Michael Silver

Michael Silver

Section 11

Fall 2001

Professor Gregory MaggsCONTRACTS 1 OUTLINE

I.BASES FOR ENFORCING PROMISES

A.ENFORCEMENT OF A CONTRACT

1. When a P sues a D for breach of contract, the P claims that the D made a promise and did not keep it, and the P asks the court to enforce the promise.

2. A court will not enforce Ds promise unless P can show basis f/ enforcement.

3. The three modern bases for enforcement are consideration, reliance, and, in a few special cases, "moral obligation." B. CONSIDERATION AS A BASIS FOR ENFORCEMENT

1.What is Consideration?

Consideration is a promise or performance (action/forbearance) that is bargained in exchanged for (sought/given)

Hamer v. Sidway. Uncle offers nephew $5000 for not gambling and drinking until hes 21. Nephew performs but uncle dies before money paid. D argues no consideration b/c no detriment to promisee nor benefit to promisor. Consideration. Benefit or detriment irrelevant. Nephew gave up things in exchange f/ promise

No consideration if pretense of bargain. Could be consideration when item not worth much $$$ but genuine bargain occurs (e.g. item w/ sentimental value)

Fiege v. Boehm. Fiege promised to pay Boehm child support and medical expenses, she promised not to bring bastardity proceedings. P stopped paying when found out child wasnt his. D: no consideration, not based upon valid claim (e.g. kid was someone elses). Court says consideration exists b/c false claim honest and reasonable (i.e. made in good faith) at time of the promise.

2. The Requirement of an Exchange

Arguments for why no valid bargained for exchange:

a. Past performance: Promise or performance given by P already received by D, thus not given in exchange for.

b. Conditional promise to make a gift

Kirksey v. Kirksey: Brother-in-law invites widowed woman to move with her family to his farm. Offers to give her place to raise family if she sells her land and moves. Court says no consideration. Ds promise = conditional promise to make a gift. Although P may have taken actions to satisfy the condition, D did not seek those actions in exchange for the Ds promise.

c. Subsequent Performance: Promise or performance not given until after Ds promise

Feinberg v. Pfeiffer Co. D promised to pay pension to P upon her retirement. Worked for 18 more months. D argues no consideration b/c its a gift. Also, promise or performance by P not given until after Ds promise. Court: neither past performance nor subsequent 18 months valid consideration (wasnt sought and given in exchange for). Possible reliance.

Central Adjustment v. Ingram (minority): 3 Ps work for debt collection company. Sign non-competition agreements binding for 2 yr. upon employment, Take steps to start competitor. Court holds that while there is no promise of employment (at will), actual continued employment constituted consideration.

d. Bargain in exchange merely a sham (peppercorn)

3. The Requirement of a BargainIf you do _________, I will do ____________. Bargain, or conditional promise to make a gift?

Helpful hint, but NOT CONCLUSIVE TEST (Williston): whether the happening will have benefit to promisor or detriment to promisee.

4. Promises as Consideration: Promise is illusory if it does not impose any express or implied commitment.

Strong v. Sheffield. P endorsed promissory note of husbands debt. D promised to forebear collecting debt until he wanted $$. Tried to collect after 2 yrs. D: actual forebearance of collecting debt was consideration. Court says no, b/c forbearance never bargained for. Illusory promise not consideration***** Promise may be illusory on surface, but must look for implied terms. Could be implied promise to exercise reasonable efforts and in good faith.

Mattei v. Hopper. P wanted tenants f/ shopping center, would pay f/ property if he finds satisfactory lessees. D signs lease w/ another shopping center. D says illusory promise because satisfaction clause meant P wasnt bound. Court: consideration because Mattei acted in good faith. Standard can be subjective.

Wood v. Lucy, Lady Duff-Gordon. Lucy gave Wood exclusive rights to license/market her goods, he promises to give her profits. Lucy sells line of clothing to Sears. Lucy says no consideration because Wood didnt have any obligations. Court: Consideration because promise to pay Lucy profits from exclusive agency was implied promise to make reasonable efforts to market her stuff. Subsequent performance could be seen as evidence of implied terms5. Invalid Arguments for why no Consideration:

a. Promise or performance given by P did not benefit D or impose detriment on D. Hamer v. Sidwayb. Promise or performance given by P < Ds promise. Fiege v. BoehmC.RELIANCE / PROMISSORY ESTOPPEL1. When court enforces promise on basis of reliance = promissory estoppel

2. Equitable estoppel = when statements of fact induce reliance.

Ricketts v. Scothorn. Ps grandpa offers to pay her $2000. She quits job, relying on promise. Grandpa dies. D: P under no obligation to do or refrain from doing anything. Court: executor estopped f/ claiming no consideration b/c she relied on promise, and put herself in worse position by quitting job. Unusual application

Allegheny College v. Natl Ch. C. Bank. Philanthropist promises to pay $5000 to college scholarship fund. $1000 paid while still alive but she repudiated promise. Courts: consideration for promise in exchange f/ colleges promise to set up memorial fund. Arose f/ acceptance of $1000. Promissory Estoppel: Restatement 90

a. D made a promise

b. D could reasonably expect P to take an action/forbearance

c. Action induced by (taken in reliance on) the promise

d. Enforcement of promise necessary to prevent Injustice Feinberg v. Pfeiffer. Feinberg argues promise enforceable because of reliance. D: she would have retired anyway. Court: promissory estoppel. Feinberg retired from lucrative position in reliance upon Ds promise to pay her a pension.

