dramatically at station on P’s land.
 Deal had been for D to pay P 1.25¢ per gallon of gas sold on the leased station.
Judgement
 damages for P bc was clearly implied that D would use reasonable diligence in operating
the gas station, “evident wrong” a.k.a. bad faith
 Have implied standards of performance
o “Here the Defendant willfully and deliberately and purely with the intention of
injuring the Plaintiff built himself a station right next door and transferred to the
new place. Now he stands before the Court and says there is nothing in my
contract that I will not cheat the Plaintiff by building my own station next door
thereby depriving her of income under the lease. Of course, there is not”
E’s Note
 In Seggebrush the contract based the rent on the volume of gas sold but it said nothing
about how much gas was to be sold. The court implied an obligation to use “reasonable
diligence” to sell gas.
 Bloor v. Falstaff Brewing Corp., 601 F.2d 609 (2nd Cir. 1979), involves a claim by the
seller of the Ballantine beer brand against the buyer of the brand, Falstaff, for breach of
an express promise to use “best efforts” to sell Ballantine beer.
o The royalty of $.50 a barrel on sales was an essential part of the purchase price

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  It was sufficient to show that Falstaff simply didn’t care about Ballantine’s volume and
was content to allow this to plummet so long as that course was best for Falstaff’s
overall profit picture, an inference which the judge permissibly drew. The burden then
shifted to Falstaff to prove there was nothing significant it could have done to promote
Ballantine sales that would not have been financially disastrous.
o “the judge was faced with a difficult problem in computing what the royalties on
the lost sales would have been.” Looked at “the combined sales of Rheingold and
Schaefer beers, both, like Ballantine, being “price” beers sold primarily in the
northeast, and computed what Ballantine sales would have been if its brands
had suffered only the same decline as a composite of Rheingold and Schaefer.”

UCC § 2–306
Output, requirements, and exclusive dealings
 A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of
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

UCC “Good Faith” Standards

(Pre-2001 version)
§1-201 (Definitions): “Good faith” means honesty in fact in the conduct or transaction
concerned
§1-203 (Obligation of good faith): Every contract or duty within this Act imposes an obligation
of good faith in its performance or enforcement
o This § does not support an independent cause of action for failure to perform or
enforce in good faith; rather, the failure to perform or enforce in good faith a
specific duty or obligation under the contract constitutes a breach of that
contract

(2001 version)
§1-201 (Definitions): “Good faith,” except as otherwise provided in Article 5, means honesty in
fact and the observance of reasonable commercial standards of fair dealing
 Pre-2001 version defines “good faith” narrowly; 2001 version defines it more broadly
 as of July 1, 2011, forty states had adopted the revised official version of Article 1. Of
these forty, eleven did not adopt the definition of good faith in revised Article 1 and
retained the prior definition of good faith in Article 2.

R2nd §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
 Good faith performance or enforcement of a contract emphasizes faithfulness to an
agreed common purpose and consistency with the justified expectations of the other

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 party; it excludes a variety of types of conduct characterized as involving “bad faith” b/c
they violate community standards of decency, fairness, and reasonableness
 Subterfuges and evasions violate the obligation of good faith in performance even
though the actor believes his conduct to be justified. But the obligation goes further:
Bad faith may be overt or may consist of inaction, and fair dealing may require more
than honesty
 Types of bad faith include: Evasion of the spirit of the bargain, lack of diligence and
slacking off, willful rendering of imperfect performance, abuse of a power to specify
terms, and interference with or failure to cooperate in the other party’s performance

Sanders v. FedEx Ground Package System, Inc., Supreme Court of New Mexico, 2008.
Issue
 FedEx recruited S as independent contractor, he was told orally that would be able to
grow his business by buying other routes as they became available, later interfered in
his efforts to do so.
Judgement
 Right to sell?
o Nothing in contract expressly granted it, but he relied on it.
o FedEx did not object to the admission of extrinsic evidence at trial nor to
Sanders’ use of it. Instead, FedEx relied on similar extrinsic evidence, in the form
of testimony by FedEx terminal managers as to their own understanding of the
contract
o Sanders’ understanding that FedEx only retained veto power over a sale if the
contractor was not in good standing was supported by the testimony of one of
his fellow independent contractors
o Court finds this isn’t in violation of PER as it’s about interpreting the existing
ambiguous language, not an entirely new clause
 breach of covenant of good faith and fair dealing
 Covenant breached only when a party seeks to prevent the contract’s performance or to
withhold its benefits from the other party
 ***Key element:
 Some bite to this idea: some obligation here that you can't just look at your own
profit margin. You owe the other person something.
o An important part of law of beach –obligation of good faith.
o Person never would have entered without that clause in there
 not an expected obligation but an expected way to get to in negotiation

E’s Note on Criticism of the Doctrine

Example of Young Living Essential Oils, LC v. Marin, 366 P.3d 814 (Utah 2011)
 judicial inference of contract terms is also fraught with peril, as its misuse threatens
commercial certainty and breeds costly litigation

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 o when people make their own deals, court has no place to decide if it’s fair post-
hoc
o It has to be pretty longstanding for it to really be justified as a new covenant of
understanding
 To sustain a new covenant, evidence of “course of dealing” would have to
conform to the core terms of the legal doctrine, by demonstrating a
settled, longstanding pattern of dealing that the parties unquestionably
would have relied on (but failed to memorialize) in entering into their
contract. If Young Living for years provided new product to its
distributors on the first of every month, for example, but suddenly
withheld such product until the 20th of the month despite the existence
of a monthly sales quota, it might make sense to deem Young Living to
have breached a covenant informed by the parties’ longstanding course
of dealing. 
 Texas court sees it as a BS liberal CA thing that’s against the adversary system
o would place a party under the onerous threat of treble damages should he seek
to compel his adversary to perform according to the contract terms as agreed
upon by the parties

