Contracts OutlinePosner 2002

I) The UCCA) Applies to “transactions in goods”

1) “Goods” are defined in UCC §2-105(1) to include movable things other than money and various intangible rights

II) ConsiderationA) Bargain Promises

1) General Rule—Bargain is Consideration.(a) As a general rule, a bargain constitutes consideration. A bargain is an

exchange in which each party views his promise or performance as the price of the other’s promise or performance.(i) Restatement 2d §71:

(a) To constitute consideration, a performance or a return promise must be bargained for.

(b) A performance or return promise is bargained for if it is sought by the promisor in exchange for his promise and is given by the promisee in exchange for that promise.

(c) The performance may consist of:1. an act other than a promise, or2. a forbearance, or

a. Langer v. Superior Steel Corp., PA Supr. Ct., 1932. Employer gives pension w/ noncompetition clause to retired worker. Held: noncompetition clause is consideration for pension. Forbearance of promisee’s legal right to the promisor’s benefit is objectively “bargained for” consideration for promise of pension.

b. Hamer v. Sidway, NY Ct. of App., 1891. Uncle promises nephew $5,000 if he refrained from smoking/drinking/swearing/gambling until age 21. Held: nephew’s refraining from smoking, etc., is consideration for promise. Any “bargained for” exercise or forbearance of a legal right—even if objectively beneficial rather than detrimental to promisee—is consideration.

3. the creation, modification, or destruction of a legal relation.(b) A detriment to the promisee is not necessarily consideration unless it is bargained

for(i) Kirksey v. Kirksey, AL Sup. Ct., 1845. Man offers house to dead

brother’s widow, and she incurs expenses moving into it. Held: her moving wasn’t consideration for promise of house. Detriment incurred as a consequence of, rather than to induce, a promise isn’t “bargained for” consideration.

(b) A benefit to the promisor is not necessarily consideration unless it is bargained for(i) Bogigian v. Bogigian, IN Ct. of App., 1990. Woman unknowingly waives

judgment against ex-husband when selling house to get out of mortgage. Held: because parties didn’t agree that A was for B, her release from mortgage not “bargained for” consideration for release from judgment. Where there are

no representations that the detriment to promisee or the benefit to promisor induced promise, a detriment to promisee or benefit to promisor is not “bargained for” consideration.

(c) Equal value not required. The theory is that the parties to a bargain are the best judges of its desirability for each of them.(i) Apfel v. Prudential-Bache Securities, Inc., NY Ct. of App., 1993.

Following disclosure, bank buys non-novel idea for computerized book-entry system for municipal bonds. Held: post-disclosure, license to use non-novel idea is consideration for promise to pay. If “bargained for” return promise/performance is met, there’s no additional requirement of adequacy/equivalence of consideration.

(ii) Restatement §79: Adequacy of consideration; mutuality of obligation(a) If the requirement of consideration is met, there is no additional

requirement of1. a gain, advantage, or benefit to the promisor or a loss, disadvantage, or

detriment to the promisee; or2. equivalence in the values exchanged; or3. “mutuality of obligation.”

(iii) Exceptions to claim that cts. don’t inquire into adequacy of consideration:(a) Gross disparity in exchange as evidence to support defenses (e.g.,

incapacity, fraud, duress)(b) Unconscionability—disparity in value, if sufficiently great, may be

substantively unconscionable.1. Jones v. Star Credit Corp., NY Sup. Ct., 1969. Welfare recipient buys

$300 freezer from door-to-door salesman for $1200. Held: sale price was unconscionable. Where there’s abuse of unequal bargaining power and/or terms of K are so grossly unfair that no reasonable person would enter K given the circumstances, the K is unconscionable.

(c) Equitable remedies—adequacy of consideration may be reviewed by ct. when a party seeks specific performance. Equity cts. normally require a showing of fairness and substantial equivalence in value as a condition to granting relief.

