Contracts Outline - Penn Law

8/3/2019 Contracts Outline - Penn Law

1/50


2/50

IV. Performance and Breach (27)A. Implied Duty of Good Faith (27)B. Conditions and Constructive Conditions (27)C. Substantial Performance and Material Breach (28)

V. Defenses (29)

A. Capacity (29)B. Improper Consent (30)1. Misrepresentation (30)2. Duress (32)3. Undue Influence (33)4. Unconscionability (33)

C. Failure of Basic Assumption (34)1. Mistakes of Present Existing Facts (34)

a) Mutual Mistake (35)b) Unilateral Mistake (36)c) Duty to Disclose (36)

2. Changed Circumstances (37)a) Impossibility and Impracticability (37)b) Frustration of Purpose (39)c) Long Term Contracts (39)

VI. Remedies (40)A. Types of Damages (40)

1. Expectation and Reliance (41)2. Restitution (44)

B. Limitations on Damages (45)1. Unforseeability (45)2. Uncertainty (45)3. Avoidability (46)

C. Liquidated Damages and Penalties (48)D. Specific Performance (49)

1. Land and Goods (49)2. Personal Services (50)

2 of 50


3/50

I. Elements of Contract

The Restatement (Second) of Contracts

1. Group of common law principles, with some innovations not in the common law, that

are useful in clarifying the majority principle.2. Very influential while NOT a statute and binding on courts per se, some courts have

adopted portions to be their states common law.3. Originally published by Williston and Corbin.

Restatement (Second) 1. Contract Defined

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

Restatement (Second) 2. Promise; Promisor; Promisee; Beneficiary

(1) A promise is a manifestation of intention to act or refrain from acting in a specified

way, so made as to justify a promisee of which the law in some way recognizes as a duty.(2) The person manifesting the intention is the promisor.(3) The person to whom the manifestation is manifested is the promisee.(4) Where performance will benefit a person other than the promisee, that person is a

beneficiary.

Restatement (Second) 3. Agreement Defined; Bargain Defined

An agreement is a manifestation of mutual assent on the part of two or more persons. Abargain is an agreement to exchange promises or to exchange a promise for a performance or toexchange performances.

Restatement (Second) 4. How a Promise May be MadeA promise may be stated in words either oral or written, or may be inferred wholly orpartly from conduct.

The Uniform Commercial Code

1. Model statutes for states (adopted with minor variations in almost every one).2. UCC itself is not law, although state laws reference it, and courts cite as law.3. Article I General Provisions; Article 2 Sales Transactions in Goods.

UCC 1-103. Supplementary General Principles of Contract Law Applicable

Unless displaced by the particular provisions of this Act, the principles of law and equity,

including the law merchant and the law relative to capacity to contract, principal and agent,estoppel, fraud, misrepresentation, duress, coercion, mistake, bankruptcy, or other validating orinvalidating clause shall supplement its provisions.

UCC 2-102. Scope; Certain Security and Other Transactions Excluded from this Article

Unless the context so requires, the Article applies to transactions in goods; it does NOTapply to any transaction which although in the form of an unconditional contract to sell or

3 of 50


4/50

present sale is intended to operate only a security transaction nor does this Article impair orrepeal any statute regulating sales to consumers, farmers, or other specified classes of buyers.

UCC 2-105. Definitions: Transferability; Goods.

(1) Goods means all things (including specially manufactured goods) which are

movable at the time of identification to the contract for sale other than the money in which theprice is to be paid, investment securities (Article 9) and things in action. Goods also includesthe unborn young of animals and growing crops and other identified things attached to realty asdescribed in goods to be severed from realty ( 2-107).

UCC 2-106. Definitions: Contract; Agreement; Contract for Sale; Sale; Present Sale

(1) In this Article unless the context otherwise requires contract and agreement arelimited to those relating to the present or future sale of goods. Contract for sale includes botha present sale of goods and a contract to sell goods at a future time. A sale consists in thepassing of title from the seller to the buyer for a price ( 2-401). A present sale means a salewhich is accomplished by the making of a contract

Default Rule Rule parties can contract around by prior agreement (e.g. assets to spouse, thento kids on death).

Majoritarian Default Rule majority of contracting parties would want.Penalty Default Rule at least one party would NOT want.

Immutable Rule Rule parties cannot change (e.g. duty to act in good faith).

Special Contract denotes an express or explicit contract, with all term laid out, as opposed toone where terms must be inferred from law or nature of circumstances surrounding transaction.

Shaheen v. Knight (Pa. 1957)

Facts: Shaheen contracted with Dr. Knight to sterilize him. Two years later, he got hiswife pregnant and had another child.

Law: No warranty of cure implied in contract (not a medical malpractice tort action). Inany case, it would be against public policy to award damages for the birth of a healthy child.

II. Mutual Assent

Restatement (Second) 17. Requirement of a Bargain

(1) Except as stated in Subsection (2), a formation of a contract requires a bargain inwhich there has been a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules

applicable to formal contracts under the rules stated in 82-94.

Restatement (Second) 18. Manifestation of Mutual Assent

Manifestation of mutual assent to an exchange requires that each party either make apromise or begin or render a performance.

4 of 50


5/50

Restatement (Second) 19. Conduct as Manifestation of Assent

(1) The manifestation of assent may be made wholly or partly by written or written orspoken words OR by other acts OR by failure to act.

(2) The conduct of a party is not effective ad manifestation of his assent unless he intendsto engage in the conduct and knows or has reason to know that the other party may infer from his

conduct that he assents.(3) The conduct of a party may manifest assent even though he does not in fact assent. Insuch cases a resulting contract may be voidable because of fraud, duress, mistake, or otherinvalidating clause.

Subjective Theory (old)

Consider what parties actually thought.Must have Meeting of the Minds both parties conform to same intent.Subjective from both listeners and speakers points of view.

Objective Theory (new)

Intention ascertains for outer manifestation, not inner thoughts.Obligation attaches by mere force of law to certain acts (L. Hand)Supported in late 19th and early 20th centuries by Williston and HolmesExemplified by Reasonable Person Standard

Embry v. Hargadine McKittrick (Mo. 1907)

Facts: Embry went to boss to demand renewal of contract or quit; boss said Go ahead,get your men out. Embry took this to mean that he retained job. Later fired.

Law: Meeting of the minds is determined by expressintention. If what McKittrick saidtaken by reasonable mind as offer of employment, and Embry so understood it, then the contractis valid. (Objective Standard)

Note: There is a subject element to the objective standard in the Embry must have sounderstood McKittricks offer.

Lucy v. Zehmer(Va. 1954)Facts: Parties signed contract over drinking for Lucy to buy Zehmers farm for 50K, a

reasonable price. Zehmer later reneged.Law: Lucy actually believed Zehmer was serious, AND wasjustified in believing so.

No evidence that Zehmer was too drunk to make contract. (Objective Standard)

Reasonable Person Standard

Average Reasonable Person would any reasonable person think party received

offer? Person Like Promisee would someone with promisees actual characteristicsthink party received offer? (focus on major characteristics danger of creeping intosubjective)

Person from Promisors Perspective What would someone with characteristicsapparent to person do?

5 of 50


6/50

A. Offer and Acceptance

|----------------------------|-------------------------------------|I talk you talk I talk againOffer Acceptance X

OR Solicitation Offer AcceptanceContract formed upon acceptance, but what acceptance is depends on when offer made.

Restatement (Second) 22. Mode of Assent: Offer and Acceptance.

(1) The manifestation of mutual assent to an exchange ordinarily takes the form of anoffer or proposal by one party followed by an acceptance by the other party or parties.

(2) A manifestation of mutual assent may be made even though neither offer noracceptance can be identified and even though the moment of formation cannot be determined.

UCC 2-204. Formation in General

(1) A contract for the sale of goods may be made in any manner sufficient to show

agreement, including conduct by both parties which recognize the existence of such a contract.(2) An agreement sufficient to constitute a contract for sale may be found even though

the moment of its making is undetermined.(3) Even though one or more terms are left open a contract for sale does not fail for

indefiniteness if the parties have intended to make a contract and there is a basis for anappropriate remedy. [Cf. 33, below]

UCC 2-206. Offer and Acceptance in Formation of Contract

(1) Unless otherwise unambiguously stated by the language or the circumstances(a) an offer to make a contract shall be construed as inviting acceptance in any

manner by any medium possible under the circumstances; [Cf. 30, below]

(b) [shipment can equal acceptance].(2) Where the beginning of a requested performance is a reasonable mode of acceptance,

an offeror who is not notified of acceptance within a reasonable time may treat the offer ashaving lapsed before acceptance.

1. Offer

Restatement (Second) 24. Offer Defined

An offer is the manifestation of a willingness to enter into a bargain, so made as to justifyanother person in understanding that his assent to that bargain is invited and will conclude it.

[Offer effective when receivedby offeree]

Restatement (Second) 29. To Whom an Offer is Addressed

(1) The manifested intention of the offeror determines the person or persons in whom iscreated a power of acceptance.

(2) [Power may be had by individual or group]

6 of 50


7/50

Restatement (Second) 33. Certainty

(1) Even though a manifestation of intention is intended to be understood as an offer, itcannot be accepted so as to form a contract unless the terms of the contract are reasonablycertain.

