Table of Contents

Contract Formation...............................................................................................................3Classification: Bilateral v. Unilateral..............................................................................................3Offer...............................................................................................................................................3

Advertisements as Offer........................................................................................................................5Assent/Preliminary Negotiations..........................................................................................................6Unilateral Mistake.................................................................................................................................8Mutual Mistake.....................................................................................................................................9

Acceptance......................................................................................................................................9Shipment of Non-Conforming Goods & Acceptance (UCC 2-206)...................................................10Acceptance by Silence (R2d 69).........................................................................................................11Termination of the Power of Acceptance............................................................................................11Mailbox Rule/When Acceptance Takes Effect...................................................................................12Mirror Image Rule (R2d)....................................................................................................................12

Battle of the Forms (UCC 2-207)..................................................................................................13Option Contracts..........................................................................................................................16

Option Contracts and Revocation.......................................................................................................17

Contract Enforcement..........................................................................................................18Consideration................................................................................................................................18

Settlement of Claims as Consideration...............................................................................................19Conditional promises..........................................................................................................................20Consideration or mere gift?.................................................................................................................20Adequacy of consideration..................................................................................................................20Consideration when modifying an existing K.....................................................................................20Illusory Promises (and Termination Clauses/Satisfaction Clauses)....................................................21Consideration: Requirements and Output Contracts (Sale of Goods)................................................22

Reliance (Promissory Estoppel)....................................................................................................23Restitution.....................................................................................................................................25

Quasi contract......................................................................................................................................25When D breaches................................................................................................................................26

Definiteness...................................................................................................................................27Capacity........................................................................................................................................30

Immaturity/Infancy – R2d 14..............................................................................................................30Insanity – Mental Illness or Defect.....................................................................................................31

Overreaching: Getting Out of a K Legally...........................................................................31Pressure in Bargaining.................................................................................................................31

PELDR................................................................................................................................................31Duress..................................................................................................................................................33Undue Influence: R2d 177..................................................................................................................34

Concealment/Misrepresentation...................................................................................................34

Supplementing/Modifying K................................................................................................37Parol Evidence Rule......................................................................................................................37

Ambiguous Terms/Multiple Meanings...............................................................................................40Unconscionability..........................................................................................................................43

pg. 1

Performance & Breach.........................................................................................................45Conditions (Express and Constructive)........................................................................................45

Mitigating Non-Occurrence (Express Conditions).............................................................................47Mitigating Non-Occurrence (Constructive Conditions)......................................................................49Substantial Performance......................................................................................................................50Divisibility...........................................................................................................................................52Restitution (to mitigate non-occurrence of a constructive condition).................................................53

Material Breach............................................................................................................................55Giving a Reason for Rejection:...........................................................................................................58

Anticipatory Repudiation.............................................................................................................59Assurances (UCC 2-609, R2d 251).....................................................................................................63Measuring Damages for Anticipatory Repudiation............................................................................64

Mutual Mistake, Impracticability, and Frustration......................................................................64Mutual Mistake...................................................................................................................................64Supervening Impracticability/Frustration...........................................................................................65Existing Impracticability/Frustration..................................................................................................65

Remedies/Damages...............................................................................................................67Remedies for Breach.....................................................................................................................67

Specific Performance..........................................................................................................................68Calculating Damages..........................................................................................................................70Cost of Completion.............................................................................................................................73

Limitations on Damages.......................................................................................................75Avoidability..................................................................................................................................75

Mitigation............................................................................................................................................77Foreseeability................................................................................................................................79Certainty.......................................................................................................................................81Liquidated Damages.....................................................................................................................81

pg. 2

Contract FormationOffer + Acceptance = binding K, when consideration is present and no valid defenses to K exist.“It is not every agreement that results in a binding, legally enforceable contract.”

Classification: Bilateral v. Unilateral Bilateral contract: (most common)

o If a return promise is requested, contract is bilateral.o Promise exchanged for promise o Exchange of promises is enough to render them both enforceable.o Offeree starting performance is enough to constitute acceptance.o Offeree must give notice of acceptance (return promise). (note mailbox rule)

Unilateral contract:o If a return performance is requested, contract is unilateral.o One party promises to do something in return for an act of the other party.

Ex: monetary reward for finding a lost dog.o Acceptance :

Offeree’s promise to perform does not constitute acceptance; offeree must perform the act (find the lost dog) to accept the offer (monetary reward).

Starting performance is not enough to accept a unilateral contract: requires complete performance.

Starting performance will make the offer irrevocable for a reasonable period of time to allow for complete performance.

Offeree can accept only an offer of which he is aware. If the offeree doesn’t become aware of the offer until after

performance, his actions do not constitute acceptance. In many states, an offer that can be accepted only by performance

(i.e., a unilateral contract) is deemed accepted by performance of the act unless the act is accompanied by a manifestation of intent not to accept.

With respect to rewards, an offeree who performs the act is entitled to the reward even though the offeree did not know of the offer of a reward, because the offeror received the desired benefit.

o FIND CASES HERE Notice of acceptance is required when the offeror is not likely to become

aware that the act is being performed or if the offeror requests such notice in the offer. Notice would be required under the same circumstances when a bilateral contract was being accepted by performance.

Offer An offer is a communication that leads the offeree reasonably to believe that a power to

create a K is conferred upon him. (R2d 24) (and Corbin)o Would a reasonable person have considered it an offer? (see Leonard v. PepsiCo)o Does the would-be offeree have the power to say “I accept”?

Offers are not transferrable (if A makes offer to B, C cannot accept)

pg. 3

Language must be specific regarding terms of the deal and intent to be bound (not merely indicating intention to sell or interest in buying).

o Hypo: Seller selling farm to Buyer, who asks about water. Seller says: (1) “Never mind the water, it never failed in MN yet.” (not a promise) (2) “Never mind the water, there will be at least __ water a year.” (more

concrete language = closer to a promise, but seller can't guarantee the rain. An optimistic statement is not enforceable by contract)

(3) “Never mind the water, I will see to it that there is at least __ water a year and if there is not, I will reimburse you for your losses.” (this is a promise – specific language and commitment)

o Statements of opinion or invitations to bargain are not an offer Ex: “What is your lowest price?” (mere inquiry); “We can quote you $5

per gross for immediate acceptance” (offer) Ex: Offer vs. statement of price to start a bidding war (if the person who

receives it is unaware that the price is being stated to other people, may be reasonable for him to believe it is an offer)

o Terms of the deal: (see also “Definiteness” below) The terms of the offer must be certain and definite. R2d approach:

Terms must be reasonably certain (R2d 33(1)); they are reasonably certain if they provide a basis for determining

the existence of a breach and for giving an appropriate remedy (R2d 33(2));

The fact that one or more terms are left open/uncertain may demonstrate a lack of offer or acceptance (R2d(33(3)).

All essential terms must be covered (subject matter/price/quantity) UCC approach:

UCC 2-204 allows for more liberal K formation: K is formed if parties intend to contract and there is a reasonable certain basis for a remedy.

As long as parties intend to create a K, UCC “fills the gap” when K is silent as to terms other than quantity or subject matter, including setting place for delivery, or even price (UCC 2-305).

Requirements/output contracts satisfy UCC K formation requirements even without naming specific quantities.

UCC implies good faith as a term.o Intent to be bound:

A statement is an offer only if the person to whom it is communicated could reasonably interpret it as an offer. Must express present intent to be legally bound to a K.

Primary test: whether a reasonable person receiving the communication would believe that she could enter into an enforceable K by accepting the offer. (objective test)

(note: a similar objective test applies to determine whether a statement is an acceptance)

Cases:

pg. 4

o Owen v. Tunison D said “It would not be possible for me to sell it unless I receive 16K” RULE: General statements made in negotiation are not a binding offer if

they do not indicate a party’s intent to be bound by those statements.o Harvey v. Facey

P wants to buy land from D, sends him a telegraph asking 1. Will you sell? And 2. What is your lowest price? P sends back telegram saying lowest price is $900

RULE: Answering an inquiry as to the lowest price is not an offer to sell.o Fairmount Glass Works

P wrote to D asking for “lowest price” for specific group of goods (doesn’t specify quantity). D responded not just with “quoted” prices but ended with “for immediate acceptance” thereby inferring it was an offer up to P to accept.

Missing term: quantity. Court looks at industry terms and interprets offer as giving the offeree the right to choose quantity

RULE: A quotation of prices alone is not an offer to sell and does not form a binding contract. However, D’s response invited “immediate acceptance.” Reading D’s letter as a whole, and viewed together with P’s initial letter, D’s letter constituted a binding offer that could not be revoked after P accepted its terms.

Advertisements as Offer General rule: Advertisements are NOT offers – considered invitations to make an offer

(Moulton)o Advertisements do not specify to whom they are addressed, leave terms open.o A company doesn’t want to bind itself, run into problem of demand > supply (and

a reasonable person should know this. May constitute an offer when it clearly specifies who may accept and how acceptance is

to be made, and leaves nothing further for negotiation. (Donovan) Cases:

o Moulton v. Kershaw Ds sent a letter to P with greeting “Dear Sir,” selling salt at a certain price.

P responded that he wanted to order 2,000 barrels. The language was not such as a business man would use in making an

offer to sell a definite amount. A general letter stating simply that a company is selling a product for a particular price does not constitute an offer. This was an invitation to make an offer, not an offer itself.

o Leonard v. PepsiCo A price that is too good to be true may indicate no offer has been made. The price of a Harrier jet is roughly $23M. Even if an objective,

reasonable person were not aware of this fact, he would conclude that purchasing a fighter plane for $700,000 is a deal too good to be true.

o Carlill v. Carbolic Smoke Ball Co. (unilateral contract) D made an offer that was capable of being accepted by any person who

buys a Carbolic Smoke Ball, uses it as directed, and contracts influenza. P

pg. 5

accepted this offer by fulfilling the advertised condition. Both parties presented adequate consideration.

An advertisement of an award constitutes an offer that is capable of being accepted and binding, provided at least contemporaneous notice and some consideration are present.

o Lefkowitz v. Great Minneapolis Surplus Store P tries to buy women’s clothes, listed by company as a dollar “first come,

first serve.” D refuses to sell to him because of store policy (unpublished) that it doesn’t apply to men.

When an advertisement is clear, definite, and explicit, and leaves nothing open for negotiation, it constitutes an offer, acceptance of which will complete the contract.

An advertiser has the right at any time before acceptance to modify his offer, but does NOT have the right, after acceptance, to impose new or arbitrary conditions not contained in the published offer.

o Donovan v. RRL Corp. D placed an ad for a specific used car at a specific price; P test drove that

car and accepted the “offer”; after P accepted, D claimed that the advertised price was a mistake.

Generally, ads are not offers, but this ad offers a specific car for a specific price; moreover, the revocation came after acceptance.

This court said mistake was irrelevant. R2d 153(b) - other party had no reason to know of the mistake. (Could be “too good to be true,” meaning he should have known, but trial court disagreed)

Supreme Court of CA later reversed, said mistake does matter. Unconscionable to enforce the contract given the mistake. R2d 153(a)

Consumer not out much: time spent on test drive (not substantial loss). Court chose to stick him with the loss, rather than stick other party with a $10k loss.

Assent/Preliminary Negotiations Preliminary negotiations are not an offer (R2d 26) unless the parties intend for the

“finality” to just be a formality (R2d 27 - but the circumstances may show that the agreements are preliminary negotiations)

Objective Theory of Assent: What would a reasonable person standing in the listener’s shoes take the words/conduct to mean? (Lucy v. Zehmer)

Tribune I K – most terms have been agreed upon, just not finalized Tribune II K – Parties agree on major terms, but agree to negotiate other terms later;

expected to continue to negotiate in good faith.o Attempt to renegotiate the terms already agreed-upon could be seen as bad faitho Tribune II is semi-binding in that parties must negotiate in good faith

UCC Definition of Good Faith (UCC 2-103): “in the case of a merchant [good faith] means honesty in fact AND the observance of reasonable commercial standards of fair dealing in the trade.”

Gentlemen’s Agreements

pg. 6

o Letter of intent that says “none of this is intended to be legally binding.” There are times when parties want to make

Assent Cases:o Lucy v. Zehmer

D agreed to sell farm to P for $50k; contract written on a receipt; P tried (but failed) to give D nominal consideration ($5); D claims it was a joke.

Court enforces the objective theory of assent – Even if D were joking, it doesn’t matter because:

Reasonableness of D’s offer: (1) rewrote the contract; (2) discussed the contract for 40 minutes; (3) D’s wife signed, too; (4) $50k is a reasonable price for the farm.

RULE: What matters is D’s objective intent (reasonable person), not his subjective intent.

D’s statement to wife that it was a joke is immaterial because P did not hear it.

“The mental assent of the parties is not requisite for the formulation of the contract. If the words or other acts of one of the parties have but one reasonable meaning, his undisclosed intention is immaterial except when an unreasonable meaning which he attaches to his manifestations is known to the other party.”

Would a reasonably prudent offeree believe a K had been formed?o Specht v. Netscape Communications Corp.

D tries to hold Ps to arbitration clause in terms hidden on website. Court says P’s downloading of software did not constitute acceptance of terms.

Regardless of apparent manifestation of his consent, an offeree is not bound by “inquiry notice” of inconspicuous terms of which he is unaware.

Would a reasonably prudent offeree know the terms of the K?o Channel Homes Centers v. Grossman (Tribune II K)

D negotiates with P for mall space; D agrees to take space off market and negotiate further terms if P signs letter of intent; D leases space to another party.

Consideration = letter of intent (D wants it to secure financing) Promise = “to negotiate in good faith”

Holding: there was intent to be bound and to negotiate in good faith; there was no vagueness – enough specificity to enforce; and there was consideration for the promise (letter of intent).

o Pennzoil Getty had “handshake deal” to sell stock to Pennzoil, Getty refused to

perform and sold it Texaco. Pennzoil attempted to sue Getty for breach of K, failed. Sued Texaco for "interference with contractual relations."

If Pennzoil has a K with Getty, it would be a tort against Pennzoil for a third party to get Getty to sell to Texaco instead. Therefore, Texaco is liable to Pennzoil. (fairly obscure tort)

Just because DE court didn't find a breach of K by Getty, doesn't mean TX court won't find “interference with K” by Texaco.

This case is a challenge to our theory of “efficient breach.”

pg. 7

Unilateral MistakeA mistake is a belief that is not in accord with the facts as to a basic assumption on which the K is based that materially affects performance of the K. Incorrect prediction about future does not count.

A contract is voidable when only one of the parties is mistaken as to an essential element of the K, and the mistaken party does not bear the risk of the mistake and (R2d 153)

o Enforcement of the K would be unconscionable (Elsinore); oro The other party had reason to know of the mistake or caused the mistake.

Ex: Buyer offers $1.5M. Owner refuses, counters with $200k. Buyer accepts. Owner claims he meant $2M. No contract. Buyer had reason to know of offeror’s mistake at time of acceptance.

Ex: Construction bid is $50k and all six other bids were all $95-100k. If closer call (bids from $60-190k), analysis changes. For bidder,

argue unfairness (they’ll lose a ton of $ if enforced against them). But if a G uses S’s bid to win a project, courts are less willing to let S out of his mistake because G is being made worse off.

A party bears the risk of a mistake when (R2d 154)o (a) the risk is allocated to him by agreement, or o (b) he is aware he has limited knowledge, but treats his limited knowledge of the

facts to which the mistake relates as sufficient; or o (c) the risk is reasonably allocated to him by the court based on the surrounding

circumstances.o Note on (b): if a party was aware of the risk and didn’t assign it to somebody else,

then he is responsible. Disclosure of a party’s lack of knowledge does NOT get him off the hook because it reveals his awareness of the risk.

Cases:o Elsinore Union Elementary School District v. Kastorff (G)

G mistakenly enters an incorrect bid to make additions to P’s school; mistake made G’s offer the lowest by $11K; G won and seeks rescission.

Traditional view: No K because P had reason to know that G made a mistake). Contractor can rescind bid if it would be “unconscionable” to enforce. Elements:

other party knows / has reason to know of contractor’s error; AND the mistake is material to the contract; AND enforcement of the contract would be unconscionable; AND the other party can be placed in status quo; AND the party seeking relief gives prompt notice of the rescission; AND D restores everything of value that he received

Note: Mistake cannot be a mistake of judgment; clerical mistakes allowed. Generally, it is easier for Generals to get rescission than for Subs because

It is less likely that a G made a mistake of their legal duty. It is easier to return the owner to the status quo when the G made a

mistake than for the G to be returned to the status quo when S makes a mistake.

pg. 8

Typically, this case is read as getting out of a K on grounds of mistake (R2d 153/154). This case could also be read more narrowly (revoking an offer before acceptance on grounds of mistake)

o See also Donovan

Mutual MistakeWhen both parties are mistaken as to an essential element of the contract: to be voidable, there must be a substantial difference between the deal as it was contemplated and the actual deal, with no intent by the parties to take a risk on that element of the transaction.

Mutual mistake deals with problems at time of K formation. If later problem develops (earthquake opens fault line after building begins), may be impossibility / impracticability

2013 exam: Mistake of fact vs. mistake of prediction.

Acceptance Only a party to whom an offer is extended may accept. (R2d 29) The offeror is “master of the offer” and determines method of acceptance (R2d 30)

o Method merely suggested? (Allied Steel) Bilateral offer:

o Can be accepted either with a return promise or the completion of the act.o Starting performance is enough to accept an offer.

Unilateral offer:o Not considered accepted until the act required is performed.o An offeree can accept only an offer of which he is aware. If the offeree doesn’t

become aware of the offer until after performance, his actions do not constitute acceptance.

In many states, it is deemed accepted by performance of the act unless the act is accompanied by a manifestation of intent not to accept.

o With respect to rewards (e.g., payment for return of a lost dog), an offeree who performs the requested act is entitled to the reward even though the offeree did not know of the offer of a reward, because the offeror received the desired benefit (e.g., return of the dog).

Method of Acceptance o Allied Steel v. Ford Motor Co. (method of acceptance merely suggested)

Ford sends P.O. with indemnity provision waiving liability for Allied Workers, “This P.O. is not binding until accepted. Acceptance should be executed on acknowledgment copy which should be returned to the buyer”

Court says performance sufficed as acceptance. “Should be executed” was merely a suggested means of acceptance, not

“must” or “may only be.” If an offer gives an express time/place/manner for acceptance it must be

complied with UNLESS it is a mere suggestion (R2d 60) Notice of Acceptance (notice must be sent within a reasonable time)

o International Filter v. Conroe Gin (offeror may specify otherwise re: notice) P submitted proposal to sell equipment to D for $1,230 and provided that

modification of the sales contract can only be made by a supplementary

pg. 9

agreement signed by both parties (invitation to make an offer). D noted his acceptance by writing on the document and also wrote on the document that the shipment was to be made by March 10. (offer) Plaintiff’s manager endorsed the document with “O.K.” (acceptance)

No requirement of notice in the contract itself (i.e. on the form sent by P). P then wrote D a letter acknowledging receipt of the document,

confirming shipment, and requesting a water sample (reasonably prudent person in D’s situation would have known P had accepted).

RULE: Offeror can waive right to notice (R2d 56)o White v. Corlies & Tift (must make reasonable efforts to notify offeror)

D tells P “once agreement is met, begin at once”; P never notifies D of acceptance; P buys materials to prepare to start work and later D tells P he wants to revoke his offer

P is not sure D seeks acceptance by performance or promise. If vague, the default rule is that acceptance is either performance or promise. R2d 32.

However, acceptance by performance is a promise to render complete performance. R2d 62(2) To form a binding contract, acceptance by performance must be sufficient to manifest acceptance to the offeror.

If unilateral K is being sought and you have reason to know that the offeror won’t know you’ve commenced performance, you must make reasonable attempt to notify R2d 54(2)

o Ever-Tite Roofing Corp. v. Green (beginning work may provide notice) “This agreement shall become binding only upon written acceptance…OR

upon commencing performance of the work.” Both parties understood that some delay in acceptance was necessary, as P

had to complete a credit check / receive financing approval first P shows up to start work only to find a 3P performing the work Unlike White, here it was not vague, performance was an acceptable

means of acceptance and the crew showing up gave D reason to know of the acceptance (unambiguous)

RULE: For acceptance by performance, no notice is required unless specified by the offer. R2d 54(1)

o See also Carbolic Smoke (context may imply notice is not required)Shipment of Non-Conforming Goods & Acceptance (UCC 2-206)

Corinthian Pharm. v. Lederle Labso P finds out D is increasing prices, phones in order 10x larger than normal.

Corinthian’s order = offer. D ships 50 vials at lower price, tells P the remainder is higher price, gives P option to cancel.

o [Note: Under R2d, shipping 50 vials would be acceptance by beginning performance, thus binding you to complete performance]

o These goods were non-conforming because shipped 50 instead of 1,000 (constituted a counteroffer which P could have accepted by silence)

o Auto-reply/tracking # is not acceptance (unless says “we accept”). o With partial performance, UCC 2-206(1)(b): Shipment of goods can be

acceptance, if shipment is either conforming or nonconforming. Shipment of non-

pg. 10

conforming goods is not acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer

Acceptance by Silence (R2d 69)Where offeree fails to reply to offer, his silence/inaction is an acceptance ONLY WHEN:

Offeree takes the benefit of offered services with reasonable opportunity to reject them and has reason to know that they were offered with the expectation of compensation

Offeror has made it known to offeree that silence is acceptable, and offeree by being inactive intends to accept [this can only be used by offeree for his protection, offeror can never request acceptance by silence]

Due to previous dealings, it is reasonable that the offeree should notify the offeror if he does not intend to accept

Cases:o American Bronze Corp. v. Streamway Products

Buyer regularly called in orders and seller would begin production, but then seller refused to fill three orders. “As a regular practice constituted a valid acceptance and thus created a binding contract.”