Market Street Associates v. Frey, United States Court of Appeals, Seventh Circuit, 1991.
Issue
 MSA, new leaseholder gets leasehold interest in shopping center w/ 25-yr lease
agreement with 6 years left. Owner of it is Gen Elec Pension Trust (Frey).
 There was a sale leaseback agreement where if $ rejected, there is an option to buy
back at relatively favorable rate.
 Orenstein (MSA) made a formal request for $2 million financing, but never mentioning
the lease nor the relevant provision of the lease providing the contingent buy-out
option. Erb (GEPT) peremptorily rejected this request, explaining that the pension trust
was not interested in financing projects of less than $7 million. 
Judgement
 Market Street Associates should, the judge opined, have advised the pension trust that
it was requesting financing pursuant to paragraph 34, so that the trust would
understand the penalty for refusing to negotiate. . . .
 if the trust refused to negotiate over the request for financing, Market Street Associates,
as Penney’s assignee, would be entitled to walk off with the property for (perhaps) a
song
 is not telling them of the buyback option breaking good faith?
 Not that every contractor is a fiduciary of every other contractor. But, “it is one thing to
say that you can exploit your superior knowledge of the market” and another “to say
that you can take deliberate advantage of an oversight by your contract partner
concerning his rights under the contract”
o This is just sharp dealing

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 o like theft it induces costly defensive expenditures, in the form of overelaborate
disclaimers or investigations into the trustworthiness of a prospective contract
partner
 Moreover, this is a contract case rather than a tort case, and conduct that might not rise
to the level of fraud may nonetheless violate the duty of good faith in dealing with one’s
contractual partners and thereby give rise to a remedy under contract law.
o Not moralistic, but efficient: The concept of the duty of good faith like the
concept of fiduciary duty is a stab at approximating the terms the parties would
have negotiated had they foreseen the circumstances that have given rise to
their dispute
o “The contractual duty of good faith is thus not some newfangled bit of welfare-
state paternalism”
 not just at drafting but in entirety
 So, the “dispositive question in the present case is simply whether Market Street
Associates tried to trick the pension trust and succeeded in doing so”
 The district judge jumped the gun … The essential issue bearing on Market Street
Associates’ good faith was Orenstein’s state of mind, a type of inquiry that ordinarily
cannot be concluded on summary judgment, and could not be here.
 So, question for a fact finder (jury)
 Frug: my problem is he doesn’t answer the question here!

Chapter 21, The Doctrine of Substantial Performance

Section 1. The General Principle

 Tension between “perfect tender rule” and the “substantial performance rule”
o Pros for perfect tender rule: Simplifies the rules of breach
o Problems with perfect tender rule: No economy could run this way because
every contract would become a litigation (no tender is ever totally “perfect”)
 Most courts have adopted substantial performance. But substantial performance must
be interpreted since it is not self-evident how much work constitutes substantial
performance
o [Frug thinks this a pragmatic approach since perfect tender shifts all of the risk to
the seller, while the buyer can get out on trivialities (allows to refuse if price is
falling, etc.)]
 Strong incentive to get substantial performance and sue on the contract rather than to
sue for restitution as the contract breacher and only get value of services not tied to
contract price

Remedies
 If substantial performance: π gets [contract price]– [diminution of value]
 If not SP, then restitution: π gets [benefits provided] – [cost of completion]

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Examples of Perfect Tender gone wrong (from class)
Warrington v. Wright (not CB) 1885 S Ct
 Contract for sale for 1000 iron tons / Month
o 1st: 400 / 2nd: 885 / 3rd: month: 1800
o S Ct: this isn't 1000. No, no, no. 1000 is 1000.
o Doctrine of Perfect Tender: you. say, you do.
Filey v. Poe S Ct 1885 (not in CB)
 Iron from Mead to New Orleans, LA
 But shipped it from Glasglow instead. Buyer rejects. It didn’t come from the right city.
 Perfect tender? No.
Beck v. Paul (not in CB)
 -Deliver business cards by end of year. They arrive @9:18am on Jan 1.

Court finally says this is silly and econ can’t run if people are so fussy!

So, we get SubstPerf.

 Not material breach.
 Minor damages, but can’t walk away from issue

Plant v. Jacobs (not in CB)

 contractor building house, owners refused to pay, he walked away.
 Had did everything but cabinets.
 He gets substantial perf
 So what sub. perf is trivial?

Jacob & Youngs v. Kent, Court of Appeals of New York, 1921.

Issue
 Builder unknowingly used wrong kind of pipe in home, though same quality and price
Judgement
 Def made substantial performance, so Def entitled to damages for diminution of value,
which is trivial
o not the cost of replacement, which would be great, but the difference in value,
which would be either nominal or nothing
 “In a case of imperfect performance, a party is entitled to the money which would allow
him to complete the performance, unless the cost of completion is grossly and unfairly
out of proportion to the good to be attained”
 Factors to weigh when determining damages for imperfect performance:
o The purpose to be served
o The desire to be gratified
o The excuse for deviation from the letter
o The cruelty of enforced adherence

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Bruner v. Hines 295 Ala. 111, 324 So.2d 265 (1975)
 Not moral, but sensible
 adds legal efficacy to promises by enforcing the essential purposes of contracts and by
eliminating trivial excuses for nonperformance

Goetz & Scott, The Mitigation Principle: Toward a General Theory of Contractual Obligation, 69
Va.L.Rev. 967, 1010 (1983)
 “The substantial performance doctrine reduces opportunistic claims by softening the
breacher-nonbreacher distinction, thereby removing opportunities to exploit
inadvertent breaches.”

