PART 1: IS THERE A LEGALLY ENFORCEABLE CONTRACT

I. MUTUAL ASSENT: OFFER AND ACCEPTANCE- both parties must assent before an agreement can arise- mutual assent typically occurs by the process of offer and acceptance

A. Objective Manifestation of Mutual Assenti. Whether mutual assent has occurred is judged objectively, not subjectively [Embry – employee wanted

his K renewed]1. Is a question of fact settled by the factfinder (judge or jury)

ii. TEST: Listener had to believe there is a deal and this belief must be reasonable1. What a reasonable person in the position of the listener would have thought that the

speaker intended the requisite intent is there if a reasonable person would have thought the other had the intent

2. How do we ascertain if the belief was reasonable or not?a. Words and acts [Language and Circumstances]

iii. What You Have To Determine:1. Did the person actually believe he had a K?2. Was he reasonable in believing this? [It isn’t what the speaker actually intends but that

the other would reasonably believe]a. Language

i. May not be definitive but the circumstances can make it seem reasonableb. Circumstances

i. Can make the belief reasonable or they can make it unreasonable iv. Why do we look at reasonable belief, rather than what the D actually intended?

1. How are you suppose to prove what someone actually intended?a. Creates a problem of disproving what the interested party says was their intentb. Could look at his actions to disprove it (we often infer what people intend thru their actions)

– but why should we have to go thru this exercise?2. Fairness – it doesn’t seem fair that a person ought to be able to lead someone to reasonably believe

they have a deal and then just say they were joking

B. OFFER [1 ST MANIFESTATION OF MUTUAL ASSENT] i. Summary of Offers

1. General Principle for Deciding Whether Something is an Offer:a. Fixed Purpose Test -- Would a reasonable person think they could make a K by saying ‘I

Accept’ (Would a reasonable person think there was no further assent needed by the offeror)

2. Determination of Whether A Reasonable Person Would Think This Was an Offer a. Surrounding Circumstances – including (among others):

i. Language Used1. Does the language make a commitment

ii. Addressees1. If the person could reasonably think he was the only person being sent

this offeriii. How Definite is the Wording

1. The more it seems to cover, the more definite it is, and the more likely someone is to construe it as an offer

2. The less it seems to cover, the less likely someone will reasonably construe it as an offer

iv. Surrounding Circumstances

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3. Communication a. Offer must be communicated to the offeree

ii. Does Language of the Offer Manifest to Reasonable Offeree an Intent by Offeror to be Legally Bound?

1. Test : If a communication reasonably seems to require no more further assent, then it is an offer – If a reasonable person would think the communicator had to express some further assent, then the communication is not an offer

2. Restatement §25 – “If from a promise, or manifestation of intention, or from the circumstances existing at the time, the person to whom the promise or manifestation is addressed knows or has reason to know that the person making it does not intend it as an expression of his fixed purpose until he has given a further expression of assent, he has not made an offer.” [Lonergan – letters back and forth about the possible sale of land]

3. Jesting [Lucy – claimed to be joking about selling farm – supposedly drunk]a. It doesn’t matter what a party says they intendedb. What matters is whether the other side believed there was an assent to a K, and more

importantly whether that belief was reasonable or not c. In deciding a case where one side says they don’t intend to contract, we look at 2 things:

i. Did the listener believe he had a K?ii. Was it a reasonable belief?

4. Social Promises a. Have an intent to make an obligation but there is a separate issue of whether there is an

intent that the obligation be legally bindingb. TEST: for whether one can assume the obligation is legally binding is the same for the

test for intent to assume the obligation in the 1st place i. Objective Test

1. Whether a reasonable person in a position of the obligee would reasonably believe the obligation was legally binding

2. Factors:a. What did they say (Words)b. What context did they say it (Circumstances)

ii. Business Context (ex. agree to sell my laptop for $500)1. Normal assumption: legally binding unless the parties say otherwise

(explicitly say this is not legally binding)iii. Family Context (ex. dad promises to take you to the Super Bowl if you pass your

first semester)1. Normal assumption: not intended to be legally binding

a. Reason – courts don’t want to tie themselves up with family disputes unless they have to

iv. Social Context (ex. friend promises to pick you up from the airport but doesn’t show)

1. Normal assumption: not intended to be legally bindinga. Reason – parties usually don’t understand this to be a legally

binding situationb. Exception – reasonable and foreseeable expenditures may cause a

court to enforce an obligation at least for allowing recovery for the expenditures (ex. Prom)

i. Other person would have to be able to reasonably foresee that the other would spend this kind of money in reliance

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2. If you had offered to pay for the gas there may be a stronger argument that it looks like a business context (court may still not enforce it though)

5. Ads a. General Rule : Ads are not offers

i. Reasons1. Normally not understood to be an offer but rather to simply inform the

public as to what is available and invite people to come in2. Are usually not definite enough (necessary terms are not in it – requires

further negotiations)3. Often a Multiple Acceptance Problem

ii. Exception : If the ad is drafted to cure these problems – leaves nothing open for negotiation and removes the multiple acceptance problem then it could be an offer [Lefkowich – ad for furs found to be an offer b/c it was clear, definite, and left nothing open for negotiation, and got rid of the multiple acceptance problem b/c it was first come first served – House Rule about it being for women didn’t matter b/c it wasn’t in the ad, even though he knew about it the 2nd time he went – this isn’t the usual approach (Ct here seemed to disagree with the policy)]

b. PepsiCo (Pepsi commercial for Harrier Jet) i. Not an Offer

1. Commercial refers to the catalog (which doesn’t have the jet)a. Ad is sufficiently definite

2. Multiple Acceptance Problem 3. It was an obvious joke that no reasonable person would think was serious

c. Lonergan – ad in paper; P inquired for more info; D responds with price and description saying it’s a form letter; P responds and suggests escrow; D responds telling him to act fast b/c he expects a buyer by next week; D sold to 3rd party; P writes back ‘accepting’

i. Issue: Is there an offer? NOii. Ad isn’t an offer – it’s vague and requires further assent

iii. D form letter response – not an offer b/c a reasonable person would think more than one person was getting this communication

iv. D’s letter telling to act fast is not an offer b/c it suggests he wants people to make offers to him

6. When Do Negotiations Ripen Into An Offer a. TEST: Would a reasonable person have thought that what they had received from the

other party didn’t require any further assent from the other party to make a dealb. Southworth (Seller approached neighbor who was very interested – seller later sends letter with info –

‘selling…here’s the info we discussed’ – included description, price, date)i. Was an offer – Court spells out the specific factors used to decide what is an offer and what isn’t

ii. Evidence must be weighed – some favor there is no offer, but there is more that there was an offer1. Language Used – enclosure says ‘selling’ – this isn’t a very strong commitment2. Addressees – evidence pulls both ways – there is some indication the buyer knew the

seller was contacting another person – but may have thought the other person was only being contacted regarding the grazing permits for the land – ‘here’s the info we discussed’ makes it seem like it was only sent to him

3. How Definite – has definite terms – weighs in favor of offer4. Surrounding Circumstances – seller contacted the buyer and got a ‘very interested’

response – seller knows the buyer is serious about this and is very likely to treat this as a serious matter

7. Underlying Equity a. The particular rule doesn’t speak to them directly but they nevertheless guide the judgeb. Could influence whether a judge is going to conclude whether something is an offer or

not an offerc. Very often judges, whether they are familiar with the rules or not, from listening to the

facts will get a sense of what is fair or not

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d. Most of these rules aren’t so specific that there is no room for interpretation

iii. Offer Must Be Communicated to Offeree1. You can’t accept an offer you know nothing about2. Can come up in reward cases where the person didn’t know about the reward before they gave

the info3. HYPO: What happens if I write an offer and put it on my desk and someone comes along and sees it sitting there

and says I accept and points to the lettera. Was the offer communicated to you? NO

C. ACCEPTANCE [2 ND MANIFESTATION OF MUTUAL ASSENT] *See Chart

i. Manner and Communication of Acceptance1. Manner – typically Return Promise (Words) or Performance

a. As a general rule the offeree must do something to accept; usually silence is not sufficient for acceptance

2. Communication – assuming you made the promise or performed, do you have to notify the offeror?

ii. MANNER OF ACCEPTANCEA response to an offer is an acceptance only if the response is a proper manner of acceptance. What is a Proper Manner of Acceptance? That depends on the wording of the offer and the circumstances surrounding the making of the offer.

a. Look first to the offer. Any manner of acceptance stipulated or suggested in the offer is a proper manner of acceptance.

i. Court may sometimes have to interpret what the offer saysb. If the offer is silent or ambiguous on manner of acceptance, then any manner of

acceptance reasonable under the circumstances is permissible.i. Possibilities:

1. Return Promise2. Performance3. Either Return Promise or Performance

Whether the offeree has made a proper manner of acceptance is relevant to several acceptance issues: 1) Is there a contract, 2) Must the offeree communicate its acceptance to the offeror to make a contract, and 3) The effect of part performance by the offeree

2. Manner of Acceptance Required by the Offer a. The offeror is master of its offer (may stipulate the terms upon which he is willing to

bargain and can prescribe the method of acceptance). Therefore, follow the manner of acceptance (if any) stipulated or suggested in the offer.

b. If the offeror requires a certain thing to accept then that’s what you have to do to accept, no matter how ridiculous.

c. LaSalle – real estate writing specified that it wasn’t a K until the principle signed it – principle did not sign, only the buyer’s agent signed, therefore there was no K

d. Sometimes it is necessary to interpret what the manner of acceptance is. In doing that the court may look at underlying equities

e. Ever-Tite – writing said what would constitute acceptance (either the home office signing it or the beginning of work) – home office didn’t sign, therefore when work commenced the K was accepted – Court said work commenced when the trucks were loaded

i. Why did the court construe that as when work was commenced?1. Underlying Equities - roofer having to spend money (detrimental reliance); the

homeowner could have called to tell they got someone else

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ii. Offer did not expire 1. The loading of the truck occurred within a reasonable time therefore the offer was still

in effect when they commenced work, therefore we have a K

3. The Offer is Silent or Ambiguous: Any Manner of Acceptance that is Reasonable

a. If the offer is silent or merely suggests (not requires) a particular manner of acceptance, any reasonable manner of acceptance is permitted. Ascertain what is a reasonable manner of acceptance from the wording of the offer and the circumstances surrounding the making of the offer.

b. There are 3 possible outcomes of this analysis: a) Performance is the only reasonable manner of acceptance; b) a Return Promise is the only reasonable manner of acceptance, c) Either a Return Promise or Performance is a reasonable manner of acceptance

c. Corinthian – seller jacks price up on drugs – buyer got word of this and ordered 1000 vials the day before the price increase went into effect – got a tracking number with their order – seller shipped 50 at the lower price w/ a letter saying if they wanted the other 950 it would be at the higher price

i. Offer – order of the 1000 bottles was the offerii. Acceptance?

1. Tracking # - not acceptance – was automatically generated with no thought by the computer and the buyer would probably have known that; users would have been informed of the significance of a tracking number if it did constitute an acceptance

a. Could an automated system ever be an acceptance? Yes – ex. ordering something online

2. Sending of the 50 vials – not an acceptance – it’s a counteroffer for the 50 vials and buyer’s choice if you want the other 950 you can have them at the higher price

a. In order to be an acceptance the so-called acceptance must sufficiently match the offer!!!

iii. It is a K for the 50 b/c they kept the 50 – when they kept the 50 they accepted the counteroffer for the 50 – have the option to accept the counteroffer for the other 950 but chose not to

d. HYPO: They sent the 50 w/o the letter – Was this an acceptance? It’s possiblei. UCC – An order or other offer to buy goods for prompt or current shipment shall be construed as

inviting acceptance either by a prompt promise to ship or by the prompt or current shipment of conforming or non-conforming goods, but such a shipment of non-conforming goods does not constitute an acceptance if the seller seasonably notifies the buyer that the shipment is offered only as an accommodation to the buyer

1. This was a shipment of non-conforming goods and the buyer would be entitled to treat this as acceptance for the 1000

2. But the letter in the actual case made it clear that this was only an offer for the 50, not the 1000

4. When PERFORMANCE is the Only Reasonable Manner of Acceptance [Unilateral Offers] Carlill

a. This is not the normal circumstance – in the normal situation you will have acceptance by return promise and that would be reasonable

b. In some circumstances the only reasonable manner of acceptance is performance; that is, doing the act requested in the offer. The circumstances will indicate that a return promise is not a reasonable manner of acceptance [Circumstantial Evidence]. Whether or not beginning performance is an acceptance is covered below under Part Performance!!

c. Examples:i. Offer of a reward for finding offeror’s lost dog. The offer can be accepted only by full

performance; that is, finding the lost dog. Why isn’t a promise reasonable manner of accepting a reward offer? The offeror doesn’t want (or expect) people contacting it to promise to find the dog.

1. Further, what if we make the deal and you don’t find the dog, then you are in breach – this wouldn’t make any sense

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ii. Uncle says he will give $$ to his nephew if he refrains from gambling and drinking. Nephew would have to perform to accept.

5. When a Return PROMISE is the Only Reasonable Manner of Acceptance [Bilateral Offer] Hendricks

a. In some circumstances the only reasonable manner of acceptance is a return promise; that is, promising to perform the act requested in the offer

b. Example:i. Written offer to buy a house. Signing the offered contract is a reasonable manner of

accepting an offer to buy a house. The offeror doesn’t want (or expect) immediate performance; it wants a written performance first. Why? Normally when real estate is to be sold, each party must undertake preliminary tasks before the sale is to be completed.

1. Buyer must arrange for financing, title examination and inspection of the property2. Seller must prepare a deed and ensure all liens on the property are paid

ii. Neither party desires the others performance until these tasks have been completed. At the same time neither party desires to undertake these tasks unless they have a K. Thus the only reasonable manner of acceptance is to sign the offered K.

iii. These surrounding circumstances tells us that promise is the only reasonable manner.

6. When Either a PROMISE OR PERFORMANCE is a Reasonable Manner of Acceptance

a. In many circumstances the offeror is indifferent to how the offeree accepts. Thus a reasonable manner of acceptance could include either: 1) Promising to perform the act requested in the offer; or 2) Performing the requested act

b. Remember, what is a reasonable manner of acceptance depends on the circumstances. Contrast the following two examples: the first involving an offer for prompt shipment and the second an offer for delayed shipment

i. Buyer offers to purchase goods that seller has on hand for prompt shipment. B/c the offer is for prompt shipment, the seller may accept either by shipping the goods or promising the ship the goods

ii. B offers to purchase goods for delivery in 3 months. S doesn’t contact B, but waits 6 weeks and then ships the goods so they arrive within 3 months of the offer. This shipment is not a reasonable manner of acceptance. B expects to hear back from S before it ships. When B doesn’t hear back from S within a reasonable time, B may assume S is not interested and contract for the goods elsewhere.

1. The performance would have to occur within a reasonable period of time (would want to know within a reasonable time if they have a deal or not)

iii. Communication of Acceptance1. Communication is required for an effective agreement unless offer expressly or impliedly

dispenses with communication2. If the offeree’s response is a proper manner of acceptance, what is the role of communication of

the acceptance to the offeror? There are two possibilities:a. Communication is required to form a Kb. Communication is not required to form a K

i. However, K can be discharged if offeree fails timely to communicate its acceptance to the offeror

3. Whether communication is required to accept depends on the manner of acceptance4. Analysis : Is Communication Required? [*See below for more detail]

a. Look to the offeri. Does it expressly require communication or dispense with it

b. If it is silent, look to the manner of acceptance

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i. Performance: Communication not requiredii. Promise: Communication required

5. The Manner of Acceptance Required by the Offera. The offeror is master of its offer. Does the offer expressly require communication of

acceptance? Does the offer expressly dispense with communication of acceptance. Follow the terms of the offer.

6. If the Offer is Silent on Communication of Acceptancea. Whether or not communication of acceptance is required for an effective acceptance

depends on whether the offer has been accepted by performance or by a return promise

b. Acceptance by PERFORMANCE: Communication of Performance is Not Requiredi. Communication of acceptance by performance is not required to make the K.

1. Reason: Offeree has reasonable reliance to protect, namely its performance [Detrimental Reliance!!!]

a. When someone has reasonably relied on the offer and does something requested, the fair thing is not to let the other side withdraw the offer

ii. Duty to Timely Notify Offeror of Performance : However, the offeree is not relieved of all duty to communicate its performance to the offeror. The offeror is discharged from the K if the offeree knows that the offeror will not timely learn of its performance, and the offeree fails timely to notify offeror of acceptance.