2) Exceptions—bargains that aren’t consideration:(a) Nominal Consideration

(i) A contract based on nominal consideration will fail for lack of consideration. A transaction involves nominal consideration if it has the form of a bargain but lacks the substance of a bargain; i.e., no real bargain exists.(a) If the parties truly intended to make a bargain, a ct. generally will find that

there was consideration, no matter how disproportionate the two seem to be; however, if the parties never really intended to make a bargain, but instead tried to make a donative promise look like a bargain, the ct. will deem that the purported bargain lacks consideration.1. In re Greene, USDC S.D.NY, 1930. In consideration of $1 “and other

valuable consideration,” married man promises to pay $$$ to former

mistress. Held: recited consideration is not consideration for promise of $$$. Nominal consideration isn’t “bargained for,” and thus isn’t consideration for promise.

(ii) Compare—options. Nominal consideration will make an option enforceable if the option (1) is in writing and (2) proposes fair terms.(a) UCC “firm offers”: a written firm offer by a merchant to buy or sell

goods is irrevocable for the period of time stated in the offer (or if no time is stated, for a reasonable time) w/out the necessity of any consideration or even a recital of consideration.

(b) Illusory promises(i) Mutuality rule. In bilateral contracts, parties exchange a promise for a

promise; therefore, there must be mutuality of obligation; otherwise, the promise is illusory and, since there’s no “promise for a promise,” no consideration. An illusory promise is an apparent commitment that actually leaves a “free way out” (e.g., “I will buy wheat from you at $10/bushel insofar as I want to buy wheat from you at that price”).(a) Effect of illusory promise—if one party makes an illusory promise, neither

party is bound.1. Example:

a. Promise to do an act “if I want to” (as opposed to a requirements K or a K subject to personal satisfaction)i. Rehm-Zeiher, Co. v. F. G. Walker Co., KY Ct. of App., 1913.

K to buy certain amount of whiskey per year, less if not needed “for any unforeseen reason.” Held: K lacked mutuality of obligation. Where buyer could buy less than amount provided for in K “for any unforeseen reason,” buyer’s commitment is illusory since he has “free way out,” and K is void for lack of mutuality.

b. Right to terminate at will w/out notice:i. UCC §2-309(3): provides that “termination of a K by one party

except on the happening of an agreed event requires that reasonable notification be received by the other party, and an agreement dispensing w/ notification is invalid if its operation would be unconscionable.” Thus, a sale-of-good K w/ a right to terminate at will wouldn’t be illusory, b/c the UCC implies an implied requirement of reasonable notification. An agreement dispensing w/ notice may be held invalid, leaving the rest of the promise intact and therefore not illusory.

ii. If one party can terminate only after performing some action which by itself would constitute consideration (part performance), then promise isn’t illusory

iii. If one party can terminate if he cannot perform, then the promise isn’t illusory

(ii) Exceptions to mutuality rule(a) Unilateral contracts—rule of mutuality doesn’t apply to unilateral

contracts

(b) Limited promises—promises that limit the promisor’s options in some way—no matter how slight—are real and are consideration1. e.g., a promise coupled w/ power to terminate the obligation at will

with 10 days written notice isn’t illusory, b/c the promisor must give advance notice of termination.

(c) Voidable promises—an otherwise real promise isn’t illusory merely because it is voidable by one party as a matter of law (e.g., a promise by a minor).

(d) Conditional promises—a promise that the promisor only has to perform if a specified condition occurs isn’t illusory, because the promisor has limited her future options. This is true even if the condition is within the promisor’s control.1. UCC provision §1-203 general obligation of good faith imposes an

obligation of good faith on every party w/ respect to their performance of contractual obligations.

2. “Personal satisfaction” clauses are subject to general obligation of good faith (i.e., dissatisfaction must be bona fide)a. Omni Group, Inc. v. Seattle-First National Bank, WA Ct. of App.,

1982. K to buy land subject to buyer’s personal satisfaction w/ feasibility study. Held: mutuality of obligation; K valid. Personal satisfaction not a “free way out” of K since dissatisfaction, though subjective, must be good faith dissatisfaction.