Jardine Estates, Inc. v. Donna Brook Corp., 42 N.J.Super. 332, 126 A.2d 372 (1956)
 Cannot be used as a 50%+1 defense; it’s holistic and in compliance with good faith
 “Appellant stresses that since there was a verdict in its favor for incomplete and
defective work in a sum equal to 31% of the contract price, it is conclusive that there
was not substantial performance. We do not agree. The matter is not to be determined
on a percentage basis, for the cost of remedying defects may sometimes even exceed
the outlay for original construction.”

Vincenzi v. Cerro, 186 Conn. 612, 442 A.2d 1352 (1982)

 Intentional breach is a factor but doesn’t preclude substantial performance claim
 even a conscious and intentional departure from the contract specifications will not
necessarily defeat recovery, but may be considered as one of the several factors
involved in deciding whether there has been full performance

Kreyer v. Driscoll, Supreme Court of Wisconsin, 1968.

Issue
 Pl contracted to build house for Def, did not complete it, forcing the Def owner to go
elsewhere. Def refused to pay Pl for his past work; Pl (contractor) sued for substantial
performance
Judgement
 Look at substantial performance:
o To recover on an uncompleted construction contract on a claim of having
substantially, but not fully, performed it, the contractor must make a good faith
effort to perform and substantially perform his agreement
o while the work was completed the performance of the subject of the contract
did not meet the object and purpose of the contract.
o Here, the defendant considered he had to take an active part in finishing the
house because he could not trust the plaintiff to complete the house free of liens
because of his prior conduct
o Furthermore, builder didn’t substantially perform: We do not think a contractor
who leaves this much work unfinished has substantially complied with his
contract to completely build a home according to plans and specifications

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  Look to R2nd §357(1), which provides that where a defendant justifiably refuses to
perform his contract because of the plaintiff’s breach but the plaintiff has rendered part
performance which is of a net benefit to the defendant, the plaintiff can get judgment
with some exceptions for the amount of such benefit in excess of the harm he has
caused the defendant by his breach but in no case exceeding a ratable proportion of the
agreed compensation.
 Defendant owner has to pay the $10,967.81. The amount of the judgment found by the
lower court was not justified on the theory of substantial performance but is justified on
the theory of quantum meruit or restitution.
 Key: Here we effectively have Pl who really di breach arguing for substantial
performance, and the court clarifies it’s actually restitution damages they’re getting.
Because the Pl left much of the house incomplete, he did not substantially perform and
therefore can’t recover the contract price (Def not in breach b/c Pl didn’t substantially
perform). He may, however, be reimbursed on theory of quantum meruit (restitution)
for benefit he conferred on the Def, minus damages the Def incurred in having to go
elsewhere to finish the house.
 “A dispensation in favor of a contractor on a theory of substantial performance should
be granted in cases of incompleteness only when such details are inconsiderable and
not the fault of the contractor”

O.W. Grun Roofing & Constr. Co. v. Cope, 529 S.W.2d 258 (Tex.Civ.App.1975)
Issue
 Roofer contracted with def to install new roof on def’s house; the roof had yellow
streaks when owner didn’t want them.
Judgement
o We are not prepared to hold that a contractor who tenders a performance so deficient
that it can be remedied only by completely redoing the work for which the contract
called has established, as a matter of law, that he has substantially performed his
contractual obligation.
o Even further, A recovery by Grun in quantum meruit for benefit conferred was denied:
[T]he evidence does not conclusively establish that plaintiff has received any benefit
from defendant’s defective performance

Section 2: Contracts for the Sale of Goods

White and Summers:
You can still reject at the outset, also. Rejection avoids the economic injury of a bad bargain as
well.

E’s Note on Perfect-Tender Rule & UCC

 Traditionally, sales of goods did not follow the doctrine of substantial performance.
Instead, it followed the perfect tender rule: a buyer could reject goods if it did not
conform to the contract in any way. The problem with it is that a buyer could get out of

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 almost any contract by spotting a minor defect and using it as a pretext for getting out
of the contract
 The UCC seems to get away from this idea by limiting perfect tender through the
obligation to act in good faith.
o A buyer who seized on a minor defect to justify a rejection that was really based
on the fact that the contract is no longer favorable to her might not satisfy this
obligation. 
 Also, specifically:
o UCC § 2–601 nominally preserves the perfect-tender rule for the sale of goods.
However, other provisions of the UCC strip away much or most of the
significance of this Section. UCC § 2–601 applies only where a buyer rejects
goods
o The perfect-tender rule is also significantly ameliorated by UCC §2–508, the
“cure” provision.

UCC §2–508
Intention to cure
 If buyer rightfully rejects seller’s goods, seller can notify buyer (must do so promptly) of
his intention to cure and may then make a conforming delivery, as long as it’s still made
within the time for performance
 If seller had reasonable grounds to believe a non-conforming tender would be
acceptable to buyer with a money allowance or otherwise, he may, if he seasonably
notifies buyer, have a further reasonable time to substitute a conforming tender if the
buyer rejects the non-conforming tender
 Comment: “Reasonable grounds” as used here can lie in prior course of
dealing or performance or in usage of trade or in the particular
circumstances surrounding the making of the contract.
 Comment: Replacement not allowed if the buyer gives the seller implicit
or express notice of a “no replacement” clause in the contract
 [Cure seems to perform the same function in sale of goods that substantial performance
plays in rest of contract law, but they are not same. Cure itself must be a perfect
tender]

UCC §2–601
Buyer’s rights on improper delivery
If the goods or the tender of delivery fail in any respect to conform to the contract, the buyer
may (1) reject the whole, (2) accept the whole, (2) or accept any commercial unit(s) and reject
the rest
 This is the only § of the UCC that seems to retain the perfect tender rule
 This § applies only where a buyer rejects goods; it does not apply where a buyer accepts
goods and then discover a defects (that’s UCC §2-608)