(2) The terms of a contract are reasonably certain if they provide a basis for determining

the existence of a breach and for giving an appropriate remedy.(3) The fact that one or more terms of a proposed bargain are left open or uncertain MAYshow that a manifestation if intention is not intended to be understood as an offer or as anacceptance. [Cf. 2-204(3), above]

a) Preliminary Negotiations

Restatement (Second) 26. Preliminary Negotiations

A manifestation of willingness to enter into a bargain is not an offer is the person towhom it is addressed knows or has reason to know that the person making it does not intend toconclude a bargain until he has made a further manifestation of assent.

Official Comment a: reason to know depends on words, conduct, and circumstances,including past communications and usage in line of business.

Official Comment c: in determining if offer is made, relevant factors include terms ofprevious inquiry, completeness of terms, number of parties to whom communication addressed.

Nebraska Seed v. Harsh (Neb. 1915)

Facts: Harsh sent letter to NSC naming price of millet. NSC accepted as offer.Law: Mere statement of price cannot be understood as an offer to sell. Request for bids is

not an offer, but really preliminary negotiations.

Leonard v. PepsiCo (N.Y. 1999)

Facts: Pepsi advertised junk for points, including Harrier Jet for 7M points as a joke.Law: Advertisement is generally not offer, but solicitation of one. Objective person must

construe an ad as an offer, which excludes acts in jest. No real offer made by Pepsi.

Donavan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake.Donovan came in with ad demanding car at lower price.

Law: Mistake unknown to Donovan could reasonably construe as offer since price andVIN number were both on ad thus, is an offer.

Farnsworth on Precontractual Liability

Generally courts take an aleatory view of negotiations, that the benefits of successfulcontract outweigh the risk of negotiations collapsing. They thus are generally unwilling toimpose liability for precontractual negotiations. But, on occasion courts have departed from thisrule in recent decades in the following ways:

1. Unjust Enrichment Restitution for ideas disclosed or services rendered.2. Misrepresentation usually would be actionable in tort. Rare since difficult to both

prove fraudulent intent and substantial loss.

7 of 50


8/50

3. Specific Promise Negotiating party may not, without impunity, break promise thatother party has relied upon. See promissory estoppel andRed Owl, below.

4. General Obligation courts unwilling to impose general good faith duty forpreliminary negotiations, unlike in Europe.

b) Written Memorials

Restmt. (Second) 27. Existence of Contract Where Written Memorial Is Contemplated

Manifestations of assent that are in themselves sufficient to conclude a contract will notbe prevented from so operating by the fact that the parties also manifest an intention to prepareand adopt a written memorial thereof; but the circumstances may show that the agreements arepreliminary negotiations.

Empro v. Ball-Co. (7th Cir. 1989)

Facts: Empro sent letter of intent to Ball-Co. to buy assets but negotiations reached animpasse. Ball-Co. then started negotiations with a third party.

Law: There must be an express objective intent to be binding. Letter contains phraseslike subject to indicating lack of finality no intent shown, so not a binding contract.

Counter-argument: definitive contract will simply document agreement already reached.

Texaco v. Pennzoil (Tex. 1987)

Facts: Pennzoil made initial agreement to by Getty Oil. Texaco tortuously interferedwith contract just 48 hours later.

Law: Court considers several factors to determine if agreement couldbe consideredbinding contract: 1) whether party reserved right to be bound, 2) any partial performance, 3) allessential terms agreed upon, and 4) whether complexity of transaction indicated formal contractexpected. There was enough evidence in this case for the jury to find binding contract.

c) Revocation

Restatement (Second) 35. The Offerees Power of Acceptance

(1) An offer gives to the offeree a continuing power to complete the mutual manifestationof assent by completing the offer.

(2) A contract cannot be created by acceptance of an offer after the power of acceptancehas been terminated in one of the ways listed in 36.

Restatement (Second) 36. Methods of Termination of the Power of Acceptance

(1) An offerees power of acceptance may be terminated by

(a) rejection of counter-offer by the offeree, or(b) lapse of time, or(c) revocation by the offeror, or(d) death or incapacity of the offeror or the offeree.

(2) In addition, an offerees power of acceptance is terminated by the non-occurrence ofany condition of acceptance under the terms of the offer.

8 of 50


9/50

Restatement (Second) 25. Option Contracts

An option contract is a promise which meets the requirements for the formation of acontract and limits the promisors power to revoke an offer.

Restmt. (Second) 37. Termination of the Power of Acceptance under Option Contract

Notwithstanding 38-49, the power of acceptance under an option contract is notterminated by rejection or counter-offer, by revocation, or by death or incapacity of the offeror,unless the requirements are met for discharge of a contractual duty.

Restatement (Second) 42. Revocation by Communication [Offeror Offeree]An offerees power of acceptance is terminated when the offeree receives from the

offeror a manifestation of intention not to enter into the proposed contract.

Restatement (Second) 43. Indirect Communication of Revocation

An offerees power of acceptance is terminated when the offeror takes definitive actioninconsistent with an intention to enter into the proposed contract and the offeree acquires reliable

information to that effect.

Dickinson v. Dodds (U.K. 1876)

Facts: Wed Dodds offered to sell house to Dickinson. Thurs Dodds sold to Allan(then Dodds found out). Fri Dickinson tried to accept offer and was refused.

Law: Before acceptance, parties free to change if offer revoked, then there is nomeeting of minds at time of supposed acceptance. Dickinson knew offer was revoked becauseDodds sold to Allen. No contract. See Restmt. 43 (above).

UCC 2-205. Firm Offers

[Not revocable for lack of consideration, but can lapse after a reasonable time (should

never be LONGER than 3 months)]

2. Acceptance

Restmt (2d) 40. Time When Rejection or Counter-Offer Terminates Power of Acceptance

[When received by offeror]

a) Mirror Image Rule

Mirror Image Rule acceptance must contain no new terms.

Ardente v. Horan (R.I. 1976)Facts: Horan offered to sell house for $250,000. Ardente agreed to buy and sent $20,000

deposit check and condition that some of the personalty remain in realty. Horan returned checkand revoked offer.

Law: Conditional acceptance only valid if acceptance is independent of condition. Canonly consider language actually used request was not independent, so revocation valid.

9 of 50


10/50

Restatement (Second) 61. Acceptance which Requires Change of Terms

[Acceptance with change of terms not invalid unless terms are conditional].

b) Acceptance by Mail

Restatement (Second) 63. Time when Acceptance Takes Effect[Acceptance is valid when out of offerees possession].

Mailbox Rule Acceptance effective on dispatch avoids Two Generals problem.

Restatement (Second) 64. Acceptance by Telephone or Teletype [same as in person].Restatement (Second) 65. Reasonableness of Medium of Acceptance

[It is reasonable if customarily used for similar transactions].Restatement (Second) 66. Acceptance Must be Properly Dispatched

[Must be properly addressed and reasonably ensure safe transmission].

c) Acceptance by Performance (Unilateral Contracts)

Restatement (Second) 54. Acceptance by Performance

(1) Where an offer invites an offeree to accept by rendering a performance, nonotification is necessary to make such an acceptance effective unless the offer requests such anotification.

(2) If an offeree who accepts by rendering a performance has reason to know that theofferor has no adequate means of learning of the performance with reasonable promptness andcertainty, the contractual duty of the offeror is discharged unless

(a) the offeree exercises reasonable diligence to notify the offeror, or(b) the offeror learns of the performance within a reasonable time, or(c) the offer indicates that notification of acceptance is not required.

Restatement (Second) 45. Option Contracted Created by Part Performance

[option contract starts when performance begins duty to complete is created, butconditional on completion of performance]

Restatement (Second) 30. Form of Acceptance Invited

(1) An offer may invite acceptance to be made by an affirmative answer in words, or byperforming or refraining from performing a specified act, or may empower the offeree to make aselection of terms in his acceptance.

(2) [any manner and any medium reasonable Cf. 2-206(1)(a), above]

Restatement (Second) 32. Invitation of Promise or PerformanceIn case of doubt an offer in interpreted as inviting the offeree to accept either by

promising to perform what the offer requests or by rendering the performance, as the offereechooses.

Carlill v. Carbolic Smoke Ball Co. (U.K. 1893)

Facts: CSB published ad saying it would pay 100 to anyone who used their smoke balland got the flu. Carlill did, demanded her 100, and was refused.

10 of 50


11/50

Law: Notification of acceptance is required unless waived by offeror. Nature of the adwaives notification requirement thus satisfaction of the condition alone is sufficient.

Note:Leonard v. PepsiCo distinguished this case by saying Pepsis ad was not an offer.

d) Acceptance by Silence

Restatement (Second) 69. Acceptance by Silence

(1) Silence acceptance is OK in following cases only: [a), offeree takes benefit ofservices (for which compensation expected) with reasonable time to reject, b) offeror indicatesacceptance by silence is ok, c) previous dealings indicate so].

Hobbs v. Massasoit Whip Co. (Mass. 1893)

Facts: Hobbs had in past sent eel skins to MWC, and MWC had accepted and paidHobbs. Hobbs sent MWC batch, MWC did nothing except to destroy them months later.