(e) Alternative promises1. If the promisor reserves the right to discharge his obligation by

choosing between two or more alternatives, there is consideration only if each alternative would be sufficient consideration if bargained for alone.

2. If the promisee can choose one of several alternative promises from the promisor, consideration exists if any of the alternatives would be sufficient consideration if bargained for alone.

(f) Agreements allowing one party to supply a material term1. At common law, such a promise is illusory2. However, where one party has the power to alter or modify contract

terms, the promise isn’t illusory since the power is subject to the obligation to perform in good faith.a. Even the power to supply (rather than vary) a material term isn’t

illusory if the term must be fixed in relation to an objective measure (e.g., market price).

3. UCC provisionsa. UCC §1-203: imposes a general obligation of good faith on all

parties to a contract for a sale of goodsb. UCC §2-305: explicitly provides that the power to set a price in a

contract for a sale of goods is enforceable if the parties so intend.(g) Implied promises—mutuality is satisfied if a promise can be implied in

fact or in law from a party’s words or actions.

1. A common type of implied promise involves a promise to use one’s reasonable or best efforts to perform (Wood v. Lucy, Lady of Duff-Gordon)a. Wood v. Lucy, Lady Duff-Gordon, NY Ct. of App., 1917. Agent

has exclusive contract to market designs on a commission basis. Held: since there’s mutuality of obligation, K is valid. Because K is exclusive and it can be inferred from terms of K that such is intent of parties, agent has implied obligation to use reasonable efforts.

2. UCC §2-306(2): codifies rule in Wood v. Lucy by providing that, unless otherwise agreed, a lawful agreement for exclusive dealing in goods imposes an implied obligation “by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.”a. B/c UCC only applies to Ks for sale of goods, Wood v. Lucy

remains an important precedent for other types of Ks; e.g., Ks for services or real estate.

(h) Requirements and output contracts—modern cts. and the UCC enforce these contracts since the party who determines quantity has limited his options; if he buys or sells at all, he must buy from or sell to the other party.1. UCC §2-306(1):

a. Good faith—the quantity of the output or requirements must be provided in good faith, meaning that the party who determines quantity must conduct business in good faith and according to commercial standards of fair dealing in the trade, so that output or requirements will approximate a reasonably foreseeable figure.

b. Limitations on quantity—quantity tendered under output K or demanded under requirements K must not be “unreasonably disproportionate to any stated estimate, or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirement.”

c. Implied promise to remain in business—ability to go out of business is limited by duty of good faith. If the party subject to the output/requirements K goes out of business for reasons other than the profitability of the K in question—no breach. However, a shutdown motivated by the unprofitability of the K in question may violate the duty.i. McMichael v. Price, OK Sup. Ct., 1936. Salt salesman to buy

all salt he “can sell” from one supplier. Held: since there’s mutuality of obligation, K is valid. A requirements/output K has mutuality because no “free way out” of obligation since K is exclusive and predicated on buyer/seller being in certain industry.

(c) Legal duty rule—promise to perform an act promisor already obliged to perform

(i) General rule—the promise or performance of an act that the promisor has a preexisting duty to perform doesn’t constitute consideration.

(ii) Preexisting public duties(a) If an official’s promised performance is within the scope of official duties,

neither the promise nor the performance thereof is legally sufficient consideration.1. Scope test—the legal duty rule is applicable to a promise by an official

whenever the action is w/in the scope of the official’s duties, even if the specific act isn’t legally required.b. ex: police officer promises to keep an eye on a store on his beat for

$50 = unenforceable, even though officer doesn’t have specific duty to watch over store; however, watching the store is w/in the scope of officer’s duties.

c. ex: police officer on vacation in another state agrees to spend 3 hrs/day watching lobby in exchange for free room = enforceable, because scope of officer’s duties don’t apply out of state

(b) Performance of a public duty required by law (e.g., jury service) is also not legally sufficient consideration.1. ex: witness promises plaintiff to tell the truth on the stand for $1K =

unenforceable, because promise is for performance of public duty required by law.

