ben’s property outline for helmholz - university of chicagoblsa.uchicago.edu/first...

Benjamin Fanger 5/6/2023

Ben’s Contracts Outline for E. Posner

CHAPTER II: THE BASES OF PROMISORY LIABILITY

POSNER’S SUMMARYeverything we’ve done involves promises. no “I promise. . .” necessary, just cooperation that entails a promise stated or unstated.To enforce a promise, you have to make a legal argument for it. We’ve learned three ways (you can bring more than one in court):

1. Consideration present – argument centers on the bargaina. mutuality of intent/assent—not nominal or illusoryb. statute of frauds could be used as defense in certain casesc. breach results if contract upheld, damages therefore

2. Promissory Estoppel – argument centers on the promisee’s acts, etc.—reliancea. promisee reliesb. promissory estoppel is broad but doesn’t swallow up the consideration doctrine b/c

i. it’s easier in 90% of the cases just to show consideration (instead of reliance, injustice, etc.)ii. the damages that can be obtained are limited in promissory estoppel cases.

3. Restitutiona. promisee confers benefit on promisor

i. sometimes no promise necessaryii. sometimes subsequent promise necessary to reenact the validity of an original promise, etc.

iii. No gratuity, no chance to bargain, no officiousnessiv. if restitution is found, then you get damages for unjust enrichment

SIDE NOTES:1. “Restatements” are not binding unless they are formally adopted by a court or a court has already said the same thing.2. Some cases we’ve read are inconsistent, but they are often from different courts that are not binding on eachother3. Universal Commercial Code UCC was adopted by the courts (some only adopted certain sections) for purposes of

sales of goods. But look for the common law as well.

Section 1: Bargain Contract: Promise + Consideration(A) BARGAIN REQUIREMENT

Consideration summary:consideration serves two purposes:

1. FORM –a hoop to jump through; a test; a way for the parties to objectively show that there is a quid pro quo (and know whether there is one).

-courts fight against the formal interpretation in several ways:(1) Sufficiency: consideration “sufficient”? They don’t just ask if there’s consideration, but ask the

more substantive question of whether it’s sufficient(2) Right Motive: the court looks at the more substantive question of motive

2. SUBSTANCE –the court looks at the meat of it. Looks at whether there was really an intent to have a legally binding agreement

reasons substantive side isn’t helpful:(1) what’s the theory behind the decision? who knows

consideration doctrine is also being used to police gifts, hold-up, misrepresentation

I. CONSIDERATION – the “quo” in “quid pro quo.” (promise is the “quid”) (a) In Restatement 2nd 71, the essential elements of consideration are:

a. The return promise or performance must be bargained for AND…b. The return promise or performance is sought in exchange for the promise and vice versac. The promisee gives up something of value, or circumscribes his liberty in some way (i.e., he suffers a "legal

detriment")(b) DETRIMENT = relinquishing some right (not necessarily entailing being harmed)


this could be (1) a forbearance, (2) an act, or (3) a partial or complete abandonment of an intangible rightSide note: $1 (or another inadequate “detriment”) said to be consideration may not be.

(c) BENEFIT ≠ a tangible gain (necessarily)this could be simply getting what you bargained forSide note: altruistic pleasure is not a benefit

(d) BARGAIN = an agreement to exchange the thing sought by the promisor (consideration) for the thing sought by the promisee (promise)

a. this does not mean there must have been negotiation—only understanding that the quid was given FOR the quo. THE PROMISE INDUCES THE CONSID. (and vice versa)

Note: there are both substantive and formal reasons for making consideration a measure of the enforceability of contractssubstantive: society benefits from enforcing commercial contracts, etc. etc. formal: consideration is a good litmus test to make sure the parties are serious, etc.

CASES:1. Kirksey v. Kirksey

Brother-in-law of widow invites her to move onto his landd. The court ruled that it was “mere gratuity” and that there was no consideration in P moving residences.

i. gratuities or gifts are without consideration and therefore unenforceableii. “conditions of the gift” (like coming to get it or holding out your hand) DO NOT CONSTITUTE

CONSIDERATION. Conditions can be distinguished from consideration in that they are not of benefit to the promisor

iii. Altruistic pleasure not sufficient2. Langer v. Superior Steel

D (SS) stops paying a pension that was given to P (contract in the letter)Court reasoned that:

i. P not working for competition (as requested in letter) was detriment to the promisee (he forbore to work elsewhere)

ii. the letter was the “bargain” iii. promissory estoppel would have worked too

3. Bogigian v. Bogigian Hazel signs the release of the judgment awarding her $10,000 upon sale of ex-hubby, David’s home. She claims she thought it was only the release of the lien, he claims it was her part of a contract made between them at the signing.

a. Court reasons thati. no consideration because there was no bargain (Hazel supposedly didn’t know about the release,

therefore it couldn’t have been “in exchange” for her release from the mortgage) bargaining requires knowledge of both the quid and quo

ii. no promissory estoppel because P failed to show that the release was signed with the intent that D act on it.

II. NOMINAL CONSIDERATION - You can’t trade $100 promise for $1 consideration.(a) Sham and nominal consideration: where the "consideration" that has been paid is so small as to be nominal, the court may conclude as a factual matter that there is no real "bargain" present at all. If so, the promise will not be enforced, due to lack of consideration. (b) Payment not in fact made: If a non-trivial payment is recited, but the payment was not in fact made, most courts will take this as evidence that no bargain was present.

Underlying principle: promise has to INDUCE or MOTIVATE the consideration.

CASES:1. Thomas v. Thomas

Brother-on-laws make a contract w/ wife to give her the house her husband wanted her to have. Court says:1. the husband’s desire ≠ consideration because charity and desire to benefit another don’t

constitute consideration – Kirksey2. wife repairing the house ≠ consideration because that is a condition of the gift—even a person

who receives a gift would probably keep it in good repair. – it’s a condition because it does not benefit the promisor; it did not motivate the promise

3. 1£ is consideration, even though this isn’t equal to what reasonable rent would be, it is still “in exchange” for the promise and therefore sufficient.

B – BUT, did the 1£ induce or motivate them to give the house?


Though Thomas seems to allow nominal consideration, Restatement 2nd suggests that $1 would no longer be considered adequate consideration. This is likely because what really motivates the promisor is the desire to give, etc., NOT the $1. Therefore the $1 is not in exchange nor is it bargained for.

(B) SUFFICIENCY OF EXCHANGE

I. IN GENERAL – The law does not question the sufficiency of the promise or consideration; only that they were bargained in exchange for one another

-Adequacy not considered: The court will not inquire into the "adequacy" of the consideration. As long as the promisee suffers some detriment, no matter how small, the court will not find consideration lacking merely because what the promisee gave up was of much less value than what he received.CASES:1. Hamer v. Sidway

Uncle - $5000 FOR Nephew’s promise not to drink, smoke, swear, etc.i. RULE 1: Waiver of any legal right = detriment; therefore, consideration

ii. SO, under this principle, Hamer is okay (because promise is motivated by nephew’s waiver of rights), and Thomas is not okay because 1£ is not the motivation, doesn’t induce giving the house.

2. Apfel v. Prudential-Bach Securities P sells securities exchange computerization idea to D, D breaches contract because everyone gets the technology/idea

i. RULE: an idea can be consideration if it is novel as to the purchaserii. The court doesn’t question how much a thing benefits the party

Peppercorn Theory/Fair Exchange in Contract Law

3. Jones v. Star Credit freezer sold for $1200 that is worth $300.

i. court calls this an unconscionable transaction, therefore unenforceable. There is no accepted definition of unconscionability. The issue is whether the clause is so one-sided, so unfair, that a court should as a matter of judicial policy refuse to enforce it.

ii. consumers treated differently than businesses – especially poor/illiterate/uneducated consumers.iii. Where there is “unequal bargaining power” the court will be more likely to find the contract

unconscionable.4. In re Greene

Mistress (P) who has an agreement with D that he will continue to pay for her rent, etc. D files for bankruptcy and stops paying her rent, etc. D claims no enforceable contract b/c no consideration.

Is this a form of blackmail (I won’t tell your wife if…)

II. PRE-EXISTING DUTY RULE - If a party does or promises to do what he is already legally obligated to do, or if he forbears or promises to forbear from doing something which he is not legally entitled to do, he has not incurred a "detriment" for purposes of consideration.

1. Modification: This general rule means that if parties to an existing contract agree to modify the contract for the sole benefit for one of them, the modification will usually be unenforceable at common law, for lack of consideration.

a. Restatement: The Second Restatement, and most modern courts, follow this general rule, but they make an exception where the modification is "fair and equitable in view of circumstances not anticipated by the parties when the contract was made."

CASES:1. Levine v. Blumenthal Tenant (D) says can’t pay the higher contracted amount for the lease because of economic hardship. They modify the agreement and P ends up suing for the difference.

RULE (traditional): if there is no consideration for a modification, then there is no contract

2. Alaska Packers v. Domenico Fishers “hold up” the company in Alaska for more $

i. hold up = use of coercion to take unjustifiable advantage of the other’s condition. ii. Alaska had a large investment, no other options for men to hire, no time to find them, etc.

3. Angel v. Murray waste collector (D) requests more funds to cover an increase in waste from 400 unanticipated new unitsP says no consideration for the modification

Restatement 2nd 89D and most modern courts say a modification lacking consideration may be enforced if:


(1) Unanticipated and unexpected difficulty(2) No coercion (both voluntarily agree)(3) Made before either party full performs(4) Modification is fairAND UCC says no consideration necessary to modify a contract when acting in good faith.Also see: doctrine of duress

III. MUTUALITY OF OBLIGATION and ILLUSORY PROMISES - An "illusory" promise is not supported by consideration, and is therefore not enforceable. An illusory promise is a statement which appears to be promising something, but which in fact does not commit the promisor to do anything at all.

CASES:1. Rehm-Zeiher v. F.G. Walker long-term contract for the sale of specific amounts of goods. Seller breached because the prices rose.

i. buyer had option to buy as few as they wanted for “any unforeseeable reason” ii. Allowing the buyer to not buy the goods for “any unforeseeable reason” = not requiring anything of the buyer.

iii. Thus, because there is no obligation, this is an illusory promise and hence not mutuality of obligation.2. McMichael v. Price Buyer (P) agrees to purchase all the sand that he can sell from Seller(D)

i. Rule: “requirements” and “output” contracts are enforceable—ie those contracts for which one party’s obligation is contingent on either his outputted amt. of goods or his required (needed) amt. of goods.

ii. UCC explicitly allows requirement and output contracts if: (1) done in good faith and according to reasonable standards of fair trade and (2) where the output or requirement is not unreasonably disproportionate to any estimate or normal

amount.iii. in McMichael P is forced to exclusively buy from D, whereas in Rehm the buyer (P) can buy nothing from D.

3. Wood v. Lucy P promises to give D half proceeds of his marketing, she gives him exclusive mktg rights. She breaches and says he gave no consideration because he didn’t have to do any mktg.

i. Cardozo implies a promise from P to use reasonable or best effortsii. Courts try to avoid striking down agreements for lack of consideration. One way they do this is by finding

that the promisee has made an implied promise in return. (this is what Cardozo did here)iii. why is “reasonable effort” (Lucy) different than “any unforeseen reason” (Rehm-Zeiher)?

a. unforeseen reasons = no limitations BUT reasonable effort = at least some effortb. Cardozo says if they want it enforceable then give it to ‘em (so maybe Rehm would be

decided dif. under Lucy)

4. Omni Group v. Seattle-First National Bank Buyer (Omni/P) wants to enforce the earnest money agreement to buy land from Seller (Clarks/D).

i. Seller argues that contract is unenforceable because:1. the promise is illusory because it is conditional on B getting the report (which is in B’s control)2. the promise is illusory because it is conditional on B’s satisfaction of the report

ii. in order to give the contract flexibility, the court implies “reasonable effort” to do anything that is a condition of the contract.

iii. In conditional contracts, it is unenforceable if antecedent condition totally in control of one side (like “satisfaction”) UNLESS you require reasonableness and good faith req’d by UCC.

Section 2: Moral Obligation: Restitution, quasi-contract, etc.Usually used where no promise has been made, one party has been enriched, and it would be unfair for that party not to pay the giver for that enrichment.When is restitution used?

1. Valid K has been breached but for some reason remedies for breach aren’t as much as remedies for restitution2. Invalid K but benefit conferred which other has no right to keep/not pay for—violation of some rule like statute of

frauds, mistake, etc.3. Promise w/o consideration but benefit conferred which other has no right to keep/not pay for (sometimes in this case,

relief is supported both by restitution and promissory estoppel.


4. No contractual involvement but benefit conferred which other has no right to keep/not pay for

I. Restitution—the remedy:1. Restitution is the remedy, Unjust Enrichment is the cause of action2. restitution seeks to reimburse the giver for the benefit to the recipient—a benefit for which there is no legal

justification3. elements of restitution:

i. benefit conferredii. not gratuitous (you can’t sue a person to get a gift back)

iii. no opportunity to bargaineg.’s:doctor saves unconscious man. –restitution justifiabletotally random person gets money by mistake. –restitution justifiablecontract entered to sell widgets, later contract is not enforceable. But delivery of widgets already happened. to get widgets back, –restitution justifiablejumping in water to save somebody & get injured –no restitutionwhere contract with 3rd party to do work and claimant does work—no restitutionbreaching buyer who paid a portion of the cost—restitution justifiable (UCC 2-718(2))note—in some jurisdictions the breaching party can’t recover anything.

II. Quasi-contract1. QK = “contract implied in law”—not actually a contract: Not the same as a “K implied in fact” which is binding in

the same sense an explicit contract is. 2. The court understands there is no contract, but implies one for the sake of giving restitution for unjust enrichment

III. Unjust enrichment—the cause of action1. UNJUST

a. Not Gratuitous a. a “volunteer” or passerby who acts altruistically is acting gratuitously ∴ cannot expect restitutionb. Must have been an intent to charge for services/benefit rendered

i. Objective test of intent used b/c:1. it can be measured2. it allows recipient reasonable chance to reject benefit—recipient can be expected to

understand that she will be charged for the benefitii. Intent might be expected by the circumstances—judging by the relationship of the parties (doc-

patient) etc.iii. That the benefitor intended to charge the recipient and not someone else is essential. (flower

salesman can’t collect from reciepient for flower given to them by someone else)b. No Imposition

a. Claimant must not be an officious intermeddleri. benefactor requested the benefit

ii. OR it was an emergency (1) immediate action req’d, (2) advance assent impractical, (3) claimant had no reason to believe the recipient didn’t want it

iii. OR recipient given opportunity to reject2. ENRICHMENT

a. economic benefit receivedb. not necessarily a benefit when all things are consideredc. Measurement of enrichment:

ii. contracts expectation damagespromissory estoppel reliance damagesrestitution measure based on the amount of benefit received (restitution damages). (could be

market value of benefit or recipient’s actual net gain) Sometimes reliance damages given.

IV. Moral Obligation—restitution for PROMISE + ANTECEDENT BENEFIT1. moral obligation alone is never enough to enforce a promise2. Usually, this has been used in statute of limitations situations where the contract has become barred, but the recipient

makes it binding by promising to repay afterward.


3. Also in situations where the contract is voidable for some reason (mistake, fraud, etc.) but the party with right to avoid promises anyway to perform, the latter promise makes the contract binding.

4. Broad and narrow uses of moral obligation principle:i. Restatement 2nd takes a broad application of this principle where:

a. promisor was unjustly enriched by a benefit previously receivedb. benefit was not gratuitousc. promise in recognition of benefit later given by recipientd. the enforcement of the promise is binding to the extent necessary to prevent injustice (discretion of court)

ii. Some states take a narrow application of this principle requiring that the original obligation be a legal one (i.e. antecedent benefit can’t have been exclusively moral)

CASES:

1. Mills v. Wyman –good sam cares for the son and pays for health expenses, later father(D) promises to reimburse good sam(P) for his aid.

Court says: 1. if it had oringinally been a loan to the son and passed statute of lim. then a new promise would reinstate the

contract (of the loan)2. BUT, without an original legal obligation, a promise cannot “reinstate” a legal obligation.

Mills shows that the court is very reluctant to make enforceable any moral obligation (like the obligation kids have to help their elderly parents)

2. Manwill v. Oyler $given to Utah farmer**agrees with Mills that moral obligation should not be the consideration for an enforceable contract

3. Webb v. McGowin block of wood divertedi. antecedent benefit transferred (life saved), promise given to compensateii.distinguished from Mills? –no material benefit in mills, just non-material benefit but Harrington, there is

material benefit, but the court still comes out that its unenforceableiii. But in Harrington there no relationship, whereas with the others there is a relationship of some sortiv. Maybe AL and NC just see humanitarian acts differently

4. Harrington axe in head avoidedantecedent benefit plus promise not enforced.

Section 3 Promissory Estoppel: Promise + unbargained-for reliance

PROMISSORY ESTOPPEL A. General approach: Promises which foreseeably induce reliance on the part of the promisee will often be enforceable without consideration, under the doctrine of promissory estoppel ("P.E."). Rest.2d, §90's definition of the doctrine is as follows: "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 such action or forbearance is binding if injustice can be avoided only by enforcement of the promise."

1. Actual reliance: The promisee must actually rely on the promise to her detriment.2. Foreseeable reliance: The promisee's reliance must also have been reasonably foreseeable to the promisor.3. Descendent of “equitable estoppel”: where detrimental reliance on any misinformation is cause of action

*Ambiguity of law—two ways to look at PE:1. It should be treated like a contract where PE applies—remedy would be full enforcement of promise2. It should be treated more like a tort—remedy would be reimbursement of actual loss.

B. The elements of Promissory Estoppel:1. Promise made—clear language of commitment objectively manifesting intent to commit2. Promisor should reasonably expect reliance—likelihood and general nature of reliance was foreseeable3. Promise induced the action—cause and effect relationship4. Promisee justified in response—responded as a reasonable person in her position would have


5. Injustice avoided only by enforcement—weighing of detriment to each party, must have been a measurable loss, lack of formality considered, deliberateness, etc.