Law: MWC did accept Hobbs offer by doing nothing since conduct imported acceptancebased on previous dealings, even if state of mind did not. Restmt. 69(1)(c).

3. E-Commerce

Specht v. Netscape (N.Y. 2001)

Facts: Specht downloaded SmartDownload by NS which had browse license. Claimedwas violating privacy NS required arbitration because of term in license.

Law: No affirmative manifestation of assent to license required to download, so act ofdownloading does not create binding contract.

B. Interpreting the Agreement

1. Ambiguous and Vague Terms

Restatement (Second) 200. Interpretation of a Promise or Agreement

Interpretation of a promise/agreement/term thereof is the ascertainment of its meaning.

General Approach

1. Did parties (subjectively) attach same meaning to term at time of contract?Yes There is an agreement, use same meanings. 201(1).No go to 2

2. Did party X know or have reason to know party Ys meaning of term?Yes if Y did not know Xs meaning use Ys meaning. 201(2).

No go to 33. Can objective meaning be determined?

Yes use whichever partys subjective meaning matches objective meaning.No no agreement, onlyseemedto be mutual assent.

11 of 50


12/50

Restatement (Second) 201. Whose Meaning Prevails

(1) [When parties have same meaning, use that].(2) [When different meanings, use As meaning if B a) knew, or b) had reason to know of

As meaning].(3) Except as stated in this Section, neither party is bound by the meaning attached to the

other, even though the result may be a failure of mutual assent.

Restatement (Second) 202. Rule in Aid of Interpretation

[Use whole weight of words, including context and in light of all circumstances.Generally prevailing meaning used, but use technical definitions and trade usage whereappropriate. Use course of performance and course of dealing. Any term accepted withoutobjection should be given greater weight].

Restatement (Second) 206. Interpretation Against the Draftsman

UCC Evidence Hierarchy

1. Express Terms; 2. Course of Performance; 3. Course of Dealing; 4. Trade Usage

Raffles v. Wichelhaus (U.K. 1864)

Facts: Wichelhaus, a cotton speculator, contracted with Raffles to buy cotton arriving onPeerless. W meant one leaving in Oct., R shipped on one leaving in Dec. W refused to buy.

Law: Two ships Peerless ambiguity means there is no meeting of the minds.

Oswald v. Allen(2d Cir. 1969)Facts: Oswald wanted to buy all Swiss coins from Allen, including those in her Rare

Coin Collection. Allen thought only coins in Swiss Coin Collection.Law: No meeting on the minds, so no contract. No sensible way to choose between two

different interpretations.

Weinberg v. Edelstein (N.Y. 1952)

Facts: Weinberg had restrictive covenant which meant only he could sell dresses in thebuilding. Edelstein tried to sell two piece business suits.

Law: Should use trade usage of the word dress, which does not include business suits.

Frigaliment v. B.N.S. Intl Sales Corp. (N.Y. 1960)

Facts: BNS shipped chickens to Frig including stewing chickens. Frig only wantedbroilers and fryers and said thats what the contract called for when said chicken.

Law: BNSs view coincided with AN objectively reasonable meaning of the word in thetrade. Frig has to show broilers and fryers is the ONLY objective meaning of the word.

Note: Frig had the burden if B.N.S. was suing, then its claim would have failed toosince Frigs meaning was also reasonable in the trade and the burden would be on B.N.S.

12 of 50


13/50

2. Filling Gaps

Restmt. (Second) 34. Certainty and Choice of Terms; Effect of Performance or Reliance

(1) The terms of a contract may be reasonably certain even though it empowers one orboth parties to make a selection of terms in the course of performance.

(2) Part performance under an agreement may remove uncertainty and establish that acontract enforceable as a bargain has been formed.

(3) Action in reliance on an agreement may make a contractual remedy appropriate eventhough uncertainty is removed.

Restatement (Second) 204. Supplying an Omitted Essential Term

When the parties to a bargain sufficiently defined to be a contract have not agreed to aterm which is essential to a determination of their rights and duties, a term which is reasonable inthe circumstances is supplied by the court.

UCC 2-204. Formation in General

(3) Even though one or more terms are left open a contract for sale does not fail forindefiniteness if the parties have intended to make a contract and there is a basis for anappropriate remedy. [Cf. 33, below]

UCC Provisions for Open Terms

2-305. Open Price Term

[Price can be left open should be fixed reasonably] 2-306. Output Requirements

[(1) Quantity measured by output can be in good faith, should reasonably to comport toestimates; (2) Each party should use best efforts to satisfy bargain in exclusive agreements]. 2-308. Absence of Specified Time for Delivery

[Generally, place should be home or business, titles through banks, and if seller knowswhere buyer is, then at that place] 2-309. Absence of Specific Time Provisions; Notice of Termination.

[Should give reasonable notice of termination and ship goods in reasonable time] 2-310. Open Time for PaymentShip[ping] under Reservation

[Payment due at time and place of receipt, buyer may inspect goods]

Sun Printing v. Remington Paper (N.Y. 1923)

Facts: Sun agreed to buy paper from Remington over 16 month period with price termleft open for last 12 months; agreed to negotiate price during that time.

Law: Essential terms must be agreed upon an agreement to agree or negotiate does not

supply term as it is too uncertain. Since price not agreed upon, Sun not bound. Judges must notbe given the power to revise, only to interpret.

Martin v. Schumacher (N.Y. 1981)

Law: Mere agreement to agree unenforceable, especially when specific performancesought. There must be some inkling that parties would have agreed to price judicially imposed.

13 of 50


14/50

Texaco v. Pennzoil (Tex. 1987)

Facts: Texaco gives laundry of list of potential details to be worked out.Law: Contract still binding because specific term omitted not alleged by Texaco.

New York Central Iron Works v. United States Radiator (N.Y. 1903)

Facts: CIW promised to buy entire radiator needs of 1899 from USR. Needs shot way up(100K+) previous years (48K). USR couldnt deliver. CIW sued for breach.Law: Parties must act in good faith and fair dealing when executing contract. There is

no reason to believe CIW didnt actually need the additional amount.

Requirements Contract

1. If market price > contract price (buyer has made good deal), then better for seller tosell to market than buyer.

2. If market price < contract price (seller has made good deal), buyer will limit quantity(seller still has less profit).

Wood v. Lucy, Lady Duff Gordon (N.Y. 1917)Facts: Lucy promised to exclusively endorse products for Wood and split profits. Lucyendorsed for someone else and claimed Wood not doing enough to promote her products.

Law: A whole writing may be instinct with an obligation which creates a contract thatrequires Wood to make reasonable efforts to earn profit. Implied promise binds Wood.

3. Adhesion

Adhesion Contract Standardized contract (take it or leave it) consumer has no realistic hopeof negotiating or bargaining terms and cannot obtain product without acquiescing to terms.

Restatement (Second) 211. Standardized Agreements(1) Except as stated in Subsection (3), where a party to an agreement signs or otherwisemanifests assent to a writing and has reason to believe that like writings are regularly used toembody terms of agreements of the same type, he adopts the writing has an integrated agreementwith respect to the terms included in the writing.

(2) Such a writing is interpreted wherever reasonable as treating alike all those similarlysituated, without regard to their knowledge or understanding of the standard terms in the writing.

(3) Where the other party has reason to believe that the party manifesting such assentwould not do so if he knew that the writing contained a particular term, the term is not part of theagreement.

Comment: Party does not expect the other to read all standardized terms, but generally are

enforced but construed against draftsman ( 206) and must be in good faith ( 205). They alsomay be superseded ( 203), or the court can refuse to enforce as unconscionable ( 208).

Carnival Cruise Lines v. Shute (U.S. 1991)

Facts: Shute bought tickets through travel agent. Company sent tickets with standardform agreements, including a forum selection clause in Fla. Shute wanted to be in Wash.

Law (Blackmun): FSC can be enforced since it is fundamentally fair, even if there wasunequal bargaining power, as in this case. No bad faith or fraud indicated.

14 of 50


15/50

Dissent (Stevens): Unequal bargaining power should make FSC unenforceable, especiallysince contracts of adhesion should be subject to heightened scrutiny.

Compagno Case: Still enforceable not overruled by subsequent legislation.Caspi Case: There is notice for terms on computer screens in adhesion contracts.

4. Discerning Terms

a) Battle of the Forms

UCC 2-207. Additional Terms in Acceptance or Confirmation (Current)

(1) A definite and seasonable expression of acceptance or a written confirmation which issent within a reasonable time operates as an acceptance even though it states terms additional toordifferent from those offered or agreed upon, unless acceptance is expressly madeconditional on assent to the additional or different terms.

(2) The additional terms are to be construed as proposals for addition to the contract.Between merchants such terms become part of the contract unless:

(a) the offer expressly limits acceptance to the terms of the offer;(b) they materially alter it;(c) notification of objection to them [given within reasonable time after received].

(3) Conduct by both parties which recognizes the existence of a contract is sufficient toestablish a contract for sale although the writings of the parties do not otherwise establish acontract. In such case the terms of the particular contract consist of those terms on which thewritings of the parties agree, together with any supplementary terms incorporated under anyother provisions of this act.

Comment: 2-207 applies when agreement reached orally and one or both parties sendformal memoranda embodying additional terms.