1. Reason: Protect offeror’s reasonable expectations: If the offeror is unaware of the performance; it may assume that the offeree did not accept and contract with another after a reasonable time expires w/o hearing from the offeree

2. THIS ISNT A CONDITION FOR MAKING A K!!!3. It is a condition subsequent – if it occurs it undoes the obligation; is not a

condition precedent, which must occur before the obligation comes into effect

iii. Carlill – Smoke Ball CO. puts ad in paper offering reward – deposited money in the bank to show sincerity – P used smoke ball and got flu – D’s argue the ad wasn’t an offer

1. Court said it was an offer – the $ was deposited and they said in the ad it was meant to show sincerity – were using the ads to boost their sales

2. The nature of this ad is such that the company isn’t going to get notifications b/c they aren’t directly selling to the customers – have t go thru pharmacist – have to go thru 3rd party

3. Test for an Offer: a. Definite Terms – pretty definiteb. Language – ‘sincerity’c. Addresses – Isn’t there a multiple acceptance problem – Court isn’t

sympathetic to this b/c the more people who bought the more it benefited the company – their problem

4. Manner of Acceptance – Performance is the only reasonable mannera. There was nothing in the ad to indicate you had to notify them of acceptanceb. Acceptance occurs when you buy the smoke ball

5. Communication therefore is not required

c. Acceptance by a Return PROMISE: Communication of the Promise is Requiredi. The promise must be communicated to the offeror before a K is formed. Thus,

the offer may be withdrawn until communication is given.1. Reason: Offeree has no reasonable reliance to protect

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ii. Hendricks – P is escrow holder for alleged deal between the Ds – Ds sent letters between real estate brokers – 2 agents are involved who are both agents of the seller – buyers mailed written offer w/o deposit – sellers signed – buyers wanted to withdraw the offer before they were aware of the acceptance

1. Issue: Do we have a complete acceptance when the K is signed or only when the offeror is notified that the offer has been accepted? Is communication required to make a K? YES

a. Communication to the agent was not sufficient b/c both the agents were the sellers – if the agent who got notification was the buyer’s agent it would have constituted communication

b. At the time the buyer became notified of acceptance, the offer was no longer in effect

c. The sellers engaged in the proper manner of acceptance (signing) while the offer was still in effect but didn’t notify the buyers while the offer was still in effect

iv. Acceptance by Words1. Not effective until mailed Adams 320 [*see below]

v. Acceptance by Performance: Doing the Act Requested by the Offer1. Requires full performance to be an acceptance (but part performance may disable the offeror

from revoking the offer)

2. Acceptance effective when performance completed (Notification not required for effective acceptance)

3. Performance Without Knowledge of the Offer a. Can’t accept an offer you know nothing aboutb. Glover – woman turns in killer and later finds out about reward - No K – In looking at the facts a

reasonable person could only come to the conclusion that she hadn’t intended to accept cause she didn’t know – no objective person would conclude she intended to manifest assent

4. Mixed Motives in Performing the Requested Act a. May be a case where the performer knows about the offer but there may have been

multiple motives involved, some which were to accept the offer and others were to do the offer anyway but for other reasons

b. In a mixed motive case, the burden is on the offeror to convince the factfinder there was no attempt to accept the offer. If they fail to carry that burden there is a K. [Rebuttable Presumption – taken to be true unless the D proves otherwise]

i. Reason: Since the offeror was willing to give value for this performance that is good indication that they benefited from the performance therefore they ought to bear the burden; otherwise they get a benefit for nothing

c. Industrial – B-H wants to merge and contacts broker who sets them up with possibilities but nothing comes of it – B-H decided not to work with him anymore but don’t tell him – he continues to search – Fulton has an ad saying ‘brokers fully protected (may be construed as an offer) – Broker writes to Fulton but doesn’t name B-H – could have mixed motive in putting them together – which offer he intended to accept – won in lower court against B-H (offer – indicated they would pay commission if merger arrived at; acceptance – he performed)

i. Court – burden is on Fulton to bring evidence tending to indicate the broker didn’t intend to accept the Fulton offer

ii. When you have more than one motive (more than one offer in this case) and by doing the requested act you could have attempted to accept on or both, if a possible motive is to accept the Fulton offer, there is a rebuttable presumption that there is an attempt to accept both offers

vi. Effect of Part Performance on Offer

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1. Offeree begins to perform and before there is full performance the offeror attempts to withdraw the offer. Offeree has begun to detrimentally rely on the offer. Question is whether we protect that part performance.

2. Rule : The offeror will not be able to withdraw its offer once the offeree has reasonably and substantially relied on the offer. (Detrimental Reliance)

3. However , the legal theory by which the offeror is disabled from withdrawing the offer is different, depending on whether or not it makes sense for the offeree to be liable for failing to complete performance.

4. Two Legal Theories used to disable the offeror from withdrawing when the offeree has reasonably relied on the offer by beginning performance

a. Full Contract – both parties boundb. Option Contract – offeror alone is bound

vii. OFFER THAT CAN BE ACCEPTED BY EITHER A PROMISE OR PERFORMANCE [Part Performance (if Reasonable) Can be Protected by FULL CONTRACT]

1. If the part performance is reasonable under the circumstances it can be a reasonable manner of acceptance – is an acceptance by promise to complete performance

2. Performance Can be Accomplished All at Oncea. If the offer requires performance all at once (e.g. by paying the entire asking price in

cash) there is no risk that offeree will have only partly performed before offeror attempts to withdraw the offer

b. Suppose that the offer permits the offeree to make a partial payment. When offeree makes the partial payment, this conduct indicates to offeror that offeree accepts; it’s an acceptance by promise (promise to pay the rest) and there is a K at that point. The offeree’s part performance is protected.

3. Performance Will Take Timea. Suppose that the performance will take time (e.g. Offer is for cabinetmaker to craft

custom cabinets)b. Offeree Notifies Offeror before Starting to Perform: Acceptance by Promise

i. Normally the offeree will notify the offeror that the offeree intends to perform before it begins to perform.

ii. Ex. In response to the offer for custom cabinets, cabinetmaker calls or writes offeror indicating that it will make the cabinets. The offeree’s notification is a proper manner of acceptance: it is an acceptance by promise communicated to the offeror and there is a K at that point. Hence the offeree’s subsequent part performance is protected.

c. Offeree Does Not Notify Offeror before Starting to Perform: Can be Acceptance by Promise

i. Occasionally the offeree may just begin performing w/o first notifying the offeror. Whether or not the offeree’s part performance is protected depends on whether or not it’s reasonable for the offeree to begin performance w/o first notifying the offeror. If it is not reasonable, the part performance is not protected

1. Have to look at the circumstances and see if it is reasonable to start performing w/o notifying – this is an unusual situation but it can occur

ii. However, sometimes the offer or the surrounding circumstances may indicate that the offeree may commence performance w/o first notifying the offeror.

iii. Ex. Parties discuss buyer’s requirements for custom cabinets and seller submits an estimate. Buyer then sends an offer to buy the cabinets according to the estimate and adding that delivery is to be in 2 weeks. The offer says, “If the completion date is satisfactory, go ahead with the order. If not satisfactory, contact me and we’ll work something out.”

1. It is reasonable for the offeree to start making the cabinets w/o first notifying the offeror. Offeror has reason to think the offeree can just go ahead w/o notifying

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him, and the offeree would think he could start w/o notifying. The part performance is a reasonable manner of acceptance b/c the offeror told the offeree to go ahead. A K is created when the cabinetmaker begins to perform. Cabinetmaker’s subsequent part performance is protected.

a. Beginning performance indicates a promise to complete performance – essentially have an acceptance by promise and both sides are now bound full K

viii. OFFER THAT CAN ONLY BE ACCEPTED BY PERFORMANCE [Part Performance (if Reasonable) Can be Protected by OPTION CONTRACT]

1. DON’T CONFUSE THE GUY WANTS PERFORMANCE TO MAKE A K, WITH EVENTUALLY WANTING PERFORMANCE TO FULFILL THE K ONCE IT’S ALREADY MADE!!!!!!

2. Assume an offer that can only be accepted by performance. Normally there is no acceptance until performance is completed.

3. Ex. Reward offer for finding lost dog. The offer is not accepted until the dog is found and returned. The beginning of performance (starting to search for the dog) does not create a K. Beginning performance is, however, reasonable.

4. Suppose that full performance will take time, so that reasonable part performance needs protecting. How can it be protected?

5. Notifying the offeror of intent to perform does not protect subsequent part performance as was the case with offers that can be accepted by either promise or performance. The notification is not an acceptance for 2 reasons:

a. For this kind of offer a promise is not a proper manner of acceptanceb. Often the circumstances are such that the offeree should not be liable if it fails to

complete performance6. It is, however, possible to protect the part performance by finding that beginning performance

creates an OPTION CONTRACT. An option contract is a one-way contract: only one side is bound; the other side has the option of making a K (or not) as it desires. Beginning performance binds the offeror, but the offeree is not bound. If it completes performance there is a full K; if it does not complete performance within a reasonable time, the offer expires.

a. Offeror is bound not to withdraw the offer for a reasonable period of timei. Ex. So when the offeree contacts them and says I found the dog and I want the reward,

and the offeror says I withdrew the offer yesterday – still have a K b/c now you have full performance. If you don’t find the dog, you aren’t liable b/c you weren’t bound.

7. Ex. Construction project process in which a General Contractor solicits bids (offers) from Subcontractors for various components of the project (plumbing, electricity,…) and then relies on those bids in formulating its own bid on the entire project. Suppose Gen wants to bid on a construction project. Gen will first solicit bids (offers) from various Subs. Gen will select the Sub bid it prefers for each component and compile its own bid based on those sub’s bids. The Subs know that the Gen is doing this. Assume that Gen is eventually awarded the K for the project, but before the award one of the Subs whose bid was used by Gen attempts to withdraw its bid.

a. Does Gen’s reliance on Sub’s bid disable Sub from withdrawing it? We can’t say that Gen’s use of Sub’s bid constitutes acceptance, b/c then there would be a K at that point, which the parties do not intend. Why not?

i. They intend that there will be a K between Gen and Sub only if Gen is awarded the project. If simply using Sub’s bid made a K, if the Gen did not win the project, it would have a K with Sub to do work on a project it had not been awarded. This result makes no sense. Hence, use of the Sub’s bid is not acceptance of the bid!!!

b. But Gen’s reliance on the Sub’s bid was anticipated (and sought) by Sub. It deserves protection. In a sense Gen’s use of Sub’s bid was the beginning of performance requested by Sub’s bid.

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c. The solution was to find an OPTION CONTRACT when Gen begins to perform by using Sub’s bid to formulate its own bid. In this context Sub is bound not to withdraw its bid when Gen begins to perform by using Sub’s bid to formulate its own bid. Gen is not, however, bound to complete its performance. If Gen is awarded the project it completes performance by awarding the subcontract to Sub. If Gen is not awarded the project, Gen won’t complete performance regarding Sub’s bid. Since Gen was not bound, it won’t be liable for failure to complete performance b/c it wasn’t awarded the project. The option K will then expire and Sub’s bid will no longer be binding. Hence the option K theory works a fair solution to the Sub-Gen conundrum.

8. Ex. Marchiondo case is another example of facts in which the application of the option K theory makes sense (Offer to pay commission if broker persuades named person to buy offeror’s property within specified time).

9. SUMMARY : Performance ONLY – Part Performance doesn’t make a K!!! But part performance may be reasonable, therefore we create an option K to protect the offeree’s detrimental reliance when beginning performance was reasonable.

ix. OFFER THAT CAN ONLY BE ACCEPTED BY PROMISE1. Should part performance be protected there? NO2. You have to promise before you perform3. Part Performance w/o first notifying would not be reasonable

a. If it’s not reasonable it’s not protected by part performance4. Part Performance has no effect if it’s the kind of offer that can only be accepted by promise!!!

x. How do you know whether it’s a Full K or an Option K?? 1. Is part performance reasonable?

a. If NO then it’s nothing2. If it is reasonable:

a. Full K If Offer can be Accepted by Promise or Performance (part performance becomes acceptance by promise)

b. Option K If Offer can Only be Accepted by Performance

3. One Way of Thinking of It Does it make sense for the part performer to be liable if they fail to complete performance?

a. If it does Full Kb. If not Option K

xi. Beginning of Performance must involve reliance that is both SUBSTANTIAL as well as REASONABLE!!

1. General Offers Where Beginning of Performance Involves No Substantial Reliance Expense

a. Ex. I read a flyer offering a $100 reward for finding a lost dog. I spend 30 minutes looking for the dog. My reliance on the reward offer is not substantial enough to prevent the offeror form withdrawing the offer.

i. However, if you found the dog, the offeror probably can’t withdraw the offer – b/c the offeror is getting some benefit and should have to pay for it

2. General Offer Where Beginning of Performance Does Involve Substantial Reliance Expense

a. Ex. A candy company offers a $100 prize to the member of a high school band who sells the most candy. The contest is to last 4 weeks. Assume that the band members have now spent 3 weeks selling the company’s candy. This reliance is likely substantial enough to prevent the company from withdrawing the offer.

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3. Specific Offers Where Beginning of Performance Involves Substantial Foreseeable Reliance Expense

a. Ex. The general contractor’s reliance on a sub’s bid discussed above. The reliance is substantial enough to prevent the sub from withdrawing its bid.

xii. **SEE FLOW CHART ON MANNER OF ACCEPTANCE, COMMUNICATION OF ACCEPTANCE AND PART PERFORMANCE!!!

xiii. Silence as Acceptance1. General Rule : Silence is NOT acceptance (is not assent)

a. Rationale: Silence is ambiguous; It isn’t reasonable or fair to force the offeree to say No; the offeror shouldn’t be able to force you to speak up to avoid making a K. (unless you agreed that silence can constitute acceptance)

2. Exceptions : 3 instances in which silence can be acceptancea. Where benefits have been tendered to the offeree and they take the benefits with

reasonable opportunity to reject them and reason to know they were offered with the expectation of compensation

i. Types1. Services are offered and taken2. Property is offered and used

ii. Rationale: 1. Reasonable and fair for you to have to pay for the benefit you are

receiving2. Keeping the benefit could have been motivated by a desire to accept (In

contrast, if you reject the benefit you are essentially rejecting the offer)iii. If you take the benefits, you are bound by the offer - Exception

unordered merchandise1. Unordered merchandise – merchandise mailed w/o the prior expressed

request or consent of the recipient2. By strict K analysis you would assume that if you keep it, you have

accepted the offer. HOWEVER, federal statute now regulates this 3. FTC regulation – if you didn’t order it (it comes unsolicited), you are

entitled to keep the merchandise and you don’t have to pay for it – may be treated as a gift

a. HOWEVER, if you have agreed in advance for them to send you stuff then it isn’t unordered merchandise (ex. have a subscription National Geographic and they send you a book saying if you don’t send it back you’ll be charged)

iv. Ex . of services being offered and taken1. Get an estimate and you say ‘okay’ and the painter assumes that you mean you

accept a. If this is reasonable to think it was acceptance then you have a K at that

pointb. It may be unreasonable b/c the response is ambiguous

2. He then comes and starts doing the job and you know he is there and don’t stop him – is a K!!!

a. You had the opportunity to tell him not to do it – at that point he is tendering services and if you allow them to be performed, it is fair to say that your failure to speak up constitutes acceptance

3. However, if you didn’t realize he was painting the house, failure to speak up doesn’t indicate assent b/c you didn’t know he was doing it

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v. Ex . Suppose I send you a laptop and say if you want to keep it pay me $700, if not send it back – you continue to use the laptop

1. Offeror can’t dictate what you need to do to not accept can only dictate what you need to do to accept!! - can’t force you to have to go thru the expense of sending it back – the offeree could tell the offeror to come get it himself

2. It’s likely that if the offeree uses it, he will be stuck with it. But if he just sets it aside and never contacts them it might go either way. If he contacts them and says he doesn’t want it then they have to come and get it and he won’t be stuck with the deal.

vi. Russell – drilling co. was using P’s land – P sent letter saying they could continue using it for $150/day and their continued use will constitute acceptance – co. continued using the land and didn’t respond

1. Court – the continued use was acceptance – benefits were tendered (benefit is the continued use of the land)

2. ‘Waiver of tort (trespass) and suit in assumpsit (breach of K)’ a. Benefit of suing in K, you don’t have to prove what the value of the land was –

proof of damages is a lot easier if you sue in K b. Where the offer says silence will be taken as acceptance and offeree remains silent

intending to accept i. Offer either says, or the circumstance indicate, that acceptance by silence is a

reasonable way to accept and the offeree intending to accept remains silentii. If the offeree didn’t intend to accept then this rule doesn’t apply!!!