R2d 69(b)o Hobbs v. Massasoit Whip Co.

P sent eel skins several times before, they had been accepted and paid for. Previous dealings + silence on the part of the defendant + retention of the

skins, could warrant the assumption that they were accepted, and thus amount to acceptance

R2d 69(c)

Termination of the Power of AcceptanceOfferee’s power of acceptance may be terminated by: (R2d §36)

Rejection or counter-offer by offereeo Rejection (R2d 38)o Counter-Offer (R2d 39) (note this is both a rejection and a new offer)

Lapse of time (R2d 41)o Power of acceptance is terminated at the time specified in the offer, or, if no time

is specified, at the end of a reasonable time.o A “reasonable time” is a question of fact, depending on the circumstances existing

when the offer and attempted acceptance are made.o General rule : an attempt to accept a lapsed offer is a counter-offer

Revocation by offeror:o Revocation is effective upon receipt (R2d 42)

Exception: Option holder has right to make counteroffers during option period without terminating original offer.

o Also terminated when offeror takes definite action inconsistent with an intention to enter into the proposed contract and the offeree acquires reliable information to that effect (R2d 43)

o Offeror’s power to revoke limited by: (see more under Option Contracts) Option (promise not to revoke offer) Promissory estoppel

pg. 11

Partial performance UCC firm offer rule

Death or incapacity (R2d 48)Exception to all of these: Option contract. Consideration was paid to keep the offer open during the option period, and the offer is irrevocable during that period.

Cases:o Akers v. Sedberry (lapse of time)

An offer made in a face-to-face conversation is deemed to lapse at the close of the conversation

o Loring v. Boston (lapse of time) An offer can lapse if the exigency under which it was made has passed.

Mailbox Rule/When Acceptance Takes EffectAcceptance is effective at dispatch unless the offer provides otherwise (i.e. by saying “delivery in hand by 5pm)Rejection is effective upon receipt.

Note: since mailbox rule only applies to acceptance, it almost exclusively applies to bilateral contracts (because unilateral contracts request action as acceptance).

Rejection following acceptanceo If offeree sends an acceptance and later sends a rejection, the acceptance will

generally control even if the offeror receives the rejection first.o If, however, the offeror receives the rejection first and relies on it to his detriment,

the offeree will be estopped from enforcing the contract. Acceptance following rejection

o If a rejection is sent, and a later communication is sent accepting the contract, the mailbox rule will not apply – the first one to be received by the offeror will prevail.

Revocation by offeror is effective upon receipt Mailbox rule does not apply to irrevocable offers:

o i.e. option contract, which requires that acceptance be received by offeror before offer expires, R2d 63(b)

Medium:o Acceptance by telephone or other instantaneous two-way communication is

treated as though the parties are in each other’s presence (R2d 64)o A medium is acceptable (unless circumstances known to the offeree indicate

otherwise) if it is the one used by the offeror or one customary in similar transactions (in industry or prior transactions between the parties) (R2d 65)

Mirror Image Rule (R2d) Acceptance must mirror the terms of the offer. Any modification of terms constitutes a

rejection and counter-offer. Last Shot Rule: In common law, if the acceptance contained modified terms (and was

thereby a counter-offer) but there was a K because of performance, the party that sent the last form before performance began usually prevailed.

o Courts employ various devices to mitigate this rule. The following are usually not considered to constitute a counter-offer:

pg. 12

(1) Grumbling acceptances, (2) mere suggestions, (3) acceptances requesting gratuitous benefits, (4) acceptances that also propose new deals, and (5) requests for clarification.

Key factor: Is the offeree making the transaction conditional upon the term?

o If yes, it is a rejection and counter-offer.o If no, it is an acceptance.

A conditional acceptance will terminate the offer and act as a new offer from the original offeree.

Battle of the Forms (UCC 2-207)

Abandons the “mirror image” rule. Additional/different terms included in acceptance generally do not constitute a rejection unless the offer expressly limits acceptance to the terms of the offer.

UCC 2-207:o 2-207 (1)

If it is clearly an acceptance, not conditional upon assent to new/additional terms, then it is an acceptance (despite stating additional terms)

If acceptance is expressly made conditional upon assent to the new/additional terms, then there is no K under (1), look to (3)

o 2-207 (2) (deals with terms if it is a K under 2-207(1)) The additional terms are proposals for addition to the contract. Between

merchants, those terms become part of the contract unless: the terms materially alter the K (one cannot presume a reasonable

merchant would accept the terms);

pg. 13

o a term “materially alters” the K if the term’s inclusion would result in surprise / hardship if incorporated without express awareness of other party (Dorton)

Offeror had expressly said no to those terms prior to the acceptance (or notifies within reasonable time frame); or

The original offer expressly limits acceptance to terms of the offer.o 2-207 (3)

If the acceptance was conditional in 2-207(1), there can still be a K by performance.

The terms of this K will be whatever the forms agreed on. Any terms that are not the same gets “knocked out” by the knockout rule and UCC gap-fillers apply.

Cases:o Bayway Refining Co. v. Oxygenated Marketing & Tradingo Dorton v. Collins & Aikman Corp.

P orders carpet from D; D sends sales acknowledgment form with arbitration clause on back; D ships; P pays (only one form here, but court still applies 2-207).

There is a contract because acceptance does not fit into “unless” clause 2-207(1): D’s acceptance was not “expressly conditional” on P’s

assent to the additional terms. The terms of the K are governed by 2-207(2)(b)

Arbitration clause is an additional term which materially altered the agreement, so does not become part of the agreement

Even if D’s acceptance did fit into “unless” clause, the outcome would not change because there would be a K through conduct, and any terms that both parties did not agree to (i.e. the arbitration term) drop out of the agreement and gap filler applied.

o C. Itoh & Co. v. Jordan Int’l Co. Jordan’s acknowledgement form made K expressly conditional on Buyer’s

assent to the additional/different terms/conditions (including arbitration): No K under UCC 2-207(1) (fits into the unless clause), but K is formed

under 2-207(3) – by conduct. Knockout terms the parties do not agree on, and use gap-fillers. No arbitration clause gap-filler, so no arbitration.

Seller can protect himself by not delivering the goods until such assent is forthcoming.

o Northrop Corp. v. Litronic Industries D placed an order using an order form containing a 90-day warranty; P

accepted with a form containing an unlimited warranty – clearly a different term.

P’s acceptance was not made conditional on assent, so acceptance does NOT fit into “unless” clause of 2-207(1), so there was a K under 2-207(1).

Determining terms of K: contradictory terms get knocked out and replaced with UCC gap-fillers.

pg. 14

Note that this incentivizes offeror to write very long, thorough offer so if offeree comes back with differing terms, they get knocked out and not added (because they aren’t additional).

o Step-Saver Data Systems, Inc. v. Wyse Technology P phones in order for computer programs; D promises to ship; P sends

P.O.; D ships with invoice & box-top license; P pays (agreement said “opening box implies you accept the terms”)

D argues that: (1) D’s acceptance was expressly conditional on the additional

terms of the box-top license and (2) P assented to the terms of the box-top license because they

repeatedly bought from them (so have seen box-top agreement) Court says acceptance was not expressly conditional so K was formed

under 2-207(1). The box-top license materially alters the agreement under 2-207(2)(b), so it gets knocked out and gap fillers apply.

RULE: Stating in an acceptance “opening box implies you accept the terms” is not clear enough (i.e. that you do not intend to go forward without assent to the additional terms). Ordering a product, seeing the box top license, and continuing to order more product, does not serve as assent to the additional term under 2-207(3).

o ProCD, Inc. v. Zeidenberg P buys discs, license (on disc, and appeared on screen each time software

ran) limited use to noncommercial use; D used it for commercial use. Court does not apply 2-207 here, but says “customer agreed to the term

that the software is subject to an enclosed license, as it says on the box” – pay now, terms later (not uncommon: airline tickets, concert tickets, insurance policies). Buyer can return the items if terms are not agreeable (so this policy is not unfair).

“Rolling K” (buyer agrees to terms before seeing them): Court holds that individual terms inside box (+ buyer can return if unacceptable) = offer

D using (not merely buying) software + not returning it within the given time period = acceptance by performance (there was a K) AND ALL OF P’s TERMS APPLY

o Hill v. Gateway (another Rolling K) P orders computer. Upon arrival, box has a list of terms of agreement (this

is the offer, includes an arbitration clause), says purchaser can return computer within 30 days.

P keeps computer >30 days (acceptance of offeror’s terms, K formed). P’s try to sue in court, D invokes arbitration agreement. Policy: economic efficiency. Inefficient to have cashiers read the terms to

a buyer (plus what if they forgot one?). By allowing manufacturers to place terms inside the box, it puts everything in writing, and purchaser can review in their own time. Buyer can return the product if the terms are unsatisfactory, if they keep the product they agree to those terms.

pg. 15

Option ContractsOption = independent promise to keep an offer open for a specified period of time.

Limits offeror’s power to revoke and preserves offeree’s power to accept.o Option contracts are NOT terminated by rejection, counteroffer, revocation, or

death of the offeror UNLESS the requirements are met for the discharge of a contractual duty (R2d 37)

R2d 87(1): o An offer is binding as an option if: (all 3 must be met)

It is in writing and signed by the offeror (formality), and It recites a purported consideration for making the offer, and It proposes an exchange on fair terms within a reasonable time.

UCC 2-205 (Firm Offer rule). o An offer to buy/sell goods is irrevocable if:

The offeror is a merchant; There are written assurances from offeror that offer is to remain open; and Reasonable time (Irrevocability cannot exceed 90 days, regardless of

whether a time period is stated/implied) Ways to create an option contract:

o Consideration R2d:

If option is a promise not to revoke an offer for a new K, offeree must generally give separate consideration for it to be enforceable.

If option is w/i an existing K, no separate consideration is required. If no consideration is given, then it is not an option but just an

“expiring time frame.” UCC:

Seller’s promise to keep an offer open does not need consideration if it is in writing and signed.

o Reliance (R2d 87(2)) (Drennan) An offer which the offeror should reasonably expect to induce an action or

forbearance of a substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option K to the extent necessary to avoid injustice

Just like R2d 90, but with an “offer” instead of a “promise”o On practice exam 2013, could’ve argued reliance on a

promise and reliance on an offer. Removes offeror’s right to revoke Preparation for performance may constitute “reliance” and thereby keep

offer open – even if offeror is not seeking performance.o Partial Performance (R2d 45) (Ragosta)

If the offer is for a unilateral contract, the offeror cannot revoke the offer once the offeree has begun performance. Note, though, that the offeree must have had knowledge of the offer when she began the performance.

Once performance has begun, the offeree will have a reasonable time to complete performance. The offeree cannot be required to complete the performance, however.

pg. 16

Here, preparation to perform is not enough. Try 87(2) instead. Cases:

o Dickinson v. Dodds (no consideration = no option, just an expiring time frame) D offers to sell house to P, “this offer to be left over until Friday, 9 oclock

a.m. June 12 1874.” P learns D has sold the house to another party, then tries to accept. Held for D, no consideration for the option, and P had reason to know D sold the house.

If no consideration is given, then it is not an option but rather just an “expiring time frame.”

D revoked his offer by expressing intent to sell to someone else (no express statement required, P could infer from D’s conduct) before P’s acceptance. No meeting of the minds ever occurred.

o Drennan v. Star Paving Co. S phones in bid. Same day: G uses S’s bid in calculation of own bid, and

school district accepts G’s bid. Morning of next day, G comes to S’s office. Before G accepts, S revokes own bid claiming mistake. G uses another S for $3,000 more and sues S for difference.

Held for G: he substantially relied on S’s offer and it was therefore irrevocable

Limited option K: G cannot try to renegotiate terms or delay acceptance (he did neither) but he can turn down S’s bid after being awarded the contract (not a 2-way street, he can reject S’s bid, but because of option, S cannot revoke bid)

RULE: If one’s offer does not explicitly state that it is revocable (or something of that sort), if offeree substantially relies on the offer, it cannot be revoked despite no acceptance/consideration prior to attempt to revoke (i.e. there is a limited option K, regardless of consideration). R2d 87(2)

Note: "Would you be willing to lower your bid?" is not necessarily reopening bargaining, could just be an inquiry.

Note: Seems unfair to leave sub bound while G is not bound. Counter: Gs often have to say in their own bid which S they are

using, so O knows its reputable people doing the work. Makes it harder for G to go elsewhere.

Option Contracts and Revocation Bilateral contract: A offers to sell his home to B. Before B accepts, B sells her own

home. Also before B accepts, A tries to revoke the offer. Contract?o For B: Reasonable reliance resulting in a foreseeable change in position is a

compelling basis to imply a promise not to revoke an offer.o For A: R2d 87(2): Without any acceptance, how is this injustice?

Unilateral contract: A promises B $1,000 if B will paint A’s house. A makes it clear that it is an offer for a unilateral contract. B buys paint, but has not yet begun painting the house. A tries to revoke.

o For a unilateral contract, actual completion of performance would be acceptance. Can A revoke before B has begun painting? 2 arguments:

R2d 45(1): A has invited B to accept by rendering performance (not a promissory acceptance). An option K is created when B begins the invited

pg. 17

performance. Buying paint is not beginning performance, an option K has not been created, and A can revoke.

R2d 87(2): A should reasonably expect her offer to induce action of the offeree before acceptance (B must buy paint before he can complete performance). It did induce such action, so it is binding as an option contract to the extent necessary to avoid injustice.

Some states have statutes that change the rule re: revocations, but not “Central VA”

Contract Enforcement

ConsiderationIn addition to offer and acceptance, a K requires consideration to be enforceable. (exception for a promise to repay a debt after the statute of limitations has passed – R2d 82)

Bargain (R2d 71)o A performance/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.

Benefit/Detriment (arguably no longer part of the test: see Kirksey v. Kirksey) o Most courts say there is consideration if there is a detriment to the promisee,

irrespective of benefit to promisor. Consideration does not require benefit/detriment, equivalence in the values exchanged, or

“mutuality of obligation” (R2d 79)o Gross inadequacy of consideration may be relevant to capacity, fraud, perhaps

lack of intent to be bound.o Not intended as a safeguard against imprudent contracts.

Consideration is a promise/performance the promisor bargains for in exchange for the promise. (R2d 71). Can take the form of:

o A return promise to do somethingo A return promise to forbear from doing something legally permitted;o Performance of an act;o The creation, modification, or destruction of a legal relation

A promise made without consideration is a gratuitous promise Consideration Cases:

o Hamer v. Sidway Uncle promises nephew 5K on 21st bday if he refrains from smoking or

drinking. Nephew upholds bargain, uncle dies, nephew never gets money. Executor believed law should not enforce because it lacked consideration. Held for nephew even though he technically benefited from his forbearance.

Court will not inquire as to value of consideration. Any waiver of legal right at the request of another is sufficient consideration for a promise

Different case if promise had been to refrain from illegal activity R2d 71: forbearance counts as performance R2d 79: There is no additional requirement of a detriment to promisee

o Kirksey v. Kirksey (did away with benefit/detriment requirement of common law)

pg. 18

“If you will come down and see me, I will let you have a place to raise your family. P left home, lives there for 2 yrs then is kicked out.

No consideration because act between family members is likely gratuitous promise. Also, D didn’t “seek” anything = no bargain, no consideration

Her actions facilitate the giving of the gift - versus in Hamer where his abstention from drinking does not facilitate the giving of $5k, he actually wanted his nephew to not drink

o Lake Land v. Columber P claims D violated non-compete agreement to not engage in business in

50-mile radius for 3 yrs. D says no consideration for the non-compete, he didn’t get anything out of it

Continuing an “at-will” relationship = consideration (D bargaining for continued employment). When non-compete agreement was presented, D had legal right to leave, P had legal right to fire D if he did not sign. By signing, both parties enter into new “at-will” employment relationship.

There was bargain, but not benefit/detriment - employer's freedom of action was not restricted, experienced benefit but no detriment

Policy: Courts may be hostile to non-compete agreements, which give a lot of power to employer, makes it harder for a person to earn a good living, facilitates collusion.

Hypo: Adam wants to take Sarah to a concert because his wife will not let him go unless he takes his daughter. Sarah does not know this, and Adam thinks he can use the concert to get Sarah to wash his car. Adam asks Sarah to promise to wash his car if he takes her to the concert. Assuming that they go to the concert, has Sarah received consideration for her promise?

o Yes, see §81(2): The fact that a promise does not of itself induce a performance… does not prevent the performance… from being consideration for the promise.

o Relying on his external manifestation when making the promise constitutes consideration.

Settlement of Claims as Consideration Williston test:

o Forbearance from suit on a clearly invalid claim is insufficient consideration.o Forbearance from suit on a claim of doubtful validity is sufficient consideration if

there is sincere belief in the validity of the claim (good faith and reasonable basis) R2d 74 test: (good faith or a reasonable basis) Forbearance to assert a claim which

proves to be invalid is not consideration unless:o The claim is doubtful because of uncertainty of facts or law (honest belief), oro The forbearing party believes the claim may be fairly determined to be valid

(reasonable belief) [Note: the validity of the claim matters, informs whether the belief was honest] Settlement of Claims Cases:

o Fiege v. Boehm B claimed F fathered her child, F agreed to give $ in exchange for B not

filing bastardy proceedings. Pays portion of money, then stops. B brings

pg. 19

proceedings, then discovers child is not F’s. B didn’t know, so it was made in good faith even though she didn’t tell F she wasn’t sure.

Forbearance to assert a doubtful claim = consideration (honest belief). Good faith test applies at time of agreement, not time of trial

(If she had known the claim was false, that would be fraud.)o Dyer v. National By-Products, Inc.

P suffered work-related accident, left on worker’s comp, returns, laid off. Believed he had valid claim against D (employer), said his forbearance from litigating was in exchange for a promise of lifetime employment.

Forbearance from filing an invalid legal claim can constitute consideration for a settlement if the party in good faith believed that the claim was legitimate.

Conditional promises are not consideration if the promisor knows at the time of making the promise that the condition cannot occur (R2d 76).

Consideration or mere gift? Test to distinguish gift from consideration: whether offeree could have reasonably

believed that the intent of the offeror was to induce the action. o If yes, then there is consideration.

A party’s promise to make a gift is enforceable under the doctrine of promissory estoppel if the promisor/donor knows that the promise will induce substantial reliance by the promisee and the failure to enforce the promise will cause substantial injustice.

Ex. 1: A promises to give B $1,000 when B turns 21. o The act of B attaining the age of 21 is not a bargained-for event and is thus not

sufficient consideration. o Note: There can be no reliance on the promise because B will turn 21 regardless

of A’s promise (so promissory estoppel does not apply) Ex. 2: A offers B $1,000 if B quits smoking.

o A is bargaining for B to quit and thus B’s act is sufficient consideration. o Note: If B relied on A’s promise, promissory estoppel may apply.

Adequacy of consideration: Must be something of substance given in exchange for the promise. Does not need to have economic/objective value as long as promisor wants it (subjective

value, e.g., “a mere peppercorn is enough”). Promise to perform a preexisting legal duty is not consideration because the promisor is

already bound to perform. Must give something in addition to what is already owed (however slight).

Consideration when modifying an existing K more here R2d approach: consideration is required

o Modification of an existing K must be supported by consideration. Modification may still be enforced if:

There is a rescission of the existing K and the entering into a new K, whereby one party must perform more than he was to perform under the original K;

pg. 20

There are unforeseen difficulties, and one party agrees to compensate the other when the difficulties are discovered; or

There are new obligations on both sides. UCC approach: good faith is required

o A merchant’s promise to keep an offer open need not be supported by consideration if it is in an authenticated writing.

o No consideration is necessary to modify a K for sale of goods, though there is a requirement of good faith. An attempt to extort modification will be ineffective.

Illusory Promises (and Termination Clauses/Satisfaction Clauses)A promise that essentially pledges nothing (either too vague or promisor can choose whether or not to honor it) is not consideration. 4 ways to “save” illusory promise, make it enforceable:

1. If each alternative option would have been bargained for individually, there is consideration. R2d 77(a)

a. Ex: Right of first refusal. Essentially two alternatives: “I will offer to sell to you, or I will not sell to anyone else.” Restricts rights of the promisor.

2. If one option would have been bargained for and the other wouldn’t have, but there was a substantial chance that events would eliminate the latter option R2d 77(b)

a. Ex: Buyer orders goods & reserves right to cancel before shipment. Substantial chance that shipment will occur before he cancels the order.