UCC 2-207. Terms of Contract; Effect of Confirmation (Proposed)Subject to Section 2-202, if (i) conduct by both parties recognizes the existence of a

contract although their records do not otherwise establish a contract, (ii) a contract is formed byan offer and acceptance, or (iii) a contract formed in any manner is confirmed by a record thatcontains terms additional to or different from those in the contract being confirmed, the terms ofthe contract, are:

(a) terms that appear in the records of both parties;(b) terms, whether in a record or not, to which both parties agree; and(c) terms supplied or incorporated under any provision of this Act.

Knockout Rule ( 2-207 Official Comment 6)

What to do if terms are different, not additional knocks out conflicting terms fromcontract in order to avoid the following adverse result:

Example 1: PO offer (no back taxes); Invoice acceptance (back taxes).Different term needs acceptance by offeror, so no back taxes.

Example 2: Price Book offer (back taxes); Order acceptance (no back taxes).Different term still needs acceptance, so back taxes.

15 of 50


16/50

Union Carbide v. Oscar Meyer (7th. Cir 1991)

Facts: OM (buyer) promised to pay UCs taxes with respect to production, sale, andtransport. UC accepted orders outside of Chicago to avoid municipal tax. Eight years later,Illinois tax authority said no and made them pay anyway.

Law (Posner): Material alteration of a term is not effective even if contract is. OM had

no knowledge being charged taxes, so term is ineffectual.Test: Term inserted by offeree is ineffectual if:(1) offer expressly limits acceptance to terms of offer OR(2) the new term a) makes a material alteration (UCC 2-207(b) consent cannot be

presumed) AND b) there is no showing that offeror in fact consented to alteration expressly ORby silence against background of course of dealing.

b) Terms that Accompany Product

ProCD v. Zeidenberg (7th Cir. 1996)

Facts: ProCD has license inside box. Zeidenberg bought product and violated license.

Law: Notice on outside, license on inside, right to return for refund is an acceptable wayof doing business. Since only one form, 2-207 not relevant, although contract still cannot beunconscionable (which it isnt in this case).

Hill v. Gateway (7th Cir 1997), Klocek v. Gateway (Kan. 2000)

Facts: Plaintiff bought Gateway with contract inside the box, had problem, and did notwant to submit to arbitration.

Hill: 2-207 does NOT apply because there was only one form and refund allowed.Klocek: 2-207 DOES apply because terms in box are additional terms to which

purchaser did NOT consent. No evidence Klocek given notice.

C. Assent in Writing

1. Statute of Frauds

Restatement (Second) 110. Classes of Contracts Covered

(1) The following classes of contracts are subject to a statute, commonly called theStatute of Frauds, forbidding enforcement unless there is a written memorandum OR applicableexception:

a) executor-administrator provision b) suretyship provisionc) marriage provision d) land contract provision e) one-year provision

[NOTE: if contract not in these classes, does NOT need to be written to be enforced]

(2) The following classes of contracts, which were traditionally subject to the Statute ofFrauds, are now governed by Statute of Frauds provisions of the UCC:

a) goods $500+ ( 2-201) b) securities ( 8-319) c) property $5000+ ( 1-206)(5) In many states other classes of contracts are subject to a requirement of writing.

16 of 50


17/50

Exceptions to the Statute of Frauds Requirements

1. Restmt. 125 payment after land transferred, short term leases2. Restmt. 129 action in reliance; specific performance (must establish reasonable

reliance, continuing assent from other party, and that injustice requires specific performance)3. Restmt. 130 contract not be performed within one year

4. Restmt. 139 enforcement by virtue of an action in reliance (can exempt if therewas detrimental reliance and injustice so requires; see promissory estoppel, below)5. UCC 2-201(3)

(a) specially made for buyer and part performance (b) admission in court(c) goods for which payment has been made or accepted OR which have been

received and accepted ( 2-606)

Restatement (Second) 131. General Requisites of a Memorandum

Unless additional requirements are prescribed by the particular statute, a contract withinthe Statute of Frauds is enforceable if it is evidenced by any writing, signedby or behalf of theparty to be charged, which

(a) reasonably identifies the subject matter of the contract,(b) is sufficient to indicate that a contract with respect thereto has been made between theparties or offered by the signer to the other party, and

(c) states with reasonable certainty the essential terms of the unperformed promises in thecontract.

Restatement (Second) 133. Memorandum NOT Made as Such

Except in the case of a writing evidencing a contract upon consideration of marriage, theStatute may be satisfied by a signed writing not made as a memorandum of contract.

Boone v. Coe (Ky. 1913)

Facts: Boone and J.T. Coe had verbal agreement with J.F. Coe to leave Ky. and go toTex. to work farm there under a one year lease commencing at arrival time, at cost of $1400.When they got there, J.F. wouldnt let them occupy.

Law: Contract is within statute of frauds since completion of contract (finishing the lease)will happen more than one year after it is made. Thus, is unenforceable.

Note: Could possibly have been an exception under 139 since there was detrimentalreliance, but then damages would be limited to reliance.

Schwedes v. Romain (Mont. 1978)

Facts: Romain sent offer to Schwedes to sell property. Schwedes called to accept.Romain later sells to Vornbrooks instead.

Law: No enforceable contract exists since there was no consideration oral promise topay is insufficient.

Leonard v. PepsiCo ad not in writing, not signed.

Donovan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake.Donovan came in with ad demanding car at lower price.

17 of 50


18/50

Law: Must be signed by UCC 2-201. But, since signature is any symbol toauthenticate, UCC 1-201(37), companys name on ad suffices.

2. Parol Evidence Rule

Parol Evidence Oral evidence (Blacks), but generally applies to all extrinsic evidence

Restatement (Second) 209. Integrated Agreements

[Writings constituting final agreement subject to parol evidence ruleOff. Comm. c: Whether or not there is an integrated agreement is step 1 to determine

whether or not to admit parol evidence]Restatement (Second) 210. Complete and Partial Integrated Agreements

[Complete complete and exclusive statement of terms; Partial all othersOff. Comm. b: Must give wide latitude to determine circumstances bearing on intent]

Integrated Agreements

1. Not integrated not final2. Partially integrated final, but terms left open3. Completely integrated final, all terms final

Methodology of Admitting Parol Evidence

1. Is written agreement intended to be final expression of their agreement?No extrinsic evidence is admissibleYes go to Question 2.

2. Is agreement complete and exclusive statement of terms?No extrinsic evidence admissible and must be consistent. 213(1).Yes extrinsic evidence within scope of agreement inadmissible. 213(2).

Merger Clause merges all previous agreements into current one (thus, cannot vary).

Restatement (Second) 212. Interpretation of an Integrated Agreement

[use meaning of terms in light of circumstances, including relations of parties, subjectmatter of transaction, preliminary negotiations, usages of trade, course of fair dealing]

Restatement (Second) 213. Parol Evidence Rule

(1) A binding integrated agreement discharges prior agreements to the extent that it isinconsistent with them.

(2) A binding completely integrated agreement discharges prior agreements to the extent

they are within its scope.(3) An integrated agreement that is not binding or that is voidable and avoided does notdischarge a prior agreement. But an integrated agreement, even though not binding, may beeffective to render inoperative a term which would have been part of the agreement had it notbeen integrated.

18 of 50


19/50

Restmt. (2d) 214. Evidence of Prior or Contemporaneous Agreements and Negotiations

Agreements and negotiations prior to or contemporaneous with the adoption of a writingare admissible in evidence to establish

(a) that the writing is or is not an integrated agreement;(b) that the integrated agreement, if any, is completely or partially integrated;

(c) the meaning of the writing, whether or not integrated;(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating clause;(e) ground for granting or denying rescission, reformation, specific perf, or other remedy.

Restatement (Second) 216. Consistent Additional Terms

(1) Evidence of a consistent additional term is admissible to supplement an integratedagreement unless the court finds that the agreement was completely integrated.

(2) An agreement is not completely integrated if the writing omits a consistent additionalagreed term which is a) agreed to for separate consideration, or b) such a term as in thecircumstances might naturally be omitted from the writing.

UCC 2-202. Final Written Expression: Parol or Extrinsic EvidenceTerms with respect to which the confirmatory memoranda of the parties agree or whichotherwise set forth in a writing intendedas a final expressionmay NOT be contradicted byevidence of any prior agreement or of a contemporaneous oral agreement but may be explainedand supplemented

(a) by course of dealing or usage of traded ( 1-205) orperformance ( 2-208) and(b) by evidence of consistent additional terms unless the court finds the writing [is

complete and exclusive].

Thompson v. Libbey (Minn. 1885)

Facts: There was a written contract for the sale of logs and an oral promise of warranty.Law: NO to Parol Evidence contract was complete without oral promise only

evidence of completion is contract itself.

Brown v. Oliver (Kan. 1927)

Facts: Replevin for hotel furniture after removed written contract was for the sale ofreal estate, question as to whether or not furniture should be included.

Law: YES to Parol Evidence written instrument only complete as to sale of real estate conduct and language important to determine assent must look at surrounding circumstances.