C. Possible applications:1. Promise to make a gift: The P.E. doctrine is most often applied to enforce promises to make gifts, where the promisee relies on the gift to his detriment.

a. Intra-family promises: The doctrine may be applied where the promise is made by one member of a family to another.

2. Charitable subscriptions: A written promise to make a charitable contribution is increasingly being held to be binding without consideration, under the P.E. doctrine. Here, the doctrine is watered down: usually the charity does not need to show detrimental reliance. (But oral promises to make charitable contributions usually will not be enforceable unless the charity relies on the promise to its detriment.)3. Gratuitous bailments/agents: If a promisor promises to take care of property of promisee, then PE may be used. But courts are less likely to enforce on PE in promises to procure insurance because promisor is exposed to enormous liability.4. Offers by sub-contractors: Where a sub-contractor makes a bid to a general contractor, and the latter uses the bid in computing his own master bid on the job, the P.E. doctrine is often used to make the sub-bid temporarily irrevocable.5. Promise of job: If an employer promises an at-will job to an employee, and then revokes the promise before the employee shows up for work, P.E. may apply. 6. Negotiations in good faith: A person who negotiates with another may be found to have a duty to bargain in good faith; if bad faith is found, the court may use P.E. to furnish a remedy.

D. Amount of recovery: Restatement 2nd 90 says remedies are “limited as justice requires” Where P.E. is used, the damages awarded are generally limited to those necessary to "prevent injustice." Usually, this will mean that the plaintiff receives reliance damages, rather than the greater expectation measure. In other words, P is placed in the position he would have been in had the promise never been made.

CASES:

1. Ricketts v. Scothorn - grandpa gives note to granddaughter for $2000 to make it possible for her to quit worki. payee changes position to her detriment (and could reasonably be expected to do so by the payer) and does so

in reliance of the promise actionable w/o consideration

ii. What makes it reasonable for him to expect her to do x in reliance of his promise?-he states that his promise is to allow her to do x-she has every reason to trust that he will pay

Gratuitous Promises to Charitable Organizations:

2. Allegheny College v. Bank of Jamestown –college endowment to be named after ladyQ - is a fund being named after you suff. consideration for $? Cardozo says contract.

OR – is it just a condition of the gift that the fund be named after herQ2 - If the college didn’t name the endowment after her, would it be breach or a moral wrong? Unjust enrichment?1. Conditional gifts are just gifts that are more limited than an unconditional gift—like a gift certificate for $102. Dissent says there is no contract because the College couldn’t accept the offer until after lady was dead.

3. Feinberg v. Pfeiffer --D increases P’s wage and grants her a pension on retirement.Court says no consideration, but grants claim on basis of promissory estoppel because:

1. she relied on the promise by continuing to work for D2. she relied on the promise by retiring when she could keep working

But did the pension induce her to quit or did illness?

4. Grouse v. Group Health Plan - P is offered a job, D can’t contact his references, P turns down another offer and quits his job, D hires another applicant.

1. Why no breach of contract issue here? P didn’t quit his other job in exchange for the position—rather, these things were conditions that were not the meat of the contract.

2. And the real employment contract was just an “at-will” agreement to employ and work. the damages here would be minimal (one second of work?) So, P goes for promissory estoppel


5. Cohen v. Cowels Media -- Reporters promise confidentiality to gubernatorial candidate’s assistant—editors overruleA. promissory estoppel arg: P gave info relying on the promise that D wouldn’t identify him in the article. B. Is giving info a detriment? Yes, but more in the sense that it was a benefit to the promisorC. failure to enforce the promise would result in an injustice—Cohen had reason to believe the promise of

the newspaper which had kept like promises in the past. Reporters agreed it was unethical.D. The newspaper’s objection that a greater injustice would occur if they had kept the name confidential was

rejected by the court.

Section 4: The Statute of FraudsCertain kinds of transactions have to be in writing to be enforceable:

I. The Types of Transactions that fall under Statute in most jurisdictions:1. sale of goods greater than or equal to $500 (UCC)2. sale of real estate or interest in real estate (long term lease included)3. transactions that can’t be performed within one year from time of contract (not nec. take a year to perform)4. A few other less important ones too.

II. Writing that Satisfies the Statute1. Must be in a written memorandum of almost any type (even if voice message etc. or even if it’s been lost)2. Memo must contain enough info to show a contract has been made

a. Common law usually req’s parties, nature of exchange, most material termsb. UCC just req’s quantity of goods and sufficient writing to indicate contract made b/tween parties

3. Writing must be signed by party against whom the action is broughta. signed = any mark indicating authentication by party

III. Exceptions where Contract does not Comply—either to avoid technical voiding or to protect relier1. Part performance—subject to discretion and many courts don’t like to make this exception2. Judicial Admission—where party admits to contract in litigation, UCC allows, some other jurisd’s don’t3. Protection of Reliance—like promissory estoppel or equitable estoppel, but maybe a little more strict

SIDE NOTES*Every state has its own “statute of frauds” with its own list of transactions that require written memo, but they all are basically the above stuff*Prob—uninformed buyers/sellers can lose*Modifications to such transactions must comply w/ statute

CHAPTER III: THE BARGAIN RELATIONSHIP

Section 1: The Agreement Process: Manifestation of Mutual AssentBackground:

Mutual Assent is the basis of a contract—that each party intends to enter into a contractual relationship. This entails volitional action on the part of each party

Offer/Acceptance issues arise where there is a question as to:1. whether a contract was formed (not in promissory estoppel, etc.)2. what the terms of the contract are (was a certain term negotiation or actually part of the contract?)3. which jurisdiction governs (where the contract was made)

Reasons for more leniency (that UCC and Restatements offer):1. sometimes the actual will of the parties was otherwise

i. the person not knowing the law who’s joking would be bound.

General Rules (all of this is in some jurisdictions only):1. offer—clear and determinate, reasonable objective standard2. acceptance3. offers are prima facia not binding, however there are exceptions:

a. if they’ve been acceptedb. if it’s an option Kc. to enter unilateral K where there is part performance


d. to enter bilateral K and there is some reliance (Drennan)4. acceptance must be valid

a. not expired offerb. mirror image in common lawc. if unilat K, then exact performance req’d

--Why don’t we use an approach where there are formal req’s? (like stamping w/ wax) reg. consumers?--Why don’t we rely completely on subjective intent? not as easy to manifest it.Our system seems to be a mix of formalistic/substantive, objective/subjective sides.

(A) Ascertainment of Assent: The “Objective” Test

Two goals: (1) to protect the party who did not assent to the contract, and (2) to protect the party who relied on what objectively seemed like assent.

Objective test of contracts: Contract law follows the objective theory of contracts. That is, a party's intent is deemed to be what a reasonable person in the position of the other party would think that the first party's objective manifestation of intent meant. Restatement 2nd §2, 3, 19, 20 all use term “manifestation” to define promise, agreement, etc.Subjective intent is secondary and may or may not be accepted as evidence to supplement objective evidence because:

1. the other party could not have known what the person’s subjective intent was (reliance issue)2. subjective evidence is unreliable (person may lie as to what they thought or believed—evidential issue)

CASES:1. Embry v. Hargadine -- P says D(employer)’s words reinstated the employment term contract after it had expired.

A. After the term is up, P became at-will employee—at will emp gets paid on grounds of restitution, not contract.B. Issue: whether the trial court erred in telling the jury that both parties must have intended to contract with

each other. i.e. Is intent to contract necessary?C. Answer: it doesn’t matter what the parties intended subjectively—only objectively what a reasonable person

in the party’s position would have understood the other party to mean.

2. Lucy v. Zehmer -- While drinking, D agreed to sell his farm to PA. Does it matter if P knew it was a joke? Not unless a reasonable person in P’s position would know it was a

joke.B. Can the waitress be held to be the “reasonable person?” Maybe not b/c she’s not a “reasonable person in

the position of the other party.”

3. Hole in One case –prize car for a hole in oneA. rule: generally rewards are enforceable when they require something of the person and if the offeree acted

for the sake of the reward.

4. Cohen v. Cowles Media -- P claims that D fraudulently promised confidentiallyA. Court thinks reporters didn’t intend to be legally bound—rather bound by ethics and reputationB. Presumptions as to contracts being legally bound: Where the evidence is ambiguous about whether the

parties intended to be bound, the court will follow these rules: (1) In a "business" context, the court will presume that the parties intended their agreement to be legally enforceable; (2) but in a social or domestic situation, the presumption will be that legal relations were not intended.

(B) Offer: Creation of Power of Acceptance

Restatement 2nd §24 says an offer is: “manifestation to enter into a bargain so made as to justify another person in understanding that his assent to that bargain is invited and will conclude it”I. Elements of an Offer:

1. the offer must be communicated2. the offer must communicate a desire to enter into a contract3. must be directed at some person or group4. must invite acceptance5. must create reasonable understanding that upon acceptance, the contract will arise w/o further approval from

the offeror


II. Determining an Offer vs. Preliminary Proposal:1. look at the words used—“offer,” “quote,” etc.2. look at the comprehensiveness of the terms. A communication that omits significant terms isn’t likely an offer3. is the communication directed at a particular individual?4. what is the relationship of the parties?5. look at whether the common practices of the trade were used

III. Ways the offer is terminatedGeneral strategy: For an acceptance to be valid, it must become effective while the power of acceptance is still in effect. So where there is doubt about whether the acceptance is timely: (1) pinpoint the moment at which the "acceptance" became effective; and (2) ask whether the power of acceptance was still in effect at that moment. If the answer to part (2) is "yes," the acceptance was timely.

2. expiry: reasonable time given to accept (unless revoked in meantime). “reasonable time”= time enough to receive, consider, and reply (not applicable in face-to-face situations

Four terminations in Restatement § 36:3. rejection: offer lapses if rejected4. counteroffer: offer lapses b/c counteroffer = rejection + new offer5. death or mental disabling of the offeror6. revocation

i. unless the offer is an option or firm offerii. revocation effective only once it is communicated to the offeree

iii. revocation governed by legal receipt—received by person, rep., or deposited in authorized placeiv. revocation in same way offer was made works (ads, etc.)v. action clearly inconsistent w/ offer = revocation (selling the house offered revokes the offer to

others)CASES:

1. Lonergan v. Scolnick -- Seller (D) sends real estate ad. Buyer (P) asks for more detail, detail given w/ request to respond asap, Buyer sends back letter accepting offer, but seller already sold to third party. Buyer sues for breach.

A. Advertisements: Most advertisements appearing in newspapers, store windows, etc., are not offers to sell. This is because they do not contain sufficient words of commitment to sell—instead they request offers.

B. The later letter was an offer, but was conditional (respond fast you can have it)C. Appeals court says no offer (not even conditional) b/c the language indicates that there was another buyer

2. Lefkowitz v. Great Minneapolis Surplus Store -- fur coat not given to first-comerA. To determine that an ad is an offer, the court looks for:

i. Specific terms: If the advertisement contains specific words of commitment, especially a promise to sell a particular number of units to a person meeting certain req’s, then it may be an offer.

ii. Words of commitment: Look for words of commitment — these suggest an offer.B. other rules:

i. Offer can be modified any time before acceptance—not afterii. communication “clear, definite, explicit, nothing open for negotiation” offer

iii. The court is concerned that the store was trying to “bait and switch” the customer w/o being bound to what the as offers

3. Izadi v. Machado Ford -- ad for 88 Ford rangerA. This is not an offer because the terms and offeree aren’t clear and limited, but it is misleading advertising.

4. Southworth v. Oliver – Seller (D) talks to neighbor (P) about selling land. D sends letter to P and other neighbors. P gets money ready and sends letter of acceptance. D already sold to other neighbor.

A. The letter is clear and explicit but lacks words of commitment (the evidence that the offeror intends to bind himself). Still, the court finds that there is a contract here b/c. . .

B. Offer to more than one person may still be an offer if it satisfies other req’s:i. reasonable man test

ii. objective testiii. words of commitmentiv. naming the addresseev. definiteness in general

(C) Acceptance: Exercise of Power of Acceptance


only offeree may accept acceptance must be freely done like offer, it is judged by “objective test” it is the offeree’s manifestation of assent

Method and Communication of Acceptance

I. Mirror Image rule1. response modifying offer or imposing conditionals on acceptance ≠ acceptance

a. although, recently, courts are more lenient on minor discrepancies—especially if discrepancies were implicit in offer

2. Non-conforming response = Counteroffer UCC 2-207(1)—a counteroffer is an offer made by the offeree relating to the same matter as the original offer, but proposing a different substitute bargain.

a. Restatement § 39 defines a counteroffer as an offer relating to same subject matter as the offer, but proposing a substitute bargain. I.E.: a rejection and a new offer.

b. Limited: Courts are reluctant to find that this section applies. Only if the second party's form makes it clear that that party is unwilling to proceed with the transaction unless the first party agrees to the second party's changes, will the clause be applied so as to prevent a contract from forming.

c. UCC always tries to find a contract, so allows lots of ways an offer can still become a contract when certain things change.

3. where a response is a request for info or suggestion for changes, this may not be a counteroffer or rejection4. UCC view: The UCC rejects the "mirror image" rule, and will often lead to a contract being formed even

though the acceptance diverges from the offer. Wherever possible, the UCC tries to find a contract, so as to keep the parties from weaseling out (as they often try to do when the market changes). This entire "battle of the forms" is dealt with in UCC §2-207, probably the most important UCC provision for the Contracts student.

5. UCC 2-205 says that default is any manner of acceptance reasonable under the circumstances.II. Mode of Acceptance

1. acceptance must be manifested and communicated2. offeror may specify what must be done to accept (offeror is the master of the offer)

a. terms of acceptance may be the same thing as the performance required by the bargain (paying $10) or may be something that is not the thing bargained for (standing on your head)

3. Three modes of acceptance as indicated (or not) by the offer:a. offer explicitly states that one way to accept is exclusive and mandatoryb. a manner is specified, but the offer does not make clear that it is exclusivec. the offer does not specify any mode of acceptance (in which case the offeree may use same medium as

offeror or any other reasonable or customary means of communicating acceptance)4. Offeror can’t make ambiguous action (like “leaving your house = acceptance”) the form of acceptance5. Silence of inaction = acceptance only when (1) receiver of goods acts as if its his property (exercises dominion)

or (2) prior dealings of the parties make it reasonable for the offeror to expect notice of rejectionIII. When Acceptance takes effect

1. In instantaneous communication like face-to-face interaction or phone calls, acceptance takes effect upon manifestation

2. In non-instantaneous communication and in the absence of other specification by the offer, acceptance takes effect when it is put out of the offeree’s possession, provided delivery is made via a medium expressly or implicitly authorized by the offer (MAILBOX RULE).

a. Lost in transmission: If the acceptance is lost in transmission or delayed, the applicability of the mailbox rule depends on whether the communication was properly addressed.

Properly addressed: If the acceptance is properly addressed, it is effective at the time of dispatch even if it is lost and never received by the offeror at all. (But a court might "discharge" the offeror in this circumstance, for instance if he had sold the goods to someone else.)Not properly addressed: If the acceptance is not properly addressed, or not properly dispatched (e.g., sent by an unreasonably slow means), it will be effective upon dispatch only if it is received within the time in which a properly dispatched acceptance would normally have arrived. If it comes later than this "normal" time, it will not be effective until receipt.

3. Both acceptance and rejection sent by offeree: If the offeree sends both an acceptance and rejection, the rule depends on which is dispatched first.

1. Rejection sent first: If the rejection is sent first, then the acceptance will be effective if (and only if) the offeror receives it before he receives the rejection.

http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+%A72-207&client=Student


2. Acceptance dispatched first: If the acceptance is sent before the rejection, the acceptance is effective upon dispatch, and the subsequently-dispatched "rejection" (really a "revocation of acceptance") does not undo the acceptance, whether that rejection is received by the offeror before or after he receives the acceptance.

IV. Offer for Bilateral vs. Unilateral contracts:1. when words are used to accept, the contract is bilateral b/c it is an exchange of a promise for a promise

a. some bilateral contracts still have terms of acceptance that are performances even though the actual thing exchanged is a promise

2. in a unilateral contract, the act of acceptance is also the complete act of performance—(promise for performance)

3. either unilateral or bilateral: courts tend to allow either performance or promise as acceptance unless clearly stated in offer that only one would be valid acceptance.

4. Restatements Partial performance:a. where either method is allowed, partial performance = promise to fully perform = acceptance (Rest.

§ 62) (also § 50 says acceptance can be beginning performance)b. where only performance is deemed valid by offer, partial performance or tender of performance

creates option contract for offeree Rest § 45c. Under § 45 and 62, usually preparations ≠ beginning performanced. tension—an offeror needs to be able to revoke if the offeree isn’t doing a good job, but if we allow this,

then the offeror can revoke when the offeree is two steps from the other side of the bridge.5. offeree has duty to notify offeror of performance where offeror is not present, would not reasonably know6. reverse unilateral contracts (A inciting a promise from B with a performance—giving cash, etc.)7. prospective sellers usually only held to be soliciting offers when advertising

CASES:1. La Salle National Bank v. Vega —B’s offer stipulates that there be certain events before contract enforceable. including

“trust’s execution” (which never happened)a. Seller or buyer could start over with a new offer, but this offer must be accepted as stipulated by offeror.

2. Hendricks v. Behee —P offers to buy real estate. D signs agreement w/o yet communicating that to P. P rescinds offer before hearing of acceptance by agent.

a. default rule: No communication no acceptancei. But offeror can stipulate other ways to accept (“just sign it,” etc.)

b. the reasonable person standard is from the point of view of the other party—and where no communication, then other doesn’t know

i. Thus, offeror can withdraw before acceptance communicatedc. otherwise would paralyze offeror from selling to others w/o worrying about liability to first party (unless only

one possible offeree)d. Court notes that communication of acceptance to the agent here was not acceptance

3. Ever-tite Roffing v. Green -- contract offer to be accepted by (1) written acceptance or (2) by commencing work. P went to start work for D, D had already hired other roofers who were there working already.

a. What does “commencing performance of work” mean—when they load the truck? This court says P had commenced work.

i. Trial court says revoking offer on P’s arrival was okay.b. P likely wanted to be able to accept by commencing work.c. RULE: An offer may be withdrawn at any time before acceptance, but there are exceptions, one is:

i. The offeror is required to give reasonable time for acceptance if there is no expiration of the offer stated in the contract. Then the offer would expire on its own.

ii. So D should put a time limit for acceptance next time.