3. Disguised offer/condition subsequently satisfied (i.e. at time of offer, there was a contingent condition that has since been performed: the performance is consideration) (Wood v. Lucy)

4. Good faith or reasonable effort wherever there would be a lack of considerationa. A promise conditioned upon an event within the promisor's control is not

illusory if the promisor impliedly promises to make reasonable effort to bring the event about, or to use good faith / honest judgment in determining whether or not it has occurred (UCC 2-103)

b. Ex: Mattei v. Hopper (subjective test of satisfaction requires good faith) Termination clauses (see also Express Conditions) this is copied/pasted from other

outline, check actual notes to see how this fits:o If a termination clause is read as giving a party the power to terminate at any time

at will, without more, the party’s promise will be held to be illusoryo If, however, a termination clause is read as requiring the party to give prior

notice, notice in writing, or in some other way to restrict the right of termination, the promise will NOT be held to be illusory.

Satisfaction Clauses (Mattei)o Satisfaction as to commercial value, mechanical quality (more objective)

Standard: reasonable person If the factors are too numerous and varied for “reasonable person” test, it

falls into the second categoryo Satisfaction regarding fancy, taste, or judgment (subjective)

Standard: good faith Does not allow promisor to withdraw from the agreement based on

general dissatisfaction, but instead imposes an obligation to exercise the condition in good faith – so promise to perform is valid consideration.

pg. 21

Illusory Promise Cases:o Strong v. Sheffield

Uncle loans money agrees not to collect until “time when he sees fit” (ends up being 2yrs).

Court finds that the performance could not serve as consideration. Even though there was performance, performance is not what was

bargained for – the promise was bargained for and the promise of forbearance was illusory (completely under Uncle’s control)

o Mattei v. Hopper (satisfaction clause) P agrees to buy land from D. Agreement contained a personal satisfaction

clause: P was excused from performance if unable to arrange satisfactory leases of space in the shopping center he was building with the land

The K did not lack consideration. P was obligated to make a good faith determination of whether the leases were satisfactory to him.

o Obering v. Swain-Roach Lumber Co.(disguised condition subsequently satisfied) S entered into K with P stating: if S bought certain farmland, S would sell

the land to O after removing the timber. S bought the farmland and tendered a deed for the land to O, reserving the timber for itself. O refused to accept it. Court ruled in favor of S.

S’s promise potentially illusory because could just not by the land to get out of the contract.

The fact that an offer does not become binding until the performance of some act that constitutes both an acceptance and consideration does not render the K invalid due to lack of mutuality. S’s promise was consideration, legal detriment, couldn’t sell to another party.

R2d 77: Disguised offer/condition subsequently satisfiedo Wood v. Lucy

D gave P exclusive right to market and license her designs. D was to receive half of the revenue of any contracts P made. D breached by contracting with others, P sued. D says K was invalid for lack of consideration because P was never mutually bound (no express clause in K about P actually performing). Held for P.

(1) A contract may be enforced when there is no evidence of a promise, exchanged as consideration, in the explicit terms of the contract.

(2) A promise to use reasonable efforts (to market the designs) may be implied from the entire circumstances of a contract.

Consideration: Requirements and Output Contracts (Sale of Goods) Bonebrake test for whether it’s a good or service

o Whether predominant factor is rendition of a service, with goods incidentally involved (e.g. contract with artist for a painting) or transaction of sale, with labor incidentally involved (e.g. installation of a water heather in a bathroom).

Kirkpatrick v. Introspect Healthcare Corp applied test to conclude that a K to do interior design did not come within Article 2 even though it required interior designer to sell furnishings to complete the design

pg. 22

o On exam, if this is unclear, say, “If this is a good, here is how the UCC will govern. If it were not a good, here is how the common law would govern.”

Requirements and output contractso Requirement K: Buyer agrees to buy all it will require of a product from Sellero Output K: Seller agrees to sell all it manufactures of a product to Buyero UCC 2-306 requires good faith with regard to these contracts. No quantity may

be “unreasonably disproportionate” to any stated estimate, and in the absence of a stated estimate to any normal or otherwise comparable prior requirements or output.

o R2d 79 says if a K is supported by valid consideration, no further “mutuality of obligation” is needed. A party’s good faith obligation to purchase its requirements is sufficient consideration for a requirements K, even if party had no requirements at the time of formation. (Structural Polymer)

Cases:o Structural Polymer Group v. Zoltek Corp.

D entered a 10-year requirements K to supply P’s carbon fiber. After P sued D for breach (orders went unfilled), D said the contract was void for lack of mutuality of obligation because:

P had no requirements at the time. o Court: D could claim bad faith if P refused to order

anything – however, that would mean P breached, not that K was void for lack of consideration.

The K gave P the option to buy from different suppliers if D could not meet lower prices.

o Court: P was obligated to buy from D if the price was met. The promise was not illusory.

D claimed another product they manufactured was interchangeable with the one mentioned in the K, which they had stopped manufacturing.

o Court: They are not “interchangeable,” but even if they were, the K is not void. If P bought an interchangeable product from someone else without good faith, D could sue for breach.

R2d 79: If a contract is supported by valid consideration, no further “mutuality of obligation” is needed.

Good faith provides substance to output/requirements contracts.

Reliance (Promissory Estoppel)Treats promisee’s reliance as an independent and sufficient basis for enforcement. Acts as consideration. (aka Reliance, Detrimental Reliance)

Elements, according to Restatement (First) 90:o Promiseo Promisor would reasonably expect to induce reliance of a definite and

substantial charactero Does induce such action or forbearance

pg. 23

o Injustice can only be avoided by enforcement [full expectation damages] Elements, according to R2d §90:

o Promiseo Promisor would reasonably expect to induce reliance o Does induce such action or forbearanceo Limit remedy as justice requires

[limits damages to reliance on the promise, not expectation damages] Traditional Categories:

o Family promiseso Promises to convey land and improvementso Promise coupled with gratuitous bailments

Gratuitous bailment = when person A entrusts his property to person B and person B makes a promise to A respecting the property, on which A relies.

o Charitable subscriptions Ex. If A promises to give a university $1M, and the university purchases

land in reliance upon the promise, the promise is enforceable. On exam, still look to whether there was bargain (i.e. for promise to have

wing named after her) The law sometimes enforces promises made to charitable organizations

even without the showing of reliance Damages:

o Reliance damages are recoverable under promissory estoppel, expectation damages are not

Promissory Estoppel Cases:o Ricketts v. Scothorn (note: equitable estoppel here)

D tells P (granddaughter) he is going to leave her 2k, P gives up job. Equitable estoppel prevents a promisor from revoking an otherwise

unenforceable gratuitous promise if the promisee foreseeably and reasonably relied on the promise to her detriment.

o Feinberg v. Pfeiffer Co. Company promises to pay employee $200/mo after she retires, she later

retires, D initially sends $ then reduces amount to $100 (P refuses). D argues it was not an enforceable promise, merely gratuity. In the time since she has stopped working, she has become “unemployable.”

P’s detrimental reliance is sufficient consideration to transform Pfeiffer’s gratuitous promise into an enforceable contract.

Note: the following were not consideration: past service (can’t bargain for promise in exchange for this) continuing to work (she could have quit at any time) retirement (not a condition of the promise, not bargained for)

o Cohen v. Cowles Media Company P approached D with info regarding a state gubernatorial candidate. D’s

reporters promised P he would remain anonymous as a confidential source. D’s editors chose to disclose P’s identity. [Consideration: P

pg. 24

bargained for confidentiality in exchange for the information. Promissory estoppel: he relied on their promise.]

Held for D. Reporters, in promising anonymity, do not intend to create Ks, and there can be no legally binding commitment. As far as promissory estoppel: does not appear that justice can only be avoided by enforcing the promise. Would violate newspaper’s First Amendment rights.

o D & G Stout, Inc. v Bacardi Imports, Inc. Two of P’s major suppliers (more than 50% of its sales) withdrew their

lines. P was approached by a buyer wanting to purchase the company. D affirmed its commitment to P, so P rejected the buyer’s offer. D then withdrew, so P’s other major supplier withdrew (and employees left). Buyer again offered to purchase P, but at a price $550k lower than before.

P allowed to recover difference between the sale price it received and the original offer (because the co. that bought them never assumed it would retain Bacardi). Reliance damages, not expectation damages.

A party can reasonably rely on the promise of a continuation of an at-will relationship. P reasonably relied on D’s assurances and thereby lost negotiating power in selling to another distributor.

Note: Promissory estoppel doesn’t apply to at-will employees seeking lost wages, but can recover for other damages (ex. moving expenses in expectation of a job, any “out of pocket expenses”)

Note: Court does not clarify how long D would have been obligated to continue doing business with P.

o See also: Hoffman v. Red Owl, Grouse v. Group Health Plan, Cyberchron v. Calldata, Channel Homes (promissory estoppel in a definiteness context)

RestitutionQuasi contract: When there is no K between the parties, or a contract is unenforceable, and a lack of recovery would be unjust, a person who has been unjustly enriched at the expense of another is required to pay restitution (R2d 370)

A quasi-contract based on unjust enrichment can be implied by law only when there is no other remedy available (i.e. from another party). (Callano)

A promise is not required. Something given in the past is typically not consideration because it could not have been

bargained for, nor could it have been done in reliance upon the promise. o A promise to pay for benefit already received: no bargain, no consideration

Exceptions: statute of limitations, bankruptcy, infancy - if you reaffirm your obligation to pay after each of these things, it's binding

However, modern trend toward enforcing such promises when necessary to “prevent injustice.”

o Ex: P sees D’s horse running free, knows D is out of town, feeds/houses horse. D returns and promises to pay P $50 at the end of the month. Usually unenforceable as an un-bargained-for “past consideration.” P may be able to recover in quasi contract under a theory of unjust enrichment if P expected to be compensated and D received a benefit from P’s actions.

pg. 25

Gratuitous volunteers (i.e. non-professionals, family members, spouses) and officious intermeddlers are excluded from collecting restitution.

o Officious intermeddlers: You don’t recover if you forced the benefit on the recipient and should have waited/negotiated

o Exception: one who acts out of gratuity may seek restitution if services rendered are excessively expensive/burdensome to person rendering them

o When the party receiving the benefit “names a price,” it removes the challenge of determining how much the service was worth (Webb)

One who acts in a professional capacity (i.e. doctor) may recover.

When D breaches a K, restitution restores to P whatever benefit was conferred upon D prior to breach, when it would be unjust for D to retain that benefit (R2d 373).

o Sometimes, restitution may be recovered even if P would’ve suffered loss had D not breached.

Ex.: if A contracts to paint B’s house for $500, and B repudiates the K after A has partially performed, and A shows that the fair value of the work that has been done is actually $1,000, most courts allow recovery of restitution damages ($1,000) on the theory that otherwise D would be profiting from the breach.

Partial performance = restitution If, however, at the time of D’s breach, P has fully performed and the D

owes only money (not some other performance), P is limited to expectation damages (generally K price minus cost of completion).

Full performance = expectation Cases:

o Pyeatte v. Pyeatte Wife agrees to put husband through law school without his having to work

and that when he graduated, he would put her through graduate school on same terms. Husband graduates, gets job, leaves wife.

Consideration, bargain, and detriment, but no K – restitution claims between spouses have traditionally failed – services of each presumed to be gratuitous.

We did get restitution here: “Where, however, the facts demonstrate an agreement between the spouses and an extraordinary or unilateral effort by one spouse which inures solely to the benefit of the other by the time of dissolution, the remedy of restitution is appropriate.”

If they stayed together another 20 years after his graduation, no restitution because then she has been conferred the benefit of being the wife of a successful law firm partner, so it would not be unjust.

o Webb v. McGowin P was permanently injured when he prevented a workplace accident,

saving D’s life. D promised to pay P $15 every two weeks for the rest of P’s life, and made the payments until his death 8 years later. Executors stopped payments.

Moral obligation is sufficient consideration to support a subsequent promise to pay where the promisor has received a material benefit

pg. 26

Weird result because there was no bargain. Court focuses on material benefit/detriment.

When the party receiving the benefit “names a price,” it removes the challenge of determining how much the service was worth. Partial promise fulfillment adds seriousness to it.

o Harrington v. Taylor D assaulted his wife. His wife sought safety in P’s house. D began

assaulting his wife again, she was about to strike him with an axe when P intervened. Axe struck her hand, severe injury. D orally promised to pay, paid a small amount, refused to pay more.

A voluntary humanitarian act is not consideration. (reconcilable with Webb because D here never named a price).

o Cotnam v. Wisdom D was thrown from his car in accident (unconscious). Ps (2 doctors) were

summoned, performed difficult surgery unsuccessfully, D died. D refuses to pay because he did not consent to service (he was unconscious)

Where services have been provided in an emergency to one who is unable to contract due to his condition, a quasi-contract can create a duty to pay for the reasonable value of the services (although there was no “meeting of the minds”).

o Callano v. Oakwood Park Homes Corp. Pendergast contracted to purchase a lot from D. Ps entered into K with

Pendergast and planted shrubbery on that lot. Pendergast died shortly after and had not yet paid. His estate agreed with D to cancel the lot purchase. The lot was sold, with the shrubbery, to new purchasers. Ps brought an action against D for the unpaid invoice, claiming D was unjustly enriched.

Since Ps’ direct relationship was with Pendergast, a quasi-contract cannot be implied to substitute D for Pendergast, the party against whom a legal remedy may be sought.

To recover on ground of quasi contract, P must show d: Was enriched (i.e. received a benefit); and Retention of this benefit without payment is unjust.

o It is unjust if: P expected remuneration from D (direct

relationship); or There was fraud.

A quasi-contract based on unjust enrichment can be implied by law only when there is no other remedy available (i.e. from another party).

If they had planted the shrubs at the wrong house (mistake), that would be their problem – no recovery then, either.

Definiteness Even if there is a manifestation of an intent to be bound, the terms of the K (not just the

offer) must be reasonably certain for K to be binding (R2d 33) R2d approach:

o Terms must be reasonably certain (R2d 33(1));

pg. 27

o they are reasonably certain if they provide a basis for determining the existence of a breach and for giving an appropriate remedy (R2d 33(2));

o The fact that one or more terms are left open/uncertain may demonstrate a lack of offer or acceptance (R2d(33(3)).

o All essential terms must be covered (subject matter/price/quantity) UCC approach:

o UCC 2-204 allows for more liberal K formation: K is formed if parties intend to contract and there is a reasonable certain basis for a remedy.

o As long as parties intend to create a K, UCC “fills the gap” when K is silent as to terms other than quantity or subject matter, including setting place for delivery, or even price (UCC 2-305).

Requirements/output contracts satisfy UCC K formation requirements even without naming specific quantities.

UCC implies good faith as a term.

Exam checklist:Exam checklist for definiteness:

Lots of missing/unspecified terms? o May signal parties did not intend to be bound.

Clear intent to be bound, but K is indefinite? o May not be binding due to difficulty of determining whether there was a breach,

and what the remedy would be (R2d 33(2)) Missing material terms?

o Common law: courts have been historically to insert these into Ks, but they can.o Have the parties provided a pricing mechanism?

Makes inserting a price term easier (Toys, Inc.) Pricing mechanism must be definite, not just “reasonable”

o UCC: More willing to apply material terms, even price (2-305), but not quantity. If K is too indefinite, court will order restitution.

Definiteness Cases: Toys, Inc. v. F.M. Burlington Co.

o P entered 5-year lease to rent retail space in D’s mall. Option to renew. Upon renewal, new rental amount would be “renegotiated to the then prevailing rate within the mall.” P notified D of intent to renew. D provided P with new rental amount. P responded that its renewal had been premised on a different understanding of rate. Unsuccessfully attempted to negotiate for a year. Eventually, D informed P that it was leasing to another company.

o K will not fail for definiteness if price is not given so long as some standard for determining price is given. The option contained a practicable, objective method of determining the essential terms.

Oglebay Norton Co. v. Armco, Inc.o P entered long term K with D. P agreed to meet all of D’s shipping needs, and P

agreed to pay a flexible shipping rate, set according to market factors described in the K. Parties extended the K periodically, most recently through 2010. Between 1983-1985, market changed and shipping rates were no longer made public.

pg. 28

Could no longer rely on the market factors to determine rate. Parties mutually agreed on a rate in 1984, but were unable to agree thereafter. P filed for a declaratory judgment to set the rate, and the parties continued to perform pending the court’s decision.

o If the parties intend to remain bound by the K, the K remains enforceable even though a key term has become indefinite. The court set the shipping rate for 1986, and ordering the parties to mutually agree on, or submit to mediation to determine, shipping rate through end of K.

Hoffman v. Red Owlo P in process of obtaining franchise from D; D gives various assurances that

franchise will be given. In course of negotiations, at D’s suggestion, P sells bakery, buys/sells small grocery store, moves to a new town, etc.

o Cannot use 87(2) because no offer; Many promises made by D, but none of them were definite enough to have been an offer for a K (unclear that they intended to bind themselves; essential factors lacking like size of building, layout, purchase options, etc)

o R2d §90 doesn’t require that the promise meet the requirements of an offer; court concludes that (R2d 90(3)) justice requires granting relief for P. D made promises which P relied on to their detriment

o A promise may give rise to an action for promissory estoppel even if it doesn’t contain all essential details and is incapable of resulting in binding K.

o What if they were only raising the required capital because of rapid inflation? Then, justice wouldn’t require enforcement of their promise because there was a valid reason for the change.

Grouse v. Group Health Plan: o Court awards damages based on promissory estoppel to an employee whose job

offer was rescinded before his first day of work, but after he had quit his job and turned down employment elsewhere.

o This is not the death knell of “at-will employment,” but the employer is expected to use good faith: give the employee a good faith opportunity to perform his duties.

Cyberchron Corp. v. Calldata Systems Development, Inc.o P was supposed to manufacture customized equipment for D to be provided to

Marine Corps. The item weight was unresolved, but D promised it would be resolved as long as P continued to develop the equipment. The parties never agreed and the K was terminated.

o D actively encouraged P to incur the costs and expenses in developing the equipment, but meanwhile negotiated and purchased an inferior version from another supplier. There was evidence of a clear and unambiguous promise by D that the weight issue would be resolved if P kept working, and P reasonably and foreseeably relied on that promise.

o They don’t award damages incurred prior to mid-July (prior to when “promise” was made). You only get reliance damages after the promise.

Channel Home Centers v. Grossmano Ds negotiated with P and signed letter of intent. Ds promised to “withdraw the

Store from the rental market and only negotiate the above-described leasing

pg. 29

transaction to completion.” Ds then unilaterally terminated negotiations with P and precipitously entered into a lease agreement with another store.

o A letter of intent (promising to negotiate in good faith) constitutes an enforceable agreement if P can show:

Intent to be bound to the letter Promise sufficiently definite to enforce Consideration on both sides (Ds wanted it to secure financing, Ps wanted

it to secure rental space)o Main question is whether a promise to negotiate in good faith is sufficiently

definite to enforce. Traditional view: too indefinite, but letter of intent pushes this into “Tribune II” territory: Mutual commitment to negotiate together in good faith in effort to reach final agreement. When certain major terms exist more definite easier to demonstrate breach.

Remedy will be important here (for a remedy as harsh as specific performance to be ordered, more definiteness is required).

CapacityImmaturity/Infancy – R2d 14

R2d 14: "Unless a statute provides otherwise, a natural person has the capacity to incur only voidable contractual duties until the beginning of the day before the person's eighteenth birthday."

Ks with minor are voidable at minor's election (not at adult’s election). Minor can disaffirm/ratify K within reasonable time after reaching majority, but rarely enforced against minor.

Minors are bound by their Ks for “necessaries” like board, apparel, medical aid, teaching and instruction, etc… but this is a relative term - What would be necessary in a legal sense for a minor with ample means might not be so for one with no means.

o In these cases, the other party would at least have a claim for the reasonable value of the services (i.e. a hospital that performed medical treatment)

If minor disaffirms a K, might owe restitution:o Generally, need only give back what he has.o Exceptions – sometimes must pay "reasonable value" of what he received, for:

Necessities – but maybe not if parent or guardian is obligated to supply Cash vs. credit transaction: Some courts distinguish, less willing to let minor disaffirm a

cash transaction (vs. credit, which minor might not understand). Restatement (Third) of Restitution and Unjust Enrichment: “A person who renders

performance under an agreement that is unenforceable by reason of the other party's legal incapacity has a claim in restitution… to prevent unjust enrichment.”

o But there is little authority outside of New Hampshire for this view of the law. Hypo: M buys a car from A on credit and crashes it. M returns car to A. What, if anything

does M owe A? o Traditional rule, he owes A nothing. All he has to give back is the crashed car. o Apparent shift toward requiring minor to give back something closer to the

original value in cases where M is aware of problem for months and ignores it. Doesn’t matter if M could pass for 30, or signed form claiming she was 21 (Courts very

reluctant to hold minor responsible for misrepresentation)

pg. 30

What if M contracted for a meal? (Goes into Denny’s, eats, doesn’t pay)o Arguably food is a necessity. But maybe not if there’s a guardian who is obligated

to provide food to you. Cases:

o Douglass v. Pflueger Hawaii Minor hurt at workplace, didn’t want to submit to arbitration clause in

employment K. Court holds there’s a statute in place regarding a minor’s ability to enter

into employment contracts, and that it displaces the common law. (Note court finds other reasons not to enforce it, but not due to minor’s age).

o Rivera v. Reading Housing Authority Teenage mother's application for public housing was denied. "If a minor is living with a parent or guardian who is able and willing to

furnish the minor with housing, housing is not a necessary… for the Housing Authority to assume the risks of entering into unenforceable contracts would be to jeopardize sound fiscal policy."