UCC §2–608

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Revocation of acceptance in whole or in part
 If non-conformity substantially impairs the goods’ value to buyer, he may revoke
acceptance within a reasonable time after he “discovers or should have discovered the
grounds for revocation… and before any substantial change in condition of goods which
is not caused by their own defects,” if (1) his acceptance came on reasonable
assumption that the non-conformity would be cured, or (2) he did not discover the non-
conformity because of the difficulty in doing so or because of seller’s assurances
o This § says that a buyer who has accepted goods without knowing they were
nonconforming may revoke acceptance only if his acceptance was reasonably
induced either by the difficult of discovering the defect before acceptance or by
the seller’s assurances
o For seller’s assurances to give buyer grounds for revocation, the assurances need
not have been made in bad faith

UCC §2–612
Breach of installment contracts
 Installment contracts are contracts that require the delivery of goods in separate lots.
The buyer may reject any nonconforming installment whose value is substantially
impaired and cannot be cured. If the nonconformity impairs the value of the whole,
buyer may reject the whole as long as he has not accepted any non-conforming
installment

11/28/18
p. 985-1015, 1024-1035

T.W. Oil, INC. V. Consolidated Edison Co., Court of Appeals of New York, 1982.
Issue
 TW give ConEd oil with .92% sulfur, more than the .50% per contract. ConEd rejects.
Meanwhile, price of oil goes down 25%. ConEd refuses to accept oil on reduced price,
and even replacement (cure) oil.
Judgement
 Holding: seller in good faith who unknowingly tenders nonconforming goods to a buyer
who properly rejects them, may avail itself of the cure provision of subdivision (2) of §2–
508 of the Uniform Commercial Code.
o if seasonable notice be given, such a seller may offer to cure the defect within a
reasonable period beyond the time when the contract was to be performed so
long as it has acted in good faith
 Adopt §2-508 of UCC. To avoid sharp dealing to safeguard the seller “against surprise as
a result of sudden technicality on the buyer’s part”
 They did get the oil late. So, we’re in the second half of §2-508.
o the conforming state of the Appollonian oil is undisputed, the offer to tender it
took place on February 21, only a day after Con Ed finally had rejected the

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 Khamsin delivery and the Appollonian substitute then already was en route to
the United States, where it was expected in a week
 Key focus: reasonableness of the seller’s belief that the goods would be acceptable
rather than with the seller’s pretender knowledge or lack of knowledge of the defect
o test of reasonableness, in this context, must encompass the concepts of “good
faith” and “commercial standards of fair dealing” which permeate the code

Zabriskie Chevrolet v. Smith, 99 N.J.Super. 441, 240 A.2d 195 (1968)

Issue
 as soon as they drive new car off lot, evident it’s a lemon. They stop payment on the
check. Dealership tows car back and replaced transmission from one of their showroom
cars. When they refuse delivery, dealership sues.
Judgement
 Held, dealership did not have a right to cure the defective delivery
 “A ‘cure’ which endeavors by substitution to tender a chattel not within the agreement
or contemplation of the parties is invalid.
o Because new car is itself a big investment, a new car with another car’s
transmission isn’t an effective cure.

Manassas Autocars v. Couch, 274 Va. 82, 645 S.E.2d 443 (2007)
Issue
 Car with big stain. Buyers persuaded to take it that day and return for it to be removed.
After they couldn’t remove it, dealership repaints over it. Buyers reject.
Judgement
 Manassas points out that there was no evidence that the nonconformity adversely
affected the vehicle’s “driveability.”
 But, “record thus demonstrates that the Couches intended to buy not only a means of
transportation but a new vehicle.”
 “When the nonconforming condition was repaired by repainting, the value of the
vehicle to the Couches—as a new vehicle—was impaired”

Midwest Mobile Diagnostic Imaging, L.L.C. v. Dynamics Corporation of America, 965 F.Supp.
1003 (W.D.Mich.1997)
 Which standard of conformity applies to cure under an installment contract, perfect
tender or substantial impairment?
o Debatable. Here, court argues that the ongoing relationship means the seller
should have more time to fix issue, but can’t have unlimited chances to get it
right. So, presumably, the court thinks, installment contracts still req perfect
tender.
o On its face, however, § 2–612, which generally defines a buyer’s right to reject
goods under an installment contract req’s only “substantial impairment”

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Chapter 22: Express Conditions
Up to now, the materials in this casebook have chiefly concerned promises. Now, look at
express conditions.
 an explicit contractual provision that either: (1) A party to the contract does not come
under a duty to perform unless and until some designated state of affairs occurs or fails
to occur; or (2) If some designated state of affairs occurs or fails to occur, a party’s duty
to perform is suspended or terminated
 Often used to attempt to avoid substantial performance: if the contract expressly states
that it is a condition to B’s liability to A that A’s performance meets the designated
specifications, then B’s chance of escaping liability for the contract price because of a
departure from the specifications is improved (A less likely to be able to argue for
substantial performance)
o But sometimes, A’s substantial performance of his promises may be an implied
condition to B’s obligation to perform her promises

Section 2. The Distinctions Between Operation Of A Promise And

Operation Of A Condition

Oppenheimer & Co. v. Oppenheim, Appel, Dixon & Co., Court of Appeals of New York, 1995.
Issue
 Sublease contract
 No sublease between the parties “unless and until” plaintiff delivered to defendant the
prime landlord’s written consent to certain “tenant work” on or before a specified
deadline. If this condition did not occur, the sublease was to be deemed “null and void.”
Plaintiff provided only oral notice on the specified date.
 Substantial Performance?
Judgement
 Substantial Perf does NOT apply.
 plaintiff’s attorney telephoned defendant’s attorney on February 25 and informed
defendant that the prime landlord’s consent had been secured. On February 26,
defendant, through its attorney, informed plaintiff’s attorney that the letter agreement
and sublease were invalid for failure to timely deliver the prime landlord’s written
consent and that it would not agree to an extension of the deadline.
 Defendant argues that no sublease or contractual relationship ever arose here because
plaintiff failed to satisfy the condition set forth in paragraph 4(c) of the letter
agreement.
 So, what are conditions precedent?
o A condition precedent is “an act or event, other than a lapse of time, which,
unless the condition is excused, must occur before a duty to perform a promise
in the agreement arises”
o Express conditions are those agreed to and imposed by the parties themselves.
Implied or constructive conditions are those “imposed by law to do justice”