2. ex: witness promises to travel outside her state of residence to testify, in return for payment of travel expenses = enforceable, because promise is for performance of public duty not required by law.

(iii) Preexisting contractual duties(a) General rule—neither a promise to perform a preexisting contractual duty

nor the performance of the duty is consideration. Two patterns: the hold up game and the settlement of debt

(b) Performance of preexisting contractual duty for increased payment1. Where A and B have a contract and A refuses to perform unless B

pays more than originally promised, A’s new promise to perform (or A’s performance) doesn’t constitute consideration for B’s promise to pay a greater amount than originally promised.a. Alaska Packers’ Association v. Domenico, 9th Cir., 1902.

Fishermen demand doubled wages once at sea, and APA forced to relent so as not to lose investment in enterprise. Held: modification not valid. Absent additional consideration, promising to do preexisting duty isn’t consideration for modification of K.

2. Exceptions:a. Promise of different performance—consideration exists where a

party promises to perform an act similar to, but different from, the action he was contractually obliged to perform—even if the difference is slight.

b. Defense under original contract—if a party had a valid defense to performing under the original contract, the new promise to perform is sufficient consideration.

c. Modification for unanticipated circumstances:i. Traditional view—w/out new consideration or promise of

different performance, mere business exigencies aren’t enough.ii. Levine v. Blumenthal, NJ Sup. Ct., 1936. After tenant says he

might have to go out of business, landlord agrees to accept reduced rent, but then sues for full amount. Held: modification to reduce rent unsupported by consideration. Mere business exigencies affecting ability to perform preexisting duty, not coupled w/ additional consideration, aren’t consideration for modification of contract.

iii. Modern trend—a new promise to pay is enforceable if (1) unanticipated circumstances arise that make modification of the original contract terms (2) fair and equitable (even if unanticipated circumstances aren’t enough to provide a defense of impossibility to the existing K)

iv. Angel v. Murray, RI Sup. Ct., 1974. Trash collector for city asks for increase in contract price after costs go up when 400 new units (instead of typical 25) added. Held: modification valid. Under Restatement, 2d, and analogy from UCC §2-209(1), modifications to preexisting duties are valid w/out additional consideration if motivated by unanticipated difficulties and negotiated in good faith.

d. Modification—sale of goods (UCC §2-209(1)): consideration not required to make binding modifications of contracts for the sale of goods, so long as modifications sought in good faith.i. Distinguish—waivers. Although a modification is enforceable

w/out consideration under UCC §2-209, a waiver of a right under a K is enforceable w/out consideration only if the waiver isn’t validly withdrawn.

e. Mutual rescission—some cts. get around the legal duty rule by applying the fiction that the parties mutually rescinded the original contract and formed a new one.

f. Effect of performance—the legal duty rule is a defense to an action to enforce a contract; if a contract has already been fully performed, neither party can use the legal duty rule to recover what it paid unless the party seeking to recover performed under economic duress (an improper threat leaving no reasonable alternatives can constitute sufficient economic duress)

(c) Payment of lesser amount as discharge of debtor’s full obligation1. Generally, a promise by a debtor to pay less than the full amount owed

to a creditor in exchange for the creditor’s agreement to accept the lesser amount in full satisfaction of the entire debt isn’t consideration, and the creditor’s promise to accept the lesser amount isn’t enforceable.