Insanity – Mental Illness or Defect R2d 15(1)(b) – matters whether other party has reason to know of his condition. R2d 15(2) – Where the K is made on fair terms and the other party doesn’t know of the

mental illness/defect, the power of avoiding the K terminates to the extent that the contract has been performed (or circumstances have so changed that avoidance would be unjust). Court may grant relief.

Overreaching: Getting Out of a K LegallyPressure in BargainingPELDR

Promising to do something that you were already obligated to do is not consideration. R2d 73 waters this down slightly: “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.”

Ways to evade this rule:o Rescission + new contract (Schwartzreich approach)o Waivero Taking on additional task to serve as consideration

Erosion of rule:o UCC 2-209: rely on good faith to correct problem. “An agreement modifying a

contract within this Article needs no consideration to be binding.”o NY Statute: formality (signed writing) gets around the ruleo R2d 89: Relax the rule when there are changed circumstances

Cases:o Alaska Packers (the “good” PELDR case)

D (APA) K-ed with sailors (Ps). Agreed to pay each P $50 for the season and two cents per salmon they assisted in catching. After arriving in AK, the Ps stopped working, demanded $100 for the season in order to resume their work. Unable to hire replacements, an APA agent signed a new K

pg. 31

agreeing to higher pay. Ultimately paid only the original K price. Ps sued, alleging they had demanded the new price because APA had provided them faulty fishing nets.

PELDR: There was a situational monopoly here. Ruling against APA would be bad policy.

APA’s other options (besides allowing sailors to work): Sue for breach? Even if they could show lost profits, sailors will be

judgment-proof. Court-ordered specific performance? Not feasible from middle of

ocean, and courts may be unwilling to do that. Promising additional money was sort of “self-help” specific performance.

Sailors’ other options: Agreeing to some additional task would have been consideration. Ps may argue APA waived their initial contract and created a new

contract: problem is that this agent didn’t have that authority. Estoppel argument, that they only continued working because they

had been promised $100: but only reason they promised more money is because of threatened wrongful breach.

Bad nets = breach of K, so agreement to pay $100 could have been a settlement for forbearance from suit

o Court said nets were fine, but w/ settlement all that matters is that they believed they had a valid claim

o Schwartzreich Employee signs K to work for $90/week for one year (not “at-will”

employment). Receives better offer, employer responds he will pay $100, surrenders copy of original K and gives him a K for $100.

There was mutual consent to rescind the contract and create a new contract. The second K is enforceable.

Consideration for rescinding K1 = each party relinquishing the other’s duty to perform/pay. Consideration for K2 = employer agreeing to pay $100, and employee agreeing to work for him.

o Courts that don’t want to enforce this will just say there was no consideration.

Odd because employer had a right to get the employee to work for duration of contract for $90. As in Alaska Packers, employee gets paid more but hasn’t agreed to do anything differently.

o Watkins & Son v. Carrig P K-ed with D to excavate D’s basement and encountered solid rock. K

did not account for removal of rock. P requested modification, and parties orally agreed that D would pay substantially higher price.

R2d 89: A promise to modify a K that is not fully performed on either side is binding if the modification is fair in view of circumstances not anticipated by the parties when the K was made.

PELDR Hypos: o Pro basketball player B has breakthrough season, 3 years left on K. Demands a

raise or she will quit. Team agrees, then refuses to pay. Can B force them to pay?

pg. 32

PELDR: No consideration here, court may not enforce team’s promise R2d 89: Modification can be binding if its fair, equitable, circumstances

not anticipated by parties. Could extend K additional year to serve as consideration

o B loses purse and offers $1k for its return. A policeman finds it. Must B pay? No, policeman has legal duty to return lost property.

o A fan offers B $100k if she leads her team to championship. She does. Fan refuses to pay. Can she force him?

Fan will argue that B already has a K obligation to perform to best of her abilities. She didn’t do anything she wasn’t already legally obligated to do.

B will argue she had K obligation merely to play for the team, not to lead them to the championship. R2d §73: Performance of her duty to the team is not consideration for a promise from the team; but she was not obligated to this third party until he made the promise, so it could be consideration.

Duress 4 elements:

o Threat: manifestation of intent to inflict some loss/harm on othero Impropero Overcome will of victim (deprives a party of meaningful choice)o Sufficiently grave (party can’t just cave easily and claim duress)

Note just because one party is in a bad place doesn’t make it duress. Think about whether there is a threatened wrongful breach, and whether they are doing this in bad faith or trying to settle an honest dispute here

Economic Duress (Austin Instruments)o Elements:

Threat to breach by withholding goods unless the other party agrees to some further demand

Threatened party could not obtain the goods from another source Remedy for breach of contract would not be adequate

o Note “wrongful threat” – if party decides to get out of gear business entirely, doesn’t seem like bad faith.

o Damages for breach inadequate in Austin because of reputation with government, time was important, reputational loss.

Cases:o Austin Instruments v. Loral

D subcontracted with P for parts needed for Navy K. D was awarded another govt. K and P offered to supply the parts, but demanded retroactive price increases on K1 and the right to furnish similar parts on K2. P refused to continue K1 unless D met its demands. D tried to find another manufacturer, was left with “no choice or alternative" but to meet P’s demands. D later sought recovery of price increases, cited economic duress.

Sale of goods: governed by UCC. (PELDR wouldn’t work here anyway, there was consideration: new K).

pg. 33

Held for P. It was not established that P was not acting in good faith in demanding price increases, as manufacturing costs were rising. D did not attempt to get the K1 items from other sources, and no evidence that it could not have met Navy deadline had it done so. D has not been deprived of its free will, as it carefully considered options and decided to continue with P.

Dissent: D contacted several other suppliers, none of whom could supply the parts. The possibility of default under the Navy K was a considerable threat to Loral’s business, sufficient to constitute economic duress.

(close case, 6 of 11 sided with P)Undue Influence: R2d 177

Not quite duress (which requires improper threat), not quite constructive fraud (which requires a duty between the parties based on a confidential relationship)

2 Elements:o Special relationship

Traditional approach: a confidential relationship Odorizzi approach: dominant/subservient relationship

o Excessive persuasion, indicated by several of the following characteristics: Discussion of the transaction at an unusual/inappropriate time; Consummation of the transaction in an unusual place; Insistent demand that the business be finished at once; Extreme emphasis on untoward consequences of delay; Multiple persuaders by dominant side against a single servient party; Absence of third-party advisers to the servient party; Statements that there is no time to consult financial advisers/attorneys.

Cases:o Odorizzi v. Bloomfield School District

P arrested for homosexual activities. D superintendent and principal visited P at his home, said if he did not resign immediately, they would suspend him / publicize his dismissal, as required by statute. Told him this would cause “extreme embarrassment and humiliation,” that he had no time to talk to a lawyer, and that if he resigned immediately, it would not be publicized. At the time of this meeting, P had gone without sleep for 40 hours. P agreed to tender his resignation. However, after being cleared of the criminal charges, he asked to be reinstated. D refused.

A K may be rescinded for undue influence by a party whose weakened mental state made him especially susceptible to persuasion and the dominant party employed excessive pressure.

Duress does not apply here because there was no improper threat. Was within school’s legal right (and duty) to report.

(Distinguished from Vokes v. Arthur Murray, below, where P was in dance studio, not her own home, etc)

pg. 34

Concealment/Misrepresentation Common law regime: caveat emptor (buyer beware). Seller had no duty to disclose

defects to buyer, except in case of (1) concealment, (2) confidential relationship, (3) prior statement, or (4) partial disclosure.

o Caveat emptor finds very few friends in academia. Academics generally prefer mandatory disclosure of latent defects, because:

Non-disclosure is unfair, immoral, and inefficient Buyer may not be the person who values property most highly if truth is

known Buyers will spend too much inspecting the property and searching for

information.o Law has moved toward mandatory disclosure (with substantial help from real

estate agents’ lobby). Economic efficiency dictates that buyers should prefer voluntary disclosure, but they overwhelmingly choose caveat emptor when they have the option:

Sellers worried they’ll get sued if they disclose some issues but not others of which they are unaware.

Home inspection serves as a substitute for disclosure (with a trusted inspector of the buyer’s choosing)

o UCC has implied warranties. Some states have mandatory disclosure laws. Misrepresentation is an assertion that is not in accord with the facts (R2d 159)

o Tort misrepresentation: Party can get rescission of the K but is also suing for damages. Elements:

Misrepresentation Scienter (knowledge/recklessness) Intent to induce reliance Justifiable reliance Damages

o Contract misrepresentation: Party is seeking rescission. Elements: Misrepresentation

Fraudulent (scienter + intent to mislead) or Material (even if misrepresentation was innocent)

Concealment: action that is intended (or known to be likely) to prevent another from learning a fact is equivalent to an assertion that the fact does not exist (R2d 160)

A buyer can’t typically rely on pure opinions, except in cases of (1) confidential relationship, (2) person giving opinion has special skill/objectivity, (3) listener is particularly susceptible.

o Ex: Broker gives financial advice to a widow. After 5 years tells her to buy worthless stock, assuring her it is a “good investment.”

If it is truly worthless, does he know facts are incompatible with that opinion?

Given his superior knowledge it will be treated as a statement of fact and constitutes misrepresentation (R2d 169(a)).

o If an “opinion” is incompatible with facts, that is misrepresentation. (R2d 168(2)) Ex.: Seller owns home with inoperable sewage system, tells buyer it is

“good” – misrepresentation. Opinion incompatible with facts.

pg. 35

Non-Disclosure as Misrepresentation: (R2d 161)o Nondisclosure of a known fact is tantamount to an assertion that the fact does not

exist only if the party not disclosing the fact knows that: Disclosure is necessary to prevent a previous assertion from being a

misrepresentation or fraudulent; Disclosure would correct a mistake of the other party as to a basic

assumption and the failure to disclose amounts to a lack of good faith; Disclosure would correct a mistake of the other party as to the contents or

effect of a writing evidencing their agreement; or The other party is entitled to know the fact because of a relationship of

trust/confidence between them.o Note that if you partially disclose, you are required to make a full disclosure. If

you make a statement you believe to be true, that you later find is wrong, you may have a duty to correct it.

In 2013 exam, by disclosing her income she was obligated to disclose her full ability to pay (that would be true even if she won the lottery after the income disclosure – a duty to correct a past statement that became misleading)

Cases:o Swinton v. Whitinsville Savings Bank (caveat emptor)

P purchased a house from D. At the time of sale, D allegedly knew the house was infested by termites but did not disclose this fact to P, who discovered it 2 years later. By this time, the termites had caused great damage and P had to make extensive, costly repairs.

Held: Caveat emptor (buyer assumes the risk; old rule). Seller can’t lie, but there is no liability for bare nondisclosure of facts.

If seller had actively concealed the termites = misrepresentation. R2d 160

If seller were also buyer’s attorney = fiduciary relationship. R2d 161(d)

o Kannavos v. Annino (caveat emptor) P purchased building after newspaper advertisement described property as

a multi-family income property. However, D had knowingly converted the building from a single family dwelling into a multi-family dwelling without the necessary permit. P did not inquire about zoning or building permits during the process. He was unaware of the restrictions. D was aware that P intended to use it as a multi-family investment property. The value of the property was substantially lower as a single-family dwelling. Held in favor of P.

Different from Swinton in two ways: The advertisement was a half-truth intended to mislead Swinton did not involve reliance on seller’s representations.

Counter: Zoning ordinance info comes from the city. Readily discoverable (vs. seller being in charge of the info like in Annino). (here, court says buyer’s lack of due diligence does not excuse the misrepresentation). If

pg. 36

it’s easy for buyer to discover, it weakens the “justifiable reliance” element.

o Vokes v. Arthur Murray, Inc. P entered K for one month of dance lessons after receiving a promotional

offer and compliments about her dancing by the owner. Over next 16 months, she was sold dance courses totaling > $30,000. She alleged Ds fraudulently induced her to purchase dance lessons by making false representations about her progress. Ds contended their statements mere opinions ("puffing") permitted by the trade.

Opinions are generally not misrepresentations. Exceptions to this: Fiduciary relationship Seller has employed artifice/trick Parties do not deal at arm’s length (i.e. superior knowledge)

Court also says statements like “You are rapidly improving” were partial disclosures, where full disclosure would have been “…but you have a long way to go.”

Distinguished from Odorizzi where she was in dance studio (not her own home), could presumably ask them, could get another opinion, etc.

Supplementing/Modifying K

Parol Evidence RuleParol evidence means prior or contemporaneous oral and written terms.R2d framework: partially-integrated vs. completely-integrated.

Completely integrated: agreement is adopted by the parties as a “complete and exclusive statement” of the terms (R2d 209(1)).

o “Face of the instrument” test: if document appears complete in and of itself, then it’s completely integrated. (This test often criticized because it doesn’t consider surrounding circumstances, but it’s unclear that courts are actually this stringent). Factors to consider:

Merger clause (that’s easy) Common practice in the industry Formality of document Length of document

o Gianni test: “Face of the instrument” + “naturally and normally included” terms For analysis of parol evidence, ask what role the terms play: Do the terms contradict the

writing? Are they additional? Do they show agreement was not in effect for any reason (generally allowed)? Do they interpret ambiguous terms?

Do they show agreement was not in effect for any reason?o Mutual mistake, fraud, document alleges payment that was never made, etc. – all

admissible. Parol evidence may also be admitted to prove a condition precedent to the existence of the contract.

UCC approach: UCC 2-202, rejects the face of the instrument test (comment 1a). Then, instead of using language “would naturally have been included,” says “would certainly have been included in the document” – setting a higher bar (comment 3)

pg. 37

On an exam, probably dealing with an integrated document. (unless looking at an early draft or something). Start by asking whether it’s integrated.

Partially integrated, then ask whether it’s completely integrated (much easier if there is a merger clause – mention this, but pause to note that sometimes merger clauses are found to be invalid)

o Absent a merger clause, court has a lot of work to do. Several approaches: One extreme: face of the instrument test (complete on its face, how

formal, how long) Moderate approach (“whether parties, situated as were the ones to the

contract, would naturally and normally include the one in the other if it were made”)

Subjective test: look to all evidence to determine what these parties intended, did these parties intend this to be a complete integration.

“No oral modification” clauses are generally ineffective (because you can orally agree to modify the oral modification clause) – though some jurisdictions like NY make them enforceable.

UCC approach, 2-209(2): “A signed agreement which excludes modification or rescission except by a signed writing cannot be otherwise modified or rescinded.” (but it can still operate as a waiver, 2-209(4))

pg. 38

Cases about additional/contradictory terms:

Gianni v. R. Russell & Co. (PA)o Writing contains the clause “use of premises only for the sale of fruit, candy,

soda, water,” etc. and not tobacco. Lessee alleges that there was an oral term not in the writing that gave him exclusive right to sell soda in the building.

o The parol evidence rule precludes evidence of the oral agreement. The written lease is the complete contract of the parties and it encompasses any prior oral agreements. Since the restriction against P selling tobacco appeared in the written contract, it could be anticipated that the provision for his exclusive right to sell soda would be included.

“whether parties, situated as were the ones to the contract, would naturally and normally include the one in the other if it were made.”

Masterson v. Sine (CA – different jurisdiction than Gianni)o Ds buy ranch from Ps, but Ps have option to buy it back. P goes bankrupt. If the

option becomes property of the estate, the trustee would have right to exercise the option and sell the ranch to pay some of P’s creditors. Ds argue that the parties understood that the option could not be assigned, was personal, and therefore trustee has no right to exercise the option. Under CA law, the default rule is that

pg. 39

Extreme approach: Moderate approach: Subjective approach:

How to determine if the agreement is completely integrated:

Face of Instrument Objective intent given surrounding circumstances (not intent of these parties)

Subjective intent. Look to all evidence (including prior agreements)

How to determine whether the terms “contradict” existing terms:

Implied terms (the term contradicts if it contradicts with any default terms)

Fairly implied terms (R2d approach) (do we think the party actually bargained consciously with regard to these terms, and just didn’t write them in because they were implied)

Express contradiction (it only contradicts if it expressly contradicts)

How to determine whether the terms are “ambiguous”

Four corners: look only at the document

Look to surrounding circumstances (but not evidence of prior agreements)

Plain meaning rule (used by CA courts)(1) Look to all evidence (including prior agreements) to determine if ambiguous. (2) If ambiguous, admit all evidence.

an option is assignable to someone else. Typically an option is assignable to someone else (at least under CA law, that’s the default rule).

o Court said the parol evidence was admissible. Because of the structured nature of a deed, it is unlikely that the deed itself incorporated all existing oral collateral agreements and it would be inappropriate for a court to assume as much.

In a deed, we might not expect parties to fully spell out the terms as they would in a purchase agreement.

o This illustrates what it means to “contradict” with implied terms (CA’s default law on options): Do we think the parties bargained with respect to these implied terms

Note an “express” contradiction would have been if the deed said “this option is transferrable” and the parties said it was not.

Cases about Interpreting Ambiguous Terms Parol evidence admissible to interpret terms of a K, regardless of completely integrate Fine line between interpretation and contradiction

o If the term is “ambiguous” then evidence is to interpretationo If the term is “unambiguous” then evidence is to a contradictory term

Approaches to determining whether a term is ambiguous:o Conservative: you look only to the actual writing o Moderate: look to the writing and surrounding circumstances (trade

usage/industry custom) to determine ambiguity but not prior agreementso Modern approach (CA): consider trade usage and evidence of prior terms

W.W.W. Associates, Inc. v. Giancontierio Ds K-ed to sell land to P. The K contained a merger clause as well as a reciprocal

cancellation provision. Ds cancelled the K. P sued, offered extrinsic evidence that the cancellation clause was meant to apply to P only.

o P’s evidence is not admissible. K is unambiguous and complete and will be enforced according to its terms.

PG&E v. G.W. Thomas Drayage & Riggingo Debate over whether the indemnity provision in the K applied only to damage of

the property of third parties (D’s claim) or also protected P from damage to its own property (P’s claim).

o Extrinsic evidence of the “plain meaning” of the indemnity provision is admissible. If a preliminary consideration of all credible evidence offered to prove the intent of the parties still leaves contractual terms susceptible to two rational interpretations, extrinsic evidence to prove either is admissible.

Greenfield v. Philles (shows difference between NY and CA approach)o Ronnettes want to introduce evidence that they are owed royalties using the

language from K1 (NY). K2 (CA) is the general release involved in the divorce. o K1 (NY law): Silence re: the new technology didn’t make it ambiguous, parol

evidence excluded. “A written agreement that is complete, clear and unambiguous on its face must be enforced according to the plain meaning of its terms”.

pg. 40

o K2 (CA law): all extrinsic evidence may be considered. The test of admissibility is whether the offered evidence is relevant to prove a meaning to which the language is reasonably susceptible.

Ambiguous Terms/Multiple MeaningsVagueness v. Ambiguity

Vague: “the color green” (many different shades) Ambiguous: 2 alternative different meanings

Under UCC § 2-202, with regard to sales Ks: No evidence is admissible to show:

o prior written or oral agreementso contemporaneous oral agreements contradicting the contract.

A K may be explained or supplemented by: (UCC 2-202)o Evidence of trade usage o Course of dealings or performance

The course of actual performance by the parties is considered the best indication of what they intended the writing to mean.

o Evidence of consistent additional terms (unless the contract is found to be a complete and exclusive statement of terms) (UCC 2-202(b))

Court may take very liberal view of what is “consistent” (Nanakuli) Hierarchy of evidence (UCC 1-303(e))

o Express terms > course of performance > course of dealing > usage of trade Course of performance : what the parties were doing with respect to this K Course of dealing : previous Ks between these two parties (i.e. Ks where 49.5% was ok) Usage of trade : what other members of this trade understand term to mean

UCC 1-303(d) holds everyone to the usage of trade in which they are engaged. But note (g) forbids unfair surprise (potential newbie defense, bit of a stretch)

Cases:o Frigaliment v. BNS

Buyer (P) thought meant “young” chicken. Seller (D) took broad meaning of chicken, including “stewing” chicken. Holding: P did not meet its burden of proof, loses. Does not mean D’s

meaning was correct. P showed : trade usage, prices and weights of various types of

chicken, and general use of the word chicken. D showed : regulatory definitions and parties’ conduct

Different result if under R2d 201. Under UCC everyone is expected to know the trade usage.

If a word has no clear objective meaning, but parties can be shown to have same subjective meaning, we use that meaning. (2-201).

If we don’t have the same subjective meaning, and there is no clear objective meaning, we use the meaning attached by the party who

pg. 41

is less at fault (i.e. if you didn’t know of any different meaning, but the other party knew the meaning you intended).

o Hurst v. W.J. Lake & Co. P and D enter K for horse meat scraps, which said “minimum 50%

protein.” If any scrap at less than 50%, P was to get a discount. Some scraps have 49.5% protein.

D argues both parties are members of trading group, and standard trade usage allows a .5% leeway.