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 o courts will interpret doubtful language as embodying a promise or constructive
condition rather than an express condition
 This interpretive preference is especially strong when a finding of express
condition would increase the risk of forfeiture by the obligee
 See R2nd §227(1)
 Applied here: we perceive no justifiable basis for applying the doctrine of substantial
performance to the facts of this case. The flexible concept of substantial compliance
“stands in sharp contrast to the requirement of strict compliance that protects a party
that has taken the precaution of making its duty expressly conditional
o This matter was sufficiently important to defendant that it would not enter into
the sublease “unless and until” the condition was satisfied.
 Also look at forfeiture concern, per R2nd §227. But here as well, “undisputed that
plaintiff has not suffered a forfeiture or conferred a benefit upon defendant”
o Also, the issue of substantial performance was not for the jury to resolve in this
case.

Merritt Hill Vineyards, Inc. v. Windy Heights Vineyard, Inc., Court of Appeals of New York, 1984.
Issue
 plaintiff, Merritt Hill Vineyards, entered into a written agreement with defendants,
Windy Heights Vineyard and its sole shareholder Leon Taylor, to purchase a majority
stock interest in respondents’ Yates County vineyard, and tendered a $15,000 deposit.
 Contract included several “Conditions Precedent,” including that “Windy Heights shall
have obtained a title insurance policy in a form satisfactory to Merritt Hill, and Windy
Heights and Merritt Hill shall have received confirmation from the Farmers Home
Administration that certain mortgages on the vineyard are in effect”
 at the closing, plaintiff discovered that neither the policy nor the confirmation had been
issued. Pl brought suit for deposit back plus consequential damages.
Judgement
 Plaintiff’s right to return of its deposit or to consequential damages depends upon
whether the undertaking to produce the policy and mortgage confirmation is a promise
or a condition. And, here, they’re conditions.
 Defendants’ failure to fulfill the conditions of section 3 entitles plaintiff to a return of its
deposit but not to consequential damages. Failing to satisfy condition isn’t a breach of
contract subjecting the nonfulfilling party to liability for damages
o Per R2nd §225 [1], [3]

Section 3. Problems Of Interpretation In Distinguishing Between Conditions And Promises

Howard v. Federal Crop Insurance Corp., United States Court of Appeals, Fourth Circuit, 1976.
Issue
 Plaintiffappellants sued to recover for losses to their 1973 tobacco crop due to alleged
rain damage. The crops were insured by defendantappellee. They filed everything
correctly, “but, prior to inspection by the adjuster for FCIC, the Howards had either

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 plowed or disked under the tobacco fields in question to prepare the same for sowing a
cover crop of rye to preserve the soil.”
 Is compliance by the insureds with this provision of the policy a condition precedent to
the recovery?
Judgement
 They argue expresio unius and interpretation of contract that condition precedent is
mentioned elsewhere but not in section on crop destruction.
 They decide it’s not a condition precedent: our narrow holding is that merely plowing or
disking under the stalks does not of itself operate to forfeit coverage under the policy.
But there are more factual inquiries that need to be made at lower levels.

Harmon Cable Communications v. Scope Cable Television, 237 Neb. 871, 468 N.W.2d 350
(1991)
Issue
 Under a purchase agreement for the sale of a cabletelevision system, sellers agreed to
indemnify the purchaser if a minimum number of persons were not subscribers to the
system at the time of the closing. There was a subscriber shortfall, but the purchaser
failed to comply with the notice provision.
Judgement
 Sellers contend that the purchaser could not recover damages resulting from the
shortfall because the notice provision was a condition
 Once again, turns on conditions vs. promises. If promise, liability for seller. If condition,
seller not liable.
 ** Finding in ambiguous situations towards promises, not conditions. Absence of any
conditional language (‘if,’ ‘provided that,’ ‘when,’ etc.) makes it a promise.
 So, this was a promise. Seller is liable.

R2nd §227
Standards of preference with regards to conditions
In resolving doubts as to whether an event is made a condition of an obligor’s duty…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
 Promise preferred over condition since courts want to reduce risk of forfeiture (policy)
 The test is whether a particular interpretation would have avoided the risk of forfeiture
viewed as of that time, not whether it will avoid actual forfeiture in the resolution of a
dispute that has arisen later

Section 4. Prevention; The Implication Of A Duty To Fulfill A Condition

Johnson v. Coss, Supreme Court of South Dakota, 2003.

Issue
 Coss tried to buy Johnson’s auto dealership, but couldn’t get it approved by Ford.

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  Johnson subsequently commenced this action for breach of contract and breach of the
covenant of good faith and fair dealing.
Judgement
 The dispositive issue in this appeal is whether the condition precedent (Ford’s approval
of the franchise transfer) failed because of an act for which Coss was legally responsible,
or because of a discretionary act of Ford Motor Co
 Johnson argues, though, that “under the prevention doctrine, the failure of the
condition precedent was caused by Coss, and therefore, Coss should be prevented from
relying on the unfulfilled condition.”
o Prevention Doctrine is R2nd §245: if subject to condition, add’l measures req’d a
la good faith – req’s cooperation and action to meet steps. Non-performance of
this is a breach and excuses non-occurrence of condition itself such that the
performance of the duty that was originally subject to its occurrence can become
due in spite of its nonoccurrence
o only requires that the conduct have ‘contributed materially’ to the non-
occurrence of the condition
 Because Coss raised disputed issues of material fact concerning the cause of the failure
of the condition precedent, we reverse and remand for a jury to figure it out
 Question is, did he do enough to attempt to satisfy the req’s, or was his action the
reason that he couldn’t satisfy them?