4. Corinthian Pharmaceutical v. Lederle Labs —Seller (D) sent letter to middle-men to notify of price change (not meant for buyer P to see it). P puts in a huge order to get lower price before change. D gives 50 at old price, backorders 950 at higher price.

a. Court says D gave no offers, so no contract.i. 1st letter was not even to P; Pricelist was not an offer


b. P did offer with its order of 1000, but it was not accepted—rather a counter offer was given for 50 vials.i. (mirror-image rule (common law): you have to send what was ordered for there to be acceptance)

c. UCC 2-206(1)a-b says that acceptance = any manner reasonable under the circumstancesi. BUT if goods are non-conforming then it’s still an acceptance unless notification given that it’s a

counter-offer instead of acceptance.ii. i.e.: nonconforming goods + explanation = no acceptance

5. Carlill v. Carbolic Smoke Ball --ad says anyone who uses the smoke ball for two weeks and gets the flu will be given a reward. P did it and got the flu.

a. Is the ad an offer? Is it clear as to what is being offered? To whom?i. It is an offer b/c there are specific conditions for the offeree to perform and a specific promise

(unilateral contract)b. Default: ads are not offers—rather solicitations of offers

i. BUT court says ads asking conditions of performance (like using smoke balls for 2 wks.) for a promise (paying a reward) can be offers.

ii. notice of performance usually required where performance = acceptance (but court doesn’t require it here)

6. Glover v. Jewish War Veterans of US -- reward offered, but provider of info doesn’t find out about the offer until after providing the info

a. Q—can you accept without knowing about an offer?i. No—Offeree must know of offer: An acceptance is usually valid only if the offeree knows of the

offer at the time of his alleged acceptance.b. Mutual assent—we want both parties to intend to enter into the contracts that we enforcec. Rewards: Thus if a reward is offered for a particular act, a person who does the act without knowing about the

reward cannot claim it.d. What if she were a police officer? No. she’s doing it out of a prior obligation.

7. Industrial America v. Fulton Industries – D puts out an ad that they want to buy companies. P, Indust. America, broker (Deutsch) wants to help Bush-Hog merge w/ another company, Fulton (D). P writes letter to D describing B-H, then D cuts out middleman and merges w/ B-H.

a. Q—had P ever accepted D(Fulton)’s offer? Was the ad an offer?b. what does the line in the offer stating brokers are “fully protected” mean?

i. brokers are afraid of the parties cutting them out of the middle. Does this line mean brokers will be “taken care of” as they are customarily?

ii. Implied contract here?: “If we merge with the company whose name someone gave us, then we will pay that person” Implied that providing a name of potential company is the acceptance.

c. Acceptance of unilateral K is performance.i. P could have performed in writing the letter

ii. Or, as is sometimes the case with brokers, acceptance may have been deferred until merger occurred

8. Adams v. Lindsell —seller (D) mails offer, buyer (P) receives the letter, P sends acceptance, but D sold the wool to someone else before receipt but after time in which P could have reasonably replied.

a. Q--Was there acceptance on the date of mailing or on the date of receipt by offeror? (mailbox rule)i. Court argues that nobody would ever be bound if the date of receipt was the rule b/c nobody would

ever know the contract was made valid—there would be no meeting of the minds.ii. Mailbox rule: In most courts, the acceptance is effective upon proper dispatch. This is called the

"mailbox" rule.1. Offer provides otherwise: The "mailbox" rule does not apply if the offer provides otherwise

b. Other related rules:i. offer counts when received

ii. counter offer counts when receivediii. revocation counts when received

c. Mailbox problem arises when you use mail to correspond—if you use phone this doesn’t apply.i. What about faxes, emails, etc.


9. Russel v. Texas Co. —Texas is using Russel’s land (trespass). Russel says in offer, “if you continue to use the land, that is your acceptance.”

a. Acceptance by dominion: Where the offeree receives goods, and keeps them, this exercise of "dominion" is likely to be held to be an acceptance.

b. Restatement § 72(2) says “Where offeree exercises dominion over things which are offered to him, such exercise of dominion in the absence of other circumstances showing contrary intention is an acceptance. If circumstances indicate that the exercise of dominion is tortious the offeror may at his option treat it as an acceptance, though the offeree manifests an intention not to accept.”

10. Ammons v. Wilson Co. -- Seller “books” buyer for a certain amount of shortening. “Booking” is negotiation. Buyer asks for 942 cases of shortening (offer). Seller doesn’t respond (silence). 12 days after order, seller says he won’t sell

a. Q—was the seller’s silence + their prior negotiations and business an implied acceptance?b. Generally, an offer cannot be accepted by silence. But there are a few exceptions:

i. Reason to understand: Silence can constitute acceptance if the offeror has given the offeree reason to understand that silence will constitute acceptance

ii. Benefit of services: An offeree who silently receives the benefit of services (but not goods) will be held to have accepted a contract for them if he: (1) had a reasonable opportunity to reject them; and (2) knew or should have known that the provider of the services expected to be compensated.

iii. Prior conduct: The prior course of dealing may make it reasonable for the offeree's silence to be construed as consent.

c. Restatement Contracts § 72 1(c): “Where an offeree fails to reply to an offer, his silence and inaction operate as an acceptance in the following cases and in no others:. . .(c) Where because of previous dealings or otherwise, the offeree has given the offeror reason to understand that the silence of [or] inaction is intended by the offeree as a manifestation of assent, and the offeror does so understand.”

d. Holding: silence is acceptance here. The court in Ammons is expecting the seller to notify the buyer of rejection of the offer.

11. Smith-Scharff Paper v. P.N. Hirsch & Co .—Seller (P) provides bags to Buyer (D) that have D’s logo printed on them. D denies the existence of a contract b/c D was merging with another company and it doesn’t want to be forced to purchase the remainder of P’s stock. Court finds implicit K and makes D pay for bags.

a. key facts going for a contract:i. D’s president tells P’s president not to worry—this may be an indication of the contract (not the

contract itself)ii. pattern of business

iii. Goods not suitable for sale to others, so no writing necessary under statute of frauds.iv. The fact that B projected their needs to S in advance makes an implicit contract easier to find.v. This brings in estoppel—“under obligation of good faith Buyer is estopped from denying the existence

of a contract.”b. key facts going against a contract:

i. long past pattern of business, but no past pattern of buying up bags that aren’t needed.c. UCC 2-204 (1) + 1-203(3) says that agreements not necessarily made by offer and acceptance in the

traditional way—more found in the course of dealing and expressions of conduct, etc. 1-205i. So, would it have been reasonable for the seller to believe that buyer would buy under any

circumstances—or just the circumstances of the first time they bought up the extra stock?

12. Harris v. Time, Inc —open letter and get a free calculator watch. Kid opens letter but Time doesn’t send the watch.a. This would be like Loefkowitz, except that Time needs to be notified of acceptance (performance)b. Joshua did notify Time of his performance by filing a complaintc. Despite the technical validity of the suit, court throws it out on “de minimus” theory

Nature and Effect of Counter Offer – see above; also:


Counter-offer: If the offeree makes a counter-offer, his power to accept the original offer is terminated just as if he had flatly rejected the offer.

a. Contrary statement: But as with a rejection, a counter-offer does not terminate the power of acceptance if either offeror or offeree indicates otherwise.

BATTLE OF THE FORMS (UCC 2-207): sellers and buyers have standard forms that contradict each other. Under the mirror image rule, the last form sent will win because delivery creates a contract. Also, no delivery = no contract, even if both parties want one. i.e. under formalistic rules (mirror image, etc.) you get strange outcomes sometimes (but it’s clear).UCC attempts to fix this.1. Under UCC you have to determine what “materially alters” the contract. How do you gauge this?2. UCC is not very formalistic, but this is at the expense of clarity and being definite3. Also, UCC is somewhat pro-buyer because the buyer’s original purchase order will likely govern most of the terms that are deemed part of the contract, whereas with the mirror image rule, the seller will benefit because seller can always send a last agreement along with delivery of the product.

The UCC rejects the "mirror image" ruleDefault: At the most general level, §2-207(1) provides that any "expression of acceptance" or "written confirmation" will act as an acceptance even though it states terms that are "additional to or different from" those contained in the offer. –i.e. no real mirror image needed unless. . .

Exceptions:1. Acceptance expressly conditional on assent to changes: An "expression of acceptance" does not form a contract if it is "expressly made conditional on assent to…additional or different terms."

a. Courts are reluctant to find that this section applies. Only if the second party's form makes it clear that that party is unwilling to proceed with the transaction unless the first party agrees to the second party's changes.

2. "Additional" term in acceptance: Where the offeree's response contains an "additional" term (i.e., a clause taking a certain position on an issue with which the offer does not deal at all), the consequences depend on whether both parties are merchants.

a. At least one party not merchant: If at least one party is not a merchant, the additional term does not prevent the offeree's response from giving rise to a contract, but the additional term becomes part of the contract only if the offeror explicitly assents to it. b. Both merchants: But if both parties to the transaction are "merchants," then the additional term automatically becomes part of the contract, as a general rule §2-207(2). However, there are two important exceptions to this "additional term becomes part of the contract" rule:

i. Materiality: The addition will not become part of the contract if it is one which "materially alters" the contract. For instance, a disclaimer of warranty will always be found to materially alter the contract.ii. Objection: If the offeror objects to the additional term, it won’t become part of the K.

3. Conflicting terms in documents: If an issue is covered one way in the offering document and another (conflicting) way in the acceptance, most courts apply the "knock out" rule. UCC "gap-filler" provision is used if one is relevant; otherwise, the common law controls. 4. Response diverges too much to be acceptance: If a purported acceptance diverges greatly from the terms of the offer, it will not serve as an acceptance at all, so no contract is formed.5. Contract by parties' conduct/performance: If the divergence referred to in the prior paragraph occurs (so that the exchange of documents does not create a contract), the parties' conduct later on can still cause a contract to occur. Section 2-207(3) provides that "conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract."

a. Terms: Where a contract by conduct is formed, the terms "consist of those terms in which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this Act." §2-207(3). For instance, the price term would be a "reasonable price at the time for delivery," as imposed by §2-305's price "gap filler."

6. Confirmation of oral contract: If the parties initially reach an oral agreement, a document later sent by one of them memorializing the agreement is called a "confirmation."

a. Additional terms in confirmation: If the confirmation contains a term that is additional to the oral agreement, that additional term becomes part of the contract unless either: (1) the additional term materially alters the oral agreement; or (2) the party receiving the confirmation objects to the additional terms.b. "Different" term in confirmation: If a clause contained in the confirmation is "different" from a term on the same issue reached in the oral agreement, the new clause probably doesn’t become part of the K.


http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+2-207(3)&client=Student

http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+2-207(3)&client=Student

http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+%A72-207(1)&client=Student


CASES:1. MN & St. Louis Railway v. Columbus sequence of events:

a. price/stock inquiry sent to Sb. offer sent back to B (an offer of a range 2000-5000 tons of rails because specific as to terms, etc.)

Note—offer wouldn’t have to say “2000 tons”c. Telegram and letter sent accepting 1200 tons—this is a counter-offer b/c original offer was for 2000-5000 tons. d. Seller rejects this counter offere. Buyer enters order for 2000 tons

RULE—(e) is not an acceptance of the first offer b/c the first offer was rejected by the counteroffer

2. Leonard Pevar Co. v. Evans Co. -- plywood purchase—suit for breach of implied warrantyEvents:i. oral agreement (order of plywood)

ii. buyer sends B’s purchase order to selleriii. Seller sent back S’s acknowledgment with a boiler plate “no warranties” disclaimer on the back (always assumed that

there is an implied warranty unless seller explicitly states otherwise)

1. Rejection of mirror image rule here—UCC 2-207 (p. 326) says contracts can change with those later additions that do not conflict with each other. Oral contract was made (see note 17, p. 327)—everything else is an addition and allowable unless it conflicts with something the other party says—knockout rule

2. Rule about boilerplate stuff— sophisticated merchant held to anything they sign (not always so with consumers)3. What if there was no oral contract?

i. Do (1) and (2) create a contract? No, under 2-207(1) because (3) was conditional on the acceptance of the terms. But under 2-207(3) there is a contract because the conduct of the parties show a contract.

ii. But whose terms control? According to UCC 2-207(a)-(b):1. Terms of this contract will be those on which parties substantially agree (warranty limitation is

outside the terms that agree)—so in this case we go to the UCC default terms which imply a warranty.2. terms on which the parties agree through words or conduct3. terms supplied by course of dealings and trade usage4. supplementary terms provided by UCC5. NOTE: terms that conflict are thrown out

(D) Termination of Offer: Destruction of Power of AcceptanceWays of terminating power of acceptance:

(1) rejection by the offeree; (2) counter-offer by the offeree; (3) lapse of time; end of reasonable time: If the offeror does not set a time limit for acceptance, the power of acceptance terminates at the end of a reasonable time period.(4) revocation by the offeror; and (5) death or incapacity of the offeror or offeree.

CASE:1. Dickinson v. Dodds (not the law anymore)

A. Sequence of events:1. D sent memo to P indicating he’d be willing to sell houses to him; offer to be open until Friday.2. P hears that D offered land to someone else.3. Thursday P gives letter of acceptance to D’s mother-in-law, but D never received it

B. Court says P hearing that D intends to sell to someone else = revocationRevocation effective upon receipt: A revocation by the offeror does not become effective until it is communicated to the offeree. SO—P could have accepted if he had never heard of D’s offer of the land to someone else.

C. Court says that there can be no “meeting of the minds” here b/c D changed his mind and P knows it. An offer is an “invitation to accept”—once the offeree understands there is no longer an invitation to accept, there is no offer.E. Posner seems to dislike “meeting of minds” ruleF. This is not an option contract b/c no consideration for the agreement to leave offer open for a number of days.


(E) Irrevocable Offer: Options and Firm Offers—The ordinary offer is revocable at the will of the offeror. (This is true even if it states something like, "This offer will remain open for two weeks.") Exceptions to this general rule of revocability:

1. Standard option contract: First, the offeror may grant the offeree an "option" to enter into the contract. The offer itself is then referred to as an "option contract” and is not destructible once formed, even if B rejects the contract or makes a counteroffer. (can be waived w/ more consideration on the other side)

a. Common law requires consideration: The traditional common-law view is that an option contract can be formed only if the offeree gives the offeror consideration for the offer

i. Usually separate consideration required, except where option is part of main contract (e.g. lease with an option to purchase)ii. Courts hesitate to find no consideration where option is used to entice a deal (b/c the enticement is the consideration in a sense)

b. Modern (Restatement § 87(1)a) approach: That a signed option contract that recites the payment of consideration will be irrevocable, even if the consideration was never paid.

2. "Firm offers" under the UCC: Even more liberal in some cases: allows formation of an irrevocable offer even if no recital of consideration is made. By §2-205, an offer to buy or sell goods is irrevocable if it: (1) is by a merchant; (2) is in a signed writing; and (3) gives assurance that the offer will be held open.

a. Three month limit: No offer can be made irrevocable for any longer than three months, unless consideration is given. §2-205. (also, reasonable time implied if no expiry stated)b. Forms supplied by offeree: If the firm offer is on a form drafted by the offeree, it is irrevocable only if the particular "firm offer" clause is separately signed by the offeror.

3. Part performance or detrimental reliance: The offeree's part performance or detrimental reliance (e.g., preparations to perform) may transform an otherwise-revocable offer into a temporarily irrevocable one.

a. Offer for unilateral contract: Where the offer is for a unilateral contract, the beginning of performance by the offeree makes the offer temporarily irrevocable. As long as the offeree continues diligently to perform, the offer remains irrevocable until he has finished.

i. Preparations: This doctrine applies only to the beginning of actual performance, not the making of preparations to perform.

b. Offer for bilateral contract: If the offer is for a bilateral contract, the offeree's making of preparations will cause the offer to be temporarily irrevocable if justice requires. "An offer which the offeror should reasonably expect to induce action or forbearance of substantial character on the part of the offeree before acceptance and which does induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice." Rest.2d, §87(2).

i. Offers by sub-contractors: Most importantly, an offer by a sub-contractor to a general contractor will often become temporarily irrevocable under this rule.

CASES:1. Humble Oil v. Westside Investment Corp . -- The offeree gave consideration for the option to be left open in this

case. $50 paid for the option to buy the land for a period of time.i. Humble seems to say that the offer would stay open even if the offeree “rejected” it because the contract for

the option is completely separate from the contract for the land.ii. Risk issue—allows the buyer and seller to decide who gets the risk. UCC and Restatement want to allow

options because they are an economically useful action.

2. Petterson v. Pattberg -- creditor offers to take $750 off the debt if debtor pays now. Debtor goes to creditor’s house to pay off the mortgage, Creditor announces that mortgage was sold to someone else—Debtor tries to pay.

i. No consideration—just an offer to enter into a unilateral offer (performance = paying the money)ii. RULE: acceptance of unilateral offer = performance

iii. Court says debtor began to perform, but that performance/actually paying is the only way you can accept.1. Debtor didn’t accept the money from him, so mortgage wasn’t paid off.

3. Marchiondo v. Scheck -- Seller agrees to give commission to broker on the sale of real estate.1. So 2 contracts:

a. seller—broker: offer is to pay commission buyer (who buys) being foundb. seller—buyer: offer is to transfer title to land for $

2. (a) is a unilateral contract where acceptance would be the performance of finding a buyer who buys.3. Q in these cases is: Where does performance start and preparation for performance end?




a. In Petterson, walking to the house wasn’t deemed partial performanceb. In Marchiondo it’s not clear whether performance would start where broker has expended time and effort

or where transaction for sale begins.4. Restatement 2nd § 45:Where an offer invites an offeree to accept by rendering a performance and does not

invite a promissory acceptance, an option contract is created when the offeree begins the invited performancea. Still, where does performance begin?