Cohen v. Cowles Media Co. Associate of candidate f/ governor informed reporter of opposing candidates shoplifting. Reporter said wouldnt reveal source, editors overruled. P fired by his firm. D: no reliance b/c enforcement of promise not necessary to prevent injustice. Court: reliance applies. Neither side occupied moral high ground but no compelling reason for D to break promise.

D. MORAL OBLIGATION

General Rule: court will not enforce Ds promise merely because some people think D acted immorally in breaking promise.

Mills v. Wyman. Mills cares for son during sea voyage, father (Wyman) promises to pay for expenses but later reneges. Court says no legal consideration to promise. Conditional promise to make a gift. Not sought for and exchanged. Moral obligation to pay for previously-bestowed benefit not enforceable.Special Cases: even w/o consideration or reliance, court will enforce new promise to reaffirm old obligation that was:

1. Discharged by statute of limitation

2. Discharged by bankruptcy proceedings

3. Voidable because of infancy

New Special Cases: some courts will enforce Ds promise to pay P money in recognition of material benefit the P has conferred on the D. Courts mixed.

Webb v. McGowin. Worker saves life of boss but sustains injuries. Boss promises to pay him pension, pays for 9 years until his death. D: gratuitous promise, no consideration. Court: moral obligation has sufficient consideration when promisor has received material benefit. Here, saving of life is material.

Dementas v. Estate of Tallas. Tallas made promise to pay Dementas $50K for various favors delivered over 14 year period, but died w/o including P in will. Court says no moral obligation to enforce promise in absence of consideration. Favors were performed gratuitously, and no consideration b/c past performance. E. RESTITUTION AS AN ALTERNATIVE BASIS FOR RECOVERY

1. When P cannot prove that D made enforceable promise, P may seek restitution f/ D if D has been unjustly enriched at Ps expense.

2. D must pay reasonable value of any benefit received f/ P.

3. DEFENSES: D will argue that no unjust enrichment has taken place

a. P conferred benefit as volunteer, manifesting no expectation of compensation

b. P conferred benefit as officious intermeddler. Officious intermeddler is one who forces himself upon another for purpose of collecting later Cotnam v. Wisdom. Passerby doctor performs emergency surgery on unconscious car accident victim who later dies. Doc wants to be compensated later. D (estate) argues no contract because decedent unconscious at time service rendered. (officious intermeddler) P refutes: reasonable person, if conscious, would desire similar assistance. Court: contract implied by law. c. P has other remedies. If can recover elsewhere, cannot recover under restitution

Callano v. Oakwood Park Homes. P delivered plant shrubbery to house under construction by D, at request of now-deceased 3rd party who did not pay. Court: no restitution, alternate remedies available (e.g. Callano should sue Pendergast estate). P had express contract w/ decedent, D not expected to pay at time benefit conferred.II. CONTRACT FORMATION

A. ASSENT

1. General rule: Court will not enforce Ds promise if P actually knew, or reasonable person would have known, that the D was not assenting to be bound.

2. Contractual obligations are VOLUNTARY.

3. Gentlemens agreements: promise made, but not assenting to be bound.

4. Majority: use objective standard. Assent seen through outward manifestation.

Lucy v. Zehmer. Zehmer offers Lucy farm f/ $50K. Lucy thinks its serious, consults lawyer, redrafts contract, asks brother about borrowing $$$. D: it was a joke. Court: Zehmers assented; reasonable person in position of Lucy would believe Zehmers conduct and words implied intention to enter into agreement.

B. OFFERS

An offer is a manifestation of a willingess to enter into a bargain, conditioned on the offerees acceptance

1. Offer can be made by either party and exposes oneself to contractual liability

a. Owen v. Tunison. P thinks two parties entered into agreement. D says no offer. Statement in dispute: would not be possible to sell unless I receive 16K. Court: not an offer, merely preliminary negotiations.

b. Harvey v. Facey. P asks at what price would property be sold for. D replies Lowest price: 900 pounds. P replies will buy for quoted price. P sues for performance. D claims no offer. Court: mere preliminary negotiations.

2. Price quotations and advertisements: Generally not offers, unless they state limited quantity, or have other attributes indicating the advertiser intended to make offer. Merchants have presumed intent to avoid unlimited liability

Fairmount Glass v. Crunden-Martin. P sends preliminary inquiry letter to C-M. Fairmount assumed C-Ms reply was an offer, and mailed second letter re: specification. Fairmount said couldnt fulfill order. Ds: (1) price quotation not offer; (2) contract indefinite; (3) no real offer because Fairmount wanted 1st class jars. Court: quotes not offers, but specific language may create exception. (Immediate acceptance)

Lefkowitz v. Great Minn. Surplus. Man sees ad for fur coat: first come first serve for $1, only 6 left. Tries to buy but told house rule that offer f/ women only. Court: ad was an offer, b/c clear, definite, explicit and left nothing for negotiation. Store not exposed to unlimited liability. House rule invalid because cant change offer after it was accepted.