1. May look to the subjective intent in this situationiii. This issue typically comes up when the offeror wants off the hook

1. Offeror shouldn’t be able to benefit for ambiguity of silence where he specifically said silence is acceptance; trying to take advantage of an ambiguity that he created

iv. Potential Problem: Run the risk of screwing up if you contact him and tell him you accept, and the offeror argues that you had to remain silent – offeree therefore might not want to respond to assure that he remains silent to accept

c. Where b/c of the circumstances it’s reasonable that the offeree have to respond if it doesn’t intend to accept

i. Not speaking up is unreasonable if you don’t intend to accept (reverse of the general rule)

ii. When the circumstances indicate silence is acceptanceiii. Very often this expectation will arise from past dealings where silence is

acceptanceiv. Ammons – Sales representatives is collecting offers and someone at the home office will make the

decision later – in every instance in the past the order has been accepted - they knew it as accepted b/c they received the shipment – Ammons makes offer for amount at certain price – market changes in the meantime (price goes up) – Ammons inquires and finds out the offer wasn’t accepted

1. Ammons thought the silence constituted acceptance cause that’s what has happened in the past, therefore they didn’t seek the goods from anywhere else

2. Underlying Equitiesa. Unfair b/c the D didn’t attempt to notify buyer of the market increasing, and the

P would have to pay more $b. Past dealings – they always accepted and shipped and didn’t notify; so the

indication was that if the buyer didn’t hear anything, silence was acceptancec. Reliance by not seeking the goods elsewhere

xiv. When the Acceptance is Effective1. For every manifestation of mutual assent, the rule is not effective until received EXCEPT

acceptance by promise [only acceptance of a revocable offer is effective before received]

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2. Acceptance by Words: When Acceptance is Mailed a. Mailbox Rule – acceptance is effective when it is sent but only if it is a reasonable way

of responding and it is properly stamped and addressedi. Dropping it in the mailbox is when acceptance becomes effective (becomes

effective at the point it is no longer in the offeree’s possession)b. This is a default rule that the offeror can write around (put something in the offer that

says your acceptance is not effective until I receive it) – this will override the mailbox rule

c. How would you prove it was actually mailed before the postmarked date – testimonyd. Rationale:

i. Ensures quicker performance1. Offeree might withhold performance until they hear back that the offeror got the

acceptance, b/c what happens if I start to perform and you never receive it or you withdraw before you receive it. So offeree will be reluctant to start performing b/c they aren’t sure there is a deal until they hear back from the offeror that they got the acceptance.

ii. Potential for fraud1. If the rule was effective upon receipt, is this more conducive to fraud?

a. The sending rule is more easily applied and there is less room for fraud2. Offeror could potentially argue that they never received it when they actually

did, if they wanted to take advantage of market price fluctuation 3. This is often perceived as an underlying equity that will lead a ct. to not let

someone get out of a deal.e. E-Commerce and the Mailbox Rule

i. Federal statute essentially adopts a mailbox rule for e-mailii. When it leaves the offeree’s server is when it is accepted

iii. Where the sender ceases to have any control over it is when it is effective – the e-mail is not sent until it leaves the server (which is when you no longer have any control)

iv. When is it received? When it gets in the mailboxv. If it is acceptance, when it is effective is when it leaves the server

vi. If it is another, like when the offer is effective, it isn’t until the offeree can get access to it on their server.

vii. Essentially, is the same as the mailbox rule only the server now acts as the mailbox!!

f. Adams – D sent offer saying ‘receiving your answer in course of post’ (the time it takes for the letter to get to the offeree and back) – but Ds wrote the wrong address - offeree gets the letter the 5th and send it back that night and it gets back the 9th – D sold to someone else on the 8th

i. If the letter(offer) had not been misdirected, the acceptance would have been received on the 7th – so from the D’s pov when they didn’t hear back by the 7th they assumed it wasn’t accepted – Ds tried to argue no acceptance until receipt

ii. Court – acceptance was effective when it was sent; it was Ds fault that there was a delay

3. Acceptance by Full Performance: When Performance is Completed

xv. Sufficient Match with Terms of Offer1. Responses to Offers and Their Effect on the Offer:

a. Inquiry or requesti. Doesn’t terminate the offer

b. Acceptancei. Have a K

c. Rejection

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i. Offer terminates – allows offeror to move on to another possible offeree – indicates the offeree is not interest and a reasonable offeror given this response may deal elsewhere – possibility of detrimental reliance

d. Counteroffer i. Terminates the original offer and creates a new offerii. Rationale: It creates doubt as to whether the offeree is interest in the original offer –

shouldn’t give the offeree the benefit of doubt they created – the offeror should be able to deny this

e. BASICALLY – a response to an offer that doesn’t indicate acceptance or a mere inquiry will terminate the offer

2. Minneapolis – P sent letter to D asking for a quote (inquiry-not an offer) – D sends letter to P with a range for the quantity (offer) – P responds and says they want amount in lower range (not acceptance b/c it doesn’t match but not clearly a rejection) – Issue: is it a counteroffer or inquiry? – Court said it was a counteroffer – created doubt about whether they were still interested

3. Acceptance Generally Must Mirror Offer; Otherwise it’s a Rejection of the Offer (exceptions - *see below)

a. The response must sufficiently match the offer to be an acceptance – is a function of our mutual assent requirement – they must mutually assent to the same thing

b. Mirror Image Rule – At common law, the general rule was that for a response to be acceptance it had to mirror the terms of the offer – means it has to be an exact match, otherwise there is no K

i. Problem – if the difference were immaterial this rule could give someone the opportunity to get out of a K – gives them motive to try to get out of a deal they regret (therefore exceptions were made)

c. HYPO: Suppose we have an offer for 100 widgets for $1000 – you say “I accept, ship by next week” – suppose shipping by next week is a reasonable time – do we have a match between offer and acceptance?

i. Technically there is no mirroring b/c the offer says nothing about shippingii. But it was a reasonable time – so if you hadn’t put that term in there it probably would have

ended up there that time anyway iii. So why would the seller not want to send – probably some other reason to get out the deal – it

wouldn’t be a dispute over the delivery date

d. Exceptions to the Mirror Image Rule (using the above HYPO) – These exceptions are all based on the underlying assumption that the reason the person doesn’t want the deal isn’t the varying terms, but something else

i. Varying Terms are Merely Suggestions or Requests [If the response purports to accept and the varying terms are a suggestion, not a condition of acceptance, the Court can say there is a K]

1. Then there is a K and whether the terms are in or not depends on the assent of the offeror – even if the offeror rejects the varying terms you still have a deal

a. Ex. Indicates you want the deal, and want it next week but still want it even if you can’t get it by next week

2. HOWEVER, if the varying terms are a condition, there is no acceptance – the conditional acceptance is a counteroffer and there is no K

a. Ex. if the response were ‘I accept only on the condition you ship by next week’ – Acceptance is conditioned on you shipping next week – is a counteroffer

i. Indicates you want the deal but only if you ship by next week – if they don’t do it them there is no acceptance

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3. Sometimes it’s hard to tell whether the response was a suggestion or a condition – Have to look at the surrounding circumstances to tell whether it was a suggestion or condition

a. Court results are not consistent in this area – sometimes it also depends on why the parties want out of the deal

ii. Court may say the additional terms in the acceptance were implied in the offer1. Court may say what was an implicit term of the offer 2. When it didn’t specify a delivery date – what is implicit in the offer is

shipment within a reasonable time; then look at the acceptance – said ‘ship by next week’ – if this is a reasonable time then the acceptance arguably matches the offer

3. An offer that implies a reasonable time is matched by a response that stipulates a specific time that is in fact reasonable

4. Under this view, we have a deal for the widgets and for shipment by next week

iii. Where the additional term is solely for the offeror’s benefit1. Ex. offer is for $100 for 1000 widgets post paid (added the shipment cost to the

price he quoted); Response is don’t ship them, I’ll pick them up and still pay full price – this a variation solely for the offeror’s advantage

iv. If it’s an immaterial difference it’s okay – THIS EXCEPTION IS NOT USED VERY OFTEN!!!

v. How do you know whether the use one of the exceptions - LOOK FOR AN ULTERIOR MOTIVE AND THEN IF ONE OF THE EXCEPTIONS APPLIES!!!

e. Battle of the Forms – UCC 2-207 i. Businesses often have pre-printed forms (with set terms) – suppose an

immovable form meets an irresistible form (both buyer and seller have commercial forms) - 99% of the time businesses don’t negotiate out the differences b/c usually nothing results that requires litigation

ii. What if it does go sour? 2-207 – says any transaction in which forms are involved and concerns ‘fill-in-the-blank’ terms and the pre-printed terms (boiler plate), if the ‘fill-in-the-blank’ terms sufficiently match each other then there is a deal – it doesn’t matter that the boiler plate is different

iii. Therefore it is possible to have a K where the terms differ much more widely than the common law will allow

D. THE RACE: Did the Acceptance Become Effective Before the Offer Terminated? i. Timing is everything. There can be no K if the “acceptance” only became “effective” after the offer

terminated. Acceptance has to become effective while the offer is still in effect.ii. Two Important Dates

1. Date offer terminates2. Date acceptance became “effective”

a. Depends primarily on whether notification is required

iii. When the Acceptance is Effective1. Acceptance by Words: When Acceptance is Mailed2. Acceptance by Full Performance: When Performance is Completed

iv. When the Offer Terminates – Power of Acceptance may be terminated by:

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1. Rejection or Counter-offer by the Offeree2. Lapse of Time / Expiration of Offer

a. Stated expiration time in offerb. If no stated time, then after a reasonable time

3. Death or Incapacity of Offeror or Offereea. Automatic termination – other side doesn’t have to be notified of the deathb. Policy – protect the assets of the offeror and offeree

4. Non-Occurrence of Condition of Acceptance stated in Offera. Anytime the offer poses a condition for acceptance and things change so that no one can

satisfy that condition, the offer terminates b. Ex. condition is 1st come, 1st serve – once it is gone – no one else can satisfy that

condition – and the offer terminates5. Revocation by Offeror

a. Manifestation by the offeror that the offer is no longer effective b. 2 Ways to Revoke

i. Words – Expressii. Deeds - Implied (conduct inconsistent with the offer continuing)

6. Offers Normally May be Revoked a. Revocation is Effective Only When Received

i. If expressed, not effective until received by the offereeii. If implied, not effective until the offeree learns of the conduct

7. Hendricks – Buyer made offer, sellers signed the agreement but before notifying the buyer of acceptance the buyer revoked the offer by notifying the real estate agent – Court – revocation became effective before acceptance – offeror won the race

8. Dickinson – seller offer to sells to buyer and buyer has until June 12th to accept (gratuitous promise – still free to revoke) – June 11th offeree heard the offeror was selling to someone else – Court treats this as implied revocation – Offeror won the race

9. The fact that a revocation is effective only when received and acceptance is only effective when mailed –creates the situation of them crossing in the mail

a. Apr 1 – Offeror sends revocation by mail b. Apr 2 – Offeree sends acceptance by mailc. Apr 3 – revocation receivedd. Apr 4 – acceptance receivede. Acceptance effective Apr 2f. Revocation effective Apr 3g. We have deal

10. Irrevocable Offers (Firm Offers): Purported Revocation is Ineffective a. If the offer is irrevocable, then the offeror can’t revoke it for the period of irrevocabilityb. An offer silent on revocability can be revoked.c. If there is a promise not to revoke it can still be revoked unless there is consideration or

detrimental reliance!!! Gratuitous promises mean nothing!!d. An irrevocable offer is often referred to as an option or an option Ke. 4 Ways an Offer Can Become Irrevocable

i. Acceptance 1. Acceptance makes a K – can’t be revoked

ii. Reasonable and Foreseeable Action in Reliance on the Offer (Detrimental Reliance) [Part Performance]

1. Theory by which it is made irrevocable differs depending on whether manner of acceptance is performance or promise OR just performance (full K or option K)

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2. Preparation to Performa. Majority Rule: not protectedb. BUT courts may imply certain things are part of performance

beyond what is laid out in the K iii. Promise not to Revoke + Considerationiv. Some Offers are Irrevocable by Statute

f. Foreseeable Detrimental Reliance : Offeree Begins to Performi. Distinguish between detrimental reliance that is Part Performance…

1. Begin to do something expressly requested by the offer 2. Part Performance will make the offer irrevocable if:

a. Offer can be accepted by promise or performance – part performance = acceptance

b. Offer can be accepted only by performance – part performance = option K

c. Offer can be accepted only by promise – offer has no effect b/c it isn’t reasonable detrimental reliance!!!!!

3. Therefore, reasonable Part Performance will make it irrevocable b/c it will either constitute acceptance or an option K

4. Ex. $100 to cross the bridge and you start to walk acrossii. …and detrimental reliance that is only in Preparation for performance

1. Not something that is actually requested but something you do to prepare to do something that the offeror has requested

2. This is not protected – therefore you can still revoke if they have only prepared to perform

3. Ex. suppose you go out and buy a pair of Jordans so you can walks across the bridge – this is preparation

iii. Underlying Equities: *If a Court doesn’t want to protect the detrimental reliance b/c it wasn’t reasonable or foreseeable, they may say it was a mere preparation to perform – if the expense was foreseeable (ex. you said you want him to walk across the bridge but he can’t do it in those shoes – offeror may try to argue he didn’t actually stipulate for you to go buy shoes), the Court may imply that the offeror wanted you to wear better shoes, therefore it was reasonable for you to buy a pair.

iv. It’s not always easy to tell whether something is Part Performance or

Preparation to perform. (ex. Ever-Tite)1. What constituted commencing performance?2. Look to the offer – requested act ‘replace roof’

a. Obviously when they start to do the requested act that is part performance

3. Implying terms is sometimes necessary - therefore it becomes difficult to tell what is part performance and what is preparation

4. What is the basis for implying a term? Court might imply loading up the truck and hiring guys is an implied requested act

5. Court might give a broad interpretation that certain things not specifically requested in the offer are really part performance – OR Court might take a narrow view and say only the requested act constitutes part performance

6. Court might look to the necessity of doing the act in conjunction with the requested act – once you couple this with detrimental reliance, a court might find that certain acts are part performance even though they aren’t

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specifically stated in the offer (if it is a necessary preliminary that causes d.r.)

g. Marchiondo – seller makes offer to sell to particular buyer – broker will get commission if he persuades buyer to accept – had 6 days to do so – morning of 6th day, the seller revokes – later that day broker obtained acceptance (K resulted) – seller argued it didn’t owe the commission b/c it revoked the offer before you fully performed – Q of fact: was it part performance or preparation? Depends on how reasonable, foreseeable, if the offeror got the benefit

h. Promise not to Revoke + Consideration = Promise is legally enforceable / option Ki. You can’t destroy a K right (right to revoke) gratuitously. There has to be

consideration paid to destroy the K right. ii. The option right is not destroyed by a counteroffer. Unlike a revocable offer that

is destroyed when a counteroffer is madeiii. Humble – seller gave buyer written option to purchase land - $50 was paid at the time the option

was executed to the offeror – option wouldn’t expire before June 4 – offeree sent letter exercising the option before that date but added changes to the K – then sent another letter taking back the changes (making a ‘clean acceptance’) – Seller argues the 1st letter was a counteroffer that terminated the offer – Court: counteroffer does not destroy a irrevocable offer

i. Offer Made Irrevocable by Statute i. UCC 2-205 – makes offer to buy or sell goods irrevocable in certain

circumstances:1. A signed writing2. Promise has to be made by a merchant3. And it must state that it is irrevocable

11. Special Rules for Irrevocable Offersa. A conditional acceptance (counteroffer) does not terminate the offer b. No Mailbox Rule!!! Acceptance must be received within the time state in the offer.

i. *There is only one communication effective when sent acceptance of revocable offer – everything else is effective only upon receipt

v. SUM UP THE RACE1. Need to discern whether the acceptance became effective before the offer terminated

a. If so Kb. If not no K

2. Need to compute 2 things:a. When did acceptance become effective

i. Depends primarily on whether notification is requiredb. When did offer terminate

i. Was the offer terminated?ii. When is an offer irrevocable?

vi. SUM UP OFFER AND ACCEPTANCE1. OFFER

a. Is it an offer? If a reasonable person think they could make a K by simply saying ‘I Accept’

i. Southworth factors – what specific facts to look forb. Offer must be communicated to offeree

2. ACCEPTANCEa. Is it acceptance? If a reasonable person would think the response accepted the offer

(makes a K) b. Must be Proper Manner of Acceptance.

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i. That stipulated in the offerii. If none stipulated, a reasonable manner of acceptance

c. Communication – depends on the manner of acceptancei. Promise – need communication

ii. Performance – don’t need communication immediately – only if offeror wouldn’t find out within a reasonable time

d. Must Match the Offeri. Common Law – Mirror Image Rule

ii. UCC – sale of goodse. Must Win the Race

i. Acceptance must become effective before offer terminates

II. INSUFFICIENT AGREEMENTA. DEFECTIVE FORMULATION: Misunderstanding Regarding an Essential Term

i. Situation where parties use the same term in their manifestation of assent but attach materially different meanings to the term

ii. Restatement §20 – Effect of Misunderstanding1. Equal Fault – both sides are faultless or both are equally at fault – there is no deal if “the

parties attach materially different meanings to their manifestations and (a) neither party knows or has reason to know the meaning attached by the other; or (b) each party knows or each party has reason to know the meaning attached by the other”

a. Reason to know if a reasonable person would have know2. Unequal Fault – there is a deal - the person who was not at fault is favored and their meaning

is imposed on the K – if one side was in a better position to know the other side meant something different, they are at fault and stuck with the other side’s meaning – (a) if one party knows of the different meaning attached by the other and the other doesn’t or (b) one party has reason to know and the other doesn’t

iii. These situations are often easily resolved by looking at the surrounding circumstances1. HYPO: Sale for 4 Napoleons (Napoleon is a French pastry and a coin) – assume one side meant

pastries and the other meant coins – these are materially different meaningsa. Suppose the seller is a baker – seller meant pastries; buyer meant the coins

i. The seller’s understanding is a more reasonable understanding. So the buyer is really at fault.

b. Suppose the seller is a baker and he has a coin collection – would want to know if buyer knew seller had a coin collection and whether he was shown it

i. Who was at fault? Which is the more reasonable meaning?1. LOOK TO PRICE SET IN THE K!!!!

c. Surrounding circumstances can go a long way to sort out whose meaning is more reasonable2. Peerless – sale for cotton to arrive by the Peerless ship – turns out there were 2 ships named Peerless – buyer

had the Oct Peerless in mind; seller had the Dec Peerless in mind – difference is the delivery date – neither knew there was a different Peerless – neither had reason to know – they hadn’t agreed on the ship and there didn’t seem to be a good reason to stick one side with the other’s meaning – Equal Fault no deal

3. Konic – Buyer’s agent was sent to check out surge protectors – seller told him it was fifty-six twenty – protector was installed – real price was discovered when the invoice came in for 5,620, and the purchase order had been issued for 56.20 – Court said there was no deal – neither had reason to know or it was equal levels of reason to know – Possible Underlying Equity: they used the product for a little and it may have lowered the value of it – may not be fair for the seller to get nothing for it

iv. Sale of Goods Cases1. Seldom involve significant out-of-pocket loss b/c whoever you stick with the goods can

recover by re-selling (can recover a lot of that price)v. Services Cases

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1. Does make a big deal who you stick – could suffer a significant out-of-pocket loss – so courts may interpret it different ways to protect the detrimental reliance