Winslow v. Mell, 48 Wash.2d 581, 295 P.2d 319 (1956)

 Contract for P to log certain land, provided that the D got the timber rights to the land
 D didn’t try to get the timber rights, so held for D asserting that he had the option of
obtaining the rights or not, no implied conditions.

Lach v. Cahill, 138 Conn. 418, 85 A.2d 481 (1951)

Issue
 L enters contract to buy house from C, deposits $1000. Contract says ““This agreement
is contingent upon buyer being able to obtain mortgage…” L can’t get one. C refuses to
return deposit. L sues for it.
Judgement
 Held for L. Language made the mortgage a condition.

Section 6. Excuse
Aetna Casualty and Surety Co. v. Murphy, Supreme Court of Connecticut, 1988.
Issue
 Dentist filed insurance claim for damaged office two years after event occurred, delay
violated explicit contract provision conditioning recovery on timely claim filing
Judgement
 Court struggles with the tension between the written word of the contract and
“disproportionate forfeiture” that would result from following the written words
o Note that it is a “contract of adhesion.”

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 o
 Holding: Failure to comply with condition of notice in contract does not prevent insured
from recovering as long as delay was not prejudicial to insurance company
o Read substantial performance into the condition; if not prejudicial then not
interpreted literally
o But, still kept burden of proof on dentist to show no prejudice to insurance
company: loss of coverage must be weighed against an insurer’s legitimate
interest in protection from stale claims
 “A contracting party, despite his own default, may be entitled to relief from the rigorous
enforcement of contract provisions that would otherwise amount to a forfeiture, if his
violations of those contract provisions did not materially prejudice the other party

R2nd §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
o “Forfeiture” here means the denial of compensation that results when the
obligee loses his right to the agreed exchange after he has relied substantially, as
by preparation or performance, on the expectation of that exchange
o Illustrations: different pipe in house as condition that can be excused.

Burne v. Franklin Life Ins. Co., 451 Pa. 218, 301 A.2d 799 (1973)
Issue
 Life insurance provision conditions recovery of add’l $ on death within 90 days of an
accident; deceased struck by car, but kept alive in vegetative state for 4 years
Judgement
 Provision unenforceable on public policy grounds
 Court denounces the paradox of a rule that “would deny such recovery for the death of
an accident victim who endures the agony of prolonged illness, suffers longer, and
necessitates greater expense by his family…” and states that it “offends the basic
concepts and fundamental objectives of life insurance and is contrary to public policy”

Great American Ins. Co. v. C.G. Tate Construction Co., 303 N.C. 387, 279 S.E.2d 769 (1981)
 Insurance policy said notice of an accident had to be given “as soon as practicable.” ∆’s
personnel involved in accident, did not notify insurance co. as soon as practicable
because believed its personnel had not been involved in causing the accident
 Holding: Provision construed according to the parties’ reasonable expectations, so does
not excuse insurer from payment. Provision should be guided more by its purpose
than by its precise terms
 “If the purpose behind a condition precedent has been met, the insurer will not be
relieved of its obligations because of the nonoccurrence of that requirement”

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R2nd §230
Event that terminates a duty
 If it is a condition that a certain event will discharge obligor’s duty, the duty is
discharged upon the occurrence of the event, unless:
o The occurrence of the event is the result of a breach by the obligor of his duty of
good faith and fair dealing, or
o The event “could not have been prevented because of impracticability and
continuance of the duty does not subject the obligor to a materially increased
burden.
 Illustrations: 1. Insurance policy providing no recovery if suit is not brought on the policy
within two years after a loss. Two years after loss, duty to pay is discharged.
o 2. The facts being otherwise as stated in Illustration 1, B lives in a foreign country
and is prevented by the outbreak of war from bringing suit against A for two
years. A’s duty to pay B for the loss is not discharged and B can maintain an
action on the policy when the war is ended.

R2nd §271
Impracticability as excuse for non-occurrence of a condition
 Impracticability excuses the non-occurrence of a condition if (1) the occurrence of the
condition is not a material part of agreed exchange and (2) forfeiture would otherwise
result
 Illustration: Final house payment conditional on approval of A, architect. A dies.

Clark v. West, Court of Appeals of New York, 1908. (Copied from above)
Issue
 Book to write a book on contracts
 “Full performance of the agreement on plaintiff’s part is alleged, except that he “did not
totally abstain from the use of intoxicating liquor during the continuance of said
contract”
Judgement
 They decide a fair reading of the clause on alcohol is not that he was to write in order to
keep sober but that he was to keep sober to write well. Thus, they argue it isn’t the
material element of the contract. And from that, they are willing to entertain the def’s
idea of an “express waiver”
o “The defendant has had the work he bargained for, and it is alleged that he has
waived one of the conditions as to the manner in which it was to have been
done. He might have insisted upon literal performance, and then he could have
stood upon the letter of his contract. If, however, he has waived that incidental
condition, he has created a situation to which the doctrine of waiver very
precisely applies.”
o Essentially, if at time of breach they had insisted on condition might have been
upheld, but at this point they’ve waived their concern on that
 Distinction between waiver and estoppel

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 o A ‘waiver’ is the voluntary abandonment or relinquishment by a party of some
right or advantage
o The doctrine of equitable estoppel, or estoppel in pais, is that a party may be
precluded by his acts and conduct from asserting a right to the detriment of
another party who, entitled to rely on such conduct, has acted upon it.
 NOT modification, but waiver