2. Exceptions

a. Different performance—the general rule is inapplicable where the debtor does something different, even slightly, from what she is obliged to do (e.g., makes early payment)

b. Honest dispute—if there is an honest dispute as to whether a lesser amount is owed, payment of the lesser amount is consideration for the creditor’s discharge in full

c. Unliquidated obligations—if the amount owed is unliquidated (uncertain), a debtor’s payment of the lesser amount is consideration for a creditor’s discharge in full even if the debtor pays no more than she admittedly owesi. However, if the debtor owes the creditor two separate debts,

one liquidated and one not, payment of the liquidated obligation won’t serve as consideration for the creditor’s agreement to discharge the unliquidated obligation.

d. Composition of creditors—where a composition of creditors releases a debtor in full in exchange for part payment to each creditor, consideration may be found in the creditors’ mutual agreement to accept lesser sums.

e. Explicit agreement not to file for bankruptcy—if a creditor’s purpose in discharging a debt in exchange for a lesser sum is to induce the debtor not to file for bankruptcy, consideration exists.

f. Full-payment checks—a check that claims to be tendered in full payment of the creditor’s obligation, but that is for an amount less than the creditor claims is owedi. Common law—cashing a full-payment check constituted an

accord and satisfaction of the entire debtii. UCC §3-311: cashing a full-payment check discharges the

entire debt if: (1) the check is tendered in good faith; (2) the check contains a conspicuous statement concerning full payment; and (3) either a bona fide dispute exists as to the amount owed or the claim is unliquidated.

iii. Exception—check not sent to prescribed person, office or address. The UCC rule doesn’t apply if (1) the creditor is an organization; (2) w/in a reasonable time before the check was tendered, the creditor sent a conspicuous statement to the debtor that checks tendered in full satisfaction of debts are to be sent to a designated person, office, or address; (3) the check wasn’t sent to that person, office, or address; and (4) the creditor didn’t know, w/in a reasonable time before initiating collection of the check, that the check was tendered in full satisfaction of the creditor’s claim.

iv. Exception—repayment tendered. The UCC also doesn’t apply if (1) the creditor tenders a repayment of the amount of the check w/in 90 days after the check has been paid; (2) the creditor (if it is an organization) didn’t send to the debtor, w/in a reasonable time before the debtor tendered her own check, a

conspicuous statement that full-payment checks were to be sent to a designated person, office, or address; and (3) the creditor didn’t know, w/in a reasonable time before initiating collection of the check, that the check was tendered in full satisfaction of the creditor’s claim.

B) Waiver1) Definition—a waiver occurs when a party to an existing contract promises to perform

even though some contractual condition to his obligation to perform hasn’t occurred.2) Enforceability—a waiver is enforceable if:

(a) It is given for a separate consideration;(b) Or:

(i) The waived condition wasn’t a material part of the agreement and(ii) The uncertainty of the occurrence of the condition wasn’t a risk assumed

by the party who gave the waiver.(a) Example: Acme insures Roger for $100K against injuries while traveling,

payable only if Roger gives written notice of injury w/in 30 days of incident. Roger disabled in accident while traveling, but doesn’t give Acme notice until 34 days later. Acme informs Roger that this notice is sufficient, thereby waiving the 30-day condition. Acme’s waiver is enforceable, though Roger didn’t give consideration for waiver, b/c the provision concerning notice wasn’t material party of agreed-upon exchange, and uncertainty about receiving notice wasn’t an element of risk assumed by Acme.

(b) Example: same facts as above, but Roger injured while working at home. Acme waives the requirement that the accident occur while traveling. Acme’s waiver isn’t enforceable, because the condition that the injury occur while traveling was a significant element of the risk assumed by Acme.

3) Retraction(a) An otherwise enforceable waiver can be retracted if:

(i) The waiver wasn’t given for separate consideration;(ii) The other party hasn’t changed position in reliance on the waiver;(iii) The waiver relates to a condition to be fulfilled by the other contracting

party (not by a 3rd party);(iv) The retraction occurs before the time that the waived condition was

supposed to occur; and(v) Notice of the intention to retract was given within a reasonable time for

performance (or a reasonable extension of time was given)(a) Example: Acme waives the 30-day notice requirement the day after the

accident, but retracts its waiver the day after it was given. The retraction is effective because (1) the waiver wasn’t given for separate consideration; (2) the waiver wasn’t relied upon; (3) the waiver relates to a condition to be fulfilled by Roger; and (4) the retraction occurred before the time the waived condition was supposed to occur and while there was still a reasonable time for fulfilling it.