C.TERMINATION OF OFFERS

1. Lapse of Time. Offer expires at specified time, or, if no stated deadline, at reasonable time (depends on circumstances).

2. Revocation of Offer.

a. Offeror can generally revoke offer at any time before offeree accepts

b. Only acceptable when properly directly or indirectly communicated to offeree.

c. Cannot revoke if option contract (enforceable promise to keep offer open)

Dickinson v. Dodds. D makes offer to sell land to P. Offer made on Wed., says will be open until Friday 9 AM. P decides to buy land on Thurs., finds out through agent that D already sold land. Judges: D made proper revocation. P made no option contract, nor reliance. P received notice through indirect means. Acceptance took place after revocation.

3. Death of Offeror (Restatement 48) (Earle v. Angell)

a. Offer dies w/ offeror. Death terminates unaccepted offer, but not contract

b. Incapacity is sufficient (e.g. someone goes into coma, cannot accept)

c. No communication required. Different f/ revocation

d. Option contract can keep offer open. Death does not negate offer if option contract that is enforceable exists. Hamer v. Sidway.

4.Rejection of Offera. Offeree terminates offer. Thus no more power of acceptance

b. Counteroffer = offer made in response to initial offer. Presumed rejection of initial offer.

c. Mirror image rule: acceptance of offer containing different or additional terms is treated as a rejection and counteroffer. Implied terms can fit mirror image

Minnesota & St. Louis Railway v. Columbus Rolling-Mill. Railway asks for price quote for steel/iron rails, rolling mill offers to sell 2K-5K tons of iron rails f/quoted price, railway accepts f/1200 rails, rolling mill says no, railway then orders 2K tons. D: no contract b/c no acceptance (mirror image rule). Court: counteroffer negated original offer.

D. ACCEPTANCE (ask the following 5 questions)

1.What is the offer?2. Was type (performance or promise) of acceptance did the offer invite?a. Offerer is the master of the bargain.

b.Two types of acceptance

Performance: Unilateral contract. Offeree doesnt incur any liability. Acceptance based on full performance, not promise. Hamer v. Sidway Promise: Bilateral contract. Fiege v. Boehm.

3. Did the offeree properly perform or promise?

a.People make promises expressly or implicitly, through words or action.

b.Common way to make implicit promise to render complete performance is to start performing.

4.Was notice of acceptance required?a. Performance: notice not required unless requested. 54

b. Promise: notice required, unless waived by offeror. 56

5. If notice required, did the offeree provide notice?

International Filter v. Conroe Gin

1. Filters proposal: preliminary negotiations

2. Conroes acceptance: offer

3. Filters approval (president to sign OK): acceptance

4. Filters acknowledgment letter (to Conroe): notice

5. Conroes countermand (canceling order): breach

D: no acceptance, no notice. Court: president in Chicago signing ok was valid acceptance, and notice need not be given. If it was, acknowledgement letter ok

White v. Corlies and Tift. P intended to renovate Ds offices. D sent letter that was an offer (upon agreement), White didnt reply but commenced work (bought materials). D countermanded. D: no acceptance b/c notice required for promise. P: starting work = performance = implied contract. Court: Ps actions not overt manifestation of acceptance (normally purchases materials)

Ever-Tite Roofing v. Green. D wanted roof redone, signs prelim. document. P does credit checks, shows up 9 days later, but D hired someone else. D: no acceptance, P didnt provide notice. Court: delay not unreasonable, acceptance occurred when P started to perform (transport of materials). Carlill v. Carbolic Smoke Ball Co. Woman sees ad for Smoke Ball, buys, uses as instructed and contracts flu. Wants to collect on 1000 pound award. D argues no offer because ad was a puff, and no acceptance because she gave no notice. Court: ad was offer (didnt expect unlimited liability). No notice needed because unilateral contract (offer for a performance, not promise).

Implied Acceptance: Even if offer describes one manner of making promise, offer may permit other manners of acceptance

Allied Steel v. Ford Motor Co.: Allied had to respond to offer made by Ford. Ford said acceptance should be made by sending signed contract back to Ford. Allied didnt but commenced work, Ford did not object. Court: while Ford desired one form of acceptance, others are permitted if agreed to implicitly.

Silence as Acceptance (Rest. 69): Offerees silence is not acceptance.

Exceptions: (1) Offeror has stated silence is appropriate form of acceptance; (2) Previous dealings make it reasonable to believe offeree should notify offeror if he will not accept

Hobbs v. Massasoit Whip Co.: P eelskin seller had sent goods many times to D (whip manufacturer), each time D paid. Here, P sends, D does nothing. D: silence no acceptance. Court: previous relationship justified Ps assumption that silence was acceptance. D must take affirmative action to reject.E. MAILBOX RULE

1. Acceptance effective on dispatch, not receipt, unless otherwise indicated

2. w/ option contracts, acceptance effective upon receipt

3. Acceptance effective upon dispatch whether the letter makes it to offeror or gets lost, as long as sent via reliable means

F. LIABILITY DESPITE INCOMPLETE NEGOTIATIONS

1. No liability if negotiations fail. Contractual liability supposed to be voluntary.

2. Exception: if statements made by parties during negotiations induce conduct, may give rise to liability

Drennan v. Star Paving. D submitted bid to include in Ps construction bid. P got contract, D said mistake in bid and couldnt perform. P had to pay $3800 more f/ alternate. D: offer revocable, P never communicated acceptance to D. Court: Reliance applies, D made implied promise to P that was enforceable. Mistake should fall on party who caused it (prevent injustice).