R2nd §84
Promise to perform a duty in spite of non-occurrence of a condition
 A promise to perform a conditional duty under an antecedent contract in spite of the
non-occurrence of the condition is binding, unless the condition was a material part of
the agreed exchange for the performance of the duty and the promisee was under no
duty that it occur. But the promise can be revoked if done so in a reasonable time and
not unjust because of reliance of the other party

Chapter 23 The Powers to Withhold Performance and to

Terminate a Contract in Response to Breach
 Under the Restatement a “material breach” gives a party the power to withhold
performance while a “total breach” gives a party the power to terminate a contract.
o SubsPerf: when can a party who has breached a contract nevertheless bring suit
under the contract.
o Material/Total Breach: when a party who has not breached a contract has the
power to withhold performance or the power to terminate a contract.
 Ie, this is extreme self-help, while other is extreme legal?
o each party will argue the other party’s prior nonperformance excuses their own
responsive nonperformance
 Mutual Dependency of Performances: If A and B have a contract, and under the contract
A’s performance precedes B’s performance, then B is not obliged to perform until A has
substantially performed. So, A’s performance is an implied condition to B’s duty to
perform.
o When contract doesn’t say who goes first, use R2nd §§233-§234
 UCC §§ 2–507, 2–511
o when performances can be simultaneous, presumption that they are due
simultaneously.

R2nd §233
Performance at One Time or in Installments
 (1) Where performances are to be exchanged under an exchange of promises, and the
whole of one party’s performance can be rendered at one time, it is due at one time,
unless the language or the circumstances indicate the contrary.
 (2) Where only a part of one party’s performance is due at one time under (1) if the
other party’s performance can be so apportioned that there is a comparable part that

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 can also be rendered at that time, it is due at that time, unless language or
circumstances indicate the contrary.

R2nd §234
Order of Performances
 (1) Where all or part of the performances to be exchanged under an exchange of
promises can be rendered simultaneously, they are to that extent due simultaneously,
unless the language or circumstances indicate the contrary.
 (2) Except to the extent stated in (1) where the performance of only one party under
such an exchange requires a period of time, his performance is due at an earlier time
than that of the other party, unless language or circumstances indicate the contrary.

R2nd §237
Effect on Other Party’s Duties of a Failure to Render Performance
 Except as stated in R2nd §240 (part performances) it is a condition of each part’s
remaining duties to render performances to be exchanged under an exchange of
promises that there be no uncured material failure by the other party to render any
such performance due at an earlier time.
 Comment/Illustrations
o Effectively, they cure it until it’s too late. If they cure in time, the other party still
has to perform and has no cause for breach of contract. If they don’t, then other
party can sue for total breach. When it’s too late is based on “all the
circumstances”

Walker & Co. v. Harrison, Supreme Court of Michigan, 1957.

Issue
 Billboard leased.
 Sign hit with tomato. Rust, also, cobwebs.
 Advertiser refused to pay since they didn’t keep the sign clean.
 Host of sign brought suit, and per contract, they have effectively a liquidated damages
clause (suit for $5k).
Judgement
 delay in fixing was not a material breach justifying Def’s repudiation of duty to pay.
Therefore, Def was the first to breach agreement (by repudiating it), entitling PL to
damages

R2nd §241
Circumstances significant in determining whether a failure is material
 Extent to which injured party will be deprived of benefit that he reasonably expected
 Extent to which injured party can be compensated for the part of benefit he will now be
deprived of
 Extent to which the party failing to perform or to offer to perform will suffer forfeiture
 Likelihood that the party failing to perform will cure his failure

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  Extent to which behavior of party failing to perform in line with good faith and fair
dealing
[Frug: You’re unlikely to have a situation where all these factors favor only one side.]

R2nd §242
Circumstances significant in determining when remaining duties are discharged
 In determining the time after which a party’s uncured material failure to render
performance discharges the other party’s remaining duties to render performance
under the rules stated in R2nd §§ 237 and 238, the following circumstances are
significant:
o Those in R2nd §241
o The extent to which it appears to the injured part that delay may hinder him in
making reasonable substitute arrangements
o The extent to which the agreement provides for performance without delay (not
dispositive)
 Comment:
o Since any breach gives rise to a claim, a party who has cured a material breach
has still committed a breach by his delay, for which he is liable in damages
o Further, in some instances timely performance is so essential that any delay
immediately results in discharge and there is no period of time during which the
injured party’s duties are merely suspended and the other party can cure his
failure

Bartlett v. Bartlett 465 S.W.3d 745 (2015)

Issue
 Divorce provision that dad pays college expenses for kid if he maintains C or equivalent.
Kid’s grades drop below a C for a semester, but then improve.
 Mom sues when Dad doesn’t pay
Judgement
 any breach by the son was not material and did not excuse William’s obligation to pay
for expenses incurred before the breach
 by bringing GPA up, son cured any failure
 evidence that William’s refusal to fulfill his obligations under the agreement had nothing
to do with the son’s failure to maintain a “C” GPA for the Spring 2013 semester
Dissent
 C is a C is a C. D isn’t a C!

K & G Constr. Co. v. Harris, Court of Appeals of Maryland, 1960.

Issue
 Does a contractor (C), damaged by a subcontractor’s (SC) breach of workmanlike
manner, have a right, to withhold installment payment?
 Per terms, due the subcontractor unless the negligent performance of his work excused
its payment.