C) Unrelied-Upon Donative Promises

1) General rule—a donative promise to make a gift is unenforceable for lack of consideration unless (1) it is relied upon, (2) it is compensation for a previously conferred material benefit that created a moral obligation; or, in some states, it is under seal.(a) Exception—charitable subscription or a marriage settlement is binding w/out

proof that the promise induced action or forbearance.(b) If a donor really wanted to make a binding gift that the donee shall receive in the

future, the donor can transfer the property in trust for the donee’s benefit. The trust instrument would direct the trustee to distribute the property to the donee on the occurrence of some future event—e.g., graduating from college—but to return the property to the donor if the future event fails to occur. The donor’s intention to make a future gift would be largely realized by this device, yet the transfer in trust would be regarded as a present gift—completed when the property is transferred to the trustee—and the question of consideration wouldn’t arise.

2) Effect of seal(a) Common law: a seal made a donative promise enforceable. Seal can be a piece of

wax, written, printed, or consist of some sign to represent a seal (including the letters “L.S.,” meaning “locus sigilli” or place of seal in Latin).

(b) Modern rule: almost all states have statutorily abolished the binding effect of the seal; in some states, a seal raises a presumption of consideration, such that the promisor must show lack of consideration

3) Effect of writing—a writing doesn’t make a donative promise enforceable(a) However, in some states, a donative promise in writing is presumed to have been

given for consideration unless shown otherwise by the promisor.4) Nominal consideration—nominal consideration (i.e., where the parties falsely put

their agreement in the form of a bargain) won’t make a donative promise enforceable.5) Conditional donative promise—a conditional donative promise exists where some

condition must be met before the gift is made (e.g., A tells B that she will give B her television if he comes over to her house to get it). It’s unenforceable, even if condition has been satisfied, except to the extent that fulfillment of the condition constitutes foreseeable reliance.

6) Conditional donative promise vs. bargain promise(a) The test for which of these categories a promise falls into is the manner in which

the parties view the condition(i) If the condition is viewed as a necessary part of making the gift, the

promise is donative.(ii) If performance of the condition is viewed as the price of the promise,

there is a bargain(c) The test to determine if something is bargained for is objective (is promise A

reasonably motivated by promise B) rather than subjective (promise A was subjectively motivated by X)(i) Restatement §81: Consideration as motive or inducing cause

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

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

(ii) Where the motive for a promise is mixed (partly bargain, partly donative), the element of bargain is usually sufficient to furnish consideration for the entire transaction. However, just b/c the terms of a gift impose a burden on the donee doesn’t mean that there’s a bargain element.(a) Thomas v. Thomas, Queen’s Bench, 1842. Explicitly “in consideration of

testator’s wishes,” executors give widow a house, provided she repair/pay minimal rent. Held: covenant to repair/pay rent is consideration for house. Where there are mixed bargain/gift motives that induced promise, objectively (but not subjectively) “bargained for” detriment is consideration.1. This case would probably come out differently today—arguably, this

is a case of nominal consideration.D) Relied-Upon Donative Promises—Promissory Estoppel

1) Old rule—reliance irrelevant; a donative promise is unenforceable even if relied upon.(a) Kirksey v. Kirksey, AL Sup. Ct., 1845. Man offers house to dead brother’s

widow, and she incurs expenses moving into it. Held: her moving wasn’t consideration for promise of house. Detriment incurred as a consequence of, rather than to induce, a promise isn’t “bargained for” consideration.

2) Modern rule(a) If a donative promise (1) induces reliance by the promisee (2) in a manner

the promisor should reasonably have expected, the promise is enforceable (3) at least to the extent of the reliance.(i) Ricketts v. Scothorn, NE Sup. Ct., 1898. Grandfather promises

granddaughter $$ “so she won’t have to work anymore,” and granddaughter quits job in reliance. Held: promise is enforceable under “equitable” estoppel. A promise that promisor can reasonably expect to induce reliance, and does induce actual reliance, is enforceable to extent necessary to prevent injustice.