Hoffman v. Red Owl Stores. P wants to buy grocery franchise, spent lots of $$$, alleged that D made assurances during negotiations that he relied upon to his detriment. D: no definiteness. Court: promissory estoppel (Restat. 90) applies, no requirement of definiteness. Few cases w/ reliance on assurances.

Channel Home Centers v. Grossman. P negotiating to be tenant in Ds proposed shopping plaza. Sign letter of intent (not lease). Both parties took steps toward contract formation (e.g. zoning). D reneged. P claims letter + circumstances = binding agreement to negotiate in good faith. D: no consideration. Court: finds f/ P. Both intended to be bound, definiteness, and consideration (letter of intent bargained for and helped D attract financing).

G. DEFINITENESS

1. General rule: Promise is too indefinite to enforce if the court cannot determine the existence of a breach or the appropriate remedy for the breach.

2. Courts sometimes read definiteness f/ vague contract when they look at context. Look at implied terms. General judicial eagerness to find definiteness.

3. Courts may require less definiteness if P seeks to enforce promise based upon promissory estoppel (e.g. Hoffman v. Red Owl Stores)

Varney v. Ditmars. Draftsman sued employer who supposedly promised salary + share of profits. D: promise too indefinite. Court said amount mere conjecture and thus indefinite and unenforceable.

Toys, Inc. v. F.M. Burlington Co. P given option of renewing lease f/ 5 years. Parties didnt specify exact #, agreement said price fixed by prevailing rate at mall. D: P didnt accept prevailing rate, offer expired. Court: clear f/ context and contract that D intended to renegotiate.III. THE REQUIREMENT OF A WRITING FOR ENFORCEABILITY

A. STATUTE OF FRAUDSDefinition: Every state has enacted numerous statutes making many different kinds of promises unenforceable unless the promises are evidenced by a signed writing. These statutes are called "statutes of frauds." Intended to prevent false promises f/ being alleged.

General Rule: Many states have common statutes of frauds covering 6 kinds of promises:

1. Marriage. A promise made on the consideration of marriage (unless the promise is one of two mutual promises to marriage each other).

2. Year. A promise that cannot possibly be fully performed (as opposed to merely terminated) within one year must be in writing. Distinction between complete performance and early termination.

a. If complete performance possible in one year, no writing required. E.g. contract for indefinite employment even if intended to run 20+ years; employee could die w/in a year and contract completely performed

b. If early termination but not complete performance is possible within 1 yr., writing is required. E.g. A to work f/ 5 years, contract terminated if A dies

Coan: realtor agrees to employ law student as apt. manager until kid completes his law studies. 5 weeks later Coan fired. D: agreement didnt fall under statute of frauds. Majority: early termination, contract not complete until hes done w/ law school, must be in writing. Minority: promise to work only while at law school

3. Land: a promise to buy or sell land. Subject to two exceptions:

a. Conveyance: A promise to buy land is enforceable without writing after the seller has conveyed the property.

b. Partial performance: statute of frauds no defense if buyer has substantially relied on sellers promise f/ land transaction. Most courts have said merely paying purchase price is not enough reliance, and have required buyer to have taken possession, made improvements, or performed substantial other actions.

Johnson Farms v. McEnroe: P tries to buy Ds land, D wanted to substitute property f/ $ payment. Half property transferred, half in dispute. D conveyed property, spent $ on platting land, allowed option contract to expire w/out $$ in escrow. Deal fell through. D: statute of frauds bars recovery. Holding: P relied on partial performance

4. Executor: promise by an executor to pay debts of decedent's estate out of his own pocket. Very rare.

5.Goods: promises for goods > $500. part of U.C.C. (all states follow except LA). Goods = movable goods, not services and real estate (under land)

6. Suretyship: contract whereby a person guarantees the debt of another. Promise by A to pay C a debt that B owes. Ex. Strong v. Sheffield

a. Obligee (creditor) ----> principal obligor (debtor) ----> surety (guarantor)

b. Promise must be made to party to whom person owes

c. If not in writing and signed, promise = gratuity Longman v. Alumni Ass'n of UVa. P donated property, UVa agreed to assume paying mortgage. Income f/ property fell below mortgage payments, P paid off debt and sought reimbursement. D: never signed written agreement, and was a suretyship promise under statute of frauds. Court: not suretyship b/c promise made to P to assume his debts, not to lender to assume Ps debts. B. REQUISITES OF WRITING AND SIGNING

1. Only essential terms need to be written. Purpose of statute of frauds is prevent enforcement of falsely alleged promises.