Subcontractors and bids:

4. James Baird Co. v. Gimbel Inc. (1933)-- P (contractor) gets mistaken bid from D (linoleum subcontractor). By the time D notifies P that his bid was mistaken, P’s client had accepted P’s bid. But P hadn’t accepted D’s bid. i. Usually, contractors post bond with bid—if accepted and then you don’t perform, then contractor loses bond

1. No contract here because no acceptance before offer was withdrawn.ii. So Q—can P get damages on the basis of promissory estoppel b/c he relied on the subcontractor’s bid?

1. Court says no b/c an offer conditional on acceptance is not a promise.2. Hand’s view—that it’s not reasonable to rely on a revocable offer. But that it would have been okay if

the sub had stated that it was a unilateral contract w/ performance being the g.c.’s obtaining the job.iii. Gen. contractor will want to bid shop for awhile after getting acceptance if we allow him to bid before accepting

subcontractor offer.

5. Drennan v. Star Paving Co . same facts as James Baird—different result (b/c court follows Rest.)i. Court says PE works here b/c the offer was relied on to P’s detriment and that D could foresee

thatii. What is the promise that brings PE into play?

1. Implied subsidiary promise: “if you rely by beginning performance, then I’ll give you the opportunity to complete performance before I revoke the offer.”

2. If this were a unilateral contract, Rest. § 45 would apply and the beginning of performance would create an option contract. (in order to protect the offeree during period of performance—reasonable period).

3. But this is a bilateral contract. Court still uses 45 for inspiration—that when a party has to begin performance by reliance, there is a subsidiary promise even though acceptance should be a promise.

iii. Difference between Baird and Drennan:1. Baird default = sub’s offer revocable, offeree (gen) bears the risk—circumvented by offering a unilateral

contract2. Drennan default = sub’s offer irrevocable, offeror (sub) bears the risk—circumvented by stating “the

offer is revocable.”3. So the rules in both cases are defaults ONLY, so both options available in either case.

6. ECM v. Maeda -- Sub(ECM) agrees to bid iff gen awards them the job if sub’s bid is the lowest AND gen gets the jobi. Sub trying to solve bid-shopping problem—putting risk on gen. by making a contract about the contract.

ii. Drennan + the sub’s contract to bid iff. . . = an agreement that binds both sides on the awarding of the job

Section 2: Insufficient or Defective Formulation of Agreement (indefinite, incomplete or deferred terms)

A. Defective Formulation and Expression of Agreement

CASES:1. Raffles v. Wichelhaus -- two ships called “Peerless” sailing at different times—no term in the K that refers to which one or time. Seller sues buyer b/c buyer won’t accept cotton that was shipped.

i. materially different x in mind no contractii. common law rule: must be meeting of the minds

2. Konic International v. Spokane Computer -- Buyer refuses to pay for $5620 surge protector b/c over the phone buyer’s employee heard “fifty-six twenty” and thought $56.20 was the price when he ordered the surge protector.

i. Restatement 2nd § 20:


a) There is no manifestation of mutual assent to an exchange if the parties attach materially different meanings to their manifestations and neither knows or has reason to know the meaning attached by the other

ii. If either knows the other is mistaken or has reason to know, then they have a duty to clear things upa) If this occurs, court may decide to enforce contract on other party’s term or not enforce at all.

B. Indefinite AgreementA. Generally: No contract will be found if the terms of the parties' "agreement" are unduly indefinite—i.e. a material aspect of the contract is left indefinite or the K is incurably indefinite.

Kinds of Indefiniteness:1. Vagueness or ambiguity—usually courts use parol ev., trade usage, custom, and law (UCC, etc.)2. Omitted Terms—agreement has a gap, can be filled w/ UCC or “reasonableness”3. Unresolved—of material aspect of a K not yet settled (BUT, they may have intended this)

Ways to Fix it:1. Interpretation: jury or judge interprets the contract in light of context, other evidence, etc.2. Construction: court uses “implications in law”—supplies missing terms, etc.

1. Court supplies missing term: But if the court believes that the parties intended to contract, and the court believes that it can supply a "reasonable" value for the missing term, it will generally do so.

a. UCC: The UCC expressly allows the court to fill in terms for price, place for delivery, time for shipment, time for payment, etc., as long as the parties have intended to make a contract. See §2-204(3). For example:

i. default warranties—only excluded by explicit languageii. seller’s place as default delivery locationiii. reasonable price (where none stated)

b. Non-UCC: In non-UCC cases, most modern courts follow this "supply the missing term on a reasonable basis" approach, as long as the parties have shown an intent to create a binding contract.c. Too indefinite: But there may be situations where even though the parties intended to create a binding contract, they have fleshed out the terms of their deal so little that the court simply cannot meaningfully supply all of the missing terms. In that case, the court will find the agreement void for indefiniteness. (But this is rare.)

2. Agreement to agree: Similarly, the court will generally supply a missing term if the parties intentionally leave that term to be agreed upon later, and they then don't agree. See, e.g., UCC §2-305(1)(b), which allows court to supply a reasonable price term if "the price is left to be agreed by parties and they fail to agree.…"3. Part performance: Even if an agreement is too indefinite for enforcement at the time it is made, the subsequent performance of the parties may cure this indefiniteness.

CASES:1. Varney v. Ditmars -- employer offers to “give fair share of profits” for P’s extra hard work and getting certain jobs done. This offer is vague and unclear. P does some of the jobs. D fires P for missing work once.

i. Court says there is no legally enforceable K b/c the agreement terms are not certain or explicit.ii. no discernible terms no enforceable contractiii. Also, the remedy is a “fair share.” How could the court determine what a “fair share” would be?

a) Cardozo dissents that even though the wording of the oral contract itself is unclear, the court can go back in and figure out what was meant. “Fair price” = market price, etc.

iv. Law provides default rules where the contract is silent, but sometimes the contract is so vague or indefinite that the court doesn’t even know which default terms to apply.v. quantum meruit grounds inapplicable b/c no contract in the first place.

2. Lefkowitz v. Great Minneapolis Store -- Cardozo would have said here that extrinsic evidence would be admissible to determine the price of the coats that were “worth to $100.” --contract provisions within the contract unclear, but if extrinsic evidence can clarify terms, then court can determine contract terms.

C. Incomplete and Deferred Agreement (open terms, etc) Terms can be left open for future determination in several ways:

o By objective standard (formula, market value, etc.)

http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+%A72-305(1)(b)&client=Student




o By one of the partieso By leaving no way for it to be determined, thus contract not formed because no price (material)

whether or not it’s a deal-breaker (material) will affect court’s decision as to whether K existso Agreement to agree—deliberate deferral with agreement to negotiate in good faith.

Agreement to record in writing a prior oral agreement (here court must determine whether oral K is the true K.

CASES:1. Metro-Goldwyn-Mayer v. Scheider -- contract to perform do pilot film and a TV show not completely negotiated. Contract was unfinished when performance of pilot film occurred. Actor refused to do TV show when time for that came b/c they hadn’tt agreed on date of the TV show when the performance of the pilot film was begun.

i. Rule: Where parties have completed negotiations of essential elements, and performance has begun, a contract exists even where some negotiations are deferred. If gaps exist, court will fill in the gaps with what is customary commercial practice.

a) especially if to defer the non-essential negotiations is usual practice in the industry

2. Joseph Martin Deli v. Schumacher -- lease provision allows for option to continue the lease after a certain date—the terms of the renewal “to be agreed upon.”

i. Past course of business could usually be a standard, but the court says that here no indication of that in the contract. Instead, the phrase “to be agreed upon” indicates that there is an important element still open.ii. “relationship specific investments” like this allow hold up b/c the other party doesn’t have the option to sell or buy from another. A long term contract may mitigate this hold up effect.iii. Schumacher RULE: Two things that the court requires to enforce here:

a) enough evidence of intent to be boundb) a formula or methodology by which they will agree on a price in the future

(1) Possible ways—past course of business, market value, rate of inflation, etc.iv. So is the implicit good faith the formula here?

3. Oglebay v. Armco -- Oglebay ships iron for Armco which makes steel.i. This is an eg. of a relationship specific investment—shipper wants assurance of long term contract to justify their investment in the iron shipping vessels.ii. Contract is until 2010 ands states that yearly shipping rate to be determined by:

a) regular rates for the season ORb) if no regular rate, then a rate on which they mutually agree.

iii. They use a publication to determine (a) the seasonal rate, which later ends publication. They are eventually unable to use (b) and agree on a price.iv. RULE: Court says when the stated methodology breaks down, court can determine a reasonable price.v. Though UCC not binding here, UCC allows the court to supply a reasonable price term if "the price is left to be agreed by the parties and they fail to agree.…"

4. Empro v. Ball-Co . -- D trying to sell itself. P sends letter of intent—subject to certain conditions including the approval of the shareholders. D begins negotiations with other buyers.

i. Court says P gave no objective manifestation of intent to be bound b/c under their letter of intent:1. they could do whatever they want (subject to shareholder decision) and2. the agreement mentions the anticipation of a future K that they intend to be bound by.

ii. RULE: A letter of intent memorializing general terms of an agreement is not a contract if the language of the agreement makes clear that they do not intend to be bound.

Rules:1. agreement shows both parties’ intent to be bound K2. agreement memorializes intent to be bound already shown by prior communication K3. no intent to be bound in the agreement and none prior no contract4. If there’s a contingent factor over which a party has control (“subject to approval”) probably no K

D. Remedies where Agreement Incomplete or IndefiniteRemedies for indefiniteness are on a sliding scale which depends on the degree of indefiniteness. I.E., sometimes indefiniteness will allow damages but not specific performance.

CASE:


1. Hoffman v. Red Owl Store -- P sells bakery and a bunch of stuff to get a Red Owl grocery franchise, D assures P that certain amount of cash will be enough, then changes to price several times. Court finds PE but no K

i. Q-- Reliance on a promise found, but why no K? What is necessary for P.E. ≠ offer (necessarily)ii. The offer must invite acceptance. But there is no offer here. Just a bunch of talk over a period of time.iii. Note: these days, courts are less likely to find reliance in a case like this.

CHAPTER IV: AVOIDANCE OF CONTRACT--offer and acceptance existed, but some flaw in the process makes courts reluctant to enforce. (incompetence, mistake, etc.)

Section 1: Capacity to Contract: Infancy and Mental IncompetenceCertain classes of persons have only a limited power to contract. Most important are infants and the mentally infirm. For these people, any contract they enter into is voidable at their option — they can enforce the contract or escape from it.

A. InfancyInfants: Until a person reaches majority, any contract which he enters into is voidable at his option. The age of majority is a matter of statute, and in most states is now 18. No matter how sophisticated the minor is, it’s age that matters.

1. Disaffirmance: In nearly every state, an infant may avoid the contract even before he reaches majority. This is called "disaffirmance." He may do this orally, by his conduct (e.g., refusing to go through with the deal), or by a defense when sued for breach.

a. Land conveyances: But where the contract is for a conveyance of land, most states do not allow the infant to disaffirm the contract until he has reached majority.

2. Ratification: A contract made by an infant is not void, but merely voidable, so the infant can choose to enforce it if he wishes. If he does this, he is said to have ratified the contract.

a. Must reach adulthood: The most important thing to remember about ratification is that the minor may not ratify until he has reached adulthood. Ratification may occur in three ways:

i. Failure to disaffirm: By inaction — if the infant does not disaffirm within a reasonable time after reaching majority, he will be held to have implicitly ratified.ii. Express: Expressly — the contract may be ratified by words, either written or oral.iii. By conduct: By conduct — if the former infant actively induces the other party to perform, this conduct may constitute a ratification.

3. Non-voidable contracts: Contracts often enforced where minors involved if under one of the following:a. Necessities: if the contract is for goods or services needed for livelihood, then not voidableb. Marriage: if the minor gets married, most states enforce her contracts after marriagec. Deliberate misrepresentation: if the minor deliberately represents himself as an adult, then not voidable.d. Legislated enforceability: Sometimes a statute will not allow avoidance for a minor in certain contracts.

4. Restitution: Usually the adult has to repay all that she received and the minor just has to give back whatever is left. i.e.—the minor gives back any present economic advantage.

CASE:1. Bowling v. Sperry -- Youth (B) buys used car with help of grandma, aunt. Bearing burns out. B takes car back

and leaves car at lot. S says it’s maintenance prob. B disavows purchase because he’s a minor.i. Contract voidable because minor has the right to disaffirm.ii. Does the seller have to be aware of the buyer’s age? Makes no difference. Minor only liable if he

misrepresented his age.iii. What if B used it to get to work? necessity vs. luxury distinction. The primary purpose for having

the car is luxury, so not liable?a) K enforceable if needed for necessary purpose. Why? Because otherwise, the dealer

wouldn’t enter into contracts with a minor even when the thing is a necessity for the minor.iv. Minor not required to return the equivalent of what was received—just the thing. (restoration,

not restitution). But what if the minor blows up the car?a) S could get restitution for unjust enrichment in a case where B was enriched, but that doesn’t

happen in this case.b) If infant is P, then court will require the infant to return any value which he has, and will

subtract from the infant's recovery any value obtained and dissipated.


B. Mental IncompetenceA mental incompetent is governed by the same basic rules as an infant — he may either disaffirm the contract or ratify it (but only ratify if the condition abates). A person lacks capacity to contract because of mental incompetence if either: (1) he doesn't understand the contract; or (2) he understands it, but acts irrationally, and the other person knows he is acting irrationally.

1. Subjective test—not objective like minor2. Burden is on mental incompetence claimant—unless prior proceedings have determined incompetence3. Tests:

a. Traditional/cognitive test: Was the person unable to understand the nature and consequences of the action? (i.e. so disabled that he didn’t know what he was doing?)

b. Modern broader test: Looks at psychological testimony and looks for any clinically recognized condition that would impair ability to transact in a reasonable manner. Also, whether the other had reason to know the person was incompetent.

4. Intoxication: Intoxication will give a party the power of avoidance only if: (1) he is so intoxicated that he cannot understand the nature of his transaction; and (2) the other party has a reason to know that this is the case.

CASE:1. Heights Realty v. Phillips -- Real estate agent sues for commission for finding suitable buyer which D rejected. D claims mental incompetence. D gets a doctor + evidence to support that there was a long-term incompetence.

i. Rule: Restatement § 15 (1) a) unable to understand in a reasonable manner the nature and consequences of the trans. orb) unable to act in a reasonable manner in relation to the transaction and the other party has reason to know of his condition.

ii. § 15 (2): if contract made on fair terms, and the other party doesn’t know about the incompetence, then power of avoidance terminates to the extent that the contract was performed (whole or part) or to the extent that the avoidance would result in an injustice.iii. (2) mitigates the outcome of (1) which would be discrimination against contracting with elderly, etc.iv. Court holds mental incompetence here.

Section 2: Defects in Bargaining Process

A. Mistake -- A "mistake" is a "belief that is not in accord with the facts." 1. Mutual mistake: Both parties had the same mistaken belief at the time of contracting

a. Three requirements for avoidance:i. Basic assumption: The erroneous fact must be a basic assumption on which the allegedly mistaken

party made its decision to contract. (wouldn’t have contracted if it knew truth)ii. Material effect: The mistake must have a material effect on the "agreed exchange of performance."

If no loss to the party claiming mistake, then no legal mistake.iii. Risk: The adversely-affected party (the one seeking to avoid the contract) must not be the one on

whom the contract has implicitly imposed the risk of the mistake. Often, the contract does not make it clear which party is to bear the risk of a certain type of mistake, so the court allocates this risk in the manner that it finds to be "reasonable" in the circumstances.

1. UCC § 2.313(1)b says seller gets risk of error as to goods conforming to their description.b. Special contexts:

i. Market conditions: Mistakes as to market conditions will generally not be "basic" ones, so the mistaken party will not be able to avoid the contract.

ii. The existence of the subject matter of the contract is usually a "basic" assumption.iii. A major mistake as to the quality of the contract's subject matter is often a "basic" assumption.iv. Minerals in land: In land-sale contracts, the Seller will almost always bear the risk that valuable oil

and gas deposits will be found on the land.v. A builder will almost always bear the risk of a mistake about soil or other unexpected conditions.

2. Unilateral Mistake: By contrast, if only one party has the mistaken belief, the mistake is "unilateral."a. Modern view: Where the mistake is unilateral, it is more difficult for the mistaken party to avoid the

contract than in the mutual mistake situation. The mistaken party must make the same three showings as for mutual mistake (basic assumption, material effect, and risk on the other party), plus must show that it would be unjust to enforce the contract by showing either that:


i. On weighing of the harms, the enforcement of the contract would be unconscionable; orii. The other party had reason to know of the mistake, or the other party's fault caused the mistake.

b. Construction bids: The most common type of unilateral mistake occurs where a contractor or sub-contractor makes an error on a bid for a construction job.

i. Unconscionability: shown only if the contractor shows that not only will he be severely harmed if forced to perform, but also that the other party has not relied on the bid.

ii. "Snapping up" of offer: Alternatively, the mistaken contractor may try to show that the other party either knew or had reason to know of the error.

3. Existing fact: The doctrines applicable to mistake apply only to a mistaken belief about an existing fact, not an erroneous belief about what will happen in the future.

4. Mistake of law: A mistake about a legal principle, according to most courts today, can be a mistake.5. Negligence: Where a party seeks to avoid the contract because of his own (or both parties') mistake, the fact that the

mistake was due to his negligence will ordinarily not prevent relief. (no relief for the stupid).a. Incorrect prediction not a mistake for purposes of the mistake doctrine.

6. Remedies: There are two main remedies that may be appropriate for mistake:a. Avoidance: The most common remedy is avoidance of the contract (sometimes called "rescission"). Here,

the court treats the contract as if it has never been made, and attempts to return each party to the position he was in just before the contract was signed.

b. Reliance: Alternatively, the court may award reliance damages, especially where restitution/ avoidance would not work because one party has suffered loses but the other has not received benefits.

c. Reformation: If the parties orally agree on a deal, but mistakenly prepare and execute a document which incorrectly reflects the oral agreement (typographical error), party may obtain a court order for reformation

7. Mistake can often be re-characterized as breach of warranty or misrepresentation by the other party.a. Did the other party warrant that mistaken fact was the case and it’s not?b. Did the other party represent the mistaken fact was the case and it’s not?