The language is not ambiguous, which usually means parol evidence is excluded. But in various trades, common sense meaning doesn’t match trade meaning. A court cannot limit its consideration to the plain language of a K when the trade usage is relevant to a determination of parties’ intent.

o Nanakuli P and D enter K for asphalt (both are companies that deal with asphalt). P

sues for breach, saying D raised prices and “price protection” was inherent in the K (read, wasn’t expressly in K, but D should have known). Common trade practice for asphalt suppliers to “price protect.”

Trade usage / course of performance will be implied into Ks if it does not contradict the terms and is so prevalent that the parties would have intended to incorporate them. Price protection was routinely practiced in the Hawaii asphalt market, and Shell should have known that as a member of that market. Moreover, Shell’s past performance indicated that it was aware of the practice and that Nanakuli expected it.

(Concurrence says this opinion should not be applied to read in implied terms where there is not such overwhelming evidence as with the Hawaii asphalt industry).

Is this outcome completely contrary to law? Arguably: No: written Ks are always incomplete. Gaps can be supplemented

by terms of usage. Shell better able to bear the cost than Nanakuli. Yes: There was no gap in the K – the court is directly contradicting

express price term in the K. Why guess how parties would have balanced risk when in fact they did in the K term.

o Columbia Nitrogen Corp. v. Royster Co. Royster began to manufacture phosphate. Columbia agreed to purchase a

minimum amount from Royster for three years. The contract contained a merger clause that excluded any “verbal understanding” from the terms of the contract. When phosphate prices dropped steeply in the first year of the contract, Columbia attempted to introduce trade usage evidence that price and quantity terms in the industry were treated as projections.

UCC 1-303 contradicting terms so seller wins, right? But court here says it isn’t inconsistent, because (1) contract does not expressly state that course of dealing and usage of trade cannot be used to explain the written contract; (2) the contract is silent about adjusting prices; (3) default clause refers only to failure of the buyer to pay for delivered phosphate

o Raffles

pg. 42

No meeting of the minds = no contract. Alternatively, mutual misunderstanding, R2d 201

P agrees to sell D cotton. Shipment to arrive on the Peerless. D refuses to accept the cotton, says although the ship that brought the good was called the “Peerless” (arrived in Oct.) this was not the ship they knew as the “Peerless” (supposed to come in Dec.)

Mutual misunderstanding (neither had reason to know of either’s meaning) therefore no meeting of the minds (no K) (R2d 201)

Application of R2d 201: If both parties had meant the October Peerless, they would have a

K. (even if there is not an objective meaning, when they attach the same meaning, we’ll use that meaning)

If the October Peerless was called the Matchless, and the K said “Peerless,” but they both meant the Matchless. 201(1): Where the parties have attached the same meaning, it is interpreted in accordance with that meaning.

o Under PER – K says Matchless, can they introduce evidence they both meant Peerless? Yes, evidence to show mutual mistake (exception to PER).

Seems pretty immaterial vs. what vineyard your grapes come from, etc. Counterargument: It is material. There was a cotton shortage. Price

of cotton fluctuating substantially. Price depends on ship date. What if at time of K, the buyer thinks Peerless means the Oct ship and

seller thinks Dec ship, but neither knows / has reason to know of the other’s meaning? Equally at fault. R2d 201(3), neither party is bound.

What if buyer then says, “I just want the cotton, send whatever ship you meant.” And seller says “no, we don’t have a K.”

o Unclear. R2d says there is no K at all (a little different from burden of proof approach in Frigaliment)

Suppose Buyer thinks “Peerless” is Oct. ship and seller thinks it’s Dec. ship. Assume Oct. ship was well-established, Dec. ship brand new.

Under R2d 20 / 201, Seller should have known buyer meant Oct. ship. There is a K for the Oct. ship.

Suppose same as before, but buyer knows that seller is referring to the December ship: Here buyer actually knows, so there is a K for Dec. ship.

Unconscionability A court may modify / refuse to enforce a K (or part of a K) on grounds that it is

“unconscionable.” With unconscionability, there usually is greatly unequal bargaining power between the parties.

An entire K (or a K provision) is unconscionable when it is so unfair to one party that no reasonable person in the position of the parties would have agreed to it. Look to whether it was unfair at time of K formation.

The question of whether a K is unconscionable is a question of law for the court to decide; the issue does not go to the jury.

pg. 43

Contracts of adhesion: a standardized K, which, imposed and drafted by the party of superior bargaining strength, relegates to the subscribing party only the opportunity to adhere to the contract or reject it.

2 reasons we might not like standardized forms:o unwitting assent (you don’t read it because it’s too long)o unwilling assent (you have no other choice but to agree)

Policing Pre-Printed Forms: Traditional Methods:

o Apply Objective Theory of Assent to say something was not part of offer or Ko Interpretation

Contracts of Adhesion (Scissor-Tail test)o Remember a K of adhesion is take-it-or-leave-it + unequal bargaining powero Generally, they are enforced. But refuse to enforce if either:

The contract or provision doesn’t fall within the reasonable expectations of the weaker party (unwitting assent / surprise)

Unfair to enforce Unconscionability:

o Procedural: something wrong with bargaining process (includes adhesion contracts, but could be something else) (Scissor-Tail)

o Substantive; something wrong with the outcome (too unfair) (Williams) R2d 211: Standardized agreements

o (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.

o (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.

o (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.

o Note that clause 3 is different from Scissor-Tail (which focused on expectations of the non-drafting party – the weaker party). R2d focuses on expectations of stronger party, asks whether they had reason to believe the weaker party would not agree if the weaker party knew of the clause. See Klar below.

Standardized Forms ≠ Automatic Unfairnesso Best Buy vs. Used Car Dealership: With whom do you have a better shot of

negotiating special terms? Used car dealership. But has the worse reputation in terms of fairness? Used car dealership.

o So standardized forms do not always mean a lack of fairness. Perhaps there is “herd protection” whereby a group of informed consumers help everyone else.

UCC 2-302(1): Unconscionable Contract or Clause

pg. 44

If the court as a matter of law finds the K or any clause of the K to have been unconscionable at the time it was made the court may refuse to enforce the K, or it may enforce the remainder of the K without the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result.

Cases: O’Callaghan (unwilling consent)

o P injured when she fell in courtyard of her apartment. Sues landlord. Suit barred by exculpatory clause in lease. P argued she couldn’t contract around it because of a housing shortage. Counter was that she could’ve bargained around it (bid more). However, there was rent control in place.

o Policy: Perhaps people should not be able to waive liability for their negligence in a housing shortage.

o Main takeaway here was simply that the standard tools of interpretation don’t work in this instance). Next case will give us more rule-like stuff.

Graham v. Scissor-Tail (contract of adhesion found unconscionable)o P (big-time promotor) K-ed with D to do a concert tour. P signed 4 standard form

contracts with a provision that any dispute would be arbitrated by the American Federation of Musicians board. AFM thought to be more friendly to recording artist. P had dealt with countless of these Ks before, but it was unconscionable because the arbitrator was biased against P.

o Suggests courts will police “contracts of adhesion” more carefully than other Ks. Klar v. H&M Parcel Room (illustrates relevance of R2d 211(3))

o The owner of the expensive furs probably didn’t know of this clause (limiting damages to $25) or they wouldn’t have left their furs there.

o If you’re the parcel room, can you use R2d to protect you? If the parcel room doesn’t know that this is an extremely valuable parcel,

then they have no reason to believe that the person checking the parcel wouldn’t agree to the limit, so they are protected.

o What if person signing the K knew the terms and signed anyway? Should the person still be held?

Look at clause 2: Even if individual knew, if similarly situated people would not know, he won’t be held. Don’t want to punish this person for reading the K. Keep focus on what drafting party had reason to believe.

Williams v. Walker-Thomas Furniture (substantive unconscionability)o Low-income woman buys $4k stereo and other items from furniture store. K

contains a cross-collateralization clause. Payments allocated by outstanding balance.

Cross-collateralization: For everything you buy, they apply that security interest across all of your purchases by outstanding balance. So you haven’t paid for any of those purchases until you’ve paid the entire balance in full.

Overpriced stereo: price factors in the credit risk of selling it in installments to a person who has very low income (and store is avoiding usury by selling it at that price with 0 interest).

pg. 45

o Holding: Court can refuse to enforce a K which it finds to be unconscionable at the time it was made. Unconscionability means absence of meaningful choice, together with terms which are unreasonably favorable to the other party.

Evaluate whether terms were fair at time of K formation.o Assume she had already paid. Could she use UCC 2-302(1) to get her money

back? Two issues: Whether we should have a thing as price unconscionability (seems

paternalistic) 2-302 doesn’t really give court authority to get your money back. Allows

court to refuse to allow enforcement of K, not to undo K.

Performance & Breach

Conditions must be distinguished from promises, which may be the difference between a minor breach and a complete prevention of the other party’s duty to perform.

If the provision purports to be a statement by the party required to perform, the provision is a promise; if it is a statement by the non-performing party, it is a condition.

Ambiguity is usually resolved in favor of a promise over a condition.

Conditions (Express and Constructive) Express conditions are expressed in the K. Ex.: “on condition that,” or “provided that.”

o Strict compliance required; substantial performance will not suffice. o Because law requires strict compliance, risk of forfeiture: someone could perform

and get nothing. Courts limit this risk by interpreting the clause as a duty rather than a condition (so that substantial performance suffices).

Constructive conditions are deemed to be part of K because the nature of the agreement suggests the parties intended it, or because fairness requires including it.

o Ex: If a hall is leased for a wedding, and the building burns before that date, the hall’s existence would be a constructive condition to payment of the lease price, would excuse the lessor from liability.

o Substantial compliance required; Substantial performance suffices to satisfy a constructive condition.

o There is an implied duty to (attempt to) fulfill conditions within your control. Conditions are all about assignment of risk. Interpretation: Duty or Condition?

o R2d 227(2): Unless the K is a type under which only one party generally undertakes duties [i.e. an insurer], when it is doubtful whether (a) it’s a duty, (b) it’s a condition or (c) it’s a duty and a condition, we prefer to interpret it as a duty if the event is within the obligee’s control.

o Because of risk of forfeiture and the requirement of strict compliance, it’s important to figure out whether the term is a condition. Courts must interpret.

o Two issues: Can you sue the other party for breach of their obligations? Must you perform your own obligations?

o Failure to perform duty = breach of K (leads to damages)

pg. 46

o Non-occurrence of a condition = performance of obligor is not due Cases:

o Luttinger v. Rosen (mortgage as a condition of buyer’s duty to buy house) Ps contracted to buy house from Ds. Under a condition precedent in the K,

Ps needed to obtain a mortgage at an interest rate of no more than 8.5%. Ps relied on their attorney, who knew the only bank that would give a mortgage in that amount, but the bank approved an interest rate of 8.75%. Ps notified Ds they could not get a mortgage and requested return of their deposit. Ds offered to fund the interest rate difference and refused to return the down payment.

Held in favor of Ps. Strict compliance is required with express conditions – 8.75% is not “close enough” to the 8.5%. And since K specifically said “lending institution,” Ps aren’t obligated to accept Ds offer to make up the difference. There are reasons Ps would rather get a mortgage from the bank (more confident in his judgment if bank is willing to make a loan).

Note: this was a condition of the buyer’s duty. If a relative offered the buyer cash, he could waive the condition (to get a mortgage). Seller can’t use the condition to excuse their own nonperformance (i.e. “You can’t pay us in cash, we won’t sell you the house.”)

If buyer decides they do not want to buy the home, they cannot just fail to look for financing. Must make a reasonable effort to fulfill the express condition in the K.

o Had it not been in the K, court may imply a good faith requirement.

o Internatio-Rotterdam, Inc. v. River Brand Rice Mills, Inc. D K-ed with P to deliver rice to Port1 and Port2 in December. P was to

provide D with instructions for each port 2 weeks prior to delivery. P provided instructions for the Port1 shipments, but as of December 17 P had not provided instructions for the Port2 shipments. Since December 17 was the last date on which D could receive instructions and complete the shipments within the timeframe, D rescinded the contract for the Port2shipments on December 18 (and continued to make Port1 shipments). Around this time, the price of rice rose well above the K price. P sued D for breach, alleging that its failure to provide instructions was not a breach, but merely extended the timeframe beyond December 31.

Court says giving notice on or before December 17 was both a promise and a condition. Looked at circumstances to determine parties’ intent: letter of credit specified shipment in December to get payment, so getting notice by Dec. 17 was material.

D’s duty was conditioned on receipt of the instructions by December 17, and the failure to provide those instructions by that date constituted non-performance on the part of P, and entitled D to rescind its remaining obligations.

Also, given the fluctuating market price, it would be unreasonable for parties to agree that P could unilaterally extend the time period of the K.

o Peacock Construction v. Modern Air Conditioning

pg. 47

Peacock (G) entered sub-Ks with Modern Air (S1) and Overly (S2). Both Ks contained clause requiring final payment by G to S within 30 days after “completion of the work…written acceptance by the Architect and full payment therefor by the Owner.” Upon completion of their work, S requested final payment and Peacock refused, said full payment had not been received from the owner and such payment was a condition precedent to its obligation to pay.

Court says this was merely determining a convenient time for payment not a condition precedent to payment. Not the intent of the parties that this would be a condition precedent, because of allocation of risk (small contractors would not ordinarily assume risk of owner’s failure to pay).

Possible counter: The surrounding statements (completion of work, written acceptance of architect) were conditions, so maybe this was too.

Clearer drafting to make all three a condition: “If all three have occurred, then payment.”

o Gibson v. Cranage P solicited D to allow him to create an enlarged portrait of D’s deceased

daughter, promised D would have no obligation to pay unless he was completely satisfied. Once the portrait was finished it was shown to D who did not like it and refused to accept it. P attempted to modify it to satisfy D, but D canceled the order.

D’s subjective satisfaction is a condition precedent to the obligation to pay. Although it could be contended that D should have been satisfied, he was free to reject it.

Note that if D’s dissatisfaction is due to something unrelated to painting’s quality, that is breach.

Note that R2d 228 prefers to interpret satisfaction clauses to imply the word “reasonably”.

Mitigating Non-Occurrence (Express Conditions) Prevention = breach

o You can’t work to prevent a condition from occurring. It’s not in good faith. Waiver, estoppel, and election (R2d 84, see also 2-209)

o R2d 84: A promise to perform all or part of a conditional duty in spite of the non-occurrence of a condition is binding, unless it’s a material part of the exchange.

o Waiver: “Intentional relinquishment of a known right.”o Editors of CB prefer this definition: “Voluntary excuse of a non-occurrence of a

condition” (because you don’t waive the other side’s duties, just conditions)o Plasticity of the word “waiver” – you don’t need mutual assent, consideration,

detrimental reliance. Some courts characterize it as a variant of estoppel. You can waive a condition through your actions.

o Not if too material – consideration? i.e. insurance – the company could waive requirement of a form, but can’t

waive payments of premiums: that’s the consideration.o Retraction of waiver

Prior to running of time – probably ok, if no reliance After running of time = election, not allowed.

pg. 48

“Forfeiture” R2d 229o Impracticalityo Disproportionate forfeiture (related to idea of liquidated damages)o Forfeiture Hypos:

Homeowner has fire insurance policy. House burns down. Policy states that insurance company’s obligation to pay is conditioned on insured’s bringing suit within 12 months. Civil war erupts, no practical way for homeowner to sue in time. Will Co. still have to pay homeowner?

R2d 229 This would result in disproportionate forfeiture, so court may

excuse the non-occurrence of that condition unless its occurrence was a material part of the agreed exchange. Suit within 12 months is not absolutely central/material to the exchange.

Civil war prevents not only suits but also payments of premiums. Homeowner does not pay premiums, but does lose house in a fire. Does Co. have to pay second homeowner?

R2d 84(1)(a) Here the payment of premiums was a material part of the agreed

exchange. Non-occurrence of a material condition = no payment. Cases:

o Hicks v. Bush Completely integrated merger agreement. Ds want to present evidence of a

parol condition that the agreement was not to take effect until they raised “equity expansion funds.” Not barred by PER because it was a condition to formation (if the agreement never comes into effect, it can’t discharge prior agreements). Key here is that both parties’ obligations were conditioned on this.

P could have protected himself by drafting the agreement to say “There are no conditions to the effectiveness of this agreement.”

o Kingston v. Preston D was a silk merchant, P his apprentice. D promised to sell the business to

P. P promised to provide Preston with “sufficient security” and pay fair value for the business. P never paid the security, but argued that the parties’ mutual promises were independent of one another and D still owed him the business.

Court held that payment of security was a condition precedent. o Stewart v. Newbury (work before payment) (performance before payment)

Builder alleged an oral term to pay in “usual manner” (85% every 30 days or at the end of the month, 15% retained until completed). Builder commenced work and continued until 9/29. D refused to pay and work discontinued.

Where a K is made to perform work and no agreement is made as to payment, the work must be substantially performed before payment can be demanded. R2d 234(2) (work before pay)

pg. 49

Mitigating Non-Occurrence (Constructive Conditions)A constructive condition can lead to forfeiture (particularly in construction contracts where builder is building on other party’s land. With good you can resell to someone else, but this is different.) Techniques to mitigate this forfeiture: substantial performance, divisibility, and restitution.

Prefer dependent promises. Kingston, R2d 232o Constructive conditions of exchangeo Must offer performance with ability to make it good. R2d 238 (loosely defined as

tender) Timing matters: you can make your obligations conditional on earlier events (R2d 237)

o Prefer simultaneous performance. R2d 234(1) – conditioned on other tendering as well. R2d 238

o If performance takes time, go first. R2d 234(2), Stewart

Overview of ways to mitigate non-occurrence of constructive conditions: Offset for damages for breach Substantial performance (no easy definition, R2d 241 offers guidance). Consider:

o Essential purpose of contract o Adequacy of damages o Extent to which the party failing to perform will suffer forfeiture o Extent to which the breaching party is acting in good faith (vs. willful breach)

Divisible or Severable (not Entire)o Performances can be apportioned

Done by agreement, or Left to be implied by law – court can figure out how to apportion

o Each pair of promises are “agreed equivalents” “Fairness requires that a party that has received only a fraction of what

that party expected under a contract should not be asked to pay an identical fraction of the contract price unless it appears that the value to that party of what was received is roughly the same fraction of the value to that party of full performance.” R2d 240 comment e

Restitution for party in breacho Controversial. Role of “willfulness” o Contract price as a ceiling

Substantial PerformanceA party who substantially performs can recover on the contract even though full performance has not been tendered. (this does not apply to express conditions or Ks for sale of goods)

Substantial performance means a good faith effort that actually achieved the essential purpose of the contract and provided the defendant with the fundamental benefits that it was supposed to receive from the contract.

o If you determine that the plaintiff only substantially performed the contract, then any award which you give the plaintiff must reflect a reduction for the cost to the defendant to complete the plaintiff’s full performance as required by the contract

pg. 50

o In general, damages = (K price) – (amount it will cost other party to obtain complete performance as had been promised)

If breach of a constructive condition is minor, it will not negate substantial performance. If a breach is material, it will negate substantial performance.

o Material = deprives the party of the benefit of her bargain No recovery is allowed for willful breach.

Substantial Performance: Damages Owner hires Builder to build house for $200k. Owner has made progress payments of

$100,000. “Errors” would cost $50k to fix but would reduce market value by just $10k.o Damages based on cost of completion

If substantial perf., Builder is entitled to $100k remaining on the K, offset by $50k cost for Owner to complete the performance = $50k

If no substantial perf., if Builder completes the project he will spend $50k fixing the problem and get paid the remaining $100k = $50k

Note: In real world, cost of Builder finishing it may not equal cost of Owner finding someone else to complete it.

Has builder substantially performed? 75% doesn’t really sound like substantial performance. Once we decide cost of completion is determined, you generally

won’t argue substantial performance. o Damages based on difference in market value (if we decide Reading pipe isn’t

that valuable): If substantial perf., Builder is entitled to $100k remaining on the K, offset

by $10k difference in market value = $90k If no substantial perf., if Builder completes the project he will spend $50k

completing the project and get the remaining $100k = $50k Has builder substantially performed? Difference of $10,000 is 90%

performance, looks like substantial performance. How to draft K to avoid substantial performance doctrine:

o Require architect certificate, include provision that if you don’t do it right, you have to tear it out and fix it.

Failed in Jacobs v. Young because NY uses objective standard of satisfaction, and court said difference in pipe was trivial.

o You can’t just include a “specific performance” clause in the K. General principal is you only get specific performance when damages are inadequate.

o You can’t put in a huge liquidated damages provision for putting in wrong type of pipe because court will interpret it as punitive.

o Could include an express condition that says, “I’ll withhold payment until you have everything right according to the plan.” But court will be reluctant to enforce this because it could result in disproportionate forfeiture.

UCC Approach: “Perfect Tender Rule” Substantial performance is insufficient in sales of goods contracts. If a buyer rejects goods as nonconforming and time still remains to perform under a

contract, the seller has a right to cure and to tender conforming goods

pg. 51

o Criticism of this rule: Over-inclusive, too great a risk of forfeiture if nobody else wants to buy the good. But the law doesn’t care: sale of goods requires perfect tender, sometimes rules are over-inclusive.