2. Previous cases show that any reliance by either party will be protected only if the other party has received and retained a measurable benefit

3. Courts might find the party denying there was a K is more at fault – may find they had reason to know – protects the reliance OR

4. If the party denying there was a K was the one who drafted the K and used the term in dispute then courts will sometimes say we construe the meaning of the K against the drafter – this could be used to protect reliance – (often used in insurance cases)

vi. SUM UP DEFECTIVE FORMULATION 1. If it’s a crucial term and it doesn’t make sense for the Court to say there is a deal and to stick

in a reasonable meaning for the term, the Court has to decide if there is a K, and do so by weighing the fault of the parties

2. Step 1: Is there a misunderstanding of a reasonable term?3. Step 2: Would it make sense to imply a reasonable term?

a. If not, we look to fault. b. If yes, it’s called interpretation of this ambiguous term (the issue isn’t do we have a

deal but which meaning goes into the K and if neither the court will imply a reasonable term)

B. INDEFINITE AGREEMENTS (*see handout)i. Problem here is that they have agreed to something that is indefinite (really isn’t a specific meaning to

it). Agree to the same thing, but there is a dispute as to what the term means. (Ex. fair share of the profits)

ii. Raises 2 Questions:1. Did we make a binding K?

a. At CL, giving the fair share of the profits, a court might say that even if it is clear they intended a K, there is no K if the term is unclear or indefinite (Varney – court said there was no basis for determining what a fair share of the profits was)

b. Modern View : focus on party’s intent (Cardozo’s dissent in Varney)i. If they intended a K then there is a K ii. Evidence: the guy worked for the D and had been paid on a weekly basis; their words;

if they signed a written K2. If so, are the terms of the K sufficiently definite so that the Court can grant a remedy?

a. Can we grant a remedy within the confines of the K?i. This would normally be expectation damages – put the injured party in the

position they would have been in had the K been fully performedb. If not definite enough, we might grant relief outside the K?

i. This might be measured by restitution or reliance expense

iii. How can the court grant the aggrieved party damages under the K when a crucial term is indefinite? Example: Parties agree to an employment K for one year. Employee is to be paid “a fair share of the profits.” Employer improperly fires employee 3 months into the K. Employee is entitled to damages. Problem to award damages the court must determine what is “a fair share of the profits.” This may or may not be possible. If it is not possible, the court might be able to award damages outside the K. There are several steps to this analysis:

1. Can the court make the term sufficiently definite to grant damages on the K?2. If not, can the court grant damages outside the K?

a. Restitution : Damages measured by the reasonable value of the benefit conferredb. Reliance : Damages measured by the reliance expenditures of the suing party

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iv. CONTRACT DAMAGES: GRANTING REMEDY UNDER THE K1. Despite a crucial term being indefinite there are several sources that might make the term

sufficiently definite and thus establish a K rate to be able to figure out damages:a. Look to words, conduct, course of dealing, and trade usage to provide a K rate :

i. Words: After contracting they agreed on a rate of 3%ii. Conduct: During the 3 months of employment, the employer paid 3%

iii. Course of Dealing: Under previous employment Ks with this employee the employer paid 3 % (previous deals for fair share of the profits)

iv. Trade Usage: In this trade the traditional arrangement is to pay 3%b. Protecting Part Performance Under the K: Is the K Severable?

i. Assume none of the above sources supply a rate for ‘fair share of the profits.’ If the K provides a K rate for some of the benefits conferred, such as salary, a court could sever that part of the K and award recovery based on the K rate.

ii. Ex. K calls for office work to be paid at $15/hr and sales work to be compensated with a ‘fair share of the profits.’ A court could sever the office work part of the K and award the employee damages for unpaid office work at the K rate.

iii. HOWEVER you wouldn’t just give them the $15/hr cause the deal was for more than this, so we might be able to give him restitution for the value of the services. Employer has been enriched and it would be unjust for the employee not to get paid for it

v. RESTITUTION : PROTECTING PART PERFORMANCE BY RECOVERY OUTSIDE THE K

1. Courts will usually grant Restitution of benefits that one party conferred on another under a K later found to be unenforceable. Therefore, you can’t award damages on the K, so you look outside the K.

2. If the K rate is uncertain, recovery outside the K is based on a theory of unjust enrichment, called Restitution. Employee performed and the employer received the services with the expectation of compensation. There is an implied obligation to pay for the services.

3. Since recovery is based on the implied obligation, not on the K, the amount awarded is based on the reasonable value of the services, not on the K rate (we don’t know what the K rate is).

a. Reasonable value of the services can be established by proof of what the employer or other employers in this trade paid employees who performed similar services.

4. Only entitled to be paid for the work you actually did (wouldn’t recover for work you didn’t do b/c the employer didn’t get that benefit). Unlike damages on the K, where you get your expectation.

5. Can get the salary and additional restitution for any additional benefit to the employer not met by the salary alone.

6. In determining restitution you determine the total value and then deduct the salary (to avoid double recovery)

vi. RELIANCE RECOVERY : RELIANCE THAT DOES NOT BENEFIT THE OTHER PARTY1. Assume that one party incurs reasonable and foreseeable expenses that do not benefit the

other party (Reliance Expenses – typically focus on out-of-pocket cost rather than money you didn’t take in – for ex. if you left one job for another). Since the expenses did not benefit the other party, Restitution is not available. Will a court award recovery for these Reliance Expenses? This depends on whether or not there was a K between the parties.

a. Example : Guy is negotiating with airline company and goes ahead and moves his family out to Hawaii. Shows up his 1st day of work, and employer said they changed their mind. Deal was for fair share of profits.

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i. No basis for restitution b/c he did no work – so employer was not enrichedii. Can’t award K damages cause can’t tell what ‘fair share’ is

iii. Can assume fair share had to be at least the cost of moving there cause he wouldn’t have moved there otherwise

b. There was a K reliance awardi. Suppose there was a K, but recovery based on the K is too speculative to

calculate and restitution is not available. A court could grant recovery based on P’s reasonable reliance expenses when the expenses were incurred in reliance on a K.

c. There was no K no reliance awardi. Most courts will deny recovery for reliance expenses when there was no K for

the reason that the relying party “jumped the gun” – it should have waited until it had a K.

1. One court has permitted recovery for reliance expenses based on a promissory estoppel theory (Red Owl). In that case, the D told P to go ahead and incur the expenses.

vii. SUM UP INDEFINITE AGREEMENTS1. Assuming we have a K and the parties agree on the same thing and the terms are indefinite

and one side doesn’t live up to the K. Court is faced with K with indefinite terma. 1st – the court looks to see if anything happened after the K to make the term definiteb. If no evidence to establish what a fair share but the other side partially performed than

the D should have to pay for that benefit. (Restitution) Theory is the value of the work done. If it can be ascertained you award that value.

c. If it is not possible to figure out restitution. You might be able to recover reliance expenses. Theory is that you wouldn’t take the job if it wasn’t going to at least compensate you for the moving expenses.

III. CONSIDERATION: Bargained for Exchange of Legal ValueA. To be legally enforceable a promise must be supported by Consideration or there must be a Substitute for

Consideration. Consideration is a Bargained for Exchange of Legal Value. In other words, if the promise was given in exchange for something that constitutes legal value, the legal value is Consideration.

B. To make a K need Offer, Acceptance, Consideration (or any appropriate substitute), and any required K formalities (ex. Statute of Frauds)

C. Policy Ideas Behind this Doctrine:i. Judicial Efficiency – reserve the court to resolve the most important disputes

1. Govt. is involved in the most economically or socially useful transactions. Can’t afford to resolve every inter-personal dispute

ii. Evidentiary Function – as a general rule, promises don’t have to be in writing to be enforceable – people could say that you promised them something and try to get to court to enforce the supposed agreement and you may be forced to settle to avoid a bad outcome – this is unfair b/c there never even was a promise

1. If you require consideration this requires some sort of corroboration. Requires some plausibility basis for why the promise was made. Provides a reason why the deal was made.

iii. Cautionary Function – talk is cheap unless supported by consideration – where talk is connected to someone parting with money or property it enters the realm of seriousness – saying you will do something in return for money cautions them that they are undertaking a legal obligation

D. Consideration Analysis (*see handouts)i. 1) Which Promise’s Legal Enforceability is at Issue? Identify the broken promise!!

1. Until we know who reneged on their promise, we don’t know who the D is or who the P is. Promisor of the broken promise (D). Promisee of the broken promise (P).

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ii. 2) Is that Promise Supported by Consideration?1. 2 Elements to Consideration:

a. Bargained for, andb. Return Promise or Performance

E. BARGAINED-FOR i. Was the Return Promise or Performance bargained-for by the Promisor?

ii. There must be reciprocal motive or inducement between the broken promise and the return promise or performance: Thus there must be mutual intent to induce:

1. D made its broken promise to induce the P’s return promise or performance, and2. P offered its promise or return performance to induce the D to make its promise

iii. Additionally there must be actual mutual inducement – each was induced by the other’s promise or return performance.

iv. Mutual Intent to Induce 1. Elements:

a. D must have made its broken promise to induce the P’s return promise or performance, and

b. P must have offered its return promise or performance to induce the D to make its promise

2. Normally there will be mutual intent to induce where the offer is essentially “I’ll do this, if you’ll do that” and the recipient agrees.

v. Circumstances When the Mutual Inducement Element May be Lacking 1. Gift Promises

a. No mutual inducement b/c one side doesn’t have to do anything to get the other to do something

b. Consideration or a Condition on a Gift? c. Sometimes the promise of a gift involves a situation in which the promisee must do

something to get the gift. This raises the issue of whether that action is bargained-for, and thus Consideration or only a Condition on a Gift.

d. Though the recipient of the gift promise may have been induced by the promise, there is not Consideration unless the promisee intended to induce the promisor to make the promise by the promisee’s action.

e. Williston’s Test: Is it a Condition or Consideration? (Langer)i. Whether the happening of the condition will be a benefit to the promisor – if yes

considerationii. If no benefit, was there reasonable and foreseeable detriment

1. If there is no benefit and only a detriment that is reasonable and foreseeable, the courts will be loath/reluctant to regard the promise as a mere gratuity

f. Note : The importance of the distinction between consideration and a condition on a gift has greatly diminished with the recognition of Promissory Estoppel as a substitute for Consideration. Under the Promissory Estoppel doctrine reasonable reliance on a gratuitous promise makes the promise legally enforceable, even though intent to induce is lacking.

g. Ex . Tell homeless person to come to your house at 5 and you’ll give him money and blankets – he shows up and your not there so he sues you. Issue is whether you required him to do that in order to induce them to come to your house. If you’re not really interested in inducing them to come to your house it is just a gift promise with a condition

h. Ex. But suppose you were mistreating homeless people and you set this up so they will show up at your house so the reporter sees you being nice to them – now looks like your main interest is to have them

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come to your house – ulterior motive to make you look good – now this showing up at the house isn’t just incidental to a gift promise – you really want them to show up – arguably mutual inducement

i. Kirksey – brother in law makes suggestion to sister in law to come and see him and he’ll give her a place to live and raise the kids – she moves there and he later kicks her out – broken promise promise of a house – Return promise or performance moved - Consideration or condition on gift? He intended to induce – he will give you a place no strings attached but it is here and the condition is there b/c there is no other way to give her the place (arguably a condition) – Dissent: thinks the expense and inconvenience of moving constitutes consideration

j. Langer – company stopped paying pension after 4yrs of paying – promise broken promise of the pension for as long as you live – return promise or performance a) retiring; b) past services; c) non-compete clause – Bargained for offered the pension to induce him to not to compete – is consideration – there is a benefit to the employer that is tied to the pension

2. Past Considerationa. Past consideration is not consideration at all – it isn’t bargained for (no mutual

inducement)b. Anytime someone does something for you, and you later promise to pay, this promise is

gratuitous (no consideration)c. The past rendering of the benefit wasn’t bargained for by the later making of the promise d. Mills – promise to pay for past care rendered to son – reneged on the promise - promisor did not make the

promise to induce the care giver to care for the son – no consideration

vi. Actual Inducement 1. There must also be actual mutual inducement – each was induced by the other’s promise or

return performance.2. Circumstances When Actual Inducement May Not Be Present (promisee may not, in fact, have

been induced by the promisea. Promisee Acts in Ignorance of the Promise

i. Ex. You find a lost dog and return it to its owner. You find out later that the owner had offered a $200 reward for the return of the dog. There is no actual inducement. Thus your returning the lost dog is not consideration for the reward promise.

ii. Bogigian - husband and wife divorce, husband gets house, wife gets 10,300 lien on it; husband later sells it; wife signed the deed at closing and in turn released the lien for the sale to go thru, they got nothing out of the sale, she sues him for the 10,300 a year and a half later – Promise Broken promise to release the husband from judgment – Return Promise a) house sold b) wife was relieved of mortgage liability (not all of these have to be bargained for for there to be consideration)– problem: wife signed release of lien w/o reading it – arguably the house sold is consideration b/c there was mutual inducement – but ct looks to Underlying Equities (wife would be left w/ nothing) – ct. uses the mortgage release as not being mutual inducement b/c the benefit wasn’t agrees upon by both of them – the relief from mortgage couldn’t have been inducement b/c she didn’t realize she would be relieved of liability – she signed cause she thought she was going to get $ out of the deal

b. Promisee Has Mixed Motives i. Suppose the promise is motivated by a mixture of bargain and gratuitous

motives. A bargain motive seeks something in return for the promise; a gratuitous motive seeks nothing in return for the promise. The promise might be motivated partly by the desire to make a gift and partly by the desire to get something in return. The bargained-for element is satisfied if the bargain motive is substantial.

ii. Thomas – husband made death bed wish for his wife to get his house – co-executors have it to her and then tried to kick her out – broken promise live in the house – Return Promise a) gave up right to remarry b) pay one pound yearly c) repair obligation - gratuitous motive was to give wife of decedent his house – bargain motive was relief from maintenance expenses for the house

c. Nominal Consideration i. What if the bargain motive is insubstantial or completely absent? In this case the

bargained-for element is lacking; thus there’s no Consideration.

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ii. When a gift promise is dressed up to look like a bargain, the transaction is sometimes said to have “nominal consideration,” which is not really Consideration at all.

iii. B/c it’s nominal and doesn’t induce the other side to make a promise – it isn’t bargained-for and therefore isn’t consideration

iv. Ex. The deal is my car for $1. The bargained-for element is lacking (assuming my car is worth much more than $1). Note, however, that detrimental reliance on the promise could make it enforceable under a promissory estoppel theory.

v. Some courts may find nominal consideration was bargained-for is there is an underlying equity

vii. SUM UP BARGAINED-FOR1. Mutual Intent to Induce

a. Could be lacking in the case of a gift promise with a conditionb. Also lacks where there is past consideration

2. Actual Mutual Inducementa. Can’t have a situation where there is clearly no actual inducement – acting in ignorance

of the offer b. Could be lacking in the case of mixed motivesc. Could be lacking if nominal consideration

F. RETURN PROMISE OR PERFORMANCE i. Must be legally sufficient

ii. (3) Performance may consist of: [Restatement 2nd §71]1. An act other than a promise (Benefit to Promisor)2. A forbearance (Detriment to Promisee)

a. Hamer – uncle promises nephew $ if he refrains from drinking, gambling, swearing – it was bargained for - Ct: even though it was in some sense a benefit to the nephew it was in fact a detriment b/c he gave up his right to do these things

b. So if you give up the right to do something you normally could have whether it was a detriment or benefit to you or not, that is a detriment that suffices for consideration

3. The creation, modification, or destruction of a legal relation (Change of Legal Relationship)iii. (4) Performance or return promise may be given to the promisor or to some other person. It may be

given by the promisee or by some other person. (It isn’t necessary the consideration go from the promisee to the promisor)

1. Consideration could go from the promisee to a 3rd partya. Ex. promise to pay you $100 if you loan my brother $1000

2. Consideration can run from a 3rd party to the promisora. Ex. I will pay you $100 if you get your brother to loan me $1000

3. Consideration can go from one 3rd party to another a. Ex. I’ll pay you $100 if you get your brother to loan my brother $1000

4. Situations that raise the issue of whether or not there is a legally sufficient return promise or performance:

a. Inadequacy of the Return Promise or Performance b. Good Faith Obligation as a Return Promise when Nothing Else of Legal Value has been

Giveni. Release of Invalid Claim

ii. Preexisting Duty Ruleiii. Lack of Mutuality Obligation

iv. INADEQUACY of the Return Promise or Performance (*see handout)

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1. Inadequacy doesn’t prevent the return promise or performance from constituting Consideration. If the exchange is bargained-for it is consideration, no matter how imbalanced the exchange.

2. Equivalency of Exchange is not required for Consideration: Even a worthless bargained-for return promise or performance can be consideration. Courts normally will not interfere and question the inequality of consideration.

a. Rationale: it’s a free country3. HOWEVER , this does not necessarily mean a court will enforce every deal that is unequal.