CASES:1. Boise Junior College v. Mattefs Construction -- In this case there is a clerical mistake in the making of the bid

but not an estimation mistake.i. Q-what constitutes a mistake? Court says:

a) mistake must be material errorb) enforcement of the contract would be unconscionable

(1) it would force the party to operate at a loss (opportunity cost doesn’t count)(a) counter: sometimes you have to look at all jobs to determine whether there is

loss because any company will have some high risk and some low risk jobsc) the error isn’t a judgment error—doesn’t result from culpable negligence (it’s a clerical error)d) other party wouldn’t be prejudiced (loosing a good deal doesn’t count as prejudice)e) reason for the other party to know of the mistake.

ii. Bidding note—the point of an auction is to get honest bids—does this case allow people to make a bid and then change it after they find out what other bids are or after they are given the contract?

2. Beachcomber Coins v. Boskett -- Court holds mutual mistake because both seller and buyer thought the coin was really a Denver coin when it wasn’t.

i. Buyer even investigated the coin for 45 min.ii. Lower court says the coin buyer should know—ie the more experienced party should get the risk.iii. Maybe distinction is between errors as to quality and errors as to fact.—this is a mistake of fact.

3. Lenawee County Board of Health v. Messerly -- neither party knew about the sewage defect on the land. There’s mutual mistake, material mistake, etc. Still the court doesn’t let the buyer out of the contract. (seems to fly in the face of Beachcomber)

i. WHY did the court decide this way then?a) “As-is” clause in K means that buyer bears risk for any unknown factors.b) Is it more like a barren cow? p.460 Sherwood v. Walker (parties thought cow was barren, ended up fertile—court said barren-ness went to the heart of the contract, thus mistake)

ii. Does this reward a careless seller? If we allow the seller a way out of the contract then seller won’t do her homework.


iii. One theory—whoever is in the better position to more easily acquire information should have the burden to find the information.

4. Ayer v Western Union -- Lumber dealer sues telegraph company for not delivering telegram which resulted in contract price dispute with a potential buyer. (mistake in transmission) –held that telegram co. not liable.

i. D willing to pay back the amount paid for the telegram, but not damages for the contract loss.ii. Holding: that in communications between B and S, it is reasonable that whichever party chose the

telegraph company as the means should bear the risk.a) the seller sending the transmission could have sent the message twice, or followed up with a confirming letter to cover any potential error.b) the seller is in a better position to avoid the mistake

iii. BUT: If the buyer knows the price is absurd, the burden shifts the buyer to clear up the communication before accepting the contract.

a) in this case, the buyer is in a better position to avoid the mistake.

B. Fraud and Duty to Disclose—an assertion not in accord with facts (Restatements § 159). Could be conduct too.1. Fraudulent misrepresentation

a. Elements:i. false representation of fact

1. usually opinion and prediction ≠ fact2. BUT where asserting party did not really believe the statement of opinion or prediction,

then fraud can be found3. Types of fraudulent communications can be:

a. an affirmative false statementb. deliberate action to conceal truthc. or non-disclosure of facts

i. This is the hardest one to show to be fraud because the market relies on discrepancy in information between parties.

ii. made with knowledge that it is false and with intent to mislead/induce other party into contractiii. which does deceive the other party

1. victim must show causal link between the misrepresentation and the resulting contract2. thus, significance of misrepresentation and the victim’s reaction will be considered

iv. to the other party’s injury or detriment1. Even where the contract seems perfectly fine to an observer, if the victim was fraudulently

induced into a contract she wouldn’t otherwise have entered, then this is detriment.2. This makes the contract voidable to the injured party.

2. Negligent or innocent misrepresentation—misrepresentation without deliberate intent to misleada. This only results in grounds for relief if evidence is very strong that the non-victim should have had reason to

know of the importance of getting it right, etc.3. Rescission and Restitution

a. rescission or avoidance available as an equitable remedy when fraud shown. Also sometimes where innocent misrep. shown

b. restitution also available—people put back in their original place if possible.c. Tension: The more we allow rescission, the less incentive there would be for the party to do their homework.

CASES:1. Morta v. Korea Insurance Co . -- P in car accident and seeks compensation from insurance co. Signs settlement

with a waiver of future claims--thought it was only for known injuries. Later surgery costs $11,000. Claims fraud.i. No false statements made, but did D have a duty to disclose the power of the waiver?

a) Court says NO. D did not pressure P and did not misrepresent waiver.b) D didn’t read it. You can’t make a strong mistake argument if you didn’t read the contract

ii. Why not mutual mistake as to the extent of injuries?a) the plain language of the contract put the burden of risk on the injured party.

iii. Was there constructive fraud?a) Person must have special duty to affirmatively disclose the information (be perfectly honest).

Can't be in normal adversarial bargaining relationship.b) No fiduciary relationship here:

(1) If the parties have some kind of fiduciary relationship, so that one believes that the other is looking out for his interests (doctors), then duty to disclose material facts.


2. Laidlaw v Organ -- Buyer knew about treaty of Ghent, Seller didn't.i. Issue: Did buyer have a duty to disclose the Treaty of Ghent, when seller asked if anything has

happened that would affect the price of the tobacco at issue?ii. Court says that duty to disclose here would infringe too far into normal business transactions. Both

parties had access to the informationa) Maybe different if S got information from an inside source.

3. Vokes v Arthur Murray --D sells to P, an old lady, a bunch of dance classes. P claims that D misrepresented her talent and progress.

i. Court holds for P because D misrepresented her talent to sell her more classes, on which she relied to make her decisions.

ii. Fraud is usually limited to misrepresentations of fact. Aren't these just opinions?a) The teachers were the experts and knew or should have known the opinions weren’t founded.b) The studio went beyond the usual "puffing" and salesmanship.

iii. This would be a good undue influence case.

4. Hill v Jones -- S knows that house has had past termites. B and S agree to have termite inspection, which does not reveal the past termites. S does not tell B about the termites, even when B questioned about floor damage.

i. Suppression of fact + duty to disclose = fraud. Did seller have duty to disclose the past termites to buyers? Yes, because:

a) Duty to disclose when (Restatement 2nd 161):b) Disclosure is necessary to prevent a previous assertion from being a misrepresentationc) Disclosure would correct a mistake of the other party as to a basic assumptiond) Disclosure would correct a mistake as to contents or effect of a written agreemente) There is a fiduciary relationship

ii. Accessibility to info seems to be key. –most courts find duty to disclose where the buyer doesn’t have access to material facts (a matter is material when a reasonable person would attach importance on it in determining choice of action)

iii. parol evidence always admissible to show fraud

C. DuressThe defense of duress is available if D can show that he was unfairly coerced into entering into the contract, or into modifying it. Duress consists of "any wrongful act or threat which overcomes the free will of a party."

1. Three elements of duress (Restatements § 175-176):a. One party must make a threat

i. explicit or impliedii. Sometimes the line between hard bargaining and improper coercion is thin

b. The threat must be improperi. it seems that impropriety comes when the threat is purely to hurt the other

c. The threat must induce apparent assent in that it leaves the victim no reasonable alternativei. Q—whether free will was overcome by leaving victim no reasonable alternative

2. Subjective standard used to determine whether free will has been overcome. Thus even though person of "ordinary firmness" might not have been overborne, if D can show that he was unusually timid, he may use the defense.

3. Ways of committing: Here are some of the acts or threats that may constitute duress: (1) violence or threats of it; (2) imprisonment or threats of it; (3) wrongful taking or keeping of a party's property, or threats to do so; and (4) threats to breach a contract or commit other wrongful acts.

a. Abusive or oppressive acts: If one party threatens another with a certain act, it is irrelevant that the former would have had the legal right to perform that act — if the threat, or the ensuing bargain, are oppressive, the contract will be void for duress.

4. Threat to breach contract: Most commonly, duress arises in contract cases because one party threatens to breach the contract unless it is modified in his favor; the other party reluctantly agrees, and the question is whether the modification is binding.

a. pre-existing duty rule: overlaps with duress in modification of contract’s because usually in such cases, no consideration is given in exchange for the modification

b. UCC § 2.209 doesn’t require consideration as long as the modification isn’t made under duress—you can alter your contract as long as there’s "good faith" and "fair dealing"

i. Sometimes enforced in non-UCC situations too b/c there’s reliance on the modification (estoppel).


ii. If the request for modification is due to unforeseen difficulties the duress defense will probably fail.5. Remedies: making the contract voidable or adjusting its terms.6. Undue influence: this version of duress only requires showing the dominant party had:

a. a position of trust in which the claimant had reason to believe his interests would not be harmedb. and abused that position of trust by unfairly persuading victim to enter contract adverse to his interests.

CASES:1. Austin Instr. v. Loral Corp . -- Subcontractor (S) contracts to provide necessary parts to C. Then C takes bids

for 2nd contract, S says C must accept their bid for 2nd contract AND raise pay for original contract components or else they won’t deliver 1st contract goods. C can’t get the components elsewhere in time, so agrees to the deal. S sues C because C didn’t end up paying the higher prices on the first contract. C counters with duress claim.

Rule (abstracted): economic duress exists when:1. there’s a wrongful threat

a. note—threat to breach is rarely wrongful because that’s the party’s rightb. What the court really looks at is threat + no alternative which makes the threat wrongful.

2. that precludes the “free will” of the claimant (as to reasonable alternatives)3. claimant had no adequate legal recourse

a. If you have an adequate legal remedy (allow breach and sue for damages) you must take it. (In Austin, damages couldn’t compensate for the harm done)

i. For this reason, cases like Alaska Packers are stronger because no injunction available.b. These days, courts want you to get a preliminary injunction to have the act done and then fight it out

later in court—NOT agree to the coerced terms and then sue under duress

2. Machinery Hauling v. Steel of West Virginia -- Machinery (P) doesn’t agree to coercion threat to “not do business in the future.” Then sues for duress. Court says threat not to contract isn’t a real harm.

D. UnconscionabilityIf a court finds that a contract or clause is so unfair as to be "unconscionable," the court may decline to enforce it. UCC §2-302(1). Unconscionability really is a catch-all for unjust contracts that don’t meet other avoidance doctrines.

1. No definition: There is no accepted definition of unconscionability. The issue is whether the clause is so one-sided, so unfair, that a court should as a matter of judicial policy refuse to enforce it. BUT:

a. Some courts don’t use it or use it rarelyb. UCC has an unconscionability clause, but this is only persuasive in non-sale of goods situations

2. Consumers: Courts have very rarely allowed business people to claim unconscionability; only consumers are generally successful with an unconscionability defense.

a. Although disparity in bargaining power is often the power used to create an unconscionable contract, alone it is insufficient to sustain an unconscionability claim

3. Varieties: two categories for unconscionability analysis: (1) "procedural" unconscionability; and (2) "substantive" unconscionability. Usually you need both and to show causation between them.

a. Procedural: The "procedural" sort occurs where one party is induced to enter the contract without having any meaningful choice. Here are some possible types:

i. burdensome clauses tucked away in the fine-print boilerplate; ii. high-pressure salespeople mislead the uneducated consumer (oppression and unfair surprise)

iii. industries with few players, all of whom offer the same unfair "adhesion contracts".b. Substantive: The "substantive" sort of unconscionability occurs where the clause or contract itself

(rather than the process used to arrive at the contract) is unduly harsh, unfair and one-sided.i. Excessive price: An important example of substantive unconscionability is where the seller

charges an excessive price. Usually, an excessive price clause only comes about when there is also some sort of procedural unconscionability (e.g., an uneducated consumer who doesn't understand what he is agreeing to), since otherwise consumer will usually go elsewhere.

ii. Remedy-meddling: Also, a term may be substantively unfair because it unfairly limits the buyer's remedies for breach by the seller. Types of remedy-meddling that might be found to be unconscionable in a particular case include:

1. disclaimer or limitation of warranty, especially prohibiting consequential damages for personal injury;

2. limiting the remedy to repair or replacement, where this would be a valueless remedy; 3. unfairly broad rights of repossession by the seller on credit;




4. waiver of defenses by the buyer as against the seller's assignee; and5. a cross-collateralization clause by which a secured seller who has sold multiple items

to a buyer on credit has right to repossess all items until the last of total debt is paid.4. Remedies for unconscionability:

a. Refusal to enforce clause: Most likely, the court will simply strike the offending clause.b. Reformation: Alternatively, the court may "reform" the offending clause (e.g., by modifying price)c. Refusal to enforce whole contract: rather seldom

5. Adhesion contracts: an imprecise term used to describe a document containing non-bargained clauses that are in fine print, complicated, and/or exceptionally favorable to the draftsman.

a. Refusal to enforce: If the court is convinced that: (1) the contract or the clause was not negotiated; and (2) the draftsman had a gross disparity in bargaining power, the court may refuse to enforce.

b. Tickets and other "pseudo contracts": Refusal to enforce what the court finds to be a "adhesion contract" is especially likely where the transaction is one in which the non-draftsman does not even realize that he is entering into a contract at all.

c. unconscionability is dying because we now have consumer protection rules that will protect consumers from clauses like the confession of judgment in Cutler

6. As for policy—unconscionability goes against the grain of the freedom to contract principle in contracts law. Is it clear that you’re helping the unsophisticated 7-child single moms by finding unconscionability?

Consumer TransactionsCASES:

1. Cutler Co. v. Latshaw - D hires P to do some remodeling. Orders them to stop because she doesn’t like how they are doing it. They act as her attorney and confess judgment against her b/c she gave them this power in the K.

i. confession of judgment—confessor assumes liability; warrant of attorney—gives power of attorney

a) Theses are unreasonable waivers of defensesii. D says she didn’t read the contract—court says too bad, you have a duty to read.

a) Can’t make a mistake argument—can’t make a mistake as to term if you didn’t read the termiii. Court holds for D saying that the stuff on the back of the contract wasn’t really part of the contract

and to give up such a fundamental right as the confessed judgment clause does should be obviously part of the contract. Something like confessed judgment needs to be conspicuous.

2. Williams v. Walker-Thomas Furniture - B enters a series of rent-to-own contracts with S, all of which provide that all payments made by B are credited pro rata to all purchases, so B never pays off any of the purchases as long as she owes on any of them. (and she’s a single mother of 7 kids) B defaults and S wants to repossess everything.

i. B claims that she didn’t understand the contract. Lower court says too bad—that the jurisdiction has no precedent that they can find the contract unconscionable under.

ii. Court of Appeals disagrees with lower court—adopts the UCC unconscionability doctrine.iii. Court says unconscionability includes:

a) absence of meaningful choiceb) gross inequalityc) no opportunity to understand

3. Jones v. Star Credit Corp . - freezer sold for $1200 that is worth $300.i. court calls this an unconscionable transaction, therefore unenforceable. The issue is whether the

clause is so one-sided, so unfair, that a court should as a matter of judicial policy refuse to enforce it.ii. J being a consumer and Star Credit doing door-to-door sales and the excessive price help the

decision.

Commercial TransactionsCASES:

1. Weaver v. American Oil - D runs American Oil (P) gas station franchise. P’s workers light D on fire. The agreement contains a “hold harmless” clause that says that D can’t sue P for any negligence AND that D will be held liable. P sues to get declaratory judgment that says D is liable for the damage done.

a. Court says that when there is a fine-print contract, the party seeking to enforce has the burden of showing that the other side understood the terms.

b. Holds that D didn’t understand the contract and P didn’t try to get him to understand.c. This is a rare case where unconscionability found in a case between commercial parties


2. Zapatha v. Dairy Mart - D terminates franchise agreement w/ P because he wouldn’t agree to enter new contract. P sues and asks court to enforce original contract. Lower court ruled 1st K unconscionable. Reversed.

a. Q—can D terminate the franchise agreement they made w/ P without cause, as the contract states?i. agreement requires cause or ninety days notice w/o cause.

b. procedural unconscionability—would be that P would not have known by looking at the contract that D could terminate for any reason or no reason.

c. substantive unconscionability argument—would be that P is submitted to too much risk (but they’ll repurchase everything he bought)

d. Court uses UCC 2-302 to determine that termination agreement is not unconscionablei. termination w/o cause itself is not unconscionable per se

ii. no unfair surpriseiii. no oppressioniv. no bad faith

e. Zapatha more typical with commercial parties than Weaver.

Policy pro/con of unconscionability:Fundamental con-rule: Freedom of ContractFour reasons for unconscionability in response to F of K:

1. information problemsa. response: the market will provide the consumer with the right amount of information—the courts

won’t help the matter by throwing out contract’s that don’t supply enough informationb. but the market incentive for S to reveal information is not perfect

2. bargaining relationshipa. response: if the consumer has choice between multiple big guys to buy from, then unequal

bargaining power doesn’t exist.b. but this might be a problem with situational or local monopolists (not a distinction courts make)c. Still, if there is unequal bargaining power, it’s not clear that the best thing is to strike down

contract’s. It could be that the terms are exactly what the consumer wants. Harsh credit terms make credit possible for the Mrs. Williams’ of the world.

3. competence (paternalism)a. response: gov. not in a better position to determine what Mrs. Williams wants or needs.

4. Welfare statea. court clamps down on credit laws ex ante in order to reduce the risk ex post of people going

bankrupt and the wasteful diminution of value that occurs when the sheriff repossesses lamps, tv’s and beds.