Extrinsic Evidence

1. Traynor words have no absolute and constant referents courts need to use extrinsicevidence. PG&E v. Thomas (Cal. 1968)

2. Kozinski how can courts enforce if there is no plain meaning? Preferable to rely onjudges biases than parties biases. Trident v. Conn. Gen. Life Ins. (9th Cir. 1988)

19 of 50


20/50

III. Enforceability

Six Core Principles of Enforceability

A. Party Based1) will enforce commitment by which promisor has chosen to be bound

2) reliance protect promisees reliance on promises of others3) restitution

B. Standards Based4) efficiency enforce when contract benefits exceed costs5) fairness enforce contracts that are fair

C. Process Based6) bargain enforce contracts that reflect bargain theory of consideration

Second Restatements Approach to Enforceability

1. Contract is enforceable promise ( 1-2).2. With some exceptions ( 17(2)), promise must be supplied by consideration to be

enforceable ( 17(1)).3. Promise X is supported by consideration Y if Y was bargained for ( 71(1)).4. Promise OR Performance Y is bargained for if Y is

a) sought by promisor in exchange forhis promise (X) ANDb) given by promisee in exchange forthatpromise (X).

Note: Bargain does NOT mean negotiation.

Adam Smith

1. Man needs help to survive bargains with others to get it (Lectures on Jurisprudence).2. People give goods and services because of their own self interest (Wealth of Nations).

A. Consideration

Consideration the inducement to a contract. The cause, motive, price, or impelling influencewhich induces a contracting party to enter into a contract. (Blacks)

Unilateral Contract promise for performanceBilateral Contract promise for promise

Restatement (Second) 71. Requirement for Exchange; Types of Exchange

(1) To constitute consideration, a performance or a return promise must be bargained for.(2) A performance or return promise is bargained for if it is sought by the promisor in

exchange for this promise and is given by the promisee in exchange for that promise.(3) The performance may consist of

(a) an act other than a promise, or (b) a forbearance, or(c) the creation, modification, or destruction of a legal relation.

(4) The performance or return promise may be given to the promisor or some otherperson. It may be given by the promisee or by some other person.

20 of 50


21/50

Consideration Substitutes

Bankruptcy ( 83), past consideration ( 86), option contract ( 87), modification ofexecutory contract ( 89), promissory estoppel ( 90)

1. Bargains v. Gratuitous Promises

Restatement (Second) 81. Consideration as a Motive for Inducing Cause

(1) The fact that was bargained for does not of itself induce the making of a promise doesnot prevent it from being consideration for that promise.

(2) The fact that a promise does not of itself induce a performance or return promise doesnot prevent the performance or return promise from being consideration for the promise.

Hamer v. Sidway (N.Y. 1891)

Facts: Story Sr. promised to give Story Jr. $5000 on his 21st birthday when Junior was15 if he didnt drink, smoke, or gamble until his 21st. Junior didnt, turned 21, Senior didnt pay.

Law: Waiver of legal rights (to drink, smoke, and gamble) is sufficient consideration to

make promise enforceable (as opposed to just profit to Story Sr.).

Dahl v. HEM (9th Cir. 1993)

Facts: 18 people enrolled in a program to test new medication in return for continuedsupply of drug if it proved effective. They finished test, HEM stopped giving.

Law: This was a unilateral contract a promise (giving of drugs) was made in exchangefor a performance rendered (testing the drugs). Contract in enforceable.

2. Moral Consideration

Restatement (Second) 86. Promise for Benefit Received

(1) A promise made in recognition of a benefit previously received by the promisor orpromisee is binding to the extent necessary to prevent injustice.

(2) A promise is not binding under Subsection (1)(a) if the promisee [gave as gift] orthe promisor has not been unjustly enriched.(b) to the extent that its value is disproportionate to the benefit.

New York General Obligations Law 5-1105

[Past consideration valid IF would have been valid consideration at time of signing]

California Code 1606

[moral obligation sufficient to an extent corresponding to extent of obligation]

Mills v. Wyman (Mass. 1825)

Facts: Mills took care of Wymans adult son. Wyman wrote promising to pay expensesand then refused to do so.

Law: A mere promise, without any consideration, cannot be enforced. A moralobligation is sufficient consideration ONLY IF there is a preexisting obligation, which there wasNOT in this case between father and Mills. See 86.

21 of 50


22/50

Webb v. McGowin (Ala. 1936)

Facts: Webb saved McGowins life, who then offered to pay $7.50/wk for the rest of hislife. McGowin died and his executor stopped payment.

Law: Benefit to the promisor or injury to the promisee is sufficient legal consideration tomake the promise enforceable.

3. Modification and Preexisting Duty Rule

Restatement (Second) 89. Modification of Executory Contract

A promise modifying a duty under a contract not fully performed on either side is binding(a) if the modification is fair and equitable in view of the circumstances not anticipated

by the parties when the contract was made; or(b) to the extent provided by statute; or(c) to the extent that justice requires enforcement in view of material change of position

in reliance on the promise.[X works for Y making 125K; Z offers 140K; B offers A 5K raise to 130K; Enforceable]

UCC 2-209. Modification, Rescission, and Waiver

(1) An agreement modifying a contract within this Article needs no consideration to bebinding

Stilk v. Myrick (U.K. 1809)

Facts: Two sailors deserted mid-voyage. Captain promised to pay increased wage toremaining crew for picking up the slack.

Law: Contract void for want of consideration death and desertion (and thus picking upthe slack) foreseeable on voyages.

Alaska Packers Assn v. Domenico (9th Cir. 1902)Facts: Fishermen signed up with APA for $50 (some $60) + $0.02/fish. Nets wereclaimed to be faulty threatened to quit unless paid $100 base, to which captain agreed.

Law: Consent given without consideration fishermen already obliged to render sameperformance before new contract.

Note: Holdup problem in Economics.

Brian Construction v. Brighenti (Conn. 1978)

Facts: Contractor contracted with Subcontractor to excavate site. Subcontractor foundunforeseen rubble and demanded extra to remove it, which was offered by Contractor.Subcontractor later breached.

Law: There was consideration since the promise to pay more is supported by differentcircumstances (more work to remove rubble).

United States v. Stump Home (7th Cir. 1990)

Posner: Consideration has distinct function in modification setting to prevent coercion.But, slight consideration is consistent with coercion as well. Should abandon consideration inenforcing written modifications and just focus on duress defense.

22 of 50


23/50

4. Adequacy

Restatement (Second) 79. Adequacy of Consideration; Mutuality of Obligation

If the requirement of consideration is met, there is no additional requirement of(a) a gain, advantage, or benefit to the promisor or a loss, disadvantage, or detriment to

the promisee; or(b) equivalence in the values exchanged; or(c) mutuality of obligation.

Restatement (Second) 364. Effect of Unfairness

(1) Specific performance or an injunction will be refused if such relief would be unfairbecause(c) the exchange is grossly inadequate or the terms of the contract are otherwise unfair.

B. Intention to be Legally Bound

Restatement (Second) 21. Intention to Be Legally Bound

Neither real nor apparent intention that a promise be legally binding is essential to theformation of a contract, but manifestation of intention that a promise shall not affect legalrelations may prevent the formation of a contract.

Seals under 1892 New York Statute

a) wafer, wax b) word seal c) L.S. opposite signature (locus sigilli)

Restmt. (2d) 95. Requirements for Sealed Contract or Written Contract or Instrument

(1) In the absence of a statute a promise is binding without consideration if(a) it is in writing and sealed; and(b) the document containing the promise is delivered; and

(c) [the parties are or are able to be identified when document delivered]Note: Seals rarely used in United States law (consideration used).

UCC 2-203. Seals Inoperative

The affixing of a seal to a writing evidencing a contract for sale or an offer to buy or sellgoods does not constitute the writing a sealed instrument and the law with respect to sealedinstruments does not apply to such a contract or offer.

Restatement (Second) 87. Option Contract

(1) An offer is binding as an option contract if it (a) is in writing and signed by theofferor, recites a purported consideration for making the offer, and proposes an exchange on fair

terms within a reasonable time.

Restatement (Second) 71 comment b mere pretense of bargain does not suffice.

Schnell v. Nell (Ind. 1861)

Facts: Schnell promised to pay $600 to dead wifes friends in exchange for one cent.Other considerations include wifes desire and her love and affection.

23 of 50


24/50

Law: One cent is nominal consideration which imposes no obligation on Schnell. Otherconsiderations are moral only and not bases for enforceability.

C. Promissory Estoppel

Promissory Estoppel Exists to justify non-bargained for, informal circumstances wherepromises can induce reliance to the promisees detriment.

Promissory v. Equitable Estoppel

1. Promissory is offensive while equitable is defensive.2. Promissory is when promisor knows promise was gratuitous.3. Equitable is when there was a misrepresentation.4. Williston when a lawyer or judge does not know what other name to give for his

decision to decide a case a certain way, he says there is an estoppel.

Restatement (First) 90. [Promissory Estoppel]

A promise which the promisor should reasonably expect to induce action or forbearanceof a definite and substantial character on the part of the promisee AND which does induce suchaction or forbearance IS binding injustice can be avoided ONLY by enforcement of the promise.