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  SC drove bulldozer into wall, damaging C’s house and refused to fix it.
 C stopped payment, SC stopped work.
Judgement
 SC claims that the failure to pay was the breach, C claims the damage to wall was the
breach
 Court decides promises are mutually dependent, and then tries to figure out what
makes sense. They decide that if C’s had to pay no matter what every installment even if
SC’s screw up, “probable, that many contractors would become insolvent before they
were able to complete their contracts”
 Holds that SC breached when they damaged the wall, and it was material. Injured party
can treat breach as a partial one, though – by asking SC to come back to work, C treated
it as partial breach. When SC refused, C justified in not paying again. When SC still
refused to come back to work SC breached again.
 Seems arbitrary in deciding the secondary breaches, a bit of “he started it” from grade
school?

Severability of Contracts
 contract divisible if performances can be divided into corresponding pairs of part
performances
 When severable? Per R2nd, must:
o Be able to cut into pairs of part performances
o proper to regard the parts of each pair as agreed equivalents

Zulla Steel, Inc. v. A & M Gregos, Inc., 174 N.J.Super. 124, 415 A.2d 1183 (1980)
Issue
 SC not paid on time by C, so they leave. C summons them back, they refuse. SC sues.
Judgement
 C by being materially late in payments breached. Matters the extent to which payment
was late – here it was a “substantial underpayment for a prolonged period of time.”
 Not always the case, but here, C breached.

Chapter 24: Repudiation and Insecurity

Hochester v. De La Tour, British, 1853

 Def hired Pl to accompany on trip, but before the trip, told Pl that he no longer needed
Pl’s courier services and refused compensation. Pl sued prior to the date when
performance on the contract was due (and meanwhile made other plans that partially
conflicted with the now cancelled trip).
Judgement
 Court allowed suit for anticipatory repudiation
 Reasoning: After Def repudiated, Pl should be free to consider himself absolved and not
uselessly preparing (so he can maintain the suit) but rather finding other work to
mitigate damages

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  “Where parties contract to do an act on a future day, they impliedly promise that in the
meantime neither will do anything to the prejudice of the other inconsistent with that
relation”
Commentary:
 Willistonian view: This holding makes no sense because promised performance hasn’t
come around yet (how can you sue for breach of something that was supposed to
happen, when the time when the thing was supposed to happen hasn’t yet occurred?
The other party didn’t make a promise not to repudiate; he only promised to go on the
trip)
 Corbinesque (L Hand): The parties had created an implied promise not to create
situation undermining or defeating others’ expectations (i.e., implied promise not to
prevent completion of the contract)
 Possible that for payments for completed work in installments, stuck in old way, but
usually loser in court will conform even for future payments.’

Section 2. Insecurity and the Right to Demand Assurances

UCC §2-609
Right to adequate assurance of performance
 Parties may not demand adequate assurances without reasonable grounds for
insecurity; and may not suspend performance while awaiting assurance unless it is
commercially reasonable.
 Failure to provide adequate assurance within 30 days in response to a justified demand
is a repudiation and justifies the releases the requesting party from their obligations
 Comment:
o Doctrine balances the danger of future breach with the danger of fraudulent
claims regarding a party’s expectation of performance
o What are “reasonable grounds for insecurity,” “adequate assurances,”
“commercially reasonable,” “a reasonable time”?

UCC §2-702
Seller’s remedies on discovery of buyer’s insolvency
 Where the seller discovers buyer to be insolvent he may refuse delivery except for cash
including payment for all goods theretofore delivered under contract, and stop delivery

UCC §2-705
Seller’s stoppage of delivery in transit or otherwise
 A seller may stop delivery of goods in possession of a carrier when he discovers buyer to
be insolvent and may stop large delivery when buyer repudiates or fails to make
payment due before delivery or if for other reason seller has right to withhold or reclaim
goods

R2nd §251

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When a failure to give assurance may be treated as a repudiation
 When reasonable grounds for insecurity exist that other party will commit a total breach
(under R2nd §243), the obligee may demand assurance of due performance and
reasonably suspend performance for which he has not received such assurance until he
has received it
 Failure of obligor to provide assurance within reasonable time may be treated as
repudiation
o Obligations of good faith prevents seeking assurances in hopes it will get other to
breach
 UCC §2-609 is analogous to R2nd §251, and allows request of written assurances

PittsburghDes Moines Steel Co. v. Brookhaven Manor Water Co., United States Court of
Appeals, Seventh Circuit, 1976.
Issue
 Builder (PDM) supposed to build a water tower. Contract doesn’t mention any $ in
escrow, but after they can’t get a loan they require escrow upfront from water company
(B).
Judgement
 PDM effectively couldn’t get a loan on good terms so tried to sharp deal to get B to get
it.
 PDM claims it was using UCC §2-609. Court says you can’t use it to put an implied term
into a contract, where in the contract, PDM explicitly wasn’t supposed to get paid until
30 days after completing building the water tower.
 Can only use §2-609 if there’s a reasonable reason why you might not trust there be
payment – and can’t claim this is standard practice if it’s written the opposite way in the
contract!
 fact that B had not completed its loan negotiations does not constitute reasonable
grounds for insecurity when the money in question was not to be needed for some
months.
Concurrence
 “I disagree that there must be a fundamental change in the financial position of the
buyer before the seller can invoke the protection of UCC § 2–609.” But they requested
more than was reasonable to ensure they would be paid, so I agree with judgement.

White and Summers

 2-609 is explicitly about re-writing the contract, but then if they ask for reasonable
assurances and get them, the original requester is bound to proceed.

BAII Banking Corp. v. UPG, Inc., 985 F.2d 685, 703 (2d Cir.1993)
 a party to a losing contract, A, may opportunistically attempt to use UCC § 2–609 as a
weapon to get out of an unprofitable contract by demanding adequate assurance of
performance from the other party, B, in the hope that B’s failure to provide such
assurance will be treated as a breach that will justify A’s failure to perform the contract.

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 Two conflicting interests:
(1) protection from danger of future breach
(2) unfounded claims to get out of a contract

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