Inadequacy of exchange may indicate either:a. No bargain motive (no mutual inducement) (i.e. Nominal Consideration) orb. A bargained-for exchange with a defect in the bargaining process (e.g. mistake, fraud),

which defect will invalidate the K4. *As a legal matter, inadequacy of consideration is not a theory you can argue. But if there is

inadequacy, it might indicate there was no mutual inducement or there was a defect in the bargaining process (and you should argue a doctrine based on the defect)

5. No Bargain Motive (Exchange is Not Bargained-For) a. The reason it isn’t enforcing this bargain is b/c it hasn’t been bargained-forb. Two situations raise the consideration isse when purported exchange is not bargained-

for:i. Sham Consideration – a false recitation of consideration in the K

1. Ex. the K recites “for value given,” but in fact no value was givenii. Nominal Consideration

1. Ex. Agreement to sell my car for $10. The evidence is that my car is worth much more than $10 and that the $10 was paid to make the deal legally enforceable. This is a gift promise dressed up to look like bargain.

c. General Rule : Transaction not made enforceable by Sham or Nominal Considerationi. Reason: In neither the sham nor the nominal consideration situations was the

exchange bargained-for; hence there’s no consideration. Thus, the transaction is not made enforceable by either.

ii. The sham recital creates a rebuttable presumption of consideration. However, since there was, in fact, no bargained-for exchange, proof of this rebuts the presumption.

d. Exceptions : Some courts enforce a transaction based on sham or nominal consideration if the transaction is:

i. Option K: the sham or nominal consideration supports an optionii. Guaranty Promise: made after credit has been extended to the debtor

iii. Contract Modification: Courts sometimes stretch to find that nominal consideration supports the modification. (see Pre-Existing Duty Rule)

e. Haigh – Lees owed $ to Haigh for goods – Transaction 1: Brooks gives Haigh a written guaranty up to $10,000 pounds – means if Lees can’t pay the money to Haigh, Haigh can go after Brooks – Transaction 2: Brooks wants the guaranty back – in return he promised to see the 3 drafts on Lees are paid – drafts were not paid, so Haigh sues Brooks – Promise Broken promise to pay 3 drafts; Consideration? a) return promise or performance D got written guarantee back b) bargained foryes – D Argues there was no consideration b/c the guaranty was legally unenforceable (trying to say he gave the promise to pay 3 drafts in return for nothing) – CT: if there is mutual inducement, the court isn’t going to trouble itself with whether the writing was enforceable or not – he was clearly willing to part with something of value

f. General Rule: If there is mutual inducement it doesn’t matter that the guaranty is worthless – there is consideration. Court will not inquiry into the adequacy of consideration

g. Apfel – P had idea for paperless bookkeeping for municipal bonds by computer – couldn’t get a patent for the idea b/c it wasn’t novel – company agreed to pay for it even if it became public knowledge – Yrs later stopped paying – Broken Promise promise to pay for the idea; Consideration? a) return promise or

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performance use of the idea b) bargained for yes – D Argues there is no consideration b/c it isn’t novel and P doesn’t legally own the idea so he can’t convey any rights in it – CT: there is consideration – it doesn’t matter what the value is – if they were willing to pay it obviously had some value to them

6. Defect in the Bargaining Process a. If the inequality is the product of a defect in the bargaining process (mistake, fraud,

duress), there probably was mutual inducement b. Court will usually put the ground not on lack of consideration but some other area such

as fraud, duress, mistake, unconscionability. Will say there is consideration but b/c of the defect we aren’t enforcing the deal.

c. Jones – Jones bought a freezer from salesman for $900 – they financed it – with interest it came to $1250 (retail price of the freezer is $300) – made payments until they paid about $600 – Broken Promise promise to pay $900+interest – Consideration? a) return promise or performance got a freezer b) bargained foryes – CT: there is consideration but don’t enforce the deal b/c of unconscionability – substantive unfairness (price) and procedural unfairness (door to door nature of the K) – despite the inadequacy, there is consideration b/c there was mutual inducement – court invoked a separate doctrine to set aside a transaction in which the main problem was inadequacy of consideration

v. GOOD FAITH OBLIGATION: Circumstances When Arguably Nothing of Legal Value has been Given, But Courts Might Find Consideration but Police the Bargain for Fairness.

1. In the following situations courts often use Good Faith to police the bargain for fairness. Fair bargains are enforced; unfair bargains are not: (Situations where there is mutual inducement, and there is arguably unequal exchange, and the court will not just say there is consideration, but instead will imply a good faith test to decide if the deal is enforceable)

a. Release of an Invalid Claimb. Preexisting Duty Rulec. Lack of Mutuality of Obligation

2. Release of an Invalid Claim as Consideration a. Settlement of a valid claim is consideration for your promise to payb. In return for the promise of money, a claimant settles a claim which is later found to

have been invalid. Arguably there’s no legal value (the invalid claim was worthless) exchanged for the promise to pay.

c. Ex. You sue me. We agree to settle. Later, before I paid we learn that your claim was invalid. Didn’t have a valid claim against me, so I cease payment. You sue me on my promise to pay.

i. Broken Promise promise to pay the settlement amountii. Consideration

1. Return Promise/Performance arguably didn’t give up anything if the claim was invalid

d. Nevertheless, courts will enforce the settlement if the person asserted the claim with a good faith belief that it was valid. Some courts also require that the belief be reasonable as well (usually satisfied by showing there was some uncertainty as to the facts or the law)

i. Reason: Courts favor the good faith settlement of disputed claims.1. If you wouldn’t uphold these settlements it would encourage people to

make assertions that claims were invalid, and you would wind up having to litigate the settlement all over again

2. Law wants to encourage settlements to save court resources.3. This rule draws the line between encouraging settlements and people

abusing the system by asserting claims that are invalid.ii. Key Q: Whether the claimant, in good faith, believed the claim was valid when

they asserted it e. Greene – guy was living with a woman who wasn’t his wife – when they broke up, g/f got an apartment,

$1000/month, life insurance policy – guy paid for a while but became bankrupt – she filed claim for $375,000 – Broken Promise promise to pay; Consideration? a) Return Promise/Performance she

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alleged a) he would no longer be liable for the mortgage of the house (CT: he was never liable for any of this stuff), b) past intimacies (CT: past consideration), c) promised to pay $1 for the promise (CT: nominal consideration), d) agreement said “other good and valuable consideration” (CT: there was no evidence of what that was – the fact that you agreed to other good and valuable consideration doesn’t mean there was), e) was sealed (CT: seal only creates a presumption of consideration), f) he promised to marry her, and she gave up a right to sue for breach of promise (CT: not consideration b/c it was illegal b/c he was already married and she couldn’t have had a good faith belief about this, and even if she did it wasn’t reasonable) – CT: no consideration – no valid claim for the $375,000

f. Fiege – woman became pregnant – convinced guy to pay her money by promising not to prosecute him for bastardy – he agreed to pay for expenses incident to the birth and child support – later had blood tests performed – he couldn’t have been the father – indicates the claim for bastardy was invalid – so he ceased making payments – woman had him prosecuted and he was found innocent – Promise Brokenpromise to pay; Return Promise/Performance claim in bastardy (turned out to be invalid); Bargained for yes – Issue: Did the P have a goof faith belief in the validity of the claim and is this belief reasonable? – CT: he has to pay – jury must have found she had sex with him so that satisfies her having the belief – was it reasonable? Yes b/c there was uncertainty as to the facts – b/c there are 2 guys who could be the father

g. SUM UP RELEASE OF INVALID CLAIMi. Deal is I’ll pay you and you will release your claim against me

ii. Later it is determined that the claim is invalid so the person who promised to pay stops paying (broken promise). They are sued.

iii. The giving up of the claim is usually bargained-foriv. Court looks at the invalid claim and decides it’s consideration if the person

asserting it in good faith believed it was valid (and some Js also require this belief be reasonable – that there was some factual or legal uncertainty)

3. Preexisting Duty Rule a. RULE : if the return promise or performance consists of a promise or performance that

that person was already obliged to do at the time he gave the return promise or performance, then it can’t be consideration

i. Theory: Promisor isn’t getting anything they weren’t already entitled to ii. Reason/Purpose: prevent the ‘hold-up’ game – if we didn’t have this rule it

might encourage people to drag their feet, to refuse to pay unless the amount were reduced and then when they got that agreement, pay the money and walk away free and clear

b. This issue commonly arises when the parties modify or discharge a K: One side promises something new; the other just promises that which it was already obliged to do by the original K (i.e. that which it has a preexisting duty to do)

i. Discharge from the obligation for less than it was actually forii. Modification – if we had a K and I agreed to change the K and you just simply

agree to perform but didn’t give me anything new – classically this isn’t enforceable (if you gave something new/additional it would be enforceable)

c. Ex. Debtor owes creditor $2000 and says it can repay only $1300. Creditor promises to fully discharge the debt in return for the $1300. Creditor later sues for the balance of the debt. Broken Promiserelease the debt. Return Promise/Performancepayment of the $1300. Bargained foryes. Creditor didn’t get anything it wasn’t already legally entitled to, therefore there is no consideration – hence the promise to extinguish the debt is not enforceable – which means the creditor will be able to recover the remaining $700

d. Alaska Packers – after arrival at the remote island fishermen were dissatisfied with amounts they were paid so they refused to work anymore – Employer’s agent agreed to pay them more – when they got back home they weren’t paid the extra money – CT: there was no consideration b/c the fisherman in return for the promise merely promised to do that which they were already obliged to do

e. HYPO: Suppose P1 says you owe me $1000. P2 says no I only owe you $750 b/c the product is defective. You tender $800 check saying payment in full. I cash it (essentially promising to discharge the rest of the debt). You gave up your right to proceed against me for the defect. This wouldn’t be the preexisting duty

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rule. Making a new promise in return for something. If it’s an unliquidated amount (don’t know how much you actually owe) and we settle that on our own, then there is consideration. I offered you the $800 to get you to give up your $1000 claim. You cashed the check to get the person to give up their counterclaim for the defect. Both sides have gotten something therefore it isn’t the classis preexisting duty rule

f. Levine – 2yr lease – rent the 2nd year was more than the 1st year – lessee couldn’t pay the increase b/c of the Depression and let the lessor know – lessor agreed to keep the rent at the lower price – lessee didn’t pay the last month’s rent – lessor sued for the remainder of the higher rent for the 2nd yr – LL claimed the promise to lower the rent wasn’t binding b/c there was no consideration – Promise BrokenLL’s promise to take the lower rate – Consideration? Return Promise/Performance pay the $175; Bargained For yes – The lessee was already obliged to pay the return promise/performance so there is no consideration – deal not enforced – but this didn’t seem to be a ‘hold-up’ game – lessee had a good reason to try to pay the lower price – there was a good business reason for the lessee asking for the modification nevertheless the court did not enforce it

g. Evasions (ways around the rule – Court might apply one of these if there was no hold-up game and if it was done in good faith/valid business reason)

i. Contract 2-Step (Novation – legal term that involves substituting a brand new K for an one as opposed to modifying the old one)

1. Any modification (good faith or bad faith) can be looked at in a way that there will be consideration BUT if you apply the preexisting duty rule there is no consideration

2. 1st Step – mutually agree to rescind the existing K – both give up rights against each other – there is consideration here

3. 2nd Step – make a new K on the same terms of the modification – there is consideration

4. Problem with this approach is that it doesn’t consider the hold-up gameii. New Consideration

1. Court might find new consideration b/c of Underlying Equities – if it’s a fair deal and no one is playing the hold-up game

2. Courts might say you got something in addition to what you were entitled to under the old deal

iii. Executed Gift Theory 1. The promise to make a gift might not be enforceable but once a gift is

made the court may not allow the giver to require the gift to be given back

2. Once the gift had been given (gratuitous promise has been performed) it was irrelevant whether there was consideration

3. Could look at it as if the lessee every month paid $200 and the LL turned around and said here’s a gift of $25 – for the 11 months the court will not disturb an executed gift

h. Modern Rule (has displaced the P-EDR – throws out the necessity of going thru consideration analysis and then having to apply either the P-EDR or one of the evasions)

i. Good Faith Modification (Taking the Bull by the Horns)1. Good faith motive for requesting discharge or modification makes

discharge or modification enforceablea. Reason: Distinguish extorted modifications from good faith

modifications grounded in a valid business reason2. Art 2-209(2) of UCC – An agreement modifying a K for the sale of goods

needs no consideration to be binding (an implied obligation of good faith)3. Restatement 2 nd 89(a) [what is applied outside of the sale of goods]–

Modification will be enforced if the modification is fair and equitable in

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view of circumstances not anticipated by the parties when the K was made

4. Angel – waste hauler went to municipal authorities and wanted more money to cover the unanticipated increase – the authorities agreed – taxpayer sued claiming the agreement for the extra money wasn’t enforceable – CT: it was enforceable – applied the good faith test

4. Mutuality of Obligation (*see handout)

a. RULE : there must be mutuality of obligation in an agreement before either party is bound. In other words, if one side does not have a binding obligation, the other side does not have a binding obligation: “if one side is not bound, the other side is not bound”

b. This issue arises often in bilateral agreements: the parties exchange promises (P1 and P2). P2 is given in return for P1. Suppose the P2 is an unenforceable promise (e.g. it’s illusory or too indefinite to be enforced)

i. Ex. Illusory Promise – P2 is “I’ll buy as many widgets as I want from you”ii. Ex. Indefinite Promise – P2 is “I’ll buy a substantial part of my widget

requirements from you.”c. Under these circumstances Promisor 2 is not bound to anything. Mutuality of Obligation

is lacking so Promisor 1 is not bound either. d. How is the Consideration doctrine relevant here? Courts often analyze this situation as a

Consideration issue: P2 is the return promise supporting P1. Since P2 is unenforceable it can’t constitute Consideration for P1 (P1 is essentially getting nothing). Hence P1 is unenforceable for lack of Consideration.

e. Twist that complicates this issue: Suppose that the party whose obligation is asserted to be not legally enforceable (P2) voluntarily wants to perform its obligation (and specifies an amount), but P1 refuses to perform its own promise. P2 sues P1 to enforce P1’s promise; P1 asserts that it’s not bound b/c P2’s promise is legally unenforceable. Here P1’s assertion of lack of mutuality of obligation is a technical defense: P2 is willing to perform its open-ended promise

f. However, the open-ended nature of P2’s promise raises the possibility of unfair advantage-taking by P2. If P2 is taking unfair advantage (by demanding an amount that is unreasonable), there is good reason not to enforce the agreement; thus, a court might uphold the defense. (Rehm)

g. However, if P2 is not taking unfair advantage of the agreement, there is good reason to enforce the agreement; thus a court might find a way around the defense. (McMichael and Wood)

h. *The cases tend to find consideration if:i. the party who made the unenforceable promise is suing the other party and,

ii. the suing party is not taking advantage of the other

i. Techniques for Finding P2 is Really Enforceable, or Consideration for P1 when P2 looks Illusory or Indefinite

i. Court will likely invoke this if there is unfair advantage taking by P2ii. Court may simply find P2 is not illusory or indefinite (McMichael)

iii. Modern Approach – Implied Obligation of Good Faith1. Court might find other consideration for P1 – b/c lack of mutuality

argument only applies if P2 is the only consideration and that is unenforceable

2. Though P2 is open-ended, the promisor of P2 has an implied obligation to perform P2 in good faith – implication is that when parties make deals

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and one of the promises is open-ended, the guy making the open-ended promise will perform it in good faith – the implied obligation of good faith is something that P2 is bound to this implied obligation is consideration (P3)

iv. Courts will sometimes avoid the Consideration issue entirely by finding a Substitute for Consideration

j. Rehm – seller was a distillery and the buyer was a whisky wholesaler – entered into a 5yr K for the distiller to sell whisky to the wholesaler – drafted with a stated quantity for each year – quantity increased each year – fixed price for the sizes (DANGER SIGN!!!) – fixed price is going to be a problem b/c of inflation – there was an escape clause that if the wholesaler couldn’t take the full amount the distiller will release them from the rest – for the 1st couple of yrs the buyer didn’t take all of the whiskey they had projected to – 3rd yr needed all of the cases b/c market price went up – seller refused – buyer sues – Distiller defense: P2’s promise is unenforceable – CT: the distiller isn’t bound b/c they couldn’t enforce the K against the wholesaler – escape clause – P2 isn’t really bound to anything b/c they could get out of the whole deal if they wanted to – if P2 is not bound then P1 is not bound

k. McMichael - seller was to sell sand to the buyer (wholesaler) – K for 10yrs – quantity: as much sand as the buyer could sell (buyer was a middle man) – price: 60% of the market price – at some point the seller refused to sell and so the buyer sued – P was the wholesaler(buyer) – D was the sand man – promise we are trying to enforce is the sand man’s promise – he got the promise of the other guy to sell as much as the buyer could – sand man argued it is too indefinite to be enforced – CT: promise is enforceable

l. Why did these cases come out different? (Whisky – not binding; Sand – binding) Underlying Equitiesi. In both cases the court could have gone the other way:

1. Whisky – court could have said the buyer was bound to something and he is only off the hook for unforeseen reasons

2. Sand – court could have constructed an argument that even though he made a profit of $500 for the last months there was still something indefinite – there could have been major fluctuations b/c it isn’t an established business – therefore, too indefinite to be enforced

ii. Underlying Equities 1. Whisky – wholesaler was getting an unexpected benefit b/c of the market price increase

– buyer is taking unfair advantage of the seller so the court wasn’t inclined to enforce the deal, so they said it was too nebulous to be enforced – doesn’t get the 4000 cases at the bargained price

2. Sand – doesn’t appear to be the possibility of unfair advantage taking so the Ct. went out of its way to find that the buyer’s promise was enforceable – there was nothing to be gained by demanding extra sand – b/c the price is fluctuated, there was no possibility of unfair advantage taking

m. SUM UP MUTUALITY OF OBLIGATIONi. Have P1 exchanged for P2

ii. Mutuality of Obligation argument says that unless both sides are bound, neither is bound

iii. If P2 is unenforceable, P1 got nothing in return – no consideration iv. Problem: cases where the person whose promise is not enforceable is not trying

to get out of the deal by suing to enforce – so for P1 to say ‘I’m not bound’ is really a technical defense b/c P2 wants to perform

v. This might lead courts to conclude P2 ought to be enforceablevi. Modern Approach implied obligation to fixed quantity under P2 at a

reasonable amount – if you act in good faith then the deal is enforceable (McMichael) – if not in good faith the deal is not enforceable