Restatement (Second) 90. Promise Reasonably Inducing Action or Forbearance

(1) A promise WHICH the promisor should reasonably expect to induce action orforbearance on the part of the promisee or a third person AND which does induce such action orforbearance is binding if injustice can be avoided only by enforcement of the promise. Theremedy granted for the breach may be limited as justice requires.

(2) A charitable subscription or a marriage settlement is binding under Subsection (1)without proof that the promise induced action or forbearance.

Differences in Restatements (Yorio and Thel)

Definite and substantial character removed any reliance deserves protection andshould be compensated accordingly.

Four Questions

1. Was there a promise?2. Was there expected and foreseeable reliance?3. Was there actual reliance?4. Can injustice be avoided only by enforcement of the promise?

Richard Speidels Reason to Know Test1. Did A understand in fact that B had made a promise? If not, no manifestation of assent2. If so, did B know (actual knowledge) at the time of his conduct of As understanding?

If so, a promise is made3. If B did not know, of what facts in the total situation did B have actual knowledge?4. Given this knowledge, and taking Bs level of intelligence into account, would B infer

that if he acted or spoke in a certain way, A would understand that a commitment was made? Ifso, B has reason to know of that understanding.

24 of 50


25/50

5. If not, would B infer that there was a substantial chance that A would understand that acommitment was made? If so, B does have a duty to act with reasonable care to avoidmisunderstanding; a failure to proceed with reasonable care is tantamount to reason to know.

Gilmore, Death of Contract promissory estoppel derives from tort more than contract.

1. Substitute for Consideration

a) Family Promises

Ricketts v. Scothorn (Neb. 1898)

Facts: Ricketts promised to pay granddaughter Scothorn $2000 at 6%/yr if she quit herjob as a bookkeeper. He died, estate refused to pay note.

Law: Equitable Estoppel reliance on promise to her detriment was Scothornsconsideration. Ricketts estopped from asserting want of consideration defense.

Note: Should this really be promissory estoppel?

b) Charitable Acts

Allegheny College v. Bank of Jamestown (N.Y. 1927)

Facts: Johnson promised to give $5000 to College to create memorial fund in her name,payable after her death. She died, estate wouldnt pay.

Law (Cardozo): There was consideration sufficient to make a bilateral agreement Johnson wanted posthumous remembrance. Promise is implied in fact (court does not reachpromissory estoppel).

Feinberg v. Pfeiffer Co. (Mo. 1959)

Facts: Pf. promised to pay Feinberg $200/month pension when she retired. Feinbergworked another 18 months, and then retired. Pf., under new management, stopped payment ofpension seven years later.

Law: Feinberg left gainful employment and depended on pension as income. CourtreferencesRicketts case, uses doctrine ofpromissory estoppel, and finds contract enforceable.

c) Construction

General Way of Doing Construction

1. Subcontractor sends bid to General Contractor.Is there a firm offer/option contract?

2. General Contractor submits bid to Client.a. Is bilateral, conditional contract formed?b. Does promissory estoppel apply?

3. Client accepts bid.4. General Contractor accepts Subcontractors offer.

Is Acceptance required for subs promise to still be binding?

25 of 50


26/50

Baird v. Gimbel (2d Cir. 1933)

Facts: Sub sends in wrong bid to Gen, who then uses to send in bid to client. Subwithdraws, client accepts, Sub confirms withdrawal, Gen formally accepts clients offer. Gensues Sub for breach.

Law(Hand): Offer not promise until consideration received refuses to apply doctrine of

promissory estoppel and finds for subcontractor. (Above: 1, 2a, 2b NO; 4 YES)Note: Gen could have insisted on contract before it used the figures.

Drennan v. Star Paving (Cal. 1958)

Facts: Sub submits bid to Gen, Gen submits to client, client accepts Gens bid, Subwithdraws bid. Gen sues Sub for breach.

Law (Traynor): Purpose of promissory estoppel ( 90) is to make contract binding in lieuof consideration - finds reliance and enforceable contract. Gen wins. (1, 2a, NO; 2b, 4 YES)

Note: Sub could have expressly stated that offer revocable any time before acceptance.

2. Alterative to Breach of Contract

Goodman v. Dicker (D.C. Cir. 1948)

Facts: Dicker incurred $150 in expenses in reliance on franchise contract from Goodman,which he didnt deliver. Goodman could have terminated it any time once created.

Law: Goodman representations that contracted would be awarded, so reliance wasjustified. Damages should be in reliance only, not based on lost profit.

Hoffman v. Red Owl Stores (Wis. 1965)

Facts: Red Owl strung Hoffman along, promising to grant franchise as long assubsequent conditions continued to be met.

Law: Adopts promissory estoppel action based on 90 and finds that it did exist in case.

Court bases damages on reliance, and notes that this is NOT a breach of contract action.

3. Statute of Frauds

Restatement (Second) 139. Enforcement by Virtue of Action in Reliance

(1) A promise which the promisor should reasonably expect to induce action orforbearance on the part of the promisee or a third person and which does induce the action orforbearance is enforceable notwithstanding the Statute of Frauds of injustice can be avoided onlyby enforcement of the promise. The remedy granted for breach is to be limited as justicerequires.

(2) In determining whether injustice can be avoided only by enforcement of the promise,

the following circumstances are significant:(a) the availability and adequacy of other remedies, particularly cancellation and

restitution;(b) the definite and substantial character of the action or forbearance in relation to

the remedy sought;(c) the extent to which the action or forbearance corroborates evidence of the

making and terms of that promise, or the making and terms are otherwise established byclear and convincing evidence;

26 of 50


27/50

(d) the reasonableness of the action or forbearance;(e) the extent to which the action or forbearance was foreseeable by the promisor.

4. Current Application

Hillman, Study of Promissory Estoppel (1998)1. Promissory estoppel generally loses less than 10% win on merits.2. Very unlikely to win in employment cases.3. Almost half of wins are reversed anyway (and almost no losses are reversed).4. Main reason for both failure and success is quality of reliance.

IV. Performance and Breach

A. Implied Duty of Good Faith

Restatement (Second) 205. Duty of Good Faith and Fair Dealing

Every contract imposes upon each party a duty of good faith and fair dealing in itsperformance and enforcement.

UCC 1-203. Obligation of Good Faith

Every contract or duty within this act imposes an obligation of good faith in itsperformance or enforcement.

Goldberg 168-05 Corp. v. Levy (N.Y. 1938)

Facts: Levy leased commercial space from Goldberg for 10 years starting in October1929. Rent was $13,800 + 0.1 x gross receipts. If gross fell below $101,000, tenant couldterminate. Levy supposedly diverted business to another store.

Law: Promise implies reasonable efforts to bring in sales (citesLady Duff-Gordon).Cannot avoid liability by diverting business direct violation of covenant of good faith.

Stop and Shop v. Ganem (Mass. 1964)

Facts: SS leased land from Ganem for grocery store. Rent was $22,000 + 0.0125(grossreceipts 1.3M) if total sales from this building and another store exceeded $3M. SS openedtwo other stores nearby.

Law: No implication in lease that lessee was not free to open stores elsewhere. Noallegations of unfair competition. $22,000 alone sufficient rent so no duty to bring in more.

B. Conditions and Constructive Conditions

Condition Future and uncertain event on which the existence or extent of obligation or liabilitydepends (Blacks). See 225(1) [performance of duty subject to condition cannot become dueunless the condition occurs]

Constructive Conditions

1. Condition not expressly stated that is imposed by the court when filling gaps, thebreach of which can relieve the other party of its duties. See 226.

27 of 50


28/50

2. Is backward-looking inquiry into presumed intentions at time of formation, asdistinguished from material breach, which is forward-looking inquiry into the likelihood ofperformance occurring in the future.

Restmt (Second) 237. Effect on Other Partys Duties of a Failure to Render Performance

[No uncured material defect in performance X is condition for other partys remainingduties due after X; Cf. 234 default rule is for performances to be due simultaneously]

Substantial Performance (Farnsworth)

1. Substantial performance is performance without a material breach.2. If Xs performance is constructive condition on Ys duty, X need only substantially

perform until he can recover under the contract.

Jacob & Youngs v. Kent (N.Y. 1921)

Facts: J&Y built house for Kent, who wanted Reading Pipe used. J&Y used equivalentpipe from different manufacturer. Kent refused to pay remaining $3500 and demanded that the

entire pipe be replaced.Law (Cardozo): Omission, both trivial AND innocent, not always breach of condition.Weighs purpose/desire of term, excuse for deviation, and cruelty of enforced adherence todetermine if a term is an implied condition. Parties free to propose that every term is a condition.Since condition not breached, Kent still must pay, but less damages (difference in value of pipe).

Dissent: He wanted Reading Pipe, and should get it, dammit.Note: Question as to whether Reading Pipe refers to brand name or quality.

C. Substantial Performance and Material Breach

Material Breach

1. Only if breach is material does it relieve the non-breaching party of its duty toperform under the contract.2. Is forward-looking inquiry into the likelihood of performance occurring in the future,

as distinguished from constructive condition, which is a backward-looking inquiry intopresumed intentions at time of formation.