Perfect Tender Rule gets mitigated in a number of ways (Bartus) UCC 2-606: Acceptance occurs after a reasonable opportunity to inspect the goods (in

Bartus, the 15 hours of testing the hearing aid) UCC 2-608 (Revocation of Acceptance). (1) If the non-conformity “substantially

impairs” its value to the buyer, (2) revocation must occur within a reasonable time. Effective/Ineffective Rejection, Rightful/Wrongful Rejection

o Rightful/Wrongful refers to whether goods actually conform to contract.o Effective/Ineffective refers to whether the rejection was procedurally proper.o Hypos:

Builder delivers houseboat. Immediately, buyer notices problems and refuses to accept.

This is a rightful and effective rejection (goods do not conform to contract, rejection was immediate). Buyer does not have to pay, and may sue for damages.

Builder delivers houseboat. 8 weeks later, buyer notices problems and seeks to return the boat.

This is a rightful but ineffective rejection. (goods do not conform, rejection was procedurally improper). Treat as though they haven’t rejected, buyer must pay (unless they can revoke their acceptance – subject to substantial impairment test).

Builder delivers houseboat. 8 weeks later, buyer alleges problems (there is nothing wrong) and seeks to return the boat.

This is a wrongful and ineffective rejection. Buyer must pay. Seller may sue to force payment.

Builder delivers houseboat. Immediately, buyer alleges problems (there is nothing wrong) and refuses to accept.

This is a wrongful but effective rejection. Buyer is not deemed to have accepted the boat. Does not have to pay, but must pay damages caused to seller by rejecting.

Case:o Bartus v. Riccardi

D purchased a Model A-660 hearing aid from P, making a down payment. The hearing aid that was delivered was an A-665 (described as better). D was fitted, but it bothered him and he returned it a week later. P offered to obtain an A-660, D did not respond. P sued for the balance owed.

Under UCC 2-508, a nonconforming delivery of goods may be cured by the seller (1) within the period of the K so long as seller notifies buyer of intention to replace (and delivers such replacement within that period) or (2) outside the K period so long as the seller reasonably believed the buyer would accept the nonconforming goods and “seasonably” notifies the buyer of intention to replace.

The purpose of the rule is to prevent the seller from undue harm caused by a buyer’s surprise rejection.

pg. 52

Divisibility A divisible or installment contract is one in which the various units of performance are

divisible into distinct parts. Recovery is limited to the amount promised for the segment of the contract performed. Damages are recoverable for breach of the other segments.

UCC: Special rules for installment contracts are addressed in UCC § 2-612. The most important difference between installment K and other contracts is that the perfect tender rule does not apply in an installment K; instead, the right to reject is determined by a “substantial conformity” standard.

o Nonconforming segment If the seller makes a nonconforming tender or tenders nonconforming

goods under one segment of an installment contract, the buyer can reject only if the nonconformity:

Substantially impairs the value of that shipment to the buyer; and Cannot be cured.

o Remaining segments Where there is a nonconforming tender or a tender of nonconforming

goods under one segment of an installment contract, the buyer may cancel the contract only if the nonconformity substantially impairs the value of the entire contract to the buyer.

Law will sometimes excuse non-performance of a duty when impossibility or impracticability excuses performance. But must the non-breaching party still perform?

o Impossibility does not excuse a constructive condition of exchange.o Substantial performance will, and so will divisibility.

R2d 240: If the performances to be exchanged can be apportioned into corresponding pairs of part performances so that the parts of each pair are properly regarded as agreed equivalents, a party's performance of his part has the same effect on the other's duties to render performance of the agreed equivalent as it would have if only that pair of performances had been promised.

o So in Gill, getting half the logs is worth half the price, but getting your goods shipped halfway is not half the value to you as getting it shipped the whole way. Not agreed equivalents. Adds an additional requirement to Gill test.

Cases:o Gill v. Johnstown Lumber

P agreed to drive 4M feet of logs. Partially completed, then flood pushed most logs past delivery point. P not arguing substantial performance, but says this is a divisible K payment can be apportioned for different aspects of performance (vs. a K that is entire, where a single payment is made).

The agreed payment was a per-unit price depending on type of log and the port to which they should be delivered. The K is divisible and P is entitled to payment for logs that were delivered. However, P is not entitled to payment for logs that were driven part-way but not delivered. Payment was on a per-unit basis, so no basis for apportioning payment according to distance.

Distinguished from a contract that is entire, where a single payment is made for the completed performance, even if the performance consists of

pg. 53

several distinct items. If a contract is entire, full performance is a condition precedent to payment.

Restitution (to mitigate non-occurrence of a constructive condition)This refers to restitution of a breaching party.

If that party has performed in part, and is unable to enforce the K because it failed to complete performance, it may sometimes get restitution.

This is not universal. Traditional response is that allowing recovery is bad policy – allows a party to sustain an action on his own breach.

o Sometimes justified because the finished work has conferred some benefit to the owner, and was in accordance with K up to that point. Avoids forfeiture.

o Sometimes justified because otherwise you’re worse off than if you had done nothing.

o Harder to get restitution after willful breach (but not impossible) Is voluntarily leaving willful breach? What if they left to go care for dying

parents (less choice involved)? Maybe courts mean “willful” as “bad”? R2d 374 avoids using the word “willful”

Kirkland: The breaching party is entitled to recover for his services / materials, unlesso (1) the work that he has done has been of no benefit to the owner,o (2) the work he has done is entirely different from the work he was K-ed to do; oro (3) he has abandoned the work and left it unfinished.

Restitution is different from divisibility because divisibility looks to the contract price, while restitution looks to the fair value of what was conferred.

Hypos:o Contract for building at $100k. Market price of work rises to $200k. Builder does

75% of work, breaches (stops building), and seeks restitution of $150k (75% of market value).

If owner kicks him off the job, the K price will not be a ceiling to recovery (Algernon Blair). But if builder is the breaching party, courts will not reward breach, so they won’t award restitution (that would be bad policy).

Even if we followed the Algernon Blair approach and gave $150k in restitution to builder, it would be offset by damages to owner.

Owner would suffer damages of $50k which would bring builder back to contract price ($100k), but still that is the full contract price for only 75% of the work (arguably rewarding his breach, so a reason not to restitution)

o Buyer contracts to buy Seller’s house for $300k and puts $30k down. Buyer’s job requires a move to a new town. Can Buyer get the deposit back?

Traditional rule: no. Modern rule: maybe, but you must show unjust enrichment. A liquidated damages clause may be relevant, because restitution is offset

by damages (i.e. seller locating new buyer), and liquidated damages clause can be a quick way to calculate seller’s damages.

Cases:o Algernon Blair

G entered K to construct a hospital and had contracted with S for steel erection and equipment supply. S supplied its own cranes. G refused to

pg. 54

pay for crane rental, claiming it was not obligated to do so, and S stopped work. G then hired a new sub to complete the job, and S brought suit to recover for labor and equipment furnished.

Damages measured based on current market price of the goods conferred, rather than contract price.

Material Breach

Note that R2d introduces the idea of cure.

pg. 55

R2d 237: Except as stated in §240, it is a condition of each party'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

Factors for determining whether a failure to render performance is material (R2d 241):o (a) the extent to which the injured party will be deprived of the benefit which he

reasonably expected;o (b) the extent to which the injured party can be adequately compensated for the

part of that benefit of which he will be deprived;o (c) the extent to which the party failing to perform or to offer to perform will

suffer forfeiture;o (d) the likelihood that the party failing to perform or to offer to perform will cure

his failure, taking account of all the circumstances including any reasonable assurances;

o (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing. (notice it doesn’t say “willfulness,” talks about good faith and fair dealing instead).

Cases:o Walker v. Harrison

D leased a neon advertising sign for three years, agreeing to pay P monthly. K says sign will be cleaned “as often as deemed necessary by the lessor.” Some vandalism (including a tomato stain). D alleges P failed to maintain sign as required by K, sends angry telegram, skips payment.

P breached by not cleaning the tomato stain. D was in dry cleaning business, bad for business to have a stained sign. D can sue for damages but still must pay P because the breach was immaterial (under 1st Restatement, all we ask is whether it is material)

Immaterial because rain may have washed away stain, or owner could’ve taken care of it himself on a ladder.

Harrison’s best option: Contact company, continue making payments, hire cleaner and sue

for cost (don’t clean yourself, can’t prove value) If court says “You could have mitigated damages by cleaning it

yourself,” D could say “I’m a CEO, my time is more valuable.” Do not threaten to stop payment, may be seen as repudiation

(which is material breach).o K&G Construction Co. v. Harris (decided right before R2d was published)

S to do excavating “in a workmanlike manner.” S agreed to carry liability insurance. S damaged wall, and denied liability. G withheld payment because damage had not been repaired or paid for. S discontinued work. G sued for cost to repair damage and additional cost of hiring another excavator to complete the work.

Damaging wall (i.e. failure to perform in a workmanlike manner) was breach. Material or immaterial: how central is “workmanlike manner” provision to the entire exchange of promises? (R2d 232)

pg. 56

Was the obligation to complete work in a workmanlike manner a constructive condition of exchange?

Yes. R2d 237: it is a condition of each party's remaining duties… that there be no uncured material failure by the other party to render any such performance due at an earlier time [work is due at an earlier time than payment] Breach by S was of a performance that was to be rendered at an earlier time than G’s (work comes before payment)

Counter: progress payments were not conditioned on workmanlike manner; this provision wasn’t central (not a great argument)

Was bulldozer incident a material breach? Court says yes. Not workmanlike. Counter: insurance will cover this. If S eventually fixes the wall

and compensates for delay/damage, maybe it’s not material Was it material breach for S to walk off job?

1st Restatement: G elected to treat this as partial breach (this is a form of waiver, can’t change his mind and treat it as material later). G can sue for damages but must keep performing (making payments). Failure to make those payments was material, justifies S terminating performance.

R2d: Damage to the wall is material breach. G merely suspended performance, giving S a chance to cure. Cure could have been as simple as S agreeing to fix it, but by failing to do that and terminating work, G had a right to terminate.

UCC 2-717 (one more theory to apply): Buyer, upon notifying Seller of his intention to do so, may deduct all or part of the damages resulting from breach from any part of the price still due under the same K (setoff).

o Here, G would deduct price to fix wall from price of K. OK in sale of goods but generally not in common law.

Material breach makes it difficult to advise either party: If you represent G, and they ask you whether to pay this bill, you

risk owing S almost $3k in damages if it isn’t deemed material – and you risk it not being material because of the insurance. G may have to give them chance to cure even if he wants them off the premises entirely.

If you represent S before they walk off the job, you could advise them that “cure” could just mean offering collateral in addition to the insurance.

o United States v. Peck (example of prevention) Peck K-ed to sell hay to the govt. The hay was to be cut on govt. lands

which were the only available source. Thereafter the govt. caused all of that hay to be cut by other parties. Supreme Court held that “the conduct of one party to a K which prevents the other from performing his part is an excuse for nonperformance.” Peck was not required to perform.

o Iron Trade Products Co. v. Wilkoff Co.

pg. 57

P K-ed with D to purchase rails at $41/ton, went into market and bought more rails. D did not deliver any of the rails, forcing P to purchase them elsewhere for $49/ton. P sued. D claimed P’s subsequent purchases made D’s performance impossible, driving up price and reducing supply.

Distinguished from Peck because this isn’t actual prevention (no fixed supply), just increased difficulty. D can still perform.

Different case if P had not been acting in good faith. No evidence P had knowledge that supply was limited, or intent to prevent D’s performance.

If we had found prevention, the seller would be excused from duty to perform (can’t be sued). Seller could sue for expectation damages.

o Patterson v. Meyerhofer (where D agreed to pay P to buy some houses for her, but then showed up at the auction and outbid him).

“In the case of every K there is an implied undertaking on the part of each party that he will not intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part.”

o New England Structures (S) v. Loranger (G) (new fact to justify termination of K) G doing project for school, hires S to do roofing. G grows dissatisfied with

S. Sends telegram terminating S for not providing enough skilled workmen to maintain satisfactory progress. S responds that G is the cause of the delay.

Error on appeal: jury only allowed to consider the reasons G accused S of breaching, and couldn’t look to any other reason to determine whether G was justified in terminating the K.

G is not barred from asserting grounds not mentioned in the telegram unless P establishes that it relied to its detriment upon only one ground being asserted.

Form of estoppel, need to show reliance. Ex: If they rely on the asserted ground in their attempt to cure (i.e.

replace all pipe with Reading pipe) and leave, and then G says “That’s actually not why I fired you.”

Giving a Reason for Rejection: Potential for cure is a reason to give a list of reasons for terminating K. But there is a risk

of speaking up. UCC: A orders houseboat from B. A believes there are several material defects and

wants to reject it. Should A give B a reason for rejecting? 2-605(1).o Failure to state a particular defect with a rejection precludes you from relying on

the unstated defect to justify rejection if it could have been cured. A must give reasons for terminating. Notice is required if it could be cured.

R2d: A hires B to build a house. A believes B has committed a number of material breaches and wants to terminate the K. Should A give B a reason for terminating? R2d 248.

o If you give an insufficient reason for rejection, you still have to pay if it made the other party unable to cure (looks like same result as UCC). But comment a: Ordinarily a party whose performance has been rejected must determine at his peril the reason for that rejection… He is not entitled to a statement of reasons

pg. 58

from the other party and the other party is not prejudiced if he refuses to give such a statement.

o A should not give B a reason for terminating. Not required. If he does, could run into trouble because it may preclude him from listing other problems later (unless he could show B did not rely on his partial list of problems).

o Note in R2d 248: “only if he knew or had reason to know of that non-occurrence…” So if you did not know of the other defects, you could still try to raise them (but risk that court will say you had “reason to know”)

Why the difference? UCC has perfect tender rule, mitigated by idea of cure, so we want buyers to speak up. R2d also has idea of cure, but two reasons it’s different from UCC:

o It’s a restatement and not a statute, so has to follow case lawo Not quite as harsh as perfect tender rule because you have other ways to mitigate

(such as substantial performance)

Anticipatory RepudiationBig questions:

Is the recipient of a repudiation free to make other arrangements? Yes (Hochster) Can the recipient sue immediately?

o Generally, yes (Hochster)o Not if recipient has fully performed (and performance due is payment of money).

R2d 253 (243). Can the recipient ignore the repudiation and await performance?

o Yes, at least for commercially reasonable time. (Cosden Oil – skipped) What are consequences if the recipient urges retraction?

o Recipient does not commit to further performance if no retraction. Retracting Repudiation (R2d 256, UCC 2-611, Seacoast Gas)

o Repudiation can be retracted until other party either: Materially changes position in reliance or Indicates that he considers repudiation final.

Repudiation: R2d 250: A repudiation is

o (a) a statement by the obligor to the obligee indicating that the obligor will commit a breach that would of itself give the obligee a claim for damages for total breach under §243, or

o (b) a voluntary affirmative act which renders the obligor unable or apparently unable to perform without such a breach.

Anticipatory repudiation (no performance due yet): R2d 243 Repudiation accompanied by non-performance: R2d 253 Even a good faith misreading of the law can lead to repudiation.

o Ex: refusal to make progress payments when due is material breach (repudiation), even if honest belief the rule in your jurisdiction was “work before payment”

Must be sufficiently clear that party intends to breach (positive and unequivocal) A voluntary act can lead other party to reasonably infer that you do not intend to perform.

o (i.e. A sells house to B, then sells option to buy house to C before B’s sale closes)

pg. 59

The law will be more forgiving for an involuntary situation that makes a party potentially unable to perform (i.e. discovering there is an option on the house).

o May be that the party is ultimately unable to perform, but prospective non-performance is not automatic repudiation.

Just as you can have repudiation by an act, you can have retraction by an act. Repudiation accompanied by nonperformance gives rise to a claim for damages for total

breach (with an exception).

Cases: Hochster v. De La Tour (anticipatory repudiation)

o D hired P to accompany him on a 3-month trip. The trip was to begin on June 1. On May 11, D informed P that he changed his mind. P sued on May 22 in anticipation of the breach on June 1.

o No need to wait until June 1 to sue. When one party is informed by another party that he intends to breach, the first party has an option to sue immediately in anticipation of the breach, or to wait until the act was supposed to be done.

o It would be bad policy to make the party wait, because they would lose the opportunity to mitigate (i.e. by seeking other employment).

o Alternative facts: If P had waited to sue, he could still seek employment elsewhere.

Repudiation discharges his obligation to stand ready to perform. If P had been unable to perform (i.e. was in jail), he can’t recover. But D

can’t sue for breach, because he repudiated. Diamond v. USC (anticipatory repudiation)

o USC advertised “economy” season tickets to its football games, promising that if its team went to the Rose Bowl each holder of such a ticket would be given an option to buy a Rose Bowl ticket. P bought a ticket, but for reasons beyond USC’s control, ticket holders could not be given the promised options.

o Summary judgment for USC. It is the general rule that the doctrine of breach by anticipatory repudiation does not apply to Ks which are unilateral in their inception or have become so by complete performance by one party.

R2d 253: This is consistent. P has fully performed, so USC’s repudiation does not give rise to an immediate ability to sue.

R2d 243: Not necessarily consistent. If one side has fully performed, and other side repudiates, it does not give rise to immediate suit if the only remaining duties are payment of money. Here USC’s remaining obligation was not payment of money; it was providing Rose Bowl tickets.

We differentiate between these by asking if repudiation was accompanied by non-performance. Here, it was anticipatory, so no.

Seacoast Gas (repudiation, retraction, and reliance at work)o Seacoast to sell gas to US. In October, Seacoast writes of intent to cancel K on

11/15 because of claimed breach. US says that Seacoast has no right to cancel, selects a new bidder, and gives Seacoast 3 days to retract its repudiation. After those 3 days, US accepts the new bid. On 11/13, Seacoast tries to retract.

o Even if US was not found to have relied on retraction, they would still win because they gave notice that they considered the repudiation final.

pg. 60

McCloskey (G) v. Minweld Steel (S) (alleged repudiation)o G entered 3 Ks with S to furnish and erect steel on two buildings. Ks provided

that should S fail to supply a sufficient quantity of the materials, then G had the right to provide them and deduct the cost from payments due, or to terminate the employment of S. G sought assurances, S said it couldn’t give assurances and asked for G’s help in procuring materials. G cancelled the Ks, claiming that was an admission by S that it could not perform.

o For repudiation to occur, there must be an absolute and unequivocal refusal to perform or a distinct and positive statement of an inability to do so. Mere inaction and prospective non-performance is not (yet) enough.

Hypos on Repudiation:o Debtor borrows money from Bank. Promises to pay in installments. Misses first

payment and says she won’t pay any more. Can Bank sue for entire amount? In absence of acceleration clause, no. Must wait until payments come due:

R2d 243(3): Where at the time of the breach the only remaining duties of performance are those of the party in breach and are for the payment of money in installments not related to one another, his breach by non-performance as to less than the whole, whether or not accompanied or followed by a repudiation, does not give rise to a claim for damages for total breach.

o Employer hires worker to work each of the next 100 Saturdays as an Elvis impersonator and pays worker in advance. On the first Saturday worker fails to show up and repudiates the contract.

Can employer sue worker for total breach? R2d 243(3): Immediate suit for total breach

What if worker repudiated before first Saturday? R2d 253(1) doesn’t apply because he already got all of his money. If repudiating party has yet to actually fail to perform, it is harder

for there to be total breach.

Hypos on Retraction: On 1/1 A contracts to sell land to B, closing to take place on 6/1.

o On 2/1 A sells the parcel to C and B learns of this sale. o On 3/1 A repurchases the land from C. o On 6/1 B refuses to purchase the land and A sues B.o R2d 256(2): The effect of events other than a statement as constituting a

repudiation… is nullified if, to the knowledge of the injured party, those events have ceased to exist before he materially changes his position in reliance on the repudiation or indicates to the other party that he considers the repudiation to be final.

So, depends on whether B knew A repurchased the land from C; materially changed his position in reliance (i.e. purchased other land); or told A that he considered the repudiation to be final.

Lesson here is just as you can have repudiation by an act, you can have retraction by an act.

pg. 61

Seller Ks to sell goods to Buyer for $100K. Seller repudiates one week later, when market price is $110K. Buyer does nothing. Seller retracts repudiation another week later, when market price falls to $90K. Is the retraction effective?

o UCC 2-611: If aggrieved party has materially changed his position or otherwise indicated that he considers repudiation final. Otherwise retraction could be effective.

Performer and theater entered K that provided Performer would get 50% of the receipts. Performer later sends new K asking for 60% and says that it could not think of taking less. (this was an offer for modification of contract) Theater returns the K unsigned and says that they already have a K. Performer later writes to coordinate advertisements, indicating it is coming. Theater writes back expressing surprise because it thought that Performer cancelled. Performer sues Theater for failure to provide a venue.

o The performer did attempt to retract before performance was due, and the theater did not express that it considered the repudiation final. However, the theater did materially change its position in reliance on this repudiation. Performer can’t retract.

o Actual case ruled in favor of performer: jury found there was no repudiation at all.

Repudiation in the UCC: UCC 2-610: When either party repudiates the contract with respect to a performance not

yet due the loss of which will substantially impair the value of the contract to the other, the aggrieved party may

o (a) for a commercially reasonable time await performance by the repudiating party; or

pg. 62

o (b) resort to any remedy for breach even though he has notified the repudiating party that he would await the latter’s performance and has urged retraction; and

o (c) in either case suspend his own performance or proceed in accordance with the provisions of this Article on the seller’s right to identify goods to the contract notwithstanding breach or to salvage unfinished goods.