Laws that restrict F of contract (like unconscionability) (some common ones) 1. usury laws—“you can’t borrow money over a certain interest rate (20% or whatever)

a. these have little influence because credit cards locate themselves in states w/o usury lawsb. except in the “Pay-Day” loan shops where you end up paying way more

2. equity of redemption—that as you pay your loan down, you become owner of the percentage of the house you’ve paid for. I.E., missing the last payment doesn’t allow the bank to take the whole house

3. consumer protection laws4. employment laws: e.g. right to fire someone for becoming disabled can’t be a term in a contract.5. penalty doctrine (see below)6. covenants not to compete (just limited)

Section 3: Illegality: Unenforceable on the Grounds of Public Policy

A. Public Policy and F of K1. If a contract violates public policy, then the court balances policy in Q against F of K policy and any harm that

might be done to the parties. Court has to be careful not to participate in judicial policymaking.B. Illegality: K violates a statute, then it is illegal. Kinds of contracts that are frequently found to be illegal: (1) "gambling" or

contracts; (2) lending contracts that violate usury statutes; (3) the performance of services without a required license.1. Non-compete covenants: A very important type of possibly illegal contract is a covenant not to compete. In

general, if a non-compete agreement is unreasonably broad, it will be held to be illegal and not enforced.


i. Sale of business: If the seller of a business is selling its "good will," his ancillary promise that he will not compete in the same business as the purchaser will be upheld, provided that it is not unreasonably broad

ii. Employment contracts: Such covenants will be enforced only if they are designed to safeguard either the employer's trade secrets or his customer list. Even where these objectives are being pursued, the non-compete will be struck down if it is unreasonably broad as to geography or duration.

a) Divisibility: If a non-compete is overly broad, most courts today will enforce it up to reasonable limits. Some courts apply the "blue pencil" rule, by which the clause will be enforced only if it can be narrowed by striking out certain portions. Most courts today, however, do not follow the blue pencil rule, and will "redraft" the non-compete to bring it back to within reasonable limits.

2. Cohabitation: Many courts refuse to enforce cohabitation agreements, i.e., agreements regarding property division entered into by couples who are living together without marriage. But a growing minority of courts now enforce.

C. Enforceability: As a general rule, neither party to an illegal contract may enforce it. In general, illegal contracts that are still wholly executory are less likely to be enforced by the court than those that have been at least partly performed.

1. Wholly executory: If the contract is completely executory (i.e., neither party has rendered any performance), there are only a few situations where the court will allow one party to recover damages for breach:

i. Statute directed at one party: If the statute is designed to protect one party, the person for whose protection the statute is designed may enforce the contract or sue for its breach.

2. Partly- or fully-performed illegal contracts: Where one or both parties have partly or fully performed, the courts are more willing to enforce the contract or at least grant a quasi-contractual remedy.

D. Consequences/remedies:1. Usually court follows “in pari delicto” principle that is to leave the parties where the court finds them.

i. If one party has partially performed, then there may be some restitution for a less morally or legally responsible party.

ii. In some circumstances, the court will allow enforcement on adjusted terms if this is what the less culpable party wants. This is common in a covenant not to compete case (above)

CASES: 1. Sinnar v. Le Roy P pays a middleman (D) $450 to get him a liquor license. D doesn’t get the license. P sues.

The contract $ wasn’t explicitly meant as a bribe, but court says because of illegality, in pari delicto.

2. Patterson v. McLean Credit Union (Posner didn’t spend any time on this)

3. Data Management v. Greene P included non-compete agreement in contract with D. Agreement stated that for 5 years after termination, D could not “perform similar services” for other companies in Alaska.

i. Q—was the covenant not to compete too broad? Three approaches to an overbroad covenant:a) not enforce the contractb) blue-pencil method--delete words in order to make the covenant enforceablec) reasonably alter the contract to make it enforceable

ii. (c) is the one this court adopts. Restatement 2nd 184(2) and UCC § 2-302 also use (c):a) Rest: “A court may treat only part of a term as unenforceable. . . if the party who seeks to enforce

the term obtained it in good faith and in accordance with reasonable standards of fair dealing.”b) UCC: (a) If the court as a matter of law finds the contract or clause of the contract

unconscionable at the time it was made, the court may refuse to enforce the contract, enforce the remainder of the contract without the unconscionable clause, or so limit the application of an unconscionable clause as to avoid an unconscionable result.

iii. BUT—doing this messes up the freedom of contract/free-market process. They agreed, why not enforce?iv. Three things courts look at in non-compete agreements (too much of any one will make it invalid):

a) duration (five years is on the long end)b) area (sometimes a state is too big, unless the company is a huge nation-wide one and the

person’s position is also)c) scope (usually limited to an industry of obvious competitors, etc.)

v. Note: companies often use TRO’s here because employee wouldn’t be able to pay damages (an damages would be hard to determine)

4. Watts v. Watts P sues ex-domestic partner D for a division of the accumulated wealth that he obtained over the period they lived together (had kids, told people they were married, etc.).

i. She argues that there was an implicit contract that can be found in representations D made to her over the time they were together. (He said “We will share equally in my wealth”)


ii. Lower court says, to enforce the contract would violate public policy of encouraging marriagea) D is arguing that contract is “illegal” in that it contravenes the purpose of the WI Family Code,

which is to protect the sanctity of marriage.iii. This court says that they are not persuaded that public policy overrides contract law here. To not

enforce would be to reward one party that was equally “guilty” of illicit relations anyway.iv. Court says P states a claim on which relief can be granted because she may be entitled to compensation

under: damages for breach of contract, or unjust enrichment.v. Moral of the story: just because the K violates a public policy doesn’t mean the court will see that not

enforcing is the answer—especially when other policies counter that policy.

CHAPTER V. PERFORMANCE OF THE CONTRACT

Section 1: Determining the Scope and Content of Obligation

A. Integrated Writings and the Parol Evidence Rule1. General Rule: To the extent that both parties execute a writing that is intended to be the final expression

(integration) of their agreement, no parol evidence may be admitted to supplement, explain, or contradict it. However, when there’s no evidence that it is an integration, then parol evidence that is consistent (not contradictory) may be admitted. (Restatements § 213 and UCC § 2.202)

i. parol evidence here refers to evidence of writings or oral agreements prior to the writing. Also, oral agreements concurrent with the execution of the writing in Q are parol evidence. Writings concurrent with the writing in Q suggest that the agreement is actually contained in two or more documents and therefore would not be susceptible to the parol evidence rule

ii. merger/integration clauses are evidence of intent to integrate, but may not be conclusive because sometimes they are boilerplate terms that people don’t really agree to or see.

a) counter to merger clause: it was only intended as to certain terms OR it was only intended to keep out inconsistent parol evidence (which the parol ev. rule does anyway)

iii. Modifications made after the execution of the writing in Q are not subject to the parol evidence rule.a) Subsequent agreements: The parol evidence rule never bars consideration of subsequent oral

agreements. That is, a written contract may always be modified after its execution, by an oral agreement. Though, some contracts have no oral modification clauses.

2. If a contract or term is ambiguous, unclear, or lacks evidence of integration, then parol evidence will likely be admitted. A contract may be fully or partially integrated.

3. Total integration: A "total" integration is a document that is not only a final expression of agreement, but that is also intended to include all details of the agreement.

i. Total integration: When a document is a total integration, no evidence of prior or contemporaneous agreements or negotiations may be admitted which would either contradict or add to the writing.

ii. If there is ambiguity in the contract or a term, then parol evidence is admissible.4. Partial integration: A "partial" integration is a document that is intended to be final as to some terms, but that is

not intended to include all details of the parties' agreement.i. When a writing is a partial integration, no evidence of prior or contemporaneous agreements or

negotiations (oral or written) may be admitted if this evidence would contradict a term of the writing.5. SUM: For parol evidence to be admitted, the term or contract must be:

i. lacking intended integration (incomplete) OR ambiguous OR unclear ii. AND not inconsistent with the parol evidence iii. If this test is satisfied, then the parol evidence is admitted to the trier of fact to determine what is part of

the agreement/what its terms are.6. Some courts allow extrinsic evidence to show ambiguity even when a writing seems integrated.7. Missing terms—there should be a gap in the K for this to be admitted. Sometimes legal implications fill a gap.

i. Rest. § 216(2)(b) and UCC § 2.202 suggest that an important Q in determining whether to admit parol evidence of a missing term is whether there was good reason for the term to be left out.

8. Unclear or ambiguous terms—the writing needs to be susceptible/not inconsistent with the meaning that the parol evidence would give it. Otherwise, the evidence won’t likely be admitted.

9. Exceptions (where parol evidence allowed no matter what):i. conditions precedent—because agreement wouldn’t even take effect until condition satisfiedii. evidence to show fact in writing is false


iii. evidence to show fraud, mistake, duress, or other invalidating or avoidance evidence

CASES:1. Mitchill v. Lath Seller (D) orally promises to remove ice house from land that is being sold. S doesn’t remove the

ice house. Buyer (P) sues. S claims that because the oral agreement was not written, it is not part of K.i. Q—whether to admit the extrinsic evidence of the oral part of the agreement.ii. Court applies three part test to determine whether it will admit parol evidence to vary the written K;

a) parol agreement must be collateral (in exchange for the same consideration as main K)b) parol agreement must not contradict express or implied provisions of the written contract.c) parol agreement must be one that would not ordinarily be expected to put in the writing.

(1) so especially in a simple contract (“I buy your farm for x”), court will admit parol ev.iii. Majority says that because the parties included so many terms, we would expect that they would include

the term as to the ice house too. (so sort of expressio unius argument to show violation of (c))iv. Holding: parol evidence not allowed.

2. Masterson v. Sine S sells ranch with sale agreement including an option for S to purchase within ten years. On exercise of option, B would get value of improvements they have made(minus depreciation) + value of property. Dispute arises because S went bankrupt and bankruptcy trustee wants to exercise option.

i. B’s arguments rest on admission of parol evidence:a) B says full contract (writing + parol agreements, etc.) included a provision that the land only be

sold to someone in the family.b) Also that the option is not assignable by S to someone else (S couldn’t sell or give his option to

someone else).ii. Court holds that lower court erred in excluding evidence as to the parol agreement about assignability.

a) BUT since assignability is a default term in contracts (inferred unless explicitly excluded), there seems to be more evidence against using parol agreements here than in Mitchill.-- changing a default is something we would expect to be put in writing.

iii. Points that distinguish Matterson from Mitchill:a) The agreement here is between family members who would not expect a dispute about oral agrmtb) In Masterson the intent does not seem to be that the writing be complete agreement (integration)

3. Alaska Northern Devel. v. Alyeska Pipeline -- B and S exchange letters of intent, the second responding that it is “subject to approval of owner. . .” Q—whether the second letter of intent is a partial integration.

i. note: not likely to be a full integration because no integration clause, also subject to further actions, etc.ii. U.C.C. § 2-202: You can argue that anything is integrated so long as you have evidence to show it.

a) But here, the fact that there are terms that are missing—price, etc.iii. Partial integration—certain terms can become final as the creation of the contract proceeds. Here, the

phrase “subject to approval of owner. . .” is found to be a partial integration.iv. Court finds that there is “absence of reasonable harmony” between what was found to be integrated (the

approval clause) and what the parol evidence was meant to show (that the clause only referred to price).

4. Luther Williams v. Johnson -- B wants to introduce parol evidence that the remodel contract was contingent on his getting financing. But no written term that says “subject to financing.”

i. Contract has an integration clause—“This contract embodies the entire agreement between the parties...”ii. Doesn’t seem like the parol evidence would be permitted under the UCC because there’s an integration

clause here. But this contract is for services.iii. Court doesn’t think existence of an integration clause is dispositive as to the intent to integrate issue. b/c:

a) some integration clauses are meant only to exclude contradictory evidence., etc.iv. court also argues that condition precedent must be satisfied before any part of the contract takes effect—

b/c there is a condition p. to the contract, the integration clause is not effective until condition satisfied.a) BUT—then any party can claim that whatever it wants added to the contract was a condition

precedent. Mitchill would be able to claim ice house was a condition precedent.

B. Interpretation1. Evidence of course of performance is always admissible. Course of dealing and trade usage are usually

admissible only when they pass the parol evidence rule. UCC 2.202 would seem to allow the latter two liberally.i. Most courts today allow parties to introduce extrinsic evidence to aid in the interpretation of a contract,

even if the writing is an integration. That is, parties are generally allowed to introduce evidence of what they subjectively thought the terms in a writing meant, even if the writing is an integration.


2. Contract interpretation arguments (similar to statutory interpretation)1. dictionary/plain language/textual enforcement2. hypothetical bargain—looking for real intent. If the "primary purpose" of the parties in making the contract

can be ascertained, that purpose is given great weight.3. All terms made reasonable, lawful and effective: All terms will be interpreted, where possible, so that they

will have a reasonable, lawful and effective meaning.a. but parties will feel insecure about how some random judge will enforce their contract

4. Negotiated terms control standard terms: A term that has been negotiated between the parties will control over one that is part of a standardized portion of the agreement

5. majoritarian meaning enforceda. whatever the industry or relevant community means by the word is the definition that the court uses

6. contra proferentum rule— Ambiguous term will be construed against the person who drafted the contract.a. good because it gives the drafter incentive to be clear (punitive)b. bad because it totally disregards actual intent.

CASES:3. PG&E v. G.W. Thomas Drayage & Rigging -- P hires D to fix turbine. They sign an agreement that indemnifies

P against all damage done by D during the repairs. D damages the turbine while trying to fix it, says not liable.i. P claims that the indemnity clause made D liable for all damage done—including that done to P’s

turbine. D says no, the indemnity clause only applied to third parties.ii. Plain language seems to support P—plain language doesn’t limit the meaning of the clause to indemnity

against 3rd parties.iii. Intent/extrinsic understanding supports D—that they had always intended only 3rd parties in the past

with these kind of clauses, etc. etc.iv. Court here says test is not whether the contract is facially ambiguous. The question is simply, “what was

the intent of the parties?” Court allows provisional admission—letting the court consider all credible evidence to determine the intention of the parties.

v. Judge Kozinski (plain meaning proponent) strongly disagrees with Traynor and the PG&E parol evidence admission b/c:

a) takes too longb) costly discovery (compared to just taking plain language method)c) judge could very well get it wrong (but this cuts both ways)

4. A. Kemp Fisheries v. Castle & Cook --fisher (P) rents vessel and vessel engines that run freezer break down. P sues for breach. The writing did not say that there was a warranty as to the freezer engines working. But P claims the writing is not their complete contract—that there was a warranty made in oral conversation

i. Q1—so how do we know whether this contract is complete or integrated?1. attorneys helped them2. both parties were commercial entities and thus presumably sophisticated as to contracts3. contract says once P takes boat, it is presumed that P has checked the boat and is satisfied w/ it

So they fail on the integration—court holds that contract is completeii. Q2—so how do we know whether the contract is ambiguous?

1. contract says (1) the boat will be in good condition and warrants seaworthiness, but also (2) releases D from liability for any unseaworthiness after acceptance of delivery. The lower court says that because 1&2 conflict, the contract is ambiguous and therefore admits parol evidence.

Court of appeals says that this isn’t ambiguity.

5. Frigaliment Importing Co. v. B.N.S. International Sales Corp. -- B got stewing chickens instead of younger broiler chickens. S says since the contract asks for “chickens,” they can send anything that’s a chicken.

i. Note: Since “chicken” here is ambiguous, there is no argument against parol evidence being admitted.ii. interpretive issue (these come up all the time w/ contracts)—what is a chicken in this industry and what is

the plain meaning of chicken?iii. eg’s of interpretation arguments on both sides:

a) plain language:1. Dictionary argument: chicken = chicken2. experts on both sides

a. counter—show that the expert doesn’t use the word in that way in practice


3. Agricultural definitions brought up4. argues that if they meant broiler, S would have taken a loss (and B knew this)—so there’s

no way they could have meant broilera. most people don’t ask questions just because they’re offered a good deal

b) narrower definition:1. Germans usage of “chicken” (the English word) is to refer to young chickens/broilers and

“stewing” to refer to older chickens.a. counter—it has to be reasonable to expect that the other party would know that the

word had that exceptionally narrow meaning.2. trade usage of “chicken” = young chickens

a. counter—S wasn’t in the business very long. Courts have the rule that if you’re new to the trade, then you aren’t necessarily required to understand the usage.

3. experts on both sidesa. counter—show that the expert doesn’t use the word in that way in practice

Section 2: Allocation of Risk: Conditions and WarrantiesA. Generally—a condition is an event, not certain to occur, on which the parties make certain terms contingent usually in

order to allocate the risk. This allows the person whose promise is conditioned by the event to not bear risk.1. Precedent/subsequent distinction: Courts distinguish between "conditions precedent" to a duty and "conditions

subsequent" to a duty.—subsequent then duty exists until non-occurrence of condition. i. Significance: It makes no substantive difference whether a condition is termed precedent or subsequent.

Procedurally, it makes a difference, relating to the burden of proof: (1) the party to whom a duty is owed bears the burden of proving the occurrence of all conditions precedent to that duty; but (2) the party owing the duty must bear the burden of proving that a condition subsequent has occurred and discharged him.

ii. Conditions precedent to the whole contract are not waivable by any one party because they are for the protection or benefit of both. However, if a condition is for the protection or benefit of only one party, then it is a condition precedent that may be unilaterally waived by that party.

2. Concurrent: A concurrent condition is a particular kind of condition precedent which exists only when the parties to a contract are to exchange performances at the same time.

3. Express and constructive conditions: If the parties explicitly agree that a duty is conditional upon the happening of some event, that event is an "express" condition. If, instead, the happening of an event is made a condition of a duty because a court so determines, the condition is "constructive" one (or a condition "implied in law").

i. Significance of distinction: Usually express conditions strict compliance, but if constructive condition substantial compliance is all that’s necessary.

4. Distinction between conditions and promises: The fact that an act is a condition does not by itself make it also a promise. If the act is a condition on the other party's duty, and the act fails to occur, the other party won't have to perform. If the act is a promise, and it doesn't occur, the other party can sue for damages. Sometimes a condition is also a promise (this is the case with the exchanged promises—one is contingent on the other).

i. Distinguishing: To determine whether a particular act is a condition, a promise, or both, the main factor is the intent of the parties. Words like "upon condition that" indicate an intent that the act be a condition; words like "I promise" or "I warrant" indicate a promise. Ask whether the

ii. condition not met other party has no duty to perform conditioned termiii. promise not met breach, damagesiv. promissory condition both (above)

B. Express Conditions1. Strict compliance: Strict compliance with an express condition is ordinarily required.

i. Avoidance of forfeiture: However, courts often avoid applying the "strict compliance" rule where a forfeiture would result. A forfeiture occurs when one party has relied on the bargain (e.g., by preparing to perform or by making part performance), and insistence on strict compliance with the condition would cause him to fail to receive the expected benefits from the deal.

ii. Excuse of condition: Alternatively, a court may find that the fulfillment of the express condition is "excused" where extreme forfeiture would occur. This will only be done, however, if the damage to the other party's expectations from non-occurrence of the condition is relatively minor.