G. SUM UP CONSIDERATIONi. Consideration if a bargained-for exchange of promises or performances

ii. Method for Consideration Analysis:1. See which promise has been broken

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2. Is there consideration for the broken promise a. 2 elements: a) return promise or performance b) return promise or performance had to be

bargained-for iii. Bargained-For Requirement – mutual intent to induce and actual inducement

1. Mutual Inducement:a. 2 Situations where the intent to mutually induce is lacking

i. Promises to make a gift1. Is it a condition on a gift or consideration?

ii. Past Consideration1. Something done in the past and later there is a promise to pay for it

2. Actual Inducementa. 3 Situations where it can be lacking:

i. Promisee acts in ignorance of the promiseii. If the promisee has mixed motives

1. Mixture of gratuitous and bargained motives – if the bargained motive is substantial then it is consideration

iii. Nominal Considerationiv. Return Promise or Performance

1. What can constitute a return promise/performancea. Benefit to Promisorb. Detriment to Promiseec. Can move from different parties – doesn’t matter who gives and receives as long as the

promisor and promisee bargained for it2. Circumstances where the Return Promise/Performance is Inadequate

a. Just b/c it is inadequate doesn’t mean it isn’t consideration – if there was mutual inducement/was bargained for, then there is consideration

b. But if it is an unequal bargain and was bargained for, a court might relieve the promisee but not on a consideration theory but on a defect

3. Good Faith Obligation – as a return promise when nothing else of legal value has been given – Test is really good faith, not just if there was something of legal value

a. 3 Situationsi. Return promise is the release of an invalid claim

1. Need good faith belief in the validity of the claim – if so, good faith obligation has been satisfied and there is consideration

ii. Preexisting Duty Rule1. Modern Rule: if a discharge or modification were sought in good faith a

court will say it is enforceableiii. Mutuality of Obligation

1. Modern Rule: the person who makes the open-ended promise has an implied obligation to perform it in good faith – if they are taking unfair advantage they have broken that obligation and the other side is not bound – if they did perform in good faith the other side is bound

IV. SUBSTITUTES FOR CONSIDERATION (See handout!)A. Contract law recognizes 3 circumstances in which a promise that is not the product of a bargained-for

exchange is, nevertheless, enforceable:i. Signed Writing: Promise plus signed writing (only if a statute allows)

ii. Moral Obligation: Antecedent Benefit for which there was then an obligation to pay plus later promise to pay for the benefit

iii. Promissory Estoppel: Promise plus unbargained for reliance on the promise

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B. WRITING i. A signed writing is a substitute for consideration only if a statute makes it so. Generally, a writing is

not a substitute for consideration ii. At CL, promises not backed by consideration were valid if it was under seal

1. Theory of the seal – idea of form – people don’t put their family seal unless their seriousiii. Today in most Js the seal has lost just about all of its legal effect

1. In 32 states the seal is no longer a substitute2. 13 – if there is a seal it is a rebuttable presumption that there is consideration

iv. Signed writing – the functional equivalent of the seal today v. Sometimes statutes will make a signed writing a substitute for consideration and sometimes these

statutes are limited to certain kinds of transactions (ex. merchants)vi. Statutes :

1. Uniform Written Obligations Act (PA only)a. Any promise can be enforceable if it’s contained in a signed writing – the signed

writing must contain language that the signed intends to be legally bound – there has to be something to the effect that “I intend to be legally bound” stated in the writing – puts you on notice that this writing is serious

2. UCC 2-205 – Firm Offersa. Promise not to revoke offerb. An offer by a merchant to buy or sell goods in a signed writing which by its terms

gives assurance that it will be held open is not revocable for lack of considerationvii. Suppose we just recite a phony consideration – ‘good and valuable consideration’ – still might not

be any consideration – if in fact there is no consideration reciting phony or nominal consideration won’t work – just putting in a signed writing won’t work unless there is a statute that says a writing is a substitute

C. MORAL OBLIGATION : Antecedent Benefit Plus Later Promise to Pay for the Benefit (Promise to pay for a benefit previously conferred) (See Handout!)

i. Situation:1. Benefit is conferred2. Later the recipient promises to pay for the benefit

ii. Is the later promise enforceable?iii. General Rule : Antecedent benefit is not consideration for the later promise to pay for it, b/c mutual

inducement is lacking: the later Promise was not made to induce the conferral of the benefit. (Mills – promise to pay for past care of son)

iv. HOWEVER , under some circumstances a court might enforce the later promise to pay under a theory called “moral obligation.” Since there is no mutual inducement, the moral obligation theory is a substitute for consideration. When will a court apply the moral obligation theory and find the later promise to be enforceable?

v. Whether the later promise is enforceable depends largely on whether the promisor was obligated to pay for the benefit when it was conferred.

vi. Thus, you must analyze whether or not the recipient was liable in K, tort, or quasi-K (see Quasi-K below) when the benefit was conferred.

1. 2 Possible Outcomes to this Analysis: a. Recipient was obligated to pay for the benefit when conferredb. Recipient was not obligated to pay for the benefits when conferred

2. WHEN THE BENEFIT WAS CONFERRED THE RECIPIENT HAD AN OBLIGATION TO PAY FOR IT

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a. If there was an obligation to pay for the benefit when it was conferred, the later promise to pay for the benefit is enforceable. The obligation may be in tort, K, or quasi-K. The cases distinguish between situations when the original obligation is still enforceable and situations when it is not:

b. ORIGINAL OBLIGATION IS STILL ENFORCEABLEi. Recipient is liable on either the obligation or the latter promise.

ii. Why would someone choose to sue on the later promise rather than on the earlier obligation? The later promise may fix the amount due.

iii. Ex. A defames B causing injury to B’s reputation. Later A promises to pay B for $5000 for that injury. A’s promise is enforceable.

iv. Ex. F finds and cares for O’s lost horse until it locates O, thus making O liable to F in Quasi-K. Later O promises to pay F $1000 for the care of his horse. O’s promise is enforceable.

c. ORIGINAL OBLIGATION IS NO LONGER ENFORCEABLEi. Suppose that the original obligation is barred by operation of law (e.g.

statute of limitations, infancy (if your under 18 and then there is a later promise after you turn 18), or bankruptcy)

ii. When the earlier obligation is no longer valid, the only basis for suit is the later promise.

iii. Ex. A owes B $2000. The s.o.l. runs on that obligation, making it unenforceable. Later A promises to pay the $2000. A’s promise is enforceable. (Manwill – alleged debt barred by s.o.l.; later promise to pay. No recovery b/c P failed to prove initial benefit conferral was not a gift.)

3. WHEN THE BENEFIT WAS CONFERRED THE RECIPIENT WAS NOT OBLIGED TO PAY FOR IT (usually altruistic acts – done out of kindness, not to be compensated)

a. Ex. A saves B’s life but is crippled in the process. In gratitude B promises to pay A $8000. (Harrington)

b. Why is B not obliged to pay for the benefit when it was conferred? There’s no indication that A intended to seek compensation when it conferred the benefit. The absence of this element makes the conferral of the benefit look like an altruistic act (a gift), for which there is no obligation to pay.

c. If the promisor is not obliged to pay for the benefit when it is conferred, there is a split of authority on whether the later promise to pay is enforceable.

i. Majority Rule: The later promise is not enforceable. (Harrington – promisee deflected axe and was crippled)

1. Local statutes may permit recovery under some circumstances.ii. Minority Rule (Restatement): The promise is enforceable. (Webb – promisee

deflected block and as crippled – possible underlying equity – guy had paid for it for a little while – injured guy may have begun to rely on it)

vii. QUASI-CONTRACT LIABILITY (See Handout!) 1. [Suppose A has rendered a service to B, w/o having come to an express contractual

agreement for the service. If, after the service has been rendered, B promises to pay a specified amount for it, is that promise enforceable?]

2. One source of original obligation could be K. Another common source of obligation is quasi-K. If the contractual promise to pay is unenforceable there could be a quasi-K that is enforceable that makes the later promise enforceable.

3. Quasi-K liability is based on unjust enrichment – the conferring of a benefit on another person under circumstances in which it is fair to require the recipient to pay for the benefits.

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4. On the other hand, K liability is based on consent to pay for the benefit. The two bases of liability are thus distinct.

5. Assuming no K liability, when is it “fair” to require the recipient of the benefit to pay for it? Several factors determine fairness:

a. Determine whether the benefit was requested by the recipient or notb. If the benefit was not requested, was the recipient given the opportunity to decline

it?i. If not, did exigent circumstances excuse the failure to give an opportunity to

decline the benefit?

6. REQUESTED BENEFIT CONFERRED UNDER A K LATER HELD TO BE UNENFORCEABLE (“Restitution”)

a. Ex. Employment K: Employee to do work and employer to pay “a fair share of his profits” for that work. Employee does the work. Subsequently the parties disagree over what is a “fair share”

b. Courts usually find liability in restitution to pay for a benefit requested under a K later held to be unenforceable.

i. The employer was enriched by the employee’s work. It would be unjust for the employer not to pay for that enrichment b/c both employer and employee expected the employee would be paid for that work. The employee would be entitled to recover the reasonable value of its services. (Varney)

ii. At the time the benefit was conferred there was an obligation in quasi-K to pay reasonable value of those benefits, hence later promise to pay fixed amount is enforceable

7. UNREQUESTED BENEFIT IS CONFERRED BY ONE WHO INTENDS TO BE PAID FOR IT

a. Suppose that the benefit has been conferred: 1) with the expectation of being paid for it; ii) on a recipient who has not requested the benefit. Whether the recipient is liable in quasi-K depends on 2 factors:

i. Whether the recipient was given the opportunity to decline the benefit ii. If not given the opportunity to decline, whether there was exigent

circumstances that justified conferring the benefit w/o giving the opportunity to decline it

b. Recipient is Given the Opportunity to Decline the Benefit i. Suppose that the Recipient is aware the benefit is being conferred and that the

person conferring the benefit intends to be compensated for it. The key question then is: How did the recipient respond to the benefit conferral?

ii. Recipient Accepts the Benefit1. Recipient is liable in K to pay for the benefit. Consent to pay is

inferred from the recipient’s acceptance of the benefit, knowing that the conferrer intend to be paid.

iii. Recipient Declines the Benefit1. No liability to pay for the benefit

iv. Recipient is Silent1. Silence usually makes the recipient liable to pay for the benefit, when

the recipient is aware that an unrequested benefit is being conferred with the intent to be paid.

2. Ex. 2 identical houses side-by-side. Painter is engaged by owner of house 1 to paint that house. By mistake, painter begins to pain house 2. Owner of house 2 is home

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and aware that its house is being painted but says nothing to the painter. A court would likely find the owner liable to pay for the house painting.

3. The basis for liability could be either K (consent to pay implied from failure to decline benefit) or quasi-K (unjust to allow recipient to keep benefit w/o paying—recipient should have declined the benefit, knowing that it was being conferred with the intent to be paid for it). The line between K and quasi-K is blurred when the recipient is silent. BUT which one the court says it is doesn’t matter b/c we aren’t suing on the original obligation, but on a later K.

c. Recipient is Not Given the Opportunity to Decline the Benefit : Recipient is Unaware the Benefit is Being Conferred

i. As a general rule a person can’t be required to pay for a benefit forced upon it, which means later promise to pay isn’t enforceable. There is no unjust enrichment b/c the recipient was not given the opportunity to decline the benefit.

ii. HOWEVER, there are exigent circumstances when the failure to ask permission may be excused and the recipient will be required to pay for the unrequested benefit.

iii. In some circumstances the conferrer can’t reasonably wait to ask recipient whether or not it wants the benefit. (Ex. rendering medical services to unconscious person; care of lost animal; saving property from imminent danger)

iv. In these cases the impossibility of waiting to give the recipient the opportunity to decline the benefit, coupled with the likelihood that the recipient, if given the opportunity, would have consented to pay for the benefit, makes the conferral of the unrequested benefit reasonable. Requiring payment for the benefit encourages conferring the benefit.

D. PROMISSORY ESTOPPEL – PROMISE + UNBARGAINED-FOR RELIANCE i. Is a substitute for consideration b/c the reliance is not bargained for.

ii. P.E. can make a gratuitous promise legally enforceableiii. Bargained-for Reliance Consdierationiv. Unbargained-for Reliance Promissory Estoppelv. Policy Reason: Fairness – unfair to walk away from your promise having induced the other person

to rely

vi. Restatement §90 – “A promise which the promisor should reasonably expect tp induce action or forbearance on the part of the promisee or a 3rd person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.”

vii. Elements 1. Promisor reasonably expects promise to induce reliance

a. The fact that the person would rely has to be foreseeable 2. Promisee does rely

a. Actual reliance3. Avoid injustice only by enforcing the promise

a. Ct will look at: i. How significant is the reliance? Is the reliance of a definite and substantial

nature?1. Definite – capable of valuing

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2. Substantial – must have lost a substantial amount of money or something like that – the law doesn’t attempt to fix minor stuff

ii. Enforcement vs. Non-Enforcement - If it is significant, will compare what result if I don’t enforce the promise with the result if I do enforce the promise

1. Is there a possibility of a restitution measure of damages (reasonable value of the benefit)? If there is then the court will decide what is the fairest thing to do – enforce the promise or give restitution?

2. Ex. if the promisee did something that conferred a benefit on the promisor is there a theory of recovery for the promisee (quasi-K/restitution). Is rewarding based on the value of the benefit sufficient? If so, don’t need to consider the issue of promissory estoppel and can just enforce the promise based on a restitution theory

3. *If there is no possibility of restitution, then the court’s choice is between not enforcing (you get nothing) and enforcing!!

viii. Promissory Estoppel vs. Equitable Estoppel1. Estoppel – means you said something, someone reasonably relied on it, so now you can’t

change your position2. Difference is the kind of statement relied on3. Equitable Estoppel – statement was a statement of fact – represent something to be a fact

with the intent for someone to rely on it and then later in litigation they want to prove the facts were something else and the ct. will prevent them from doing that

a. Ex. Use a fake ID to buy a car – you are equitably estopped from asserting you were underage and not capable of buying the car – seller relied on the asserted fact and this is foreseeable reliance

4. Promissory Estoppel – not a statement of fact, but a promise (fact speaks to the present or the past; promise speaks to the future) – can’t promise to do something with the intention for someone to rely on it and then go back on your word once they do rely

a. Ex. if you promise to sell you car next week – we don’t know at that time whether you will keep your promise

ix. Ricketts – granddaughter was working – grandfather gave her a note promising to give her money ($2000/yr) on her demand – said he preferred that she not work but it’s up to her – so she quit for a yr and then went back to work – grandfather died; executor refused to give her the money – CONSIDERATION: Broken Promise pay 2000; Return P/P quit; Bargained for No, she didn’t quit to induce him b/c he would have given her the money anyway – NO CONSIDERATION – PROMISSORY ESTOPPEL: 1) could grandfather reasonably expect her to rely yes; 2) did she quit in reliance yes; 3) if we don’t enforce no possibility of restitution b/c grandfather didn’t benefit – she would be out one year’s salary – CT: enforces the promise

x. Feinberg – agreement to give pension – employee worked for 37yrs – board of directors voted to give her a pension when she retired and voted to increase her salary and specifically stated that they weren’t offering her the pension to induce her to retire, they hoped she continued to work – 1 ½ yrs later she retired – company paid her pension but eventually stopped – CONSIDERATION: Broken promisepay pension; Bargained forno mutual inducement; her retiring was not bargained for – it’s really just a condition – they weren’t trying to induce her to retire – PROMISSORY ESTOPPEL: 1) foresee reliance – yes; 2) actual reliance – yes; 3) injustice avoided – court must look at factual equities – was substantial reliance (gave up salary) – No possibility of restitution (company didn’t benefit from her retiring) – since there is no measurable benefit, the choice is between nothing or $200/month – CT: enforced the promise – she was too old to get another job and had cancer at this point

xi. Charitable Subscriptions 1. Special rule for charity donations for promissory estoppel – don’t have to show detrimental

reliance b/c it can be difficult to show you actually specifically relied on that money in setting your budget

2. Allegheny College – school solicits alums for money – woman promises to pay $5000 and says this gift should be known as… - proceeds should be used to educate students preparing for the ministry – at some point she paid $1000 and later repudiated the promise – CONSIDERATION: Broken Promisepay $5000 30 days after death; Return P/Ppromise to use the money for a scholarship in her name; Bargained foryes – Cardozo

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holds this is consideration (criticism on this holding: she said it was a gift so many argue the naming thing was a condition on a gift and not consideration)

a. If there wasn’t consideration found would there have been p.e.?i. Promise Pay $5000

ii. Promissory Estoppel1. Foresee it would induce yes2. Actual reliance no; no evidence they rewarded the scholarship or advertised it –

NO PROMISSORY ESTOPPEL – BUT CONSIDER THE SPECIAL RULE FOR CHARITIES!!!