Assurances (UCC 2-609, R2d 251)UCC: 2-609, By-Lo

Cl 1:o “reasonable grounds for insecurity”o “adequate assurances”

Cl 4: no adequate assurances => repudiationCommon law?

Traditionally, no except perhaps for insolvency Movement in the law? R2d 251

Cases: McCloskey (G) v. Minweld Steel (S) (see also under repudiation)

o There were no provisions in the contracts which authorized McCloskey to make demands for assurances and thus Minweld’s failure to provide the assurances did not amount to an anticipatory breach.

By-Lo Oil v. Partecho D agreed to supply P with software. P sought assurances in 9/1997 and 1/1998

(for assurances regarding Y2K). o There are no reasonable grounds to conclude that P should have felt insecure on

January 7, 1998 that D would not perform. It was nearly 2 years until the software was required to be Y2K compliant P did not express any urgency to install the needed software updates No complaints about D’s past performance

o ParTech’s assurance that it was evaluating the software was adequate despite that it was less than what was requested by By-Lo

In evaluating assurance, consider D’s reputation, the grounds for P’s insecurity, and the other kinds of assurance available.

o UCC 2-609: “When reasonable grounds for insecurity arise”

Assurances Hypos: A hires C to build an addition to A’s house for $20k. C demands payment up front. A

goes to B to borrow money. B offers A two loans: i) an unsecured loan on a credit card that charges 18% interest or ii) a home equity loan that charges 4%. A chooses the credit card loan. After the loan is made, B grows concerned that A will be unable to pay. Should B be allowed to demand that A provide a mortgage to secure the $20k loan?

o No. B could have made provisions for this in advance and didn’t. Had B demanded a mortgage up front, the interest rate would’ve been lower. So allowing them to demand that now is unfair.

o Restrict assurances to cases where problem arises after K, less foreseeable.

pg. 63

A hires C to build an addition to A’s house. C will charge A $20k if A pays upon completion. Alternatively, C will charge just $15k if A makes progress payments as work advances. A chooses to pay $20k at the end. After work has begun, C grows concerned that A will be unable to pay. Should C be allowed to demand that A begin making progress payments?

o No. Same policy motivations as above apply. A hires B to provide entertainment at A’s conference in New York. 2 weeks before

conference B’s workers go on strike. Does A have right to demand adequate assurance from B?

o R2d governs here. Traditionally, no right to demand adequate assurances, but there may be some movement in the law. R2d 251 adopts UCC approach (some courts will follow it, some courts won’t): this is a reasonable ground to believe that the obligor will commit a breach by non-performance, so A has right.

A hires B to sing at sons’s wedding (2/1) and daughter’s wedding (3/1). Separate Ks. B fails to appear at the first wedding. Can A terminate the contract for the 3/1 wedding and hire a new singer?

o They can’t say “material breach, I’m terminating the K” because this is a separate K. However, A can demand adequate assurances because they have reason to believe that B will breach the K by non-performance.

Measuring Damages for Anticipatory Repudiation

Mutual Mistake, Impracticability, and Frustration The background principle of mistake cases is that agreements are to be observed “pacta

sunt servanda” (notwithstanding the regret that a party may experience when fresh information comes to light)

Mutual mistake deals with problems at time of K formation. If a later problem develops (earthquake opens a fault line after building begins) that’s different. That may be impossibility or impracticability.

Mutual Mistake R2d 152: When Mistake of Both Parties Makes a Contract Voidable

o (1) Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in § 154.

So need to show: (1) mutual mistake of a basic assumption, (2) that has a material effect on the exchange, and (3) the party seeking relief for mistake doesn’t bear the risk.

o (2) In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.

R2d 154: A party bears the risk of a mistake wheno (a) the risk is allocated to him by agreement of the parties, or

pg. 64

o (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

o (c) the risk is allocated to him by the court on the ground that it is reasonable in the circumstances to do so.

Exam note: Look for words such as “as is” that show that the buyer is assuming the risk.Supervening Impracticability/Frustration

R2d 261 (Impracticability), 265 (Frustration) o Where, after a contract is made, a party's [performance is made impracticable]

[principal purpose is substantially frustrated] 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 that performance is] [remaining duties to render performance are] discharged, unless the language or the circumstances indicate the contrary.

Existing Impracticability/Frustration R2d 266 (1) (Impracticability), (2) (Frustration) Where, at the time a contract is made, a

party's [performance under it is impracticable] [principal purpose is substantially frustrated] without his fault [because of] [by] a fact of which he has no reason to know and the non-existence of which is a basic assumption on which the contract is made, no duty [to render that performance] [of that party to render performance] arises, unless the language or circumstances indicate the contrary.

Cases: Stees v. Leonard

o Owner (Stees) hires builder (Leonard). Soil contains quicksand. Building collapses twice. Owner recovers restitution of progress payments and reliance losses for temporary loss of lot + out of pocket for damage to adjacent property.

o A party to a K is bound to perform unless he can demonstrate absolute impossibility. Unforeseen hardship is no excuse. It is D’s burden to do what is necessary to perform even if it means draining the site or building a stronger foundation than what was called for by the K specifications. 

o Note P did not ask for expectation damages. Significance of that: Cost of completion could be enormous. Could be greater than value of

building to P. The potential for enormous expectation damages could cause even this court to blush.

o Argument for mutual mistake: if they had known it was quicksand, would never have agreed to build. Mistake of a basic assumption (that this was buildable land).

o This case assigns the risk of quicksand to the builder. Is this good policy? The builder may know more about the land. Having a clear rule is good for insurance purposes (because you know

upon whom the risk lies and can insure yourself against that risk) Renner v. Kehl

o Ds sold lease in AZ to Ps. Ps made it clear they intended to use land to grow jojoba and that this required adequate water. Ps make a down payment, take conveyance, drill test wells. Not enough water. Seek rescission.

pg. 65

o Not the same doctrine as Raffles (the two ships Peerless). There, mutual misunderstanding. Here, everyone assumes the same thing (that there is water) but there is no water.

o Need to show: (R2d 152) (1) mutual mistake of a basic assumption,

How do we know seller assumed that? Seller knew buyers were planning to grow jojoba, and sold it to them.

(2) that has a material effect on the exchange The lack of water had a material effect on the exchange.

(3) the party seeking relief for the mistake doesn’t bear the risk. A party bears the risk when (R2d 154). Here, (a) is not true, (b)

could be true (because the buyer should verify), (c) is the court’s call.

o Sellers of land tend to lose. Buyers of land tend to win.o Note: If K had an “as is” clause, that would allocate the risk to the Buyer.

Nelson v. Riceo P advertised a public sale of some paintings for $60. Rice paid that price and

resold the paintings for more than $1M (and then paid $337k in taxes). P sought to have contract rescinded on ground of mutual mistake.

o Court said P bore the risk of the mistake. R2d 154(b), a party bears the risk of the mistake when “he is aware, at the time the contract is made, that he has only limited knowledge… but treats his limited knowledge as sufficient.” P bore the risk of mistake “based on its own conscious ignorance.”

o Also, they didn’t assume that it wasn’t a famous painting. They knew it was a risk. It wasn’t a mistake of a basic assumption.

Wood v. Boynton (valuable stone)o Customer showed jeweler a stone she had found. Jeweler gave her a dollar for it.

Said he did not know its worth. It was worth $700 (a rough diamond). o Aside from fraud, the only ground for recovery would be that there was a mistake

in fact as to the identity of the thing sold with the thing delivered. Dismissed. Sherwood v. Walker (pregnant cow case)

o Cattle breeder sold a barren cow to a banker for $80. Turns out she was pregnant and worth $1,000. Breeder refuses to deliver the cow.

o Held: A barren cow is a substantially different creature than a breeding one. Rose “was not in fact the animal, or the kind of animal, the defendants had intended to sell or the plaintiff to buy.”

o One way to distinguish Sherwood from Boynton – the cow had not yet been delivered (but the stone had already been delivered). Courts don’t want to unwind transactions.

Renner Hypos: S contracts to sell land to P, knows P intends to use the land for a jojoba farm. A nearby

river supplies plenty of water to support the farm. After signing, P discovers federal law prohibits use of land as a farm. Both S & P were unaware of this law. Mutual mistake?

o Mistake of law, not mistake of fact. Modern approach says it still counts as a mutual mistake of a basic assumption (that assumption can be “that the law is x”).

pg. 66

o Obviously, this is material.o Who bears the risk?

Maybe, as a policy matter, the buyer who wants to start a farm. Same as above, but after signing, the government dams the river upstream and there is

not enough water for the farm.o This happened after signing of K, more like impossibility/frustration of purpose. o The court might use 154(c) to assign the risk of the contract

S contracts to sell land to P, and P plans to use the land to farm jojoba. After signing the contract P discovers that there is not enough water to grow jojoba.

o S did not know P’s intended use of the land, so this is mistake of one partyo R2d 153 (material effect + does not bear the risk, and: enforcement is

unconscionable or other party had reason to know of the mistake or caused it) S did know P intended to grow jojoba, and knew there was not enough water for farming.

Extremely careful to avoid making any representations about amount of water available.o So now S has reason to know of the mistake. Does P bear risk of the mistake?

Seems too aggressive to say purchaser must look after themselves and are negligent by not checking.

o Is this misrepresentation by nondisclosure? Is there a duty to disclose here?Remedies/DamagesRemedies for Breach

Courts ordinarily award money damages. If they cannot determine an adequate amount of money, they’ll award injunctive relief

(R2d 359)o Specific performanceo Negative injunction (i.e. you can't force specific performance, but you can prevent

him from playing for any other team). Courts do not give punitive damages in contracts claims. (R2d 355)

o Exception: If there is an associated tort. Standard remedy is expectation damages: put P in as good of a position as she would

have been in had the K been performed (R2d 344(e))o The plaintiff gets the benefit of her bargaino Look to D's gain only as estimate of P's loss

Expectation interest is sometimes too difficult to measure, and the courts will award an amount based on reliance damages: put P in as good a position as she would have been had K never been entered (typically used as alternative measure of expectation damages)

Plaintiff can seek restitution damages: restoring any benefit to P that was gained by Do Restitution vs. Reliance Damages: Reliance damages aren’t just what P paid to

the school, but also what P paid to other people (housing deposit, books from Amazon, etc) in her reliance on the contract

"Efficient breach hypothesis" - Promisors will breach only when it is economically efficient to do so (that is, when her gain from breaching exceeds the damages she will have to pay to leave the promisee just as well off as he would have been had the promisor performed) – this is called “Pareto efficiency”

o The efficient breach hypothesis ignores the cost to the parties of enforcing rights: paying for attorneys, proving damages, etc.

pg. 67

Cases: US Naval Institute vs. Charter Communications

o The appellate court found that the lower court had crossed the line from awarding Naval expectation damages, to awarding punitive damages.

Sullivan v. O’Connoro Sullivan (who received a botched nose job) was awarded $13,500 in damages. D

(her plastic surgeon) appealed, saying she was only entitled to restitution. Sullivan believed she was awarded to expectation damages, but was willing to waive this objection if the court would deny the defendant’s appeal.

Note much of language in Sullivan touting reliance is dicta – P agreed to waive her exceptions if the court denied the defendant’s appeal.

Specific Performance Specific Relief – Adequacy

o No specific performance if damages are adequate (R2d 359/360) Difficulty of proving damages Difficulty of procuring substitute Difficulty of collecting (somewhat controversial)

UCC: 2-716 (look at 2-709 on own)o Unique or “other appropriate circumstances”

pg. 68

Restitution Reliance Expectation D wanted Actual Award

$300 doctor fee X X

(no- she would've paid that fee anyway)

X X

$200 hospital fee (planned operations)

X(no- she would've paid that fee anyway)

X X

$100 hospital fee (add’l operation)

X X X X

$6,000 pain / suffering, planned operations

X(no- she would've had that suffering anyway)

$3,000 pain / suffering, add’l operation

X X X

Difference in noses

Difference between nose received and original nose

Difference between nose she expected and nose she received

Difference between nose received and original nose

o Courts treat as question of adequacy. Klein, Laclede Equitable relief is discretionary.

o Fairness. McKinnon (Chapter 6 - skipped)o Difficulty of supervision (Northern Delaware)

Must balance against public policy, adequacy of damages, etc. (Laclede)o Definiteness of contract. (Laclede)o Personal services contracts.

Perhaps negative injunction if special skill or special knowledge of employer’s business.

Cases:o Morris v. Sparrow (specific performance – “unique” good)

Damages hard to calculate – can’t just buy another horse, some personal/emotional value. Want to put P in as good a position as if K had been performed, maybe can only be achieved w/ specific performance.

o Campbell Soup Co. v. Wentz (specific performances – damages inadequate) Campbell is worried they’re buying “contract carrots.” Seeking specific

performance. Were it not for an unconscionability problem omitted from text, specific performance would be appropriate.

Damages inadequate because: Carrots were unavailable on the open market. But they were

available – they were buying carrots from another seller. Couldn’t they just sue for the price difference? No, because this was an output K - quantity was uncertain.

o Klein v. PepsiCo (no specific performance – damages adequate) Pepsico refuses to deliver plane and Klein sues. K price is $4.6M, and

market price is $5.7M. What would Klein get in specific performance v. damages?

Specific performance: He’ll pay $4.6M, but he’ll get a plane. If they give him damages, he’ll take his own $4.6M, get $1.1M

from Pepsico, and buy a plane. So either way he ends up with a plane and he’s out $4.6M.

Why specific performance? Klein could argue emotionally attached to this specific plane (like

Morris v. Sparrow), but that’s not plausible. Could be that $5.7M was market price at time of breach, but way

higher by the time this goes to court.o If market price is now $7M, you want specific performance

because you’ll get a $7M plane. Otherwise you get $1.1M and can’t buy a plane with $5.7M

UCC 2-716 standard for specific performance:o Goods have to be “unique” (here, no because there are 21

other G-2s on the market)o Note: damages are calculated at time P learns of breach.

We want P to go buy a plane then, rather than wait for market to change at expense of D.

pg. 69

o Wanting to resell the good on the market is a bad fact for P. Demonstrates that the market price is good estimate of its value to P. Vs. if you intend to keep it, shows you value it more than market does, and how much more is hard to quantify, so specific performance is more adequate.

o Laclede Gas v. Amoco Oil (specific performance – damages inadequate) Laclede and Amoco entered into a long-term propane distribution

agreement. Laclede had a right of cancellation and Amoco did not, but this did not mean K was void for lack of mutuality (because Laclede could only cancel 1 year after the initial K and had to give 30 days notice). Laclede asked for specific performance.

UCC 2-716: Propane not a “unique” good. Must look to “other circumstances.” Here, quantity is uncertain (it’s a requirements K) so calculating damages would be difficult. And as far as adequacy of damages, Laclede may not have been able to get a suitable long-term replacement K.

D argues the K is too uncertain to enforce specific performance. Key question to ask is whether court can figure out what K is and enforce it. If it’s uncertain, court won’t want to give an injunction because they won’t risk jailing someone over uncertain terms.

Laclede gets specific performance despite difficulty for the court in administering/supervising the contract. Must balance difficulty of supervision against adequacy of damages and public policy.

o Northern Delaware v. E.W. Bliss Co Plant was being built on P’s land. Wasn’t progressing as quickly as he

wanted. P asked for 300 more workers to be put on the job. He’s not saying which 300 people, so it’s different from telling a specific person “You have to work here.”

Court does not order specific performance because of the impracticability if not impossibility of court carrying out the order.

o

pg. 70

Calculating Damages

Measuring Expectations Trying to put P in as good of a position as she would have been had K been performed R2d 347: Casebook formula: loss in value – cost avoided – loss avoided + other loss

o Loss in value: what should’ve been received minus what was received Ex. Seller: price if not paid Ex. Buyer: value of goods if not delivered

o Cost avoided: costs not spent / price not paid because other side breachedo Loss avoided: salvage or reallocationo Other loss: consequential & incidental

Another formula: cost of reliance + profit – loss avoided + other losso Note: Overhead is a fixed cost, can’t be avoided, so we do not subtract it from

“costs avoided by not performing the contract” Cases:

o Vitex v. Caribtex [Court cites UCC but it is not controlling authority because this was a K for a service (treatment of wool).]

P had closed its fabric processing plant. After entering the K with D, it re-opened its plant (rehired work force, etc.). D failed to deliver the products. Court awarded P damages in the amount of $21,114.

(gross profits had D performed) – (costs it would have incurred) D appealed, said P’s overhead expenses should also have been deducted. Accountant view: Overhead should be deducted from damages. Economist view (prof likes this): a business must allocate overhead to

each project so it knows how much it is earning on each project. Overhead should be included in damages.

We want to put P in as good a position as it would have been had the contract been performed, and subtracting overhead from damages doesn’t get you there.

o Laredo Hides (cover = the cost of purchasing substitute goods) P K-ed with D to purchase animal hides, a by-product of D’s business. P

agreed then K-ed with a tannery to sell all of the hides it expected to

pg. 71

purchase. The price of hides increased a ton. When P’s payment was delayed in the mail, D demanded payment in a few hours, then declared non-payment a breach and stopped providing hides. P was forced to purchase substitute hides at market price. Difference between K price and the price of substitute goods was $142k. P also had transportation and handling costs of $3k.

Buyer might prefer damages based on cost of cover (rather than K price) because the cost of a substitute item may be substantially more than K price.

If market price is clearly less than price you’re paying for cover, you probably won’t get damages for cover price because it is not reasonable (2-712(1))

In old days, non-breaching party had to show market price. Now, burden has shifted to breaching party to show that the cover price is unreasonable.

Interpretation of 2-713: Damages calculated by difference between market price at time buyer learns of breach and the K price, along with any incidental/consequential damages.

Courts interpret it as “time of repudiation” or a reasonable time thereafter: how much time should it have taken you to get a substitute. Non-breaching party doesn’t always have the right to wait. We want them to cover without unreasonable delay.

o R.E. Davis Chemical Corp v. Diasonics, Inc. (lost volume seller) P K-ed with D to purchase medical equipment for a facility P had K-ed

with two Drs. to establish. When the Drs. breached, P breached its K with D: refused to accept delivery of the equipment. D sold the K equipment to another purchaser for same amount as K price. P sued to recover its down payment, less $500 (UCC 2-718(2)(b)). D agreed that P was entitled to its down payment, but asserted that D was entitled to setoff for damages incurred as result of Davis’ breach, plus damages for lost profit.

2-718: When the seller (D) justifiably withholds delivery because of the buyer’s breach, the buyer (P) is entitled to restitution.

P is suing to get their deposit back (minus $500) 2-718(2)(b) 2-718(3) –P’s right to restitution is offset to the extent the seller

establishes a right to recover damages. Seller would have sold to both buyers had this buyer not breached. 2-

708(2): damages would not put the seller in as good a position as performance would have.

Not looking at 2-706, this court says it doesn’t trump 2-708 Language in 2-708: “due credit for payments or proceeds of

resale,” seems to say “you resold it for the same price so there are no damages” but court says this was meant to deal w/ scrap sales

D would not qualify as a lost volume seller if it were just selling a machine it didn’t manufacture. To prove they are a lost volume seller (and therefore recover), seller must establish:

It had the capacity to make the sale to buyer and to resale buyer; it would have been profitable for it to make both sales, and

pg. 72

it probably would have made the second sale absent the breach.”o Algernon Blair

G entered K to construct a hospital and had contracted with S for steel erection and equipment supply. S supplied its own cranes. G refused to pay for crane rental, claiming it was not obligated to do so, and S stopped work. G then hired a new sub to complete the job, and S brought suit to recover for labor and equipment furnished.

Expectation damages are $0, reliance damages are $0 (because they would have lost more money). So they seek restitution – measured by current market price of the goods conferred rather than K price.

“the reasonable value of the services rendered is the amount for which such services could have been purchased from one in the plaintiff’s position at the time and place the services were rendered.”

o Hypo based on Rockingham County v. Luten Bridge Co: B agrees to build bridge for A for $9k. The cost of materials rises

dramatically. B has spent $10k, but must spend another $10k to finish the job.

If A breaches, B can recover $10k, the reasonable value of the services rendered.

If B finishes before A breaches, B only recovers $9k (K price = ceiling, R2d 373)

A decides that it does not need the bridge when the job is ½ done. Should A cancel the contract?

o No, they should let B finish because they’d rather pay $9k for a finished bridge than $10k for a half-finished bridge.

Hypo: Buyer agrees to buy flour for $1.4M and makes a $500k payment (leaving $900k to be

paid). The price falls to $1.1M and the seller breaches.o What are expectation damages?

Damages are $200k. Buyer would have to spend an additional $900k to get flour worth $1.1M (if K goes through), or they could add $200k to their $900k and buy the $1.1M of flour elsewhere.

They don’t get their $500k payment back, so they are out $300k but are in the same position they would’ve been in had the K been performed.

(they expected to pay $1.4M for that flour)o What are reliance damages?

R2d 349: If K goes through, they will have lost $300k. Reliance damages are their $500k deposit, less the $300k they would have lost had performance occurred. Damages are again $200k.