2. Satisfaction of a party: If a contract makes one party's duty to perform expressly conditional on that party's being satisfied with the other's performance, the court will usually presume that an objective standard of "reasonable" satisfaction was meant.

i. Subjective: But it is the intent of the parties that controls here: If the parties clearly intend that one party's subjective satisfaction should control, the court will honor that intent. This is likely to be true, for instance, where the bargain clearly involves the tastes of a person. Here, good-faith but unreasonable dissatisfaction will still count as the non-occurrence of the condition.

3. Satisfaction of third person: If the duty of performance is expressly conditioned on the satisfaction of some independent third party (e.g., an architect or other professional), the third party's subjective judgment usually controls. But this judgment must be made in good faith.

4. Conditions implied in fact—inferred from surrounding circumstances and evidence and treated like express c’s.

Nature and Effect:CASES:

1. Dove v. Rose Acre Farms -- Egg prod. co. (D) gives bonuses for punctuality, working hard, etc. D agrees to give bonus to P if he works for 10 weeks and is there everyday and completes project. P gets sick in the tenth week and misses two days. D doesn’t give him a bonus. P argues that there was substantial performance.

i. Substantial Performance: It is a constructive condition to a party's duty of performance that the other party have made a "substantial performance" of the latter's previous obligations. In other words, if one party fails to substantially perform, the other party's remaining duties do not fall due.

a) Suspension followed by discharge: If a party fails to substantially perform, but the defects could be fairly easily cured, the other party's duty to give a return performance is merely suspended; the defaulter then has a chance to cure his defective performance. No cure discharge

b) Factors regarding materiality: Here are some factors that help determine whether a breach is material (i.e., whether the breaching party has nonetheless substantially performed):

(1) Deprivation of expected benefit: The more the non-breaching party is deprived of the benefit which he reasonably expected, the more likely it is a material breach.

(2) Part performance: The greater the part of the performance which has been rendered, the less likely it is that a breach will be deemed material.

(3) Likeliness of cure(4) Willfulness: A willful (i.e., intentional) breach is more likely material

ii. BUT P doesn’t get his money because he didn’t meet an express condition of the contract.iii. So because the condition was express (thus strict compliance req’d) and went to the essence of the

contract, substantial performance is not enough in Dove.

2. Wal-noon Corp v. Hill -- Lessors (P) replace roof before reading the lease and realizing that the lessees (D) were supposed to pay for the replacement. P brings suit to collect money for the roof replacement. They had not given notice to D at the time of replacement.

i. Issue: whether notice (a condition) required—also whether D was prejudiced by the fact that they did not have a chance to make decisions as to the replacement of the roof, find evidence of P’s negligence, etc.

ii. D agreed to repair on condition that P gives notice of need (this notice is not express)a) Court says that notice is an indispensable precondition to D fulfilling its duty to repair.b) So, because it’s a constructive condition, D doesn’t have to pay (?)

(1) but not giving notice ≠ breachiii. lower court says P was unjustly enriched—therefore gives them some relief.

3. Jacobs & Youngs v. Kent -- P built residence for D. In the contract, P agreed to put in a certain brand of pipe. Through oversight, it put in another kind of pipe that is pretty much the same pipe—just a different brand. After construction is pretty much complete and D has moved in, D refuses to pay final payment because he noticed brand discrepancy. Performance would require demolition. So there’s substantial performance here.

i. Q—is the pipe brand condition also a promise, the non-performance of which, would mean breach?ii. Cardozo says no: “An omission of the both trivial and innocent will sometimes be atoned for by the

allowance of the resulting damage and will not always be breach to be followed by forefeiture.”a) ie: Where there’d be “substantial economic waste” to repair, then P gets paid the diminution

of value in home—which is zilch here.iii. Dissent: If D really wants a certain brand of pipes, how does he make sure he gets them? What if a

certain condition is really important to the party but doesn’t look important to the court?


Excuse of Conditions A condition may be excused to prevent injustice. For example, if other party hinders fulfillment, did not make good faith effort to fulfill (where required), waived condition, or gave the non-favored party reason to rely on waiver, then often excused.

CASES:4. Clark v West -- law prof. (P) agrees to write law books. P gets 4 more/per page if he totally abstains from use of

liquors during contract. Completed. Clark sued for other 4 bucks, but West refused because Clark drank.i. 2 possible contracts

a) West has to pay 4 only on condition that Clark does not drink.(1) In this case, if Clark sued, he wouldn’t get the four bucks because he drank.

b) Alternative is that staying sober is part of the consideration(1) If Clark sued after writing book but not staying sober, he would argue substantial

performance. West would argue that Clark breached. But if Clarke had breached, then West could just sue him for harm done.

ii. Forfeiture – victim of breach is damaged, but relatively small amount compared to breacher if held to strict performance.

iii. Waiver argument – D had knowledge of p’s drinking. After the first book, West allegedly repeatedly avowed that clark would be entitled to 4. Accepted books.

5. Aetna v. Murphy (read this?) - Aetna (P) sued Murphy, insured. D tries to get his insurance company, Chubb to pay. Chubb refuses. Express condition in K says that D must give notice in reasonable amount of time. If K enforced strictly, D would not be able to make claim and so would forfeit payments of premiums until then. Gets nothing.

i. Chubb does not want the notice to be part of the promise, or part of the consideration, but wants provision to be a condition instead.

ii. adhesion contract – form contract and take it or leave it (not bargained for)a) Ins. co. has legitimate interest in notice provision. It wants notice so it can investigate if liable.b) But insurance co. can also use provision to refuse to pay claims.

6. Note Prob. p. 667 -- Jacob & Youngs. Parties could have put express language in contract making special pipes a condition.

i. Waiver vs. contract modification: You can waive a condition, but can’t waive consideration or a promise.

C. Constructive Conditions of Exchange (conditions implied in law)1. Use in bilateral conditions: Remember that a constructive condition is a condition which is not agreed upon by

the parties, but which is supplied by the court for fairness. The principal use of constructive conditions is in bilateral contracts (where each party makes a promise to the other).

i. General rule: Where each party makes one or more promises to the other, each party's substantial performance of his promise is generally a constructive condition to the performance of any subsequent duties by the other party.

a) Independent promises: But in a few situations, circumstances may indicate that the promises are intended to be independent of each other. Here, the court will not apply the theory of constructive conditions.

ii. Strict compliance not required here because the parties didn’t explicitly agree to condit’ns implied in law2. Order of performance: Be careful to interpret the contract to determine the order in which the parties'

performances are to occur.i. Intent: The parties' intent always controls. Where the intent is not clear, the court supplies certain

presumptions, as discussed below.ii. Periodic alternating: The parties may agree that their performances shall alternate. This is true of most

installment contracts. Here, a series of alternating constructive conditions arises.3. No order of performance agreed upon: If the parties do not agree upon the order of performance, there are

several general presumptions courts use:i. Only one party's work requires time: Where the performance of one party requires a period of time, and

the other's does not, the performance requiring time must ordinarily occur first4. Divisible contracts: A divisible contract is one in which both parties have divided up their performance into units

or installments, in such a way that each part performance is roughly the compensation for a corresponding part performance by the other party. If a contract is found to be divisible, it will for purposes of constructive conditions be treated as a series of separate contracts.


i. Significance: If the contract is found to be divisible, here's the significance: if one party partly performs, the other will have to make part payment. If the contract is not divisible, then the non-breaching party won't have to pay anything at all (at least under the contract).

ii. Employment contracts: Most employment contracts are looked on as being divisible. Usually, the contract will be divided into lengths of time equal to the time between payments.

iii. Fairness: The court will not find a contract to be divisible if this would be unfair to the non-breaching party.

CASE:1. Kingston v Preston -- Sale of business. Buyer has agreed to get security or collateral that seller approves. Seller

rejects and refuses to sell business. i. illustrates difference between conditions and promises.

a) Aka independent covenants vs. dependant covenants (exchanged promises in a bilateral K).ii. The promises are dependent on each other.iii. even if not explicit that security is condition, it’s the only way the contract makes sense.

a) Thus court reads in constructive condition (condition implied in law)

The Avoidance of ForfeitureWhere enforcing condition would be a harsh deprivation to one party and an unfair benefit to the other.

CASE:2. O.W. Grun Roofing v. Cope -- D put roof on P’s house. Roof was different colors in different places, defective,

etc. P refuses to pay and wants to pay another company to fix it. P sues.1. damages: trial court says it would cost $700 and something more to have another co. fix it. 2. Isn’t P getting what she paid for? Shouldn’t the court let this stand for freedom of contract reasons?3. But this case is different from Jacobs because in Jacobs the condition of payment is substantial

performance—here it is complete performance because the agreement explicitly said that D would make a roof of a “uniform russet glow,” etc. etc.

a. brand name stamp on pipes in a wall aren’t as big a deal as the look of a roof where a certain look is explicitly agreed upon

4. In this case, the contractor built a whole roof and doesn’t get paid because the whole roof still wasn’t complete performance. D has to pay P the cost of replacing the roof minus what P didn’t pay him

3. Lowy v. United Pacific -- C is going to do grading work and street improvements for O. Does 98% of the grading but no street improvements. O sues for the difference between how much he would have paid C and how much he had to pay another contractor.

i. Court says that there is only one contract but it is divisible. 1. Divisible contracts:

a. If the contract is divisible into separate pairs of "agreed equivalents," a party who has substantially performed one of the parts may recover on the contract for that part.

b. Court finds that grading part of contract, substantial performance, therefore C gets paid.c. As for second part of contract, nothing done so no payment

2. Court says refusal to pay was first breach (i.e. O breached first) Does C still have to perform?a. no—there is always a constructive condition of performance that the other side will pay.

So since O fails to pay, C does not have to continue performance

4. Britton v. Turner -- C contracted to do farm labor, supposed to work for a year. Works for 9 months and quits.1. employee leaving is breach.

a. in traditional contract law, employee didn’t perform, so employer doesn’t have to pay.2. BUT court says with each day, the employer got value equal to payment for that day. So C gets 9 months

of pay instead of $0 which would be what a regular breacher would get.a. Court is allowing C to collect even after willful breach because this prevents injustice

3. How is this different from the roofing case?a. there wasn’t any work that would have to be re-done. Each day, work for that day was completed.b. counter—that employer did training that would have to be re-done. also finding someone at the

end of the year would be difficult4. This decision sort of forces the parties to be explicit about the fact that they want a year contract.

a. but courts today don’t allow this sort of contract5. Was there substantial performance here? (is 9 months substantial performance?) Is this dif. than Jacobs?


a. In Jacobs, the result was essentially the same value as actual performance.

D. Representations and Warranties of Quality

Warranties (see UCC p. 701) (note for test—just study UCC sections that Posner goes over)1. Types: Under the UCC, a seller may make several warranties that are of importance. If the seller breaches any of

these warranties, the buyer may bring a damage action for breach of warranty, which can be viewed as a special type of breach-of-contract action:

a. an express warranty; b. an implied warranty of merchantability;c. a warranty of fitness for a particular purpose.

2. Express Warrantiesa. Any statement of fact about the state of the thing is a warranty.

i. UCC 2-313 express warranties1. Any affirmation of fact or promise made by the seller to the buyer2. Any description, then goods must conform to description

ii. no need to use the word “warranty,” etc.b. Some promises are warranties (this car won’t break down.)c. Puffing: If S is clearly "puffing," or expressing an opinion, he will not be held to have made a warranty.

3. Implied Warranties:a. 2-314—merchantability—always implied unless disclaimed

i. must be suitable within the tradeii. "fit for the ordinary purposes for which such goods are used." §2-314(2)(c).

b. 2-315—fitness for a specific purpose (sort of the next step up from merchantability)i. where the seller has reason to know of the purpose the goods are going to be used for, then

implied that they are fit for the purpose 1. e.g. if buyer says he’s planning to climb mt. w/ shoes, then seller has to say the shoes won’t

be fit or else implied warranty of merchantability4. Modern UCC is less “caveat emptor” than common law. Still, seller and buyer can contract around the implied

warranties—UCC 2-316 a. The seller may make an explicit disclaimer of these warranties, but only by complying with strict procedural

rules. (must be explicit and conspicuous, mention key word (merchantability) etc.)

Limitations of Warranties and Remedies (Adhesion K's ?)a. UCC limits: Instead of disclaiming warranties, the seller may try to limit the buyer's remedies for breaches of

warranty or other contract breaches.i. "Failure of essential purpose": First, if the remedy as limited by seller would "fail of its essential

purpose," the standard UCC remedies come back into the contract.ii. Unconscionability: Court will refuse to enforce a damage limitation if it finds that this is unconscionable.

According to §2-713(3): (1) barring consequential damages for personal injury will virtually always be unconscionable; but (2) limiting damages where the loss is commercial will generally not be unconscionable.

CASES:1. Henningsen v. Bloomfield Motors –B buys car from S (dealer). Few weeks later, defect in the car caused serious

accident. S is being sued as well as M-manufacturer (even though no contract between manufacturer and B).i. Today courts don’t have privity of contract req., so B can sue M. But a K can define extent of privityii. Would S be liable under UCC?

a) yes—implied warranty of merchantability under 2-314b) But contract says “no warranties express or implied” except defects in material or workmanship

under normal use. BUT limits its liability to replace the parts, etc.c) S disclaims express and implied warranties twice.—but the words wouldn’t be that clear to a B

(even though B didn’t even read when has a duty to read) Also merchantability not mentionediii. This case doesn’t use the word unconscionability, but finds for B on those grounds:

a) Court says no competition among carmakers as to warranty—they all use the same one, so B has no choice—adhesion contract

b) Court notes relative sophistication.


http://web.lexis-nexis.com/research/execute?task=searchLexstat&cite=UCC+%A72-314(2)(c)&client=Student


2. Murray v. Holiday Rambler -- Sale of a motor home. Motor home is trashed. B brings it back and S attempts to fix things. B gets fed up with continual prob’s.

i. Why doesn’t B just sue to get his $ back? B/c the contract disclaims all express and implied warranties.ii. How is this different than Henningsen K? --maybe larger print in this K. Also, maybe horrible injuries in

H influenced court to find unconscionability.iii. B argues for UCC warranties under UCC 2-719—if the contract gives remedies (fixing prob’s) and they

fail in their essential purpose (purpose = keeping your car on the road; car blows up, therefore unfixable), then the disclaimer will be void and ordinary UCC warranties available.

a) response—this car didn’t blow up.b) Court agrees that this was enough to let buyer get UCC warranties

iv. How does S get the court to enforce the limitation on warranty next time?a) maybe S gives no limited remedies, therefore UCC 2-719 wouldn’t apply (sale as-is)

Section 3: Changed Circumstances: Impracticality (very rarely applied.)A. Impracticability applies when events following a contract formation are so different from the assumptions on which the

contract was based that it would be unfair to hold the adversely affected party to its commitments. (sort of like mistake) It is adopted both by Restatements § 261 to 272 and UCC § 2.615. Four general elements:

1. After K entered, an event occurred, the non-occurrence of which was a basic assumption of the K.i. if the parties had foreseen the event, it would change the very basis of the exchange (i.e. they’d act very

different)ii. The event is unforeseen (not necessarily unforeseeable)iii. e.g.’s: change in law, a natural disaster, a strike, etc. NOT normally market changes.

a) Most impracticability cases relate to extreme cost increases suffered by sellers who have signed fixed-price contracts. Here, while it is theoretically possible for the seller of goods or services to escape the contracts on the grounds of impracticability, sellers generally lose. The reason is that such sellers are generally found to have implicitly assumed the risk of cost increases, when they signed a fixed-price contract.

2. The event rendered the party’s performance impracticable (unduly burdensome)i. not just a loss—usually performance would be a huge loss often threatening the existence of the company

3. The party seeking relief is not at fault4. The party seeking relief did not bear the risk of the event occurring (the risk was not allocated to her)

i. allocation of risk could be express or implied or even through conduct or past performancea) Sometimes a general warranty will do to allocate the risk of the unforeseen event.

Relief: impracticality is usually a complete defense, relieving a party of liability or duty to perform. Sometimes, though, it is most appropriate to adjust the terms of the contract.

A. Existing Impracticality

CASES:1. Mineral Park Land v. Howard -- C contracts with O for purchase of gravel and sand (to build a bridge). O says C

promised to buy 100,000 cubic yards and C only takes and pays for 50,000.1. Under contract, C promised to take all needed gravel from O.2. Runs into big difficulties because the other 50,000 was under water (would cost 10x more to take out)3. C takes the other half from someone else, claiming it’s impracticable for them to take the rest from O. 4. Finding cheaper widgets somewhere else is not impracticability (market changes foreseeable) 5. Court releases C from obligation under contract because contract is impracticable.

a. Used to be an impossibility doctrine—contract unenforceable only if impossible to perform.b. Now there has to be "extreme impracticability" to perform and it has to be something the

party they wouldn’t have agreed to—almost like mistake.


2. U.S. v. Wegematic —D wins bid to deliver computer by June. K has a liquidated damages provision of $100/day late fee. D sends two letters saying they have to delay delivery. Finally in Oct., P buys a comparable computer from IBM. Court says no impracticability here.1. S argues impracticability because of basic engineering difficulities.

a. D argues that being able to make the computer is a basic assumption of the K.2. How is this different from Mineral Park where impracticability found?

a. D here presented the computer as something that was pretty much made.b. In MP, the basic assumption was the ability of D to get the dirt out. Here, the basic assumption is

that they will be able to deliver—not that they will be able to engineer a computer because D represented that as already having been done.

c. In MP, D didn’t know that it was possible that there be water in the ground, etc. But here, D should have been able to foresee that they may not be able to perform.