2. Must be signed by party being charged (i.e. defendant)

3. If writing lost, promise still enforceable. Dont want to place too much value on piece of paper

C. AMELIORATING THE STATUTE OF FRAUDS

Ways person could recover w/o written contract:

1.Restitution: person can recover f/ unjust enrichment conferred upon another

Ex. Maggs makes $10K down payment then loses house, him losing $10K unjust

2.Equitable Estoppel: D asserted that sufficient signed writing had been made (statement of fact), and P relied on this assertion, statute of frauds does not apply.

3.Partial Performance: seller of land may not assert statute of frauds as defense if buyer has substantially relied on the promise to sell. Johnson Farms v. McEnroe

4.Promissory Estoppel: (20 states) if people rely on promise, does not matter whether in writing. Injustice can be avoided only by enforcement of promise.

Monarco v. Lo Greco: Parents promise Lo Greco farm if he works until they die. He forgoes other work and securing interest in property. At last minute father changes will. P: statute of frauds, land involved. P: equitable estoppel. P: Lo Greco relied on promise, not statement of fact. Court: promissory estoppel applies; no writing required, Lo Greco entitled to land share.

IV. POLICING THE BARGAIN

A. CAPACITY

1. Infancy

a. Restat. 14: Unless statute provides otherwise, person has capacity to make only voidable contracts until beginning of day before 18th birthday.

Only exceptions are for marriage and support for illegitimate children

Contracts voidable at infants option. Parents cannot void for them

Infant may be liable in tort; to protect against infants who lie about age

b. Restitution ( 62): If infant voids contract he is liable f/ restitution (must give back the good, or whats left of it). Infant cannot be unjustly enriched.

Infant does not have to make restitution for damages if good no longer available. Ex. 17 year old pays for car, then totals it. He can rescind offer and get back money, all seller is left w/ is totaled car

Restitution required for necessaries even if the good is no longer available. Ex. Clothing, food, drink, shelter, medical care.

Kiefer v. Fred Howe Motors, Inc.: Minor buys car, after 21st birthday tries to return car f/ refund. D says as public policy, court should allow enforcement of contracts made by emancipated minors over 18. Court: not enforceable because car not a necessary. 2. Mental Infirmity

a. Traditional Test ( 15)(1)(a): Was the person unable to understand the substance of the contract?

Cundick v. Broadbent: P wife of rancher who sells ranch f/ much < value. Contract made due to mental infirmity. Court: contract OK. Actions indicate he understood (traditional test). b. Modern Test ( 15)(1)(b): Was person able to act reasonably while forming contract, and did other party have notice of mental defect? Ortelere v. Teachers' Retirement: P husband of schoolteacher sick w/ mental illness and selected pension plan that paid benefit until her death, which was 2 months later. P: unenforceable b/c of traditional test: she was unable to understand. D: she asked complicated legal questions. Court: D had notice, remand to see if wife reasonable B. DENYING SPECIFIC PERFORMANCE

1.Limits on Availability/Equitable Remedies

a. Legal remedies = money damages. Differing standards for remedies (legacy)

b. Courts often look to substance of contracts when deciding to grant equitable remedies. Not really true w/ legal remedies.

c. Equitable remedies

Specific performance: forcing one to do what he promised to do

Injunction: preventing person f/ doing something

Rescission: rescinding the contract, i.e. restoring status quo. P must first make restitution.

Restitution: D restores value lost to P by paying him $$

Reformation: altering contract so as to be consistent w/ oral agreement, when party wrote down something different f/ oral agreement

2.Grounds for Denying Specific Performance/Injunction

a. Damages adequate to protect Ps expectation interest (Rest 359). Look at:

Difficulty of proving damages w/ reasonable certainty

Ability of P to obtain suitable substitute performance (often w/ rare items)

Likelihood award of damages could not be collected

b.Exchange inadequate or unfair (Rest. 364). Doesnt affect legal damages.

To determine fairness, must look at time contract made McKinnon v. Benedict: P gives interest-free $5000 loan to D, in exchange f/ promise not to make major improvements to land. Offers to help find D get business for camp but does virtually nothing. D sells camp but builds trailer park. P wants specific performance (no more trailer park). Court: contract grossly unfair to D, he sacrificed ability to improve land, Ps help worthless Tuckwiller v. Tuckwiller: P promises to take care of elderly landowner f/life, in exchange f/ right to her farm. 3 days later woman becomes ill and then dies before will changed. P wants specific performance. D: P should only get reasonable value f/ services rendered, and not specific performance. Court: consideration adequate at time of signing (signature + Attempt to change will)C. PUBLIC POLICY

1. Courts will not enforce contract if public policy outweighs benefits (Rest. 178).

2. Examples: (differs by state)

a. Commission of crime, tort, or other behavior prohibited by statute

b. Restraint on Marriage ( 189). In general contracts that are too restrictive of person or private freedoms are unenforceable

c. Contracts that restrain trade or ask someone to violate personal ethics

Black Industries, Inc. v. Bush: P is middleman f/ govt war supplies, says D failed to provide supplies. D argues contract void f/ public policy: P making unfair profit, prices ultimately passed on to govt and public during Korean War. Court says no: beyond scope of court to impose regulatory controls on middlemen in govt contract cases. Shows limit of conventional controls.