Lesson here: D shows that you would’ve lost money on the K, reliance damages become expectation damages.

o Can the buyer recover $500,000 under some theory? Yes, under restitution.

pg. 73

Reliance Damages Reliance measure deducts losses that D can prove P would have incurred. R2d 349,

Albert & Sons v. Armstrong Rubber If performance not complete, P can seek restitution instead. Algernon Blair. Is contract price a ceiling?

o No - Southern Painting Co. o Yes - Johnson v. Bovee

Cost of Completion R2d 348 is a good approach to this: Cost of completion if not “clearly disproportionate to

the probable loss in value to him”o Personal value => less likely to be clearly disproportionate

Some courts may still follow Groveso Narrow interpretation of “unreasonable economic waste” – tearing down a

structureo Role of willfulness

Two issues: If worker’s performance is not perfect, must other party pay anything? Has worker

substantially performed so that he may recover K price less damages? Best estimate of damages?

o How much would it cost owner to complete performance (can sometimes overcompensate because complete performance may cost more than P values it)

o Difference in market value btwn. what was promised and what was received. P in Jacob probably values Reading pipe more than market values it or she

wouldn’t have requested it. This measure may under-compensate.

Cases:o Jacob & Youngs v. Kent (Reading pipe)

pg. 74

Putting P in position he would have been in had K been performed depends on how subjectively happy P would have been to have Reading pipe in his home, even though difference between the pipes are nominal.

Court says “the owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value.”

R2d 348 test: Give cost of completion if “not clearly disproportionate to the probable loss in value to him.”

Restatement 1st test: Give cost of completion unless it would lead to “unreasonable economic waste”

While personal value may be a factor, it doesn’t automatically tip the balances. Unless you’re the owner of Reading pipe company, it’s unlikely you actually care enough for the giant cost to be worth it.

o Plante v. Jacobs (misplaced wall in family home) Diminished-value rule: difference between the value of the house as it

stands with faulty/incomplete construction, and the value of the house if it had been constructed in strict accordance with the plans and specifications.

Contract was substantially performed. Tearing down wall is substantial destruction, unjustified economic waste.

o Groves v. John Wunder Co. D agreed to leave the property at a uniform grade. Willful breach. The correct measure of damages is the cost of remedying the defect. [Normally, willfulness of breach does not matter in K law – but court

mentions it several times here]o Peevyhouse v. Garland Coal & Mining (

D agreed to perform certain restorative work to the property at the end of their lease. They didn’t.

Where the contract provision breached was merely incidental to the main purpose, and where the economic benefit of complete performance is grossly disproportionate to the cost of performance, damages are calculated by difference in market value.

Hypo: Pool built too shallow (contractor saved $50k not building deeper)o Cost of completion: $180k; Difference in Market Value: $10ko We want to put P in as good a position as if it had been performed. o R2d approach: is cost of completion clearly disproportionate to loss of value to

him? What if he testified that he planned to demolish and rebuild the pool if he

were awarded cost of completion? Showing personal value? Might help, but court might worry this is posturing (threatening

inefficient performance)o Groves approach: Involves tearing down a structure (economic waste), so they’d

lean toward awarding difference in market value. But since contractor saved $50k by building a shallower pool, might look like willful breach.

o

pg. 75

Limitations on DamagesOverview:

Avoidability: Luten Bridge, Parkero Related ideas

Resale contracts – Tongisho Not really a departure from general rule

Foreseeability: Hadley, Kenford Certainty: Fera

AvoidabilityOverview:

Does difference between market price and K price overcompensate the broker?o Generally, no (Tongish)o Perhaps if broker’s subsequent K is contingent on supply from breaching party.o Give mkt – contract anyway as matter of policy?

Avoidability and Employment (Parker)o Must make reasonable effort to find replacement worko Do not have to take different/ inferior jobo If you do take job, deduct wages from recovery

Cases:o Rockingham County v. Luten Bridge Co.

County hired Luten to construct a bridge despite public opposition, then told Luten it would not honor the K. At the time Luten was informed that the County would not proceed, it had performed approximately $1,900 worth of work on the bridge (total price was $18,000). However, Luten finished the bridge, then sued for the K price.

Additional facts (not in book) indicated it was not clear repudiation of K. The principle is: if you don’t mitigate, you cannot recover your full loss. P should have stopped building. What should their damages be?

Reliance costs: $1,900? (this doesn’t put them in as good a position as they would’ve been had the contract been performed)

Had they stopped building, we could have used these formulas:o Loss in value – cost avoided – loss avoided + other losso Profit they would have earned + cost in reliance on K – loss

avoided + other loss But here they did not stop building:

Change formula 1 from “cost avoided” to “avoidable cost” – we won’t allow them to recover for costs that were avoidable.

Change formula 2 from “cost in reliance” to “cost in justified reliance” – P didn’t justifiably rely on K when it kept building.

Different case if Luten had owned the land it was building on (and was building, say, a house). Then they could continue building, see what they can sell it for. Can’t recover damages because could reasonably mitigate.

Different case if it were a good (like a houseboat) and Buyer told Seller to stop building. UCC 2-704(2): Where the goods are unfinished an

pg. 76

aggrieved seller may (in the exercise of reasonable commercial judgment) either complete to avoid loss or cease manufacture and resell for scrap value (or proceed in any other reasonable manner).

Putting aside a potential “lost volume seller” argument (mention on exam), damages might be substantially less due to potential to mitigate. If it’s a good nobody else wants to buy, you resell for scrap to mitigate losses.

Hypo: Buyer runs delivery business. Seller agrees to supply gasoline, but breaches K. Rather than buy gasoline from other suppliers, Buyer just shuts down. Can Buyer recover for lost profits? See 2-715(2): Buyer could have mitigated damages by finding another Seller. It could reasonably be prevented by cover.

Mitigation Klein v. PepsiCo Hypo: Assume Klein could have bought one of the other G-II Jets for

$200k more than K price.o If he buys a G-III for $400k more than contract price (G-III, not G-II) Seller will

want to limit him to $200k in damage (difference between market price and K price). Buyer will want $400k (what he spent).

UCC 2-712(1): Seller will say this is not a “reasonable purchase” in substitution.

o After several inquiries, Klein buys a G-II for $250k more than K. Just because it was physically possible for buyer to spend $200k instead of

$250k, the fact that he made several inquiries (reasonable efforts) pushes us toward awarding full $250k. (We would need to know more about the inquiries).

o After several inquiries, buys a G-II for $150k more than K. Buyer will say he’s entitled to $200k (market price). He got a good deal. We are trying to put Buyer in position he would have been in had K been

performed. He has the jet. So that’s an argument against awarding more than $150k.

Counter: Klein was buying these planes to resell them. He may have been able to buy this $150k plane AND the plane D was supposed to deliver,

pg. 77

and he would have had 2 planes to sell. So look at 2-713 for damages instead of 2-712.

Cases:o Tongish v. Thomas

Tongish Ks to sell large sunflower seeds to Buyer (Coop) for $13 per hundredweight. Buyer makes a resale contract with Bambino for $0.55 per hundredweight profit. Price doubles to $26, and Tongish breaches, sells seeds to Thomas. Are damages $0.55 or $13?

If there were no resale K, damages are $13 (difference between market price and contract price)

But with resale K (at a $0.55 profit), seller argues that to give them $13 would give them a windfall due to change in market price.

But if you don’t award Buyer $13, Buyer either has to buy replacement seeds to avoid breaching, or breach (and get sued for damages, which would be market price minus $13.55, so now Coop is out $12.45 in damages, and out $0.55 in lost profits, add those together and get $13)

Distinguished from Allied: In Allied, farmer did not have raisins, farmer in Tongish did have

sunflower seeds. Looks like bad faith, though ideally courts don’t consider whether breach is willful. (but they do – Groves supra)

In Allied, ultimate buyer did release the middle man. If ultimate buyer released Buyer from K (so they won’t get sued for damages), they’re only out $0.55.

o But arguably they’re still out $13 because they could’ve found another buyer to sell to. Maybe that pushes it too far.

o Collateral source rule: Should breaching party get the benefit of the non-breaching party’s insurance? Generally, no. We want them to internalize cost so they take care. Here we don’t want the Seller here to get the value of Buyer being released from K.

Takeaway: As a policy matter and a plain meaning of statute matter, rule should be 2-713 (diff. between market price and contract price). Some courts fail to follow it because they ignore possibility that the middle man will be on hook to ultimate buyer. May makes sense in cases of release.

o Parker v. Twentieth Century-Fox Shirley MacLaine entered K with D to play the female lead in the musical

film Bloomer Girl, guaranteeing her compensation of $750k. Fox decided not to produce the film and offered MacLaine the female lead in the Western film Big Country, Big Men. MacLaine did not accept and sued to recover the guaranteed compensation under the original K.

Ds say she should’ve mitigated her damages (letter said “to avoid any damages to you”). Court says this offer was “different in inferior kind”

Easy to calculate difference in wages but not this was different genre, filmed in different location, different type of role, loss of director/screenplay approvals under original movie contract

pg. 78

Perhaps also some idea that she shouldn’t have to work with someone who just cancelled the original film.

Hypos:o Tongish: S Ks to sell goods to B for $100k, and Ks to purchase from supplier for

$90k. Market price falls to $75k and B repudiates. S should recover $100k - $75k = $25k. If market price falls further to $60k by the time of delivery, S should recover $100k - $60k (difference between K price and market price at time and place for tender, UCC 2-708)

Tender means either deliver or show up ready to deliver and offer deliveryo Parker: School fires 3rd grade teacher in breach of K. Can teacher take off the

rest of the year and still recover his lost wages? Must make reasonable efforts to obtain employment (but not

different/inferior employment)o Another school in same town offers teacher a position teaching fourth-grade at

same salary and benefits. If teacher refuses the job, can she still recover? Probably not, but could go to jury.

o Law school fires professor. A nearby and more prestigious school has an opening at Dean and offers the professor the job.

This job is more prestigious but very different job from being a professor Doesn’t have to be different AND inferior to recover lost wages.

o Teacher returns to her former job as an investment banker. Her wages exceed what she made as a teacher. What damages can he claim against the school?

At lower-paying job, can recover difference in wages (Starbucks), but it’s a stretch with higher pay. Possible enjoyment factors, difficult to prove

o Employee is fired and receives unemployment. Should employer get to deduct unemployment compensation from the lost wages in the calculation of damages?

No. Collateral source rule – breaching party should not get benefit of other party’s insurance. (overcompensates the non-breaching party but that is justified by requiring adequate damages from breaching party)

ForeseeabilityOverview:

R2d 351 is a good summary of general ruleo Party in breach must have had reason to foresee loss at time of K formationo Loss is foreseeable if they follow

In ordinary course of events Special circumstances if party in breach had reason to know

Tacit agreement test – “It depends on what liability D fairly may be supposed to have assumed consciously, or to have warranted P reasonably to suppose that it assumed, when the K was made.”

o Generally rejected – Cmt a to R2d 351, UCC 2-715 comments UCC 2-715: Buyer can get consequential damages but sellers don’t (see 2-

715) – why not? Note incidental costs tend to be smaller things and consequential

tend to be the bigger things Assumption may be that seller can sell to another person and avoid

consequential damages

pg. 79

How is it different from Kenford and R2d 351(3) - “disproportionate compensation”? R2d 351: damages are not recoverable for loss that the party in breach did not have

reason to foresee as a probable result of the breach when the K was made. Loss may be foreseeable if it follows from the breach (a) in the ordinary course of events, or (b) as a result of special circumstances beyond the ordinary course of events, that the party in breach had reason to know [only requires breaching party to know, not both parties, different from Hadley]

Cases:o Hadley v. Baxendale

P’s crank broke and halted all operations. Had to ship it to get replaced. D shipping company informed P that if shaft was delivered to them before noon, it would be delivered to Greenwich the following day. P did that, but D delayed several days, during which time the mill remained closed.

Ps allege they told the Ds they needed it ASAP, but that’s uncertain. Assume they did not tell Ds “this is our only one, the mill is shut down.”

Ps are suing for lost profits. To put them in a position if the contract had been performed, we’d pay them the lost profit. But D says lost profits were unforeseeable.

Damages are foreseeable if: arise naturally from such breach of contract may reasonably be supposed to have been in the contemplation of

both parties at time of K formation But if these special circumstances were wholly unknown to the party

breaching the contract, he would only have the first type of damages. R2d 351 (above) Suppose a reasonable person would know that mills only have one shaft,

but the shipping company clerk was clueless. Does mill recover? Under R2d yes, “had reason to know” Under Hadley maybe?

o “may reasonably be supposed to have been in the contemplation of both parties”

o Often with an objective standard, we subjectivize it: “a reasonable person in this context”: what would a reasonable person serving as a clerk in a mill town know?

Suppose after K formation miller says “also, this is our only shaft and we’ll lose profit if delivery is delayed”. Focus on time of K formation, not at the time performance was due.

Why? When you enter a K you need to know what you’re on the hook for. If you know you’ll be on the hook for their lost profits, you’ll charge them more money and devote more resources to it.

o Kenford v. County of Erie Kenford was supposed to build a dome stadium. Seeking out of pocket

costs and profits they would have made from renting the stadium. Surrounding property value had appreciated.

It was foreseeable that the value of surrounding land would appreciate. It was foreseeable they would have made profits operating the stadium. But

pg. 80

P doesn’t recover: court says county did not contemplate assumption of those risks at time of K.

Tacit agreement test: “the extent of liability should be worked out on terms which it fairly may be presumed he would have assented to if they had been presented to his mind…”

R2d 351 puts breaching party on the hook for foreseeable damages at time of K formation. Tacit agreement test asks “do we really think the parties agreed, or would have agreed, to place these risks on the breaching party?”

Comment (a) in R2d explicitly rejects tacit agreement test, but 351(3) (“circumstances justice so requires in order to avoid disproportionate compensation”) is pretty similar to it.

Comment f: Commercial deal will have more formality, more lawyers, better allocation of risk. If it’s not a commercial deal, you don’t assume parties were as well-advised. Kenford K is pretty commercial/formal, but maybe we can fall back on 351(3) “justice so requires” limitation.

Hypos:o Homeowner has a leaky pipe. A Ks with B, a plumber, to fix the pipe within 10

days. The leaky pipe is really a much bigger problem and with each day that passes there is a risk of a major plumbing disaster. A does not know this. B has seen the leaky faucet and knows, or should know, the risk exists. B is late in fixing the pipe and the disaster occurs. Is B liable for the consequences?

Yes. R2d 351 2(b) only requires that the breaching party have reason to know at time of K (not the non-breaching party)

o Alice has a job that explicitly gives her job security. She is fired in violation of this. Asks for punitive damages and damages to compensate for mental distress stemming from unemployment.

No punitive damages in contracts. She should get mental distress damages (we want to put her in as good a

position had the promise been kept) but it will be hard to specify with certainty, and courts worry about juries giving punitive damages under the guise of mental distress damages

As a general rule, mental anguish damages are not recoverable. You might get them if it’s personal in nature, the K obligation is

coupled with mental concern, and “no substantial pecuniary loss would follow its breach” (because otherwise you get nothing).

See R2d. 353: Loss Due to Emotional Disturbance.

Certainty Plaintiff must prove damages “be shown with certainty, and not left to speculation or conjecture.” R2d 352 – “reasonable certainty” Cases:

o Fera v. Village Plaza P entered 10-year lease with D in shopping center D was building. When

the premises were eventually ready for occupancy, the lease had been lost and the space rented to another tenant. Since no other space was a suitable

pg. 81

substitute, P sued for lost anticipated profits. Jury returned a $200,000 verdict.

The Court of Appeals reversed, said proof of anticipated profit of a new business was too speculative. Supreme Court reverses, says they met their burden of proof.

This case is meant to illustrate the more modern accepting rule, making it easier to recover lost profits or other damages that might be seen as speculative, more towards “reasonable certainty” approach in R2d.

Liquidated DamagesOverview:

Must be reasonable in light of i) anticipated or actual loss and ii) difficulty of proof of loss. R2d 356, UCC 2-718

o Traditional rule focused on anticipated loss onlyo Some authority for voiding clause if no actual damages

Unreasonably large liquidated damages are unenforceable.o Caps on damages may be OK.

Greater chance to evade rule if don’t use word “penalty” and phrase it as “bonus.” Why should we allow liquidated damages?

o Freedom of K (we enforce all sorts of promises, why not a promise to fix damages)

o Allows parties to avoid costly litigation over damageso Allows parties to get around some limitations on damages (i.e. if courts can’t

figure out with certainty, why not stipulate in advance) Why shouldn’t we?

o Courts don’t want to enforce penalties. But these are not “penalties,” strictly speaking.

o Worried about excessive damages to induce performance even when cost of performance exceeds benefit to other party (but then why would parties put it in the contract? People do make mistakes, cognitive errors, but this is paternalistic)

o Idea of limiting liquidated damages applies with consumers, but also with big businesses (more sophisticated)

Case:o Wasserman’s v. Township of Middletown

Commercial lease. The agreement contained a liquidated damages provision that if the Township cancelled, it would pay Wasserman’s:

Improvements multiplied by years left on lease 25% of average gross yearly receipts.

In 1989, the Township cancelled the lease and sold the property, but refused to pay the damages.

Jo-Ro sublet for 3 years until township cancelled lease. There’s a lot of inflation happening in the background. Land value

appreciated even faster than inflation. If liquidated damages clause is thrown out, P is not without remedy. Could

show expectation damages, or reliance damages.

pg. 82

Court sets out alternative statements of rule for enforceability of liquidated damages.

UCC 2-718(1): Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in the light of the anticipated or actual harm caused by the breach, the difficulties, of proof of loss, and the inconvenience or nonfeasibility of otherwise obtaining an adequate remedy. A term fixing unreasonably large liquidated damages is void as a penalty.

R2d 356(1): Damages for breach by either party may be liquidated in the agreement but only at an amount that is reasonable in the light of the anticipated or actual loss caused by the breach and the difficulties of proof of loss. A term fixing unreasonably large liquidated damages is unenforceable on grounds of public policy as a penalty.

(both say unreasonably large liquidated damages = penalty, not permitted)

UCC doesn’t apply here, use R2d: As far as improvements, an accountant might calculate if you

spend $10k to build something that will last 5 years, it depreciates 20% each year… might not be that hard to come up with an estimate (note: not everything depreciates in a straight line). Accountant’s calculation is a rough proxy, but the liquidation clause is also a rough proxy of the same calculation.

o Assume lease is broken in last month of the deal. Does this term (improvements times years left) still give the right amount? Yes.

As far as the second term (25% average gross yearly receipts) – does this measure provide a good estimate if it’s broken in the last month of the contract?

o This is the same measure if it’s broken the day after signing the K, or the day before the K ends. So this doesn’t work as well. Courts hostile to these clauses would say “this breach could have been on the last day, and damages would be unreasonably excessive. So therefore, the liquidated damages clause as a whole is unreasonable.”

o Some of the move to “anticipated or actual harm” was designed to prevent that judicial judgment.

o Argument that it is not unreasonable: Policy argument – two sophisticated parties agreed

to this clause. But that’s not enough. Assume there were no liquidated damages, P would

have to prove profits they lost, which would be speculative. This clause avoids that calculation/speculation. And D would argue that lost profits are excessive because you could have

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mitigated your loss by getting a lease somewhere else.

Liquidated Damages Hypos:o County is building a road it hopes will open on January 1. The county contracts

with a builder to build a bridge and states that it must be completed by January 1. The county promises to pay $100k, and to give builder an incentive to complete on time, includes stipulated damages equal to $200 a day the builder is late. (Assume that $200 a day is a reasonable estimate of lost commerce.)

Enforceable.o What if they labeled it a penalty?

Increases risk it’s unenforceable, but just because you call it a penalty doesn’t necessarily make it a penalty.

o Suppose stipulated damages are equal to $200 a day plus actual damages that the county can prove

If they can prove that the extra $200 stands in for a different type of damages that is harder to demonstrate with certainty (i.e. emotional damages), that will be ok.

If it’s a penalty it won’t be enforceable.o Suppose stipulated damages are the greater of $200 a day or the amount of actual

damages that the county can prove. Not ok. Sets a floor on damages which sometimes will be too high.

o Suppose stipulated damages are the lesser of $200 a day or the amount of actual damages that the county can prove.

This is ok. Sets a cap on damages which is generally enforceable (courts will let you limit damages)

o Suppose county stipulates damages of $2,000 a day ($200 is a reasonable estimate) subject to a limit of $50,000.

Not enforceable.o Suppose county sets a contract price of $50,000 (instead of $100k) and a deadline

of January 25th (instead of Jan 1). Offers early completion bonus of $2,000/day. Economically this is the same thing, just described as a “bonus.” Attempt

to fool the court.o Assume that the road is not completed on January 1, so the bridge would not have

been usable if complete. Can county recover liquidated damages of $200 a day? The answer you’d get in R2d in a literal read: “reasonable in light of

anticipated OR actual loss.” This is reasonable in light of anticipated loss, but Wasserman’s

(and R2d commentary) tells us that in cases where there is no actual loss, courts will often not enforce the stipulated damages, even if they were reasonable in light of anticipated loss.

o Alice is fired from her CEO job. Her employment K stipulates damages of $10M if she is fired.

Getting fired does reputational damage. Her lawyer could argue this is reasonable in light of her anticipated loss, which would be hard to demonstrate with clarity

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