xii. Remedy : Limited as Justice Requires 1. Restatement §90 – “The remedy granted for breach may be limited as justice requires.”2. The essence of P.E. is detrimental reliance. So what this means is that a court may limit the

remedy to a Reliance Measured Damage (Out of Pocket Cost) rather than the normal measure of damage for breach which is Expectation Damages (putting the party in the position they would have been in had the other side fully performed)

a. But the court may choose either remedy.3. Ex . suppose you promise to give the school $10,000 for a scholarship and make it very clear it is a gift and not

a bargained for exchange – suppose the court awards a scholarship for $1500 – and then you renge – they sue. Is there a possibility of restitution here? No. No measurable benefit.

a. So court will have to choose between a) enforcing the promise or b) not enforcing. b. Court then has to choose what measure of damage?

i. Reliance Measured - $1500 – this would be the fair resolution ii. Expectation Damage - $10,000

4. Purpose of this Sentence: So the court doesn’t feel compelled to choose only between giving $0 or giving $10,000

E. SUM UP SUBSTITUTES FOR CONSIDERATION i. Signed Writing – only if a statute makes it okay or the seal is still recognized as a substitute in a

certain Jii. Moral Obligation – required antecedent benefit and obligation at time the benefit was conferred

iii. Promissory Estoppel – reasonable foreseeable reliance

V. CONTRACT FORMALITIES: STATUTE OF FRAUDSA. 2 Requirements for Enforceable Agreement:

i. Mutual Assent (Offer and Acceptance)ii. Consideration (or a Substitute)

iii. *Sometimes there is a 3rd Requirement Statute of Frauds 1. Oral Promises as a general rule are just as enforceable as written promises, HOWEVER

sometimes there are statutes that require certain promises to be in writing to be enforceable.2. If that statute applies the 3rd requirement comes into play3. Policy: prevent fraud – concerned with the fact that some people might swear to agreements

that weren’t made (perjure themselves) – might cause people to make cash settlements so it doesn’t go to a jury – but there really may never have been a deal

4. If the SoF applies and is not satisfied, the K is not enforceable.5. SoF often gets raised by SJ motion.

B. 3 Main Qs under the SoF i. If the parties make an oral agreement, at least analyze the SoF to see if it applies!!!!

ii. 1) Scope – is this the kind of promise covered by the SoFiii. 2) Compliance – If it is covered, do you have compliance with the SoFiv. 3) Non-Compliance – If there is no compliance with the SoF, then there is a possibility that there

might be some recovery39

C. SCOPE -- DOES THE STATUTE OF FRAUDS APPLY: “MY LEGS” i. M arriage Promises

ii. Promises Not to be Performed Within One Year (*not in PA and NC)iii. Promise to Transfer an Interest in Landiv. E xecutor Promisesv. Promise to Sell Goods for $500 or More

vi. S uretyship

vii. English Law (p165)1. §4: No action shall be brought:

a. (1) whereby to charge any executor or administrator upon any special promise, to answer for damages out of his own estate; [EXECUTOR]

b. (2) or whereby to charge the D upon any special promise to answer for the debt, default or miscarriage of another person; [SURETY]

c. (3) or to charge any person upon any agreement made upon consideration of marriage; [MARRIAGE]

d. (4) or upon any contract or sale of lands, tenements or hereditaments, or any interest in or concerning them; [LAND SALE]

e. (5) or upon any agreement that is not to be performed within the space of one year from the making thereof; [ONE YEAR CLAUSE]

f. unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized. [COMPLIANCE]

viii. ONE-YEAR CLAUSE1. An agreement that cannot be performed within a year of its being made must be in writing.

Covers only promises incapable of being performed within a year.2. Policy: agreements made a long time ago – witnesses memories may be dim – people may

not remember the agreement the same way 3. Have to look at each of the promises in the agreement and see whether all the promises are

capable of being performed within a year or not!! a. If any of the promises is not possible to perform within a year than the whole

agreement has to be in writing (not just the promise that can’t be performed within a yr). SoF performs to all of the promises!! Ex. 2yr employment K

b. Doesn’t matter that it may be extremely unlikely that the promise will be performed within one year. And it doesn’t matter if you end up not performing it within on year (can’t have it depend on later conduct, the parties need to know at the time of the deal that it needs to be in writing) ALL THAT MATTERS IS IF THERE IS A POSSIBILITY IT COULD BE PERFORMED WITHIN 1 YEAR!!! If there is then it doesn’t have to be in writing.

c. Ex. Took out a loan that had to be paid within 20yrs – borrow the money and suppose to pay it back within the next 20yrs. Is capable of being performed within one yr, so it isn’t covered by the SoF

4. Ps sometimes try to spin off hypothetical scenarios to come up with one where the agreement would have been performed within a year – if they can do this then the SoF doesn’t apply.

5. North Shore – oral beer distribution agreement between brewer and distributor – agreement was suppose to last for as long as Scmidt’s beer sold beer in NYC – after 2 ½ yrs Schmidt beer signed with another distributor – original distributor sued – Schmidt claimed the agreement wasn’t enforceable b/c of the SoF – Could this be performed within a year? YES – so it isn’t covered by the SoF and is therefore enforceable – doesn’t matter that they didn’t quit selling within a year

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6. The One-Side Rulea. Assume the K is within the one-year clause. Ex. oral agreement for 2yr license to use some

patented machinery and under the terms of the deal they have to pay you up front when the deal is made – you refuse after getting the money to let them use the patent – they sue for breach – you plead the SoF. Isn’t capable of full performance within a yr. But if we say the deal is unenforceable, the licensor got payment for something that now the court won’t enforce.

b. One-Side Rule – if the deal is within the one-year clause (the SoF does apply), as soon as one side has fully performed their obligations, the remaining obligations are now not covered by the SoF

c. *Only applies if the initial K is covered by the SoFd. Reason: The fact that he paid him, corroborates there was a deal. He wouldn’t just

give them money for nothing. Plus there is potential unfairness.

7. SUM UP ONE-YEAR CLAUSEa. When the One-Year clause applies:

i. If full performance of the agreement is possible within one year – the SoF doesn’t apply

ii. The SoF will cover only agreement where it is impossible for it to be fully performed within a year

ix. GOODS CLAUSE1. Need a sale of goods, so the thing has to qualify as goods under UCC 2, for a price of $500

or more

x. LAND CLAUSE1. Ks selling land have to be in writing.2. Ks leasing land have to be in writing, but in most states only if it’s a lease for a year.3. Real estate agreements are permanent so we want them to be in writing.4. Part Performance will often take it out of the SoF – if you give a $20,000 down payment this

will often make an oral K enforceable.a. Reason: what are the chances you would have given him the money if you didn’t

have an agreement 5. Ex. selling you a vested remainder. Means you won’t get it until I die. Still has to be in writing b/c it is

transferring land.

xi. MARRIAGE CLAUSE1. A promise for which the consideration is marriage or a promise of marriage is within the

SoF. 2. Does not apply to mutual promises to marry (engagement)!!3. Covers a promise to marry in return for a transfer of property or money.4. Policy: people will sometimes say things when their in love that they don’t mean or that are

misinterpreted

xii. SURETYSHIP1. Covers the promise of a surety. Have a debtor who owes an obligation to a creditor.

Sometimes the creditor wants someone to co-sign. Co-signer promises to pay if the debtor defaults.

2. Reason: if the debtor defaults, the creditor is going to go after a solvent 3rd party – creditor has a significant financial motive of asserting a promise was made even if it wasn’t, so that is why it needs to be in writing

3. Ex. buying you 1st car; owner of a business guaranteeing a corporate loan41

xiii. EXECUTOR1. If you die with a will and it appoints someone to take care of your stuff, that person is called

an executor b/c they are to execute the provisions of your will.2. If you die intestate (with no will), the court will appoint someone to handle your stuff, but

they are called an administrator.3. Ex. commit the estate to $10,000 cost of burying you – this doesn’t have to be in writing – what we

are talking about is if your estate doesn’t have the $10,000 – if the executor promises to be on the hook that is a variation of a surety promise – the executor will often want to see the decedent get a funeral

4. If the executor or administrator promises to be stuck with the cost that the estate can’t over, that promise needs to be in writing.

5. General Rule – executor/administrator is not personally liable – but where they say I will pay you (be liable if the estate can’t cover it); this promise needs to be in writing

xiv. AGREEMENT FALLS WITHIN MORE THAN ONE CLAUSE 1. Ex. Sale of goods for more than one year. Since there are different requirements for each,

you may have to satisfy requirements for both.a. The writing for sale of goods can be sketchy; but for Ks more than a year, the terms

have to be pretty specific. Courts will say you have to satisfy the more stringent rule.

D. COMPLIANCE – SATISFYING THE STATUTE OF FRAUDS i. Assuming you have done the scope analysis and concluded a specific clasue of the SoF applies.

ii. English Law (see above) - …unless the agreement upon which such action shall be brought, or some memorandum or note thereof, shall be in writing, and signed by the party to be charged therewith or some other person thereunto by him lawfully authorized. [COMPLIANCE]

iii. 1) a writing can satisfy the SoF even if it isn’t the agreementiv. 2) has to be signed by the party to be charged (D in the case) or some other person lawfully

authorized (an agent of the D)

v. SIGNATURE REQUIREMENT 1. Anything put on the writing to authenticate2. Could be initials, a regular signature, a letterhead (allowed b/c of underlying equities)

vi. CONTENT OF THE WRITING 1. The content needed depends on the applicable clause2. Land Clause – writing has to be pretty complete and contain all of the material terms3. One-Year Clause – has to contain all material terms4. Sales Clause – only requires an indication that there was a sale and the quantity – you can

leave everything else out

5. When There Are Several Writings a. If you have more than one writing that contains the total agreement (say the quantity

is in one and the price and other terms are in another), if all are signed they can be put together to satisfy the content requirement

b. What if you need to put together several writings and some are signed and others are not? And the signed writing alone isn’t sufficient b/c it doesn’t contain everything that needs to be in the agreement. SPLIT IN AUTHORITY:

i. Restatement – If the 2 writings clearly relate to the same transaction, they can be put together

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1. Courts may be more likely to adopt this view if the P is not the one producing the unsigned writing. If he is then there may be a likelihood that P is being fraudulent.

2. Crabtree – agreement for 2yr employment – Scopeone year clause; Compliancesigned writing? Payroll cards initialed – didn’t contain the length of the K; Memo – mentioned the length but wasn’t signed – Ct. adopts the Restatement view and allows them to be put together – so the SoF defense doesn’t work

ii. Other View – can’t use an unsigned writing unless the signed writing specifically refers to the signed writing

6. Electronic Writings and the SoF a. Could come up in 2 contexts:

i. Where there was an original signed hard copy that was then photocopied or faxed, and now the original can’t be located

1. Most cases allow the copy to sufficeii. Where there is no original hardcopy – the relevant documents are generalized

electronically – ex. if someone sends an email summarizing the agreement 1. Federal Law – E-Sign2. State Law – UETA3. *Both make a document that would have been sufficient if it had been

in hardcopy, to satisfy the SoF

E. Effect of Non-Compliance i. Assuming one of the clauses applies and there is no compliance (no sufficient signed writing)

ii. General RULE: Agreement is unenforceable.iii. 3 Exceptions:

1. Waiver2. Admission – D admits the agreement 3. Detrimental Reliance – performance or other detrimental reliance on the agreement

iv. WAIVER 1. Knowing relinquishment of a right2. SoF is said to be waived if you do not plead at the earliest opportunity

a. Ex. P sues for breach; D answers but does not assert the SoF; in discovery D learns P doesn’t have a signed writing and tries to claim SoF; court will say too late (D should know whether they signed a writing or not) – BUT in cases involving corporations, courts might be more lenient and allow them to raise it later

v. ADMISSIONS 1. If the D admits there was an agreement, then the SoF defense drops out of the case b/c the

policy behind the SoF is satisfied. But if the D doesn’t admit to the agreement, the SoF defense will stand and the case will be dismissed b/c the deal will be unenforceable.

2. Admission has to occur in the course of litigation a. [UCC 2-201 (3)(b) – “if the party against whom enforcement is sought admits in his

pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted.”]

b. Excludes:i. Admissions made privately (out of court) – b/c it will be ‘he said/she said’

ii. Motions to Dismiss and SJ Motions – usually when you file these you are admitting everything in pleadings and discovery – HOWEVER it doesn’t operate here as an admittance to the presence of an agreement – you are just

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admitting it for purposes of that motion. B/c they aren’t accompanied by D’s sworn statement.

3. How many opportunities do you get to try to get the D to admit the presence of an agreement?

a. Answer – don’t contain a sworn statement by the D; courts will usually not dismiss based on D’s “admittance” here

b. Discovery – can question D; production of Ds – most courts allow the P a crack at the D in discovery to get him to admit

i. If you haven’t solicited an admission by discovery, the court will dismiss – usually discovery is the only opportunity to get at the D

c. SJ – most courts will dismiss at this point, b/c the SoF bars the enforcement of the deal – don’t get the chance to try and break him on the stand

4. DF Activities – unusual case - usually a motion to dismiss is not accompanied by a sworn affidavit, the attorney will do the motion – in this case, a sworn statement by the D accompanied the motion – b/c if this, the court said the P had a crack at the D – D swore under oath that there was an agreement

5. SUM-UP ADMISSIONSa. If D admits K, SoF doesn’t apply (SoF defense will not stand)b. Admission has to be made during the course of litigation in a sworn statement or

testimonyc. How Many Opportunities? Thru discovery, if you don’t get admission at that point,

Ct. will grant SJ based on SoF.

vi. DETRIMENTAL RELIANCE/PART PERFORMANCE 1. If there is no signed writing sufficient to satisfy the SoF but there is part performance or

some kind of detrimental reliance.2. Circumstances where detrimental reliance could allow relief to the relying party that could

range from enforcing the oral K to allowing restitution of benefits conferred.3. Full Performance by Both Parties SoF becomes irrelevant

a. There is no likelihood the parties are swearing to a deal that wasn’t made b/c they both performed

4. Part Performance a. Scenarios:

i. One side has fully performed their part, but the other notii. One side has partially performed their part, the other not

iii. Both have partially performed, but neither fullyb. Does Part Performance Make It Enforceable?

i. Depends on the kind of performance and the particular clause in question1. Land Clause – if we have an oral K and you pay the down payment,

many cases will say the down payment takes the case out of the SoF and it is enforceable. Is sufficient part performance.

2. One-Yr Clause – One-Side Rule: only if one side has fully performed does the K come out of the SoF

3. Goods Clause – certain kinds of part performance can take the K entirely out of the SoF

a. Ex . seller begins to manufacture specially requested goods – takes the case out of the SoF

b. Ex . if both parties have partly performed, took and paid for 1yr widgets (but the deal was for 5yrs) – deal is enforceable only for the extent of the partial performance b/c it isn’t easy to tell how long the K is actually for just from the part performance

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c. Part Performance but it doesn’t satisfy the specific clause; or there was unbargained-for reliance. 2 Other Theories that the Detrimental Relier Can Use:

i. Restitution 1. Say there has been a benefit conferred that was done under an

agreement the parties assumed was enforceable, but the court later said it wasn’t

2. The person who conferred the benefit on the other side, can get restitution from the benefited side

a. Ex. Sue to get the down payment back in restitution if that state didn’t permit the down payment to be part performance

ii. Promissory Estoppel 1. Suppose the Ps detrimental reliance didn’t benefit the D or benefited

them only minimally. Restitution isn’t useful here.2. P.E. – sometimes it is so unjust to allow the D to avoid paying for the

P’s d.r. that a Ct. will enforce an oral promise. Might have reliance on an oral promise that doesn’t satisfy the SoF that is so unfair that we ought to enforce the K based on d.r.

3. Courts usually require a high level of unfairness – b/c there is a potential problem that someone may swear to a false deal and do some reliance to evade the SoF

4. Restatement 2nd §139 (1) – “A promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce the action of forbearance is enforceable notwithstanding the SoF if injustice can be avoided only by enforcement of the promise. The remedy granted for breach is to be limited as justice requires.”

a. Elements are the same as when used as a substitute for consideration

5. Restatement 2nd §139 (2) – List of Factors to Consider in Deciding Whether Injustice Can Be Avoided Only by Enforcing:

a. The availability and adequacy of other remedies, particularly cancellation and restitution

b. The definite and substantial character of the action or forbearance in relation to the remedy sought

c. The extent to which the action or forbearance corroborates evidence of the making and terms of the promise, or the making and terms are otherwise established by clear and convincing evidence

d. The reasonableness of the action or forbearancee. The extent to which the action or forbearance was foreseeable

by the promisor 6. HYPO: airline pilot made an oral K to take a job in Hawaiil quit his old job; moved

family there; employer changed mind before he started work; he sued – SoF applies b/c it was for more than one-year – so need to apply one-side rule – likely that his actions were preparation to perform so there is not part performance – RESTITUTION: benefits conferred – No-employer got no benefit; PROMISSORY ESTOPPEL: could the company reasonably have expected him to rely – YES; did he in fact rely – YES; can injustice only be avoided by enforcing deal – factors tend to indicate there will be injustice if we don’t enforce the promise – if we enforce the promise, how much do we give him? Reliance Expenditures

5. SUM UP EFFECT OF PART PERFORMANCE/DETRIMENTAL RELAINCE ON SOF

a. Assuming an oral K that doesn’t satisfy the SoF

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b. Full performance by both SoF becomes irrelevantc. Only Part Performance effect depends on claUsed. If you don’t have sufficient Part Performance, look at possibility of recovery under

Promissory Estoppel or Restitution

F. SUM UP STATUTE OF FRAUDSi. KEY: see an oral agreement do an SoF analysis

ii. 1st Step: Scope - MY LEGS1. If it doesn’t fall in any then you’re done2. If it does, is there compliance?

iii. 2nd Step: Compliance1. Is the writing requirement satisfied?2. If not, consider the effects of non-compliance

iv. 3rd Step: Effect of Non Compliance1. Full Performance SoF doesn’t effect it2. Part Performance effect depends on clause

a. Not satisfied, consider:i. Restitution

ii. Promissory Estoppel

PART 2: HAS THE CONTRACT BEEN BREACHED?