D. DURESS

1. Promise made under duress = induced by an improper threat that left party with no reasonable alternative. Voidable by threatened person.

a. Improper threat (Rest. 176). Include threats to commit crimes or torts AND threats to break existing contracts in bad faith.

b. No reasonable alternative.

2. Promise made under pressure f/ external sources are not voidable.

E. MODIFICATION AND ATTEMPTED MODIFICATION

If two parties have formed a bargain, is a subsequent promise by one party enforceable?

1. Duress (NO).

2. Pre-Existing Duty (NO). Duties under existing contracts cannot serve as consideration for new promises. Also, a promise by one party to unilaterally assume additional duties does not have consideration, and is not enforceable.

Alaska Packers' Ass'n v. Domenico: Ps are contracted workers, go to Alaska, demand 2X salary otherwise wont perform. D signs new contract but only pays them original salary. D: supervisor didnt have authority to make new agreement (irrelevant), no consideration b/c under 2nd contract Ps would render same performance as under 1st. Court: Ps had pre-existing duty.

3. Cancellation (YES). No pre-existing duty when parties mutually agree to cancel contract and form new contract. This is form of rescission.

Schwartzreich v. Bauman-Basch: P signed contract D, got more lucrative offer elsewhere. P/D signed new contract, tore off signatures of old one, but P then fired. Court: 2nd contract OK. Rescission followed by new agreement.

4. Modern Modification Rule (YES). (Rest. 89). Subsequent promise enforceable if modification is fair and reasonable in view of changed circumstances not anticipated by parties when contract was made.

Watkins & Sons v. Carrig: P agrees to excavate Ds cellar, finds rock upon commencement of work. Under new oral agreement P agrees to excavate f/ 9X original price. D doesnt want to pay, argues no consideration b/c pre-existing duty. Court: two contracts, second has consideration. Justice requires allowance of modifications in some circumstances.

F. MISREPRESENTATION, CONCEALMENT, NON-DISCLOSURE

1. MisrepresentationGeneral Rule: A contract is voidable if it involved a misstatement of fact that was material OR fraudulent, and party was justified in relying upon

a. False statement of fact. Must be about facts.

An opinion that turns out wrong is not grounds for voiding contract.

Puffing (talking up quality of goods) is not a statement of fact

b. Material or Fraudulent Misrepresentation

Material: likely to induce a reasonable person to assent, or seller knows it would be likely to induce buyer to assent

Fraudulent: salesman believes statement is untrue according to facts, or has no basis for saying what he is saying

If statement is fraudulent, doesnt have to be material. Want to discourage salesmen f/ intentionally lying. If fraudulent can generally prove material.

c.Justified Reliance (objective): must be justified in relying on misstatement for contract to be voidable.

2. Active Concealment: Contract voidable if promisor takes action w/ intent of keeping fact from promisee. Must be affirmative act. 3. Bare Nondisclosure a. In general, promise not voidable merely because promisee failed to disclose facts to the promisor. D simply says nothing, no affirmative act

Swinton v. Whitinsville Savings Bank: P bought house infested w/ termines f/ bank. P alleges they fraudulently concealed information. D: bare nondisclosure, no act to produce concealment. P could have gotten inspector, or asked if there were termites!

b.Exceptions:

Specific statutes. Usually relate to home buyers

Half truths. Promisee misleads promisor by disclosing some, but not all, of the facts. Statement that is literally true, but has untrue implications. Treated like a misrepresentation

Kannavos v. Annino: P purchased house seen in ad, later found out in violation of city code. True that house converted to apartments, but not mention of illegality. D: could have found out violation through public record. Court: reliance all that mattered, P shouldnt be punished f/ lack of diligence.

Confidential relations (Rest. 161): Bare nondisclosure not permitted where relationship of trust exists (e.g. beneficiary/trustee). Promisee can expect full disclosure based on confidential relations.

G. MISTAKE

A mistake is a belief that is not in accord with the facts, as opposed to poor prediction about what facts might later turn out to be. Rest. 151

1. Mutual Mistake ( 152): Promise induced by mutual mistake as to a basic assumption w/ a material effect is voidable, unless promisor bore risk of mistake.

a. Mistake has to involve a basic aspect that is fundamental to the transaction

b. Person must show mistake was so severe that cannot be asked to carry out contract

c. Party bears risk of mistake (Rest. 154) when: (1) risk allocated to him by agreement of parties; (2) he is aware at time contract made that he has only limited knowledge w/ respect to facts to which mistake relates to, but treats limited knowledge as sufficient; (3) risk is reasonable under circumstances.

Stees v. Leonard: Builders tried 2X to construct building, but fell both times. Claimed quicksand underneath. D: mutual mistake about basic element of contract. Court: not voidable b/c risk allocated to builders.

Sherwood v. Walker: Both parties assumed a cow was sterile, but turned out to be pregnant. Court voids; mutual mistake and material assumption2. Unilateral mistake ( 153)a. Unilateral mistakes not usually grounds f/ voiding unless above rules plus:

Enforcement would be unconscionable

Non-disclosure of other party who knew of mistake 161 (b). Non disclosure = failure to act in good faith and in accordance w/ reasonable standards of fair dealing. Exception to bare nondisclosure rule (1/2 states)

Wood v. Boynton: P found stone, sold it to D f/ $1, turns out to be diamond. D: not mutual mistake of fact; poor prediction. P: D knew of mistake. Court: mutual mistake, not a basic element of transaction.