Restatement (Second) 348. Alternatives to Loss in Value of Performance

(2) If a breach results in defective or unfinished construction and the loss in value tothe injured party is not proved with sufficient certainty, he may recover damages based on

(a) the diminution in the market price of the property caused by the breach, or(b) the reasonable cost of completing performance or of remedying the defects if

that cost is not clearly disproportionate to the probable loss in value to him[Comment c: in construction cost of completion usually less than loss in value, which ishard to prove even if greater, better to give a small windfall than undercompensate, but ifmuch greater, should use difference in market price and property value]

28 of 50


29/50

Groves v. John Wunder Co. (Minn. 1939)

Facts: JW leased land from Groves to extract gravel and leave in uniform grade. JWextracted best gravel, left in non-uniform grade. Cost to fix is $60,000; where as the value of theland EVEN IF grade was uniform would be $12,000.

Law: JW was willful transgressor, should have to pay the $60,000 to fix.

Dissent (K-MAD: right!): Damages are for compensation, not punishment. If low cost ofcure, pay cost of cure. If high cost of cure, pay the difference in value, which cannot be morethan the entire value of the land. And if services wanted, use liquidated damages.

Peevyhouse v. Garland Coal Mining (Okla. 1962)

Facts: Peevy leased farm to GCM to mine coal. Did not clean up coal would have cost$29,000. Diminution in value is $300; verdict at trial was for $5,000.

Law: Should be for diminution in value when it is much less than the cost of cleanup.Dissent: GCM received benefit (coal), now Peevy should receive benefit of cleanup.

Diminution damages undercompensate (do not take into account subjective value).

V. Defenses

Defenses pleas in avoidance EVEN IF prima facie case of contract proven. Aff. Def.

Restatement (Second) 7. Voidable Contracts

A voidable contract is one where one or more parties have the power, by a manifestationof election to do so, to avoid the legal relations created by [or cancel] the contract, or byratification of the contract to extinguish the power of avoidance.

Restatement (Second) 376. Restitution When Contract is Voidable

A party who has avoided a contract on the ground of lack of capacity, mistake,

misrepresentation, duress, undue influence, or abuse of a fiduciary relation is entitled torestitution for any benefit that he had conferred on the other party by way of part performance orreliance. [See restitution, below]

A. Capacity

Restatement (Second) 12. Capacity to Contract

(1) No one can be bound by contract who has not legal capacity to incur at least voidablecontractual duties. Capacity to contract may be partial and its existence in respect to a particulartransaction may depend upon the nature of the transaction or upon other circumstances.

(2) A natural person who manifests assent to a transaction has full legal capacity to incur

contractual duties thereby unless he isa) under guardianship, b) an infant, c) mentally ill or defective, or d) intoxicated.

Note: see 13-16 for each of these, in turn (e.g. 14 infant means under 18 years old).

Webster St. Partnership v. Sheridan (Neb. 1985)

Facts: Two teenage kids signed lease in Sept. Paid until Oct, and were sued for notpaying Nov and Dec rent.

29 of 50


30/50

Law: Minors cannot enter into contract unless fornecessity. Housing not necessity inthis case since kids could (and did) move back into their parents houses.

Halbman (Wis. 1980) minors may recover purchase price if NOT necessity.Zelnick (Va. 2002) legal services CAN be necessity.

B. Improper Consent

General Form of Restatement Provisions ( 164, 175, 177)

1. Other PartyIf a partys manifestation of assent is induced by{misrepresentation, duress, undue influence},the contract is voidable by the recipient/victim.

2. Third PartyIF a partys manifestation of assent is induced by{misrepresentation, duress, undue influence},

by one who is NOT a party to the transactionthe contract is voidable by the recipient/victim,UNLESSthe other party to the transaction in good faith and without reason to know of the{misrepresentation, duress, undue influence}either gives value or relies materially on the transaction.

California Civil Code 1567

An apparent consent is not real or free when obtained through1. Duress 2. Menace 3. Fraud 4. Undue Influence 5. Mistake

1. Misrepresentation

Restatement (Second) 159. Misrepresentation Defined

A misrepresentation is an assertion that is not in accord with the facts.

Restatement (Second) 162. When a Misrepresentation is Fraudulent or Material

(1) A misrepresentation is fraudulent if the maker intends his assertion to induce a partyto manifest his assent and the maker

(a) knows or believes that the assertion is not in accord with the facts, or(b) does not have the confidence that he states or implies in the truth of the

assertion, or

(c) knows that he does know the basis that he states or implies for the assertion.(2) A misrepresentation is material if it would be likely to induce a reasonable person to

manifest his assent, or if the maker knows that it would be likely to induce the recipient to do so.

Restmt. (Second) of Torts 526. Conditions under which Misrepresentation is Fraudulent

A misrepresentation is fraudulent if the maker(a) knows or believes that the matter is not as he represents it to be,

30 of 50


31/50

(b) does not have the confidence in the accuracy of his representations that he states orimplies, or

(c) knows that he does not have a basis for his representation that he states or implies.

Restatement (Second) of Torts 530. Misrepresentation of Intention

(1) A representation of the makers own intention to do or not to do a particular thing isfraudulent if he does not have that intention.(2) A representation of the intention of a third person is fraudulent under the conditions

listed in 526.

Restatement (Second) 164. When a Misrepresentation Makes a Contract Voidable

(1) If a partys manifestation of assent is induced by either a fraudulent or a materialmisrepresentation by the other party upon which the recipient is justified in relying, the contractis voidable by the recipient.

(2) If a partys manifestation of assent is induced by either a fraudulent or a materialmisrepresentation by one who is not a party to the transaction upon which the recipient is

justified in relying, the contract is voidable by the recipient, unless the other party to thetransaction in good faith and without reason to know of the misrepresentation either gives valueor relies materially on the transaction.

Restatement (Second) 167. When a Misrepresentation is an Inducing Cause

A misrepresentation induces a partys manifestation of assent if it substantiallycontributes to his decision to manifest his assent.

Restatement (Second) 168. Reliance on Assertions of Opinion

(1) An assertion is one of opinion if it expresses only a belief, without certainty, as to theexistence of a fact or expresses only a judgment as to quality, value, authenticity, or similarmatters.

(2) If it is reasonable to do so, the recipient of an assertion of a persons opinion as tofacts not disclosed and not otherwise known to the recipient may properly interpret it as anassertion

(a) that the facts known to that person are not incompatible with his opinion, or(b) that he knows facts sufficient to justify him in forming it.

Restatement (Second) 169. When Reliance on an Opinion is NOT Justified

To the extent that an assertion is one of opinion only, the recipient is NOT justified inrelying on it UNLESS the recipient

(a) stands in such a relation of trust and confidence to the person whose opinion isasserted that the recipient is reasonable in relying on it, or

(b) reasonably believes that, as compared with himself, the person whose opinion isasserted as special skill, judgment, or objectivity with respect to the subject matter, or

(c) is for some other special reason particularly susceptible to a misrepresentation of thetype involved.

31 of 50


32/50

Halpert v. Rosenthal (R.I. 1970)

Facts: Halpert sold house to Rosenthal for $54,000 with $2000 deposit. Rosenthal asked3 times before closing if there were termites. Halpert said no (innocent, not intentional).Rosenthal found termites and skipped closing. House later sold for $35,000.

Law: Innocent misrepresentation can void contract. Speaker should bear loss of

misrepresentation. Boiler Plate language in the contract cannot void the remedy of rescission.

Vokes v. Arthur Murray Dance Studio (Fla. 1968)

Facts: AM induced Vokes to buy more and more hours of dancing lessons, even though itknew Vokes had no rhythm, at total cost of $31,000.

Law: Vokes has a claim for misrepresentation as promotions went beyond mere salespuffing. Misrepresentation must be fact, not opinion, except opinion give by one with superiorknowledge may be treated as fact.

Note: Sales puffing intruded into undue influence as well (below).

2. Duress

Restatement (Second) 175. When Duress by Threat Makes a Contract Voidable

(1) If a partys manifestation of assent is induced by an improper threat by the other partythat leaves the victim no reasonable alternative, the contract is voidable by the victim.

(2) If a partys manifestation of assent is induced by an improper threat by one who is nota party to the transaction, the contract is voidable by the victim unless the other party to thetransaction in good faith and without reason to know of the duress either gives value of reliesmaterially on the transaction.

Restatement (Second) 176. When a Threat is Improper

(1) A threat is improper if what is threatened is [a) crime or tort, b) criminal prosecution,

c) bad faith use of civil process] or d) the threat is a breach of the duty of [good faith].(2) A threat is improper if the resulting exchange is not on fair terms AND [a) threatenedact would harm recipient without benefit to maker, b) effectiveness of threat increased by priorunfair dealing, or c) threat is use of power for illegitimate ends].

No Reasonable Alternative

If there truly are reasonable alternatives, then promisor cannot have been coerced bythreat finding of duress depends on finding no reasonable alternative.

1. Never enforce where there is no RA parties refuse to perform2. Always enforce when there is no RA initial promise meaningless3. Happy medium - only enforce when no RA and threat not wrongful

Hackley v. Headley (Mich. 1881)

Facts: Hackley owed Headley $6200, but Headley in financial straits, so Hackley offeredhim only $4000 as a settlement for the whole thing.

Law: Hackley did not cause Headley to be in financial straits, and the same transactionwould be legal if Headley were not in trouble. Headley still could have sued for the full amount,so he was not deprived of free will and there was no duress.