PART 3: REMEDIES FOR BREACH OF CONTRACT

I. REMEDIES FOR BREACHa. 2 KINDS:

i. Remedies at Law (Damages)ii. Equitable Remedies (Specific Performance, Injunctions)

b. Goal of Contract Remediesi. Goal of K Remedies is Compensation, not punishment or deterrence

1. B/c a lot of time breaches are inadvertent; even if it is purposeful, sometimes it is more efficient and rational for the person to breach and pay damages rather than to perform

2. Breach of K is not a crime, and will usually not support an award of punitive damagesii. Primary Goal is Compensation Measured by Expectation Damages (Benefit of the

Bargain)c. 3 Ways to Measure Compensation

i. Expectation Damages – goal is to put injured party in position they would have been in at full performance

ii. Restitution – benefit based - giving back the injured party the net benefits conferred on the breacher

iii. Reliance – expense based - award the injured party their expenditures inferred in reliance on K

d. EXPECTATION DAMAGESi. The primary measure of damages.

ii. Is usually the largest award and it makes sense to put the party in the position they would be in at full performance [Benefit of the Bargain]

iii. Basic goal of K remedies is to compensate by putting the party in the position they would have been in at full performance

iv. Couple of Ways to Do This:1. Legal Remedy Money Damages

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2. Specific Performance – only available if the legal remedy is inadequate

v. MONEY DAMAGES1. Types:2. Direct Damages – general measure of damages3. Consequential Damages

a. Requirements for Recovery of Consequential Damages/Limiting Doctrines Which May Affect the Recovery of Consequential Damages:

i. Causation – must be able to causally link the damages to the breach – usually come up when it is clear the injured part suffered a loss but it may not be clear how that loss was cause

ii. Reasonable Certainty – requires that you prove the fact of damage and the amount of damage with reasonable certainty – usually comes up where you have a breach but it isn’t clear you suffered a loss, or if you did, it isn’t clear what the amount of that loss was

iii. Mitigation – once there’s a breach the injured party must take reasonable steps to minimize its loss – doesn’t mean you have to take all possible steps to minimize – only what is reasonable under the circumstances – policy: economic efficiency

iv. Foreseeability – the type of loss suffered has to have been foreseeable at the time the K was made – policy: if you are going to be held liable they have a right to be put on notice of that before they make a deal

vi. INTEREST1. In addition to expectancy damages (direct and consequential), you are also entitled to

interest2. Time value of money is measured by interest3. If you get your expectation damages 2 yrs after full performance would have occurred,

you get expectation damages plus interest on it for the 2yrsa. If the K stipulates a rate of interest, that rateb. If not, the statutory rate

4. Start with the face value at the time of full performance – if you are getting the award later than full performance would have occurred, you add interest; if you are getting it earlier than performance would have occurred, you have to deduct

e. EXAMPLE OF DAMAGES:f. Sullivan – woman was a singer; she had a nose job; Dr. promised he would fix the nose and it would be better

afterwards – he screwed it up i. Possible Damages

1. Physical Injurya. Nose b. Mental Anguish

2. Expensesa. Dr’s Feeb. Op 1c. Op 2d. Op 3

3. Lost Profits – lost any gigs (if she could prove it) ii. Possible Ways to Measure Her Damages:

iii. Expectation (Full Performance) – putting her in the position she would be in at full performance 1. Physical Injury

a. Nose promised minus nose nowb. Yes – would get full metal anguish

2. Expenses

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a. Nob. Noc. Nod. Yes – b/c she wasn’t suppose to get this one

3. Lost Profits – yes would consider the profits she makes now with the profits she would have made with the perfect nose [if she could prove it]

iv. Restitution – benefit-based – focus on the benefited party – giving to her any benefit she conferred on the K breach b/c it isn’t fair the Dr. should retain any benefits b/c he breached the K – have to ask if any of the damages benefited the Dr.

1. Physical Injurya. Nob. No

2. Expensesa. Yesb. No – b/c the hospital got the benefit, not the dr. c. Nod. No

3. Lost Profits – Nov. Reliance – expensed-based – we reimburse the injured party for expenditures incurred on reliance of the

K – putting her in the position before the K was made 1. Physical Injury

a. Difference between nose before K and nose now (nose before minus nose now)b. Mental anguish now minus mental anguish before K

2. Expensesa. Yes (she wouldn’t have incurred these expenses if she didn’t go thru with the K)b. Yesc. Yesd. Yes

3. Lost Profits a. Standard answer is usually no b/c these are future expenses, not reliance expenses – but

there have been courts that have awarded reliance based lost profitsi. Want to take into account her profits now and the profits she made before she

entered into the Kvi. Court here awarded reliance (b/c it was just right)

1. She waived the expectation damages b/c she couldn’t prove a lot of the elements [too high]2. They didn’t pick restitution b/c it wouldn’t be fair – would under compensate [too low]3. Reliance – was just right

g. CHOOSING BETWEEN REMEDIES (*See Handout)i. Normally, a P will seek expectation damages b/c they are larger than reliance or restitution

damages. When are reliance-based damages or restitution damages an alternative to expectation damages?

ii. RELIANCE DAMAGES1. Reliance damages are damages based on expenses incurred by the injured party in

reliance on the other party’s promised performance. The goal is to compensate the injured party for expenses reasonably incurred in reliance on the K. The injured party will seek reliance damages when it is: 1) unable to prove some part of expectancy damages; 2) promissory estoppel; or 3) in odd cases.

2. Cannot Prove Expectation Damages: Injured Party Unable To Prove Expectancy Damages With Sufficient Specificity (sometimes the damages are too speculative to be proven)

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a. Reliance damages are awarded if some part of the expectancy damage measure cannot be proved with sufficient specificity. Rather than award no damages, reliance damages are awarded on the theory that the injured party would at least have gained enough to cover its expenses had the K been fully performed. However, the amount of reliance recovery is limited to the expectancy recovery: Injured party cannot recover more than it would have been entitled to at full performance.

b. The Losing K: The K may have been a losing K for the injured party. If so, and if the breaching party can prove the amount of the injured party’s loss had the K been fully performed, then this loss is subtracted from the injured party’s reliance recovery.

c. Examples of Speculative Expectation Damagesi. Promoter contracts with band for concert. Band breaches. Promoter is entitled in theory

to the value of the concert, which would be the ticket receipts. Since the concert wasn’t held, that amount is speculative. A court could award the promoter the value of its reliance expenses, e.g. costs of advertising, hiring venue, on the theory that rather than award $0, the promoter would have at least made enough $ to cover the cost otherwise he wouldn’t have entered the K. If the breaching party can prove they wouldn’t have made enough to cover their expenses, you wouldn’t award full reliance expenses.

ii. New business fails as a result of breach. Assume that entrepreneur decides to open a pizza restaurant and contracts for a specially-made pizza oven to be delivered by April 1. Seller runs into delays in production and cannot deliver the oven before December 1. Entrepreneur doesn’t have sufficient working capital to carry the business until December, so it abandons its plans for the restaurant. In theory the entrepreneur is entitled to the profits it lost between April and December and beyond. But the amount of these profits is speculative; the business was new and thus had no track record from which to estimate future profits. A court could award the entrepreneur the amount he invested in the failed business as reliance expenses.

3. Promissory Estoppela. Reliance damages sometimes are awarded instead of expectancy damages when

there is a promissory estoppel to assert lack of consideration or the SoF. Since the essence of estoppel is detrimental reliance, a court might decide to enforce the K by estoppel, but grant only reliance damages, not larger expectancy damages.

b. Ex . Promise of $5000 for named scholarship. College awards $500 scholarship. Court could enforce the promise, but award only $500, not the full $5000.

4. The Odd Casea. Ex. Sullivan (botched nose job) (small K price leads to significant reliance expenses)b. Odd b/c most breach of Ks don’t lead to physical injury and/or mental anguish

iii. RESTITUTION DAMAGES1. The goal of restitution is to restore the injured party net benefit conferred under the K.

This is accomplished by requiring both sides to return all benefits conferred under the K. Restitution is available in two instances:

a. The K is unenforceable;b. As an alternative to the normal expectancy damages for breach of K

2. RESTITUTION WHEN CONTRACT IS UNENFORCEABLEa. If the K is not enforceable expectation damages are not available. However,

when benefits have been conferred on the other party under a K later found to be unenforceable, a court may order restitution of the benefits conferred. We studied this theory under indefinite contracts; e.g. Varney (employment K for “fair share of profits”).

3. RESTITUTION AS ALTERNATIVE REMEDY FOR BREACH OF CONTRACT

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a. The injured party in theory may recover expectation damages, but may choose instead to seek damages for K breach based on restitution.

b. When the Injured Party will Seek Restitution rather than Expectancy Damages

i. Normally, the injured party will sue for expectancy rather than restitution-based damages b/c the expectancy/reliance damages will be greater than restitution. However, there are some instances when restitution is greater than expectation or reliance damages or it’s otherwise advantageous for the injured party to seek restitution:

1. The Losing Contract: Expectancy Damages are Zeroa. Ex. if you promoted a band and end up making a profit – will recover

back the benefit you conferred on them rather than recovering nothing2. Injured Party Has Conferred a Benefit on the Breaching Party

That Has Appreciated (injured party wants to recover appreciated value)

a. Ex. Suppose you convey land and the person doesn’t make the payments – unbeknownst to both of you, Disney was planning on opening a PA Disney – this would raise the value of the land – b/c the party breached (didn’t make payments) you can sue for the original price or can sue to get the land back – smartest move would be to get the land back b/c it is worth more – sometimes benefits appreciate

3. Injured Party Has Received a Defective Part Performance That It Doesn’t Want To Keep

a. Ex. buy a house and later found out the house is infested with termites – could in theory recover the difference between the worth of the house now and a non-infested house – wouldn’t you prefer just to get your money back and get rid of the house (would elect to just recover restitution and give you the house back)

4. Breaching party is financially shaky so a damage award may be uncollectible. The injured party seeks return of the specific thing transferred to the breaching party.

a. Ex. Bankruptcy is more likely to uphold a claim to a specific thing than a damage award

c. Restrictions on Awarding Restitution for Breach of Contracti. Before the injured party can claim restitution outside the K, it must have

the right to terminate the contract. Normally this means that the breach must be total, but there are exceptions when a less-than-total breach will allow the injured party to call off the K and get restitution.

ii. Breach Must Be Total1. To obtain restitution for a breached K, the breach must be total;

that is, it must be so significant that the injured party may call off the contract, thus enabling recovery outside the K.

2. Exception : Restitution is not available for total breach if the injured party has fully performed and the breaching party’s only obligation is to pay money.

a. Ex. Seller delivers goods and buyer doesn’t pay. Seller cannot get restitution. It must sue on the K for the price.

iii. Breach Not Total1. If the breach is not total the K normally is still in effect. Hence the

injured party cannot go outside the K to get restitution. It must seek expectancy or reliance damages.

2. Some exceptions exist for Ks for the sale of goods or land:

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a. A buyer of goods or land often is allowed to call off the K and seek restitution for minor breaches by the seller.

d. Measuring the Amount of Restitutioni. Because the injured party is not suing on the K, the restitution recovery is

not limited by the K price. The injured party may recover more in restitution than it was entitled to under the K.

ii. Net the Respective Benefits: The injured party restitution damages are reduced by the value of any benefits the breaching party conferred on it. (If I conferred $100 and you conferred $10 from me. Net it out to $90)

iv. SUM UP HOW TO CHOOSE WHICH MEASURE OF DAMAGES IS BETTER1. It is the injured party’s choice. Typically the injured party will choose expectation.2. But there are instances where reliance or restitution may be better

a. Reliance – expense based i. If you can’t prove expectation damages (too speculative)

ii. If it’s a promissory estoppel situation – reliance may be a fairer measure of damage

iii. Odd cases like Sullivanb. Restitution – benefit based

i. If the K is unenforceable you can’t get expectancy or relianceii. Gives the injured party advantage over expectation (4 instances)

1. As a general rule, even where it is one of those 4, the breach must be total

h. EXPECTATION MEASURES OF DAMAGEi. Sale of real estate and intangible property will be essentially the same as what the seller and

buyers damages are under UCC 2 – same basic concept.ii. Trying to figure out where the person will be at full performance and where they are now, and

awarding the differenceiii. Full Performance – Now = Expectation Measure of Damages

iv. Seller’s Measure of Damages under UCC 2 1. §2-709 – Action for the Price

a. Assume seller completed performance (delivered goods) but buyer hasn’t paid. How much is the seller entitled to? The K Price

i. K Price - $100ii. Sellers Cost to Perform - $75

iii. Full Performance would have gotten $100 would be out $75 (would have a profit of $25)

iv. Now lost $75 and hasn’t received anything from buyer – so now it at -75v. Need to get it to +25 – so have to give him $100

1. [25-(-75)] = $100

2. §2-706 – Seller’s Resale Including Contract for Resalea. Assume seller completes performance and sends to buyer, but the buyer rejects

the goods. So the seller has the goods. Don’t want to give the seller the K price b/c he will resell the goods and be overcompensated “difference between the resale price and the K price”

i. Now has the goods (+goods) but is out $75 (-75)ii. Full Performance have the K price (+100) and be out $75 (-75)

iii. Full Performance – Now1. (100-75) – (Goods-75)

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2. 100-75-Goods+75 (75s cancel out)a. 100-Goodsb. Need to assign a value to the goods – can do this by seeing what he

resold the goods for after he got them back (assuming it is commercially reasonable) – suppose it was $70

c. 100-70= $30iv. If the resale price is higher than the K price then there is no damages (and

typically you won’t sue the breacher b/c you had no loss)

3. §2-708 – Seller’s Damages for Non-Acceptance or Repudiationa. Assume seller doesn’t resell the goods, but they could have been resold. How do

you put a value on the goods then? Market Price “difference between the market price at the time and place for tender and the unpaid K price”

i. Suppose market price is 65ii. K price – market price

iii. 100-65 = 35 (expectation damages)iv. Seller now has 35 + the goods. Assuming the goods have a market value is there anyway

the seller could have put himself in the position he would have been in at full performance sell the goods for $65

4. §2-709(1)(b)a. Suppose the goods can’t be resold – for instance, they are special ordered – there

is no market for it.i. K price – goods

ii. Goods really aren’t worth anythingiii. So the seller should get the full K price

v. Buyer’s Measure of Damages under UCC 2 1. §2-712 – “Cover”; Buyer’s Procurement of Substitute Goods

a. Assume K price is $100, seller breaches by refusing to deliver; buyer hasn’t paid any money yet. “difference between the cost of cover and the K price

i. Full Performance – buyer would have the goods and be out the $100 (Goods-$100)ii. Now – out nothing

iii. Full Performance – now1. Goods-$100-02. Goods-1003. Measure goods by the cover cots (how much the buyer had to go out and pay

for the goods from someone else)a. Suppose it was $80

i. 80-100 = -20 ; so you don’t get anything from the seller b/c you made a profit

b. Suppose it was $120i. 120-100 = 20 ; so you recover the 20 b/c it cost you more to

acquire the goods after the breach

2. §2-713 – Buyer’s Damages for Non-Delivery or Repudiationa. Suppose you didn’t cover – use market price to put a value on the goods

“difference between the market price at the time when the buyer learned of the breach and the K price

i. Say the market price is $110ii. 110-100 = 10 ; buyer gets $10

1. can now go out on the market and buy the goods for $110

3. §2-714 – Buyer’s Damages for Breach in Regard to Accepted Goodsa. Assume seller delivers, buyer accepts and later finds out they are defective, cut

chooses to keep them. “difference at the time and place of acceptance between

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the value of the goods accepted and the value they would have had if they had been as warranted”

i. (If it chose not to keep them then we will be measuring it by the market price or the buyer might forego expectation and recover restitution – if it paid the money)

ii. Now – out the K price and gained defective goodsiii. Full Performance – have goods and be out K priceiv. Full Performance – Now

1. (Goods-100) – (Defective Goods-100)2. Goods-100-defective goods+100

a. Goods (warranted goods) – Defective goods (accepted gods)i. Value of warranted goods – market price or K price

ii. Value of accepted goods – a) cost of repair; b) suppose you can’t fix it or the cost of repair is unreasonable – have to put an expert on the stand to estimate the value

i. MENTAL ANGUISH i. General Rule : courts do not allow recover for mental anguish caused by a breach of K

ii. Reasons: 1) there is a desire to limit damages to things that can be calculated with some certainty; 2) avoid liability disproportionate to the K price; 3) catastrophic mental anguish is usually not a foreseeable result of a breach of K b/c it doesn’t happen very often

iii. Exceptions : where courts will award for mental anguish:1. It’s foreseeable a breach would result in physical injury 2. Peace of mind Ks – sometimes Ks are made specifically for peace of mind

a. Ex. casket cases; insurance cases where someone buys disability insurance3. If the conduct which breaches the K is also a tort

a. Ex. negligent shipment of ashes

j. CONSEQUENTIAL DAMAGES i. Arise from Ks that were made or would have been made on reliance of the breached K

ii. 3 Types:1. Lost profits2. Damages to 3rd parties

a. If you were suppose to sell me goods and I was suppose to sell them to someone else – as a result of your breach, I breached my other K and was forced to pay damages

3. Physical Injury or Property Damages

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