H. EXCULPATION CLAUSES IN ADHESION CONTRACTS

1. Standard Form Contracts: pre-printed contracts. Intl Filter.

2.Adhesion Contracts: form contracts w/ no room f/ changes. Take-it-or-leave-it.

a. Not all standard form contracts are adhesion contracts. Depends on circumstances. Ex. Common in real estate context to vary or change form.

b. Nothing inherently invalid about adhesion contracts.

c. Not a defense that you didnt read adhesion contract.

3.Exculpation term: Term in contract that shields promisor from liability. Contract as a whole offered on take-it-or-leave-it basis.

Possible Ways to Avoiding Terms in Adhesion Contracts:

1. Strict construction ( 206): when choosing among reasonable meanings, court traditionally reads language against person who drafted form. Llewellyn: only works for so long before person drafts better. Doesnt get at substance.

Galligan v. Arovitch: Tenant slipped and fell on lawn. Landlord not liable for injuries in common areas, sidewalks and hallways. D: exculpation terms shield me of liability. P: lawn not included. Court: strictly constructs lease in favor of P. If he wanted to exclude lawn, he would have!

2. Adequate Notice ( 206): Person does not assent to contractual terms printed on form if did not have reason to know they were there (different f/ failing to read it)

Klar v. H.M. Parcel Room: Ps package given to someone else by mistake. P sues f/ value ($1000) of package. D: ticket stub limited liability to $25. Court: inadequate notice, P not bound to contractual terms unless he knows.

NOTE: Exculpation terms ok here, otherwise cost of liability passed to customers

3. Public Policy ( 178): if enforcing contract would harm public policy, courts will choose not to enforce.a.Courts traditionally view w/ reluctance (Bush). Only act in narrow situations w/ benefit to 3rd parties. Not concerned @ contracts between private parties.

b.Some courts stretched public policy to strike down contracts btw private parties. Looks beyond public policy interest f/ evidence of overreaching (private party taking advantage of unfair bargaining advantage)

OCallaghan v. Waller & Beckwith Realty Co.: P tenant falls, alleging negligence by landlord. D: exculpatory clause. P: no bargaining power due to housing shortage in Chicago, exculpatory clauses in leases invalid based on public policy. Court: matter not of public policy but dispute between private parties (traditional). Housing shortage ephemeral. Dissent: waiting list shows acute shortage, definite public policy grounds

4. Unconscionability ( 208)a. Contract not enforceable if exculpation clause so one-sided as to be unconscionable when contract entered into. Non-traditional view of public policy, not used often, but in UCC

Henningsen v. Bloomfield Motors: P gets into terrible car accident, Ds warranty (standard f/ all car manufacturers) reimburses only for damage to steering wheel. Court: public policy violated by warranty, no competition to get better one. Not concerned w/ strict construction or notice.

5. Many states have specific statutes that limit exculpation clauses (esp. landlords)

V. REMEDIES FOR BREACH

A. SPECIFIC PERFORMANCE

1. Specific performance: order directing D to do what he promised. Exceptions:

a. No specific performance if damages would be adequate remedy

b. No specific performance if bargain is unfair or consideration is grossly inadequate at time contract was made. McKinnon v. Benedict

2.Damages not adequate if:

a.Damages could not be proven w/ reasonable certainty

b.Contract involves rare goods f/ which suitable substitute cannot be found

c.Likelihood that damages could not be collected

d.Damages are not an adequate remedy f/ breach of contract to sell land

B. MONEY DAMAGES: EXPECTATION, RELIANCE AND RESTITUTION

1. Restat. 346: In general, Injured party always has the right to damages unless claim has been suspended or discharged. Damages are general remedy.

2. Definitions:

Expectation Damages = putting P in same position had D kept promise. Giving P lost expected profit. P always has right to expectation damages.

Restitution Damages = Recovery for benefit promisee conferred on promisor during performance of contract. Key is how much D benefited

Reliance Damages = Putting P back in same position would have been in if never entered into contract.

Nominal Damages = P proves D breached contract but cannot prove damages. Symbolic award ($1 or 6 cents)

3.Expectation interest gives promisee benefit of the bargain

b. Loss in value = difference between what D promised and what D delivered.

c. Other loss = any incidental or consequential harm caused by Ds breach

d. Cost avoided = difference between cost P expected in performing and cost P actually incurred

e. Other Loss avoided = losses that would have been incurred as incident to, or consequence of Ps performance, but were not incurred because of the breach

Loss in Value + Other Loss Costs Avoided Other Loss Avoided

[what D promised what D delivered] [costs P expected costs P incurred]

Sullivan v. O'Connor: Botched nosejob for professional entertainer. D: damages should be based on restitution interest. Court: P entitled to more than restitution; to recover for worsening of condition, pain/suffering due to third operation (she would have suffered during first two anyway), out-of-pocket expenses. Either reliance or expectancy is appropriate. C. EXPECTATION DAMAGES AND INCENTIVES ("EFFICIENT BREACH")

1. Efficient breach: breach of promise where some people improved, and nobody is worse off. Cheaper f/ D to breach and pay expectation damages than to perform.