32 of 50


33/50

Austin Instrument v. Loral (N.Y. 1971)

Facts: Loral had contract with Austin for delivery of precision gears. Working underdeadline, Loral needed parts for a second contract. Austin was only approved vendor who coulddeliver them on time, so they retroactively raised the prices for the first contract.

Law: Mere threat to breach is not economic duress, but because Loral was in need,

changing the prices for the first batch was duress Loral did not have free will to negotiate.

3. Undue Influence

Restatement (Second) 177. When Undue Influence Makes a Contract Voidable

(1) Undue influence is the unfair persuasion of a party who is under the domination of theperson exercising the persuasion or who by virtue of the relation between them is justified inassuming that that person will not act in a manner inconsistent with his welfare.

(2) If a partys manifestation of assent is induced by undue influence, the contract isvoidable by the victim.

(3) If a partys manifestation of assent is induced by undue influence by one who is not a

party to the transaction, the contract is voidable by the victim unless the other party to thetransaction in good faith and without reason to know of the undue influence either gives value ofrelies materially on the transaction.

Odorizzi v. Bloomfield School District (Cal. 1966)

Facts: Odorizzi, a teacher, arrested for homosexual activity. Right after interrogation andarrest, BSD induced him to resign or they would publicize incident.

Law: Odorizzi has a cause of action for undue influence because he was in a weakenedstate and being taken advantage of by the dominant BSD.

4. Unconscionability

Unconscionability (Leff)

1. Procedural Bargaining naughtiness2. Substantive Evils in resulting contract

Absence of Meaningful Choice

Gross inequality of bargaining power no reasonable opportunity to understand terms

Unreasonably Favorable Terms

When terms are so extreme as to appear unconscionable according to the mores andbusiness practices of the time and place

Restatement (Second) 208. Unconscionable Contract or Term

If a contract or term thereof in unconscionable at the time the contract is made a courtmay refuse to enforce the contract, or may enforce the remainder of the contract without theconscionable term as to avoid any unconscionable result.

33 of 50


34/50

UCC 2-302. Unconscionable Contract or Clause

(1) If the court as a matter of law finds the contract or any clause of the contract to havebeen unconscionable at the time it was made the court may refuse to enforce the contract, or itmay enforce the remainder of the contract without the unconscionable clause, or it may so limitthe application of any unconscionable clause as to avoid any unconscionable result.

(2) [When unconscionability claimed, parties may introduce evidence as to itscommercial setting, purpose, and effect].

Williams v. Walker-Thomas Furniture Co. (D.C. 1965)

Facts: Williams, poor mother of 7, bought stereo on credit from WTF, where she alreadyhad a balance. All future payments pro-rated to outstanding items, so all items can berepossessed until everything is paid off. She missed, they repossessed.

Law: May be unconscionable (q of fact), which includes the absence of meaningfulchoice, often by gross inequality of bargaining power since true assent not given. Contract mustbe BOTH procedurally and substantivelyunconscionable to be unenforceable.

In Re Realnetworks (Ill. 2000)Law: Arbitration and Forum Selection Clauses are not procedurally unconscionablebecause in a long contract still need to read the whole thing. Clauses not substantivelyunconscionable for requiring plaintiffs to travel or for not facilitating class arbitration.

Epstein, Unconscionability

Serves same general end as Statute of Frauds and parol evidence rules, as well aspreventing fraud, duress, and incompetence without requiring specific proof of any of them.Looks to subject matter of agreements instead of to writing requirements.

C. Failure of Basic Assumption

1. Mistakes of Present Existing Facts

Restatement (Second) 151. Mistake defined

A mistake is a belief not in accord with the facts.

Restatement (Second) 154. When a Party Bears the Risk of a Mistake

A party bears the risk of mistake when(a) the risk is allocated to him by agreement of the parties, or(b) [conscious ignorance] he is aware, at the time the contract was made that he has only

limited knowledge with respect to the facts to which the mistake relates but treats his knowledge

as sufficient, or(c) the risk is allocated to him by the court on the ground that is reasonable in the

circumstances to do so.

34 of 50


35/50

Restatement (Second) 157. Effect of Fault of Party Seeking Relief

A mistaken partys fault in failing to know or discover the facts before making thecontract does NOT bar him from avoidance or reformation under the rules stated in this Chapter,unless his fault amounts to a failure of good faith and in accordance with reasonable standards offair dealings.

Restatement (Second) 158. Relief Including Restitution

(1) In any case governed by the rules in this Chapter, either party may have a claim forrelief including restitution stated in the rules 240 [part performance] and 376 [restitution].

(2) In any case governed by the rules stated in this Chapter, if those rules together withthe rules stated in Chapter 16 will not avoid injustice, the court may grant relief on such terms asjustice requires including protection of the parties reliance interests.

a) Mutual Mistake

Restatement (Second) 152. When Mistake of Both Parties Makes a Contract Voidable

(1) Where a mistake of both parties at the time a contract was made as to a basicassumption on which the contract was made has a material effect on the agreed exchange ofperformances, the contract is voidable by the adversely affected party unless he bears the risk ofmistake under the rule stated in 154.

(2) In determining whether the mistake has a material effect on the agreed exchange ofperformances, account is taken of any relief by way of reformation, restitution, or otherwise.

Wood v. Boynton (Wis. 1885)

Facts: Wood had stone she thought was a topaz. She took it to Boynton, a jeweler, whoalso did not know what it was. She sold it to him for $1 ($20 today). It turned out to be an uncutdiamond worth $700 ($14000 today). She wanted it back.

Law: Neither party knew of value, so there was no fraud. There was also no warranty.

Sherwood v. Walker (Mich. 1887)

Facts: Sherwood contracted to buy a barren cow (Rose 2d) from Walker for $80. Walkerfound out Rose was with calf (now worth $750) before delivery and rescinded.

Law: If parties make mistake as to substance of object to be traded as opposed to itsquality, the contract can be rescinded. Majority says difference is substance, Dissent quality.

Lewanee v. Messerly (Mich. 1982)

Facts: Pickles bought land using quitclaim deed from Messerly for investment purposes.Land was later condemned for being uninhabitable because of an improper septic system.

Law: Overturns Sherwood test ofsubstance/quality and instead tests whether or not themistake materially affects the bargain. Once mistake exists, court should use equity to allocateloss. If parties expressly contract risk allocation, court will defer (as in this case).

35 of 50


36/50

b) Unilateral Mistake

Restatement (Second) 153. When Mistake of One Party Makes a Contract Voidable

Where a mistake of one party at the time a contract was made as to a basic assumption onwhich he made the contract has a material effect on the agreed exchange of performances that is

adverse to him, the contract is voidable by him IF he does NOT bear the risk of the mistakestated in 154 AND

(a) the effect of the mistake is such that enforcement of the contract would beunconscionable, OR

(b) the other party had reason to know of the mistake or his fault caused the mistake.

Tyra v. Cheney (Minn. 1915)

Facts: Tyra supposedly orally bid for work at $4025, but mistakenly left out $963 fornew part of building in written bid, which was accepted.

Law: If Cheney knew about first bid, and knew that the written bid was a mistake, hecannot accept (no meeting of the minds). BUT, if Cheney did NOT know of the mistake, then

Tyra cannot profit be his own mistake.

Drennan (see Promissory Estoppel, Construction above)

Gen had no knowledge of Subs mistake based on price, which can vary widely.

Donovan v. RRL (Cal. 2001)

Facts: RRL ran ad in paper offering car from $10,000 less than it sold for by mistake.Donovan came in with ad demanding car at lower price. No bad faith on part of RRL.

Law: Court applies Restatement 153-154:1. Basic assumption? Yes, price.2. Mistake material? Yes, 32% of value.

3. RRL must bear risk? No (note the AND in 153, so inquiry continues)Applies 154(c) must have bad faith to award risk to dealership.4. Unconscionable? Yes, unfair and unjust to permit mistake.Thus, RRL can void contract.

c) Duty to Disclose

Restatement (Second) 160. When Action is Equivalent to an Assertion (Concealment)

Action intended or known to be likely to prevent another from learning a fact isequivalent to an assertion that the fact does not exist.

Restatement (Second) 161. When Non-Disclosure is Equivalent to an AssertionA persons non-disclosure of a fact known to him is equivalent to an assertion that the

fact does not exist in the following cases only:(a) where he knows that the disclosure of the fact is necessary to prevent some previous

assertion from being a misrepresentation or from being fraudulent or material.(b) where he knows that the disclosure of the fact would correct a mistake of the other

party as to a basic assumption on which that party is making the contract and if non-disclosure of

36 of 50


37/50

the fact amounts to a failure to act in good faith and in accordance with reasonable standards offair dealing.

(c) where he knows that the disclosure of the fact would correct a mistake of the otherparty as to the contents or effect of a writing, evidencing or embodying an agreement in whole orin part.

(d) where the other person is entitled to know the fact because of a relation of trust andconfidence between them.

Laidlaw v. Organ (U.S. 1817)

Facts: Organ bought tobacco from Laidlaw right after the War of 1812 ended but beforenews leaked. Laidlaw did not k

Contracts Outline - Penn Law

Documents

Transcript of Contracts Outline - Penn Law