3. Why is risk here put on seller instead of buyer (this seems to be the default rule)?a. S has access to the knowledge—information forcingb. In MP, the ground owner had access to the knowledge—better position to know.

i. but do we want to encourage B to survey land, etc?c. Non-performance of contract will not harm P in MP but will harm US in this case.

B. Supervening Impracticality1. Taylor v. Caldwell -- D agreed to let P use music hall an certain dates. Music hall burns down. Not just

impracticability—impossibility here.i. implied condition—that the fact that the hall would still exist is an assumption that creates an implied

condition that the hall still exist on the datesa) where contract performance depends on the existence of a person or thing, the condition that that

person or thing exist is implied.ii. Why does the buyer get the risk here? (as opposed to the buyers in Wegematic and Mineral Park).

a) Maybe buyer is in a better position to bear risk here because they can make a contingency plan.iii. If performance involves particular goods, a particular building, or some other tangible item, which

through the fault of neither party is destroyed or otherwise made unavailable, the contract is discharged.

2. Canadian Industrial Alcohol v. Dunbar Molasses - D is the middleman buying from the molasses refinery (R) and P is the buyer. R slows production. So D can’t perform to the amount that it agreed to. P sues.

i. Court says that there are things that would have excused the seller:a) strike, war, failure of sugar crop, refinery burning down, etc.

ii. Why isn’t slowed production an excuse?a) the court seems to want the middleman to inform P of the possibility that R will not produce.

Another information forcing rule?b) the middleman is in the best position to provide accurate information to the parties—also best

position to bear the risk.c) So why would D be able to escape if there was a failure of sugar crop, strike, etc?

iii. Court likely thinks the promise “we’ll deliver no matter what” is referring to (a) in the following two possible things that stop production:

a) normal supply fluctuations-- Middleman usually bears riskb) destruction of sugar crop—in this case, the middleman’s promise to “deliver no matter what,” is

unreasonable.

C. Frustration of PurposeA. Frustration generally: Where a party's purpose in entering into the contract is destroyed by supervening events, most courts will discharge him from performing.

1. Distinguish from impossibility: In frustration cases, the person seeking discharge is not claiming that he "cannot" perform, in the sense of inability. Rather, he is claiming that it makes no sense for him to perform.

B. Factors to be considered: The two main factors courts have looked to:1. Foreseeability: The less foreseeable the event which thwarts the promisor's purpose, the more likely the court is to allow the frustration defense. (Example: In Krell, it was quite unlikely, at the time of the contract, that the king would be too sick to be crowned.)2. Totality: The more totally frustrated the party is, the more likely he is to be allowed to use the defense.

1. Paradine v. Jane (not the law)i. Rule: contract enforced no matter what (even if a German army comes and kills you)


2. Krell v. Henry (is the law) -- P contracts to lease/rent a room to D so that D can see the King’s coronation go by. King gets sick and no coronation. D argues frustration of purpose even though K doesn’t mention coronation.

i. frustration of purpose contract’s are usually not impracticable.—D could payii. Does the landlord need to know the purpose?

a) The court seems to say yes—in fact, in this case, then room was promoted with the coronation as an incentive to rent

iii. King getting sick wasn’t foreseeable and coronation was the basis of the contract

3. Wash. State Hop Producers v. Goschie Farms – P in secondary market buying and selling hop sales allotments or licenses (req’d by USDA). P makes several agreements to sell allotments around $0.6 per pound. USDA notifies everyone that after a year it will terminate the order requiring allotments. Allotments plummet to $0.07.

i. Restatement § 265:a) Where, after a contract is made, a party’s principle purpose is substantially frustrated without

his fault by the occurrence of an event the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary.

ii. foreseeability is a factor. So why do they get out of the contract when they knew it was possible that the USDA terminate the order?

a) Restatement says that something being foreseeable doesn’t necessarily make it not frustration of purpose.

b) This is like the fire and the theater—destruction of the subject or basic assumption of the K.

Section 4: The Duty of Good FaithGood faith generally required by courts. Explicitly required by UCC in the case of requirements and output contracts.

CASE:1. Feld v. Henry S. Levy & Sons, Inc. -- Output contract (risk shifting contract) for bread crumbs. P says “I’ll buy as many bread crumbs as you make.”1. How is it breach when D just stops producing?

a. P argues that D had a duty of good faith to keep producing2. Restatements requires in output contracts:

a. that the “seller use best efforts to supply the goods”3. Court says they should have given notice as the contract requires. Instead they just stopped even though they

could have fixed the toasting machine and continued until required notice time.RULE: that in an option contract, neither side can do anything that would go against the assumptions of the contract—make unreasonably more or less than expected. Otherwise, this is bad faith behavior

CHAPTER VI. REMEDIESCompensatory DamagesA. Breach

1. total and material breachi. promisee can (1) withhold performance, (2) terminate, and (3) claim full damagesii. A breach is material if the failure or deficiency in performance is so central to the contract that it

substantially impairs its value to the promisee.iii. breaching party may recover through restitution where non-breacher is unjustly enriched.

2. material but not totali. promisee can (1) suspend performance, (2) await cure, (3) claim compensation for loss sufferedii. UCC allows cure of defect up until date of deliveryiii. Court might find contract divisible

3. not material (Substantial performance)i. promisee can (1) claim compensation for loss sufferedii. Usual measure of damages is cost to complete. In other words, payment of the amount that would be

necessary to correct the shortfall.a) BUT: Where court feels that this would not be an accurate measure of actual harm, or where

substantial economic waste would result from performance, then the court may find damages based on diminution of market value that resulted from the shortfall in performance.


iii. If promisee’s further performance was conditioned on breached term, then promisee still must perform after substantial performance by the promisor unless condition was express.

4. NOTE: Contract law doesn’t look on breaching as an inherent wrong. Especially in the case of efficient breach.

B. Repudiation1. Where a party makes it clear by words or actions that she will breach when performance is due

i. There must be clear, unequivocal, voluntary repudiation by indicating an action or inaction that would constitute a material breach..

ii. Non-breaching party may try to encourage repudiator to come through.RELIEF:A. Basic Policies

I. Equitable Remedies A. Two types: Sometimes the court will award "equitable remedies" instead of the usual remedy of money damages. There are two types of equitable relief relevant to contract cases: (1) specific performance; and (2) injunctions. B. Limitations on equitable remedies: There are three important limits on the willingness of the court to issue either a decree of specific performance or an injunction:

1. Inadequacy of damages: 2. Definiteness: The court will not give equitable relief unless the contract's terms are definite enough to enable the court to frame an adequate order.3. Difficulty of enforcement: Finally, the court will not grant equitable relief where there are likely to be significant difficulties in enforcing and supervising the order.

C. Land-sale contracts: The most common situation for specific performance is where defendant breaches a contract under which he is to convey a particular piece of land to the plaintiff.

1. Breach by buyer: Courts also often grant specific performance of a land-sale contract where the seller has not yet conveyed, and it is the buyer who breaches.

D. Personal services contracts: 1. No specific performance: Courts almost never order specific performance of a contract for personal services. This is true on both sides: the court will not order the employer to resume the employment, nor will it order the employee to perform the services.2. Injunction: But where the employee under an employment contract breaches, the court may be willing to grant an injunction preventing him from working for a competitor.

E. Sale of goods: Specific performance will sometimes be granted in contracts involving the sale of goods. This is especially likely in the case of output and requirements contracts, where the item is not in ready supply.

II. Expectation Damages A. Formula for calculating: P's expectation damages are equal to the value of D's promised performance (generally the contract price), minus whatever benefits P has received from not having to complete his own performance.

1. Formula from Seller’s perspective: R – C – P – S + I = EWhere:R = Total Expected Profit (price of goods or services)C = Total expected cost of performance (not including overhead)P = Payments received (or other benefits)S = Salvage recoveryI = Incurred costs (in reliance)E = Expectation damages

2. Formula from Buyer’s perspective where buyer covers/substitute found: T – C + I = EWhere:T = Cost of substitute/coverage (most likely at the time of breach)

B. Limitations on Expectation recovery:1. the damages claimed must have been foreseeable at the time of contracting

1. this means the damages must have naturally arose from breach.2. If given notice of possibility of unusual damages, then breaching party liable

2. Non-breaching party must have done what she could to mitigate damages3. Causal connection must be shown between the breach and the harm4. The loss must be shown with reasonable certainty5. Damages are limited such as is necessary to avoid unfair forefeiture (unjust damage to the breacher and enrichment of the non-breacher


III. Reliance Damages A. The main situations where reliance damages are awarded are:

1. Profit too speculative: Where expectation damages cannot be computed because plaintiff's lost profits are too speculative or uncertain. 3. Promissory estoppel: Where plaintiff successfully brings an action based on promissory estoppel. Here, the suit is usually not truly on the contract, but is rather in quasi-contract.

B. Limits on amount of reliance recovery: The plaintiff's reliance damages are sometimes limited to a sum smaller than the actual expenditures:

1. Contract price as limit: Where D's only obligation under the contract is to pay a sum of money (the contract price), reliance damages will almost always be limited to this contract price.2. Recovery limited to profits: Also, most courts do not allow reliance damages to exceed expectation damages. However, the defendant has to bear the burden of proving that plaintiff's profit would have been less than the reliance damages. 3. Expenditures prior to signing: The plaintiff will not normally be permitted to recover as reliance damages expenditures made before the contract was signed, since these expenditures were not made "in reliance on" the contract.

C. Cost to plaintiff, not value to defendant: When reliance damages are awarded, they are usually calculated according to the cost to the plaintiff of his performance, not the value to the defendant.

IV. RestitutionA. Generally: The plaintiff's restitution interest is defined as the value to the defendant of the plaintiff's performance. Restitution's goal is to prevent unjust enrichment.

1. When used: The main uses of the restitution measure are as follows: (1) a non-breaching plaintiff who has partly performed before the other party breached may bring suit on the contract, and not be limited by the contract price (as he would be for the expectation and reliance measures); and (2) a breaching plaintiff who has not substantially performed may bring a quasi-contract suit and recover the value that he has conferred upon the defendant.2. Market value: Restitution is based on the value rendered to the defendant. This is usually the market value of that which the defendant would have to pay to acquire the plaintiff's performance.

B. Not limited to the contract price: The main use of the restitution measure is that, in most courts, it is not limited by the contract price. C. Losing contract: Restitution may even be awarded where P has partly performed, and would have lost money had the contract been completed.

V. Substantial performance as basis for remedies 1. A party who substantially performs may sue for ordinary (expectation) damages for breach of contract, if the other party fails to perform. The other party has a set-off or counterclaim for the damages he has suffered from the plaintiff's failure to completely perform.

VI. Damages in Sales Contracts A. Where goods not accepted: If the buyer has not accepted the goods (either because they weren't delivered, or were delivered defective, or because the buyer repudiated), the UCC gives well-defined rights to the injured party:

1. Buyer's rights: If the seller fails to deliver at all, or delivers defective goods which the buyer rightfully rejects, the buyer has a choice of remedies.

a. Cover: The most important is his right to "cover," i.e., to buy the goods from another seller, and to recover the difference between the contract price and the cover price from the seller. §2-712(2). The buyer's purchase of substitute goods must be "reasonable," and must be made "in good faith and without unreasonable delay." §2-712(1).b. Contract/market differential: If the buyer does not cover (either because he can't, or decides he doesn't want to), he can instead recover the contract/market differential, i.e., the difference between the contract price and the market price "at the time when the buyer learned of the breach.…" §2-713(1). c. Consequential and incidental damages: The buyer, regardless of whether he covers, may recover for "incidental" (incurred for the purpose of full enjoyment of the contract) and "consequential" (losses not in the contract, but dependant on the contract) damages.

i. but a party that seeks to recover consequential damages must show that the damages meet the limitations on expectation damages (above). Foreseeability is an important factor here.






d. Rejection: All of the above are judicial remedies. But the buyer who receives non-conforming goods can also exercise the self-help remedy of rejecting the goods.

2. Seller's damages for breach: Where it is the buyer who breaches, by wrongfully refusing to accept the goods (or repudiating the contract before shipment is even made), the seller has several possible remedies:

a. Contract/resale differential: Normally, the seller will resell the goods to a third party. Assuming that the resale is made in good faith and in a "commercially reasonable" manner, seller may recover the difference between the resale price and the contract price, plus incidental damages.b. Contract/market differential: If the seller does not resell the goods, he may recover from the breaching buyer the difference between the market price at the time and place for delivery, and the unpaid contract price, together with incidental damages. §2-708(1). c. Lost profits: The contract/resale differential (for a reselling seller) and the contract/market differential (for a non-reselling seller) may not make the seller whole. Where this is the case, §2-708(2) lets the seller recover his lost profits instead of using either of these differentials. d. Action for contract price: In a few situations, the UCC allows the seller to sue for the entire contract price: where goods are accepted, or they are not resaleable

CASE:1. Sullivan v. O’connor —Dr promises to enhance patient’s beauty through cosmetic surgery/nose job. He messes up

her face (a dent in her nose). She had to undergo more than the promised two operations—a third to correct mistake. Can’t fix the mistake with further surgery.

1. P sues on two theories: negligence and breach of contracta. the court demands clear proof where patient claims the Dr. promised perfection like in this

case. Court finds that there is clear proof in this case.2. Damages for breach—trial court uses random method. This court gives expectation damages. 3. Courts reluctant to give speculative losses (consequential damages)—like saying she should get damages

for lost chance to become a model.4. P could ask for damages for how much better she would feel about herself

a. How much would you accept to go from perfect nose to a worse nose? (this seems messy)

B. Breach or Repudiation by Payor1. John Hancock v. Cohen

i. Point of the case: an anticipatory breach (saying you’re going to breach) is the same as a breach.

2. New Era Home v. Forster —contract to remodel in parts w/ payments stipulated for each phase. Contractor stops after a few phases. Owner doesn’t pay up to that phase and contractor sues for damages.1. Court rejects the arg. that this is a divisible contract. (P’s arg.)2. P can collect expectation damages under contract or can collect restitution (quantum meruit) the value that D

received.a. restitution: P would collect the benefit he has conferred on D (which is the value of the partially

remodeled home).i. look at the market price of what has been done (ask other contractors)

ii. maybe the value of a completed job minus cost of getting the remodeled house to that point.

b. expectation: What P’s profit would be under contract law.i. c = work done (costs), y = payments made, z = lost profits, p = expected net profit

ii. If D repudiates day after execution, then P gets piii. If D repudiates after x, then P gets x + p – y.

3. Bernstein v. Nemeyer -- Contract has a negative cash flow guarantee to induce P to invest in a partnership for tax shelter. (i.e. D guarantees that it will keep lending money to the partnership so it doesn’t go into the red). D stops loaning money as promised (breach). Both P and D lose their whole investment.

1. P invested $1.05 mil. They hoped for more (expectation). Still, the buildings were so worthless and had so much mortgage that real expectation damages is $0.

2. So P goes for reliance damages. But you can’t do this. You are only allowed to get reliance damages if expectation damages are hard to prove or something. Since expectation damages are $0 and this is clear, P can’t go for reliance damages.

3. So P goes for restitution damages. They claim that the $1.05 mil was a benefit conferred on D. But court says D didn’t get any benefit because they actually lost money.

a. BUT, maybe D lost less money than they would have. But this is too hard to prove.





C. Breach or Repudiation by Performer1. Reliance Cooperage v. Treat -- Agreement in July for sale of oak staves by Dec. Agreement is $450 per 1,000, but

then market price goes up. D repudiated (anticipatory breach) in Oct. (market was more than $450 at this time). Actual breach didn’t occur until Dec. when there was no delivery (market at this point was more than $450 and less than $750)

1. Damages are difference between market price at the time of breach and contract price. This is because P can presumably get the staves somewhere else at the market price when breach occurs.

a. P argues that breach is at actual non-performance in Dec. (higher market)—if more then $450 then he gets difference)

2. What would his expectation damages be? If market price lower than contract price, then you get nothing (you thank the seller and never sue). If market price goes up, then you get difference.

3. Usually buyer has a duty to cover/mitigate damagesa. Court says not here because S just repudiated—not actual breach (until Dec. when there was

actual breach—at which time S would have had to mitigate by buying elsewhere). b. Generally mitigation required: After a repudiation occurs, the repudiatee may not simply

ignore the repudiation and continue the contract, if this would aggravate his damages. That is, the repudiatee must mitigate his damages by securing an alternative contract, if one is reasonably available.

c. anticipatory repudiation is a breach unless “B refuses to accede”?i. S is requiring B to make another immediate purchase. Nobody knows where the

market is going, so there’s a certain risk in coveringii. prob—that B has to anticipate the repudiation. It may not be possible for B to get

immediate staves from someone else.4. Cases conflict in some ways as to whether repudiation requires covering. Especially because courts are

always looking at things from an ex post perspective where covering or not looks smart or stupid.

2. American Standard v. Schectman -- P contracts with D to demolish buildings and grade the land (clearing foundations to one foot below ground). They only clear to the ground (not one foot under)1. Material breach. Cost to complete would be $110,500. Difference in land value (diminution) is either $3000

or nothing.2. Normally, expectation damages is cost of performance (completion).

a. But, you could counter that the “expectation” was to sell the land for $183,000 (market value). They sold for $180,000. So isn’t the difference $3,000?

3. D argues that damages should be diminution to the value of the land because Jacob & Young. a. Jacob exception: Where there’s (1) substantial performance, (2) good faith, and (3) to complete

the K would mean economic waste, then the court can require diminution in value damages instead of cost to complete.

4. Court says here the Jacobs exception doesn’t apply (and therefore cost to complete d’s) because:a. D seems to being opportunistic in this case (bad faith?)—in Jacobs, no bad faith.b. Court seems to think the grading down one foot is less incidental than a different brand of pipec. B gets what he wants on his land whether or not it adds to the value (especially in consumer cases

—ugly fountain case where fountain diminished the value of the land)

3. Hadley v. Baxendale 4. Spang Industries v. Aetna 5. Hydraform v. American Steel

D. Prevention, Hindrance and the Duty of Cooperation1. L. Albert 2. Patterson

ben’s property outline for helmholz - university of chicagoblsa.uchicago.edu/first...

Documents