Berkley v. Naval Institute: Berkley under contract to publish in Oct. Choices: (1) Dont breach, publish in Oct., no extra profit but no damages; or (2) Breach, publish in Sept., make $100,000 profit, pay $40,000 in damages

D. LIMITATIONS ON DAMAGES

1. Avoidabilitya. Restat 350: Damages not recoverable f/ loss which injured party could have avoided without undue risk, burden or humiliation

b. P can avoid damages either through ceasing performance (Luten) or making alternate or substitute arrangements (Parker)

Rockingham County v. Luten Bridge: P contracts w/ D to build bridge, cancels after $1900 work done. D finishes bridge, then sues f/ $18K due. Court: cannot pile up damages if notice of breach given. For expectation damages, use costs at breach, not completion. D has duty to mitigate avoidable damages, otherwise would inflict damage on Rockingham w/o benefit to Luten (can only recover profits anyway).c.Constructive service: ones willingness to be employed f/ full term of contract allows recovery f/ whole length of contract if breach occurs. Constructive service added to actual service in assessing cost incurred if P couldnt find comparable employment through reasonable efforts. Parker v. Twentieth Century-Fox: D breached contract w/ P f/Bloomer Girl. P sues f/ constructive service f/ $750K of 7 months promised work. D offers another movie, Big Country Big Man. D: P breached duty to mitigate damages since D offered her alternative. Court: alternative not comparable (couldnt choose director, not musical, filmed in Australia).

2.Incomplete or Defective Performancea. Different f/ incomplete performance (injured party can usually arrange to have someone else complete work at less than loss in value to injured party)

b. Cost to remedy defect and thus complete performance probably will involve cost of undoing some of work already done

c. How do we figure out value of defective items?

Loss in value to P (subjective). Ideal, but usually cant be proven w/ reasonable certainty.

Loss in market value. P can always recover loss in market value. Cost to complete remedy ( 348): Exception: cost to remedy cannot be clearly disproportionate to the subjective loss in value to P

Jacob & Youngs v. Kent (majority): P built home f/ D using Cohoes pipe instead of Reading pipe (specified). D: defective perform., wanted remedy to replace entire pipe system. Court: D entitled to diminution in market value, b/c cost to remedy clearly disproportionate to subjective value Groves v. John Wunder Co. (minority): P makes contract w/ D to remove gravel, level property. D doesnt finish. Would cost $60K to remedy, property value only up $12K. D: remedy clearly disproportionate to rise in subjective value. Court: doesnt matter b/c willful breach. Peevyhouse v. Garland Coal (majority): P made contract w/ D to strip mine coal. D failed to finish, cost to remedy $29K but market price of farm only would go up $300. D: should look at diminution of market value to assess damages. Court agrees, says Groves is anomaly. 3.Unforeseeabilitya. Damages not recoverable for losses received f/ breach that were not foreseeable to D. Rest. 351b. Damages are foreseeable in two situations:

(1) Ordinary circumstances: arise out of common knowledge.

(2) Special circumstances, if notice given to D when contract made

Hadley v. Baxendale: P, flour mill, hires D to transport broken crank shaft f/ steam engine f/ repair. Promises overnight delivery, delivers 5 days later. Mill has to close 5 days and lose 300 profit. P claims lost profit, wages. D: damages not foreseeable. Court: D not liable f/ damages. Special circumstances, and notice given was not sufficient.

4. Uncertaintya. Rest. 352: Party cannot recover f/ damages that they cannot prove w/ reasonable certainty. Need to show:

Fact of Loss. If mathematical proof that P had chance to win, will reimburse % of value of item he lost; e.g. 50/50.

Collatz v. Fox Wisconsin Amusement Corp.: P lost opportunity to win car in contest b/c D screwed him over. D: no reasonable certainty P would have won. Court agrees.

Extent of Loss (Fera). Lost profits often shown by extrapolating past performance. Difficult to prove w/ new businesses (no evidence of past performance).

Fera v. Village Plaza, Inc.: (exception to rule). P to open books/bottles store, D breaches, store never opens. P claims lost profits. D: no past performance, cannot show damages w/ reasonable certainty (didnt even get a liquor license!). P: many expert witnesses. Court: testimony conflicting but jury properly instructed, restore original damages of $200K. Value of Loss: loss might have sentimental damages, but cannot be proven. P cannot recover. E.g. Thanksgiving dinner.

D. LIQUIDATED DAMAGES AND PENALTIES

a. Damages agreed to when contract is made, to compensate f/ breach if one occurs

b. Grounds for not enforcing liquidated damages:

Damages unreasonably large (i.e. penalty). Rest. 356(1). To determine this, (1) actual or anticipated loss must be reasonably comparable to liquidated damages; (2) damages reasonable in light of difficulty of proof

Damages unconscionably small. E.g. Henningson.

Dave Gustafson & Co. v. State: P contractor took 67 days too long to finish highway. Contract had liquidated damages, P to pay $210/day. P argues unreasonably large since expectation damages uncertain. (difficult to put value on new road when parallel road still in use). D: liquidated damages not unreasonable b/c part of different damages scales, daily basis. Court agrees w/ D.

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