(b) Restatement §90:(i) 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. The remedy granted for breach may be limited as justice requires

(c) Elements of modern doctrine of promissory estoppel:(i) Promise;

(a) Can be a promise that’s too vague to constitute an offer1. Hoffman v. Red Owl Stores, Inc., WI Sup. Ct., 1965. D was involved

in franchise proposal with P, whereby D would grant franchise to P for $18K. P purchased small profitable store to get experience at D’s suggestion. D then required P sell the store to D just before profitable summer months. P was then required to put up $1K for an option on land to build the store. P was told he’d get franchise as soon as sold

his bakery, which he did. But price was raised and additional $2K. P brought action for damages based on reliance. Held: Promissory estoppel applies even though promise does not contain essential elements to form a K and negotiations were highly indefinite (none of the proposed details of the proposed bargain were sufficient to constitute an offer, let alone a K). Injustice would result if P was not granted some relief because of D’s failure to keep promises for which they induced P to act to their detriment.

2. This is the high-water mark of promissory estoppel and of unsure viability today.

(b) Make sure it’s a promise, not a threat(ii) Foreseeable reliance—action or forbearance

(a) If a promise is made to one party for the benefit of another, justifiable/foreseeable reliance by the third party beneficiary will suffice to make the promise enforceable by the third party beneficiary.

(iii) Induced reliance—action or forbearance(a) Amount of reliance needed depends upon context. If policy supports

enforcement, very little or no reliance needed (e.g., charitable subscriptions), however, in family gift context, reliance of a definite and substantial character may be needed.1. Feinberg v. Pfeiifer Co., MO Ct. of App., 1959. Employee given

pension for “many years of long and faithful service,” and retires. Held: promise of pension enforceable under promissory estoppel. Employee’s retiring from gainful employment is reasonably foreseeable reliance to her detriment on promise of pension, and injustice would result if pension not granted.

(iv) Justice requires enforcement of the promise(a) Grouse v. Group Health Plan, Inc., MN Sup. Ct., 1981. Job applicant told

he’s hired and so quits current job; however, on the day before he starts, he’s “unhired.” Held: under promissory estoppel, injustice would result if not given reliance damages. Where prospective employment is at will and new-hire quits old job in reliance, anticipatory repudiation of employment gives rise to recovery under promissory estoppel, because promisee had right to assume he’d be given good faith opportunity to perform.

(b) Cohen v. Cowles Media, MN Sup. Ct., 1992. Politico, who reporter promised confidentiality for leaking criminal history of rival candidate but story named him as source, sued newspaper for breach of confidentiality K. Held: newspaper liable under promissory estoppel. Since newspaper could’ve achieved goal of reporting whole truth while protecting source’s anonymity, a practice of long-standing importance, injustice can only be avoided by enforcing the promise under promissory estoppel.

3) Reliance as consideration. Some authorities (e.g., Restatement 2d) treat “consideration” as equivalent to “bargain”; thus, a relied-upon promise is enforceable despite the lack of consideration. Others view promissory estoppel as simply a type of consideration. These views are almost functionally equivalent, except that the view that promissory estoppel is a type of consideration seems to imply that relied-

upon donative promises are always enforceable to their full extent (i.e., expectation damages). The Restatement 2d view—the modern view—makes it clear that damages may be limited to the extent of the reliance (i.e., reliance damages).

4) Choice of Remedies(a) Since promissory estoppel is based on idea of reliance, damages are usually

limited to reliance damages (out of pocket expenses)(b) However, if there is some sort of unjust enrichment, promisee eligible for

restitution damages.(c) Sometimes, expectation damages are not so uncertain that courts will allow

recovery for them, too.(i) Without unjust enrichment, damages shouldn’t put promisor in worse

position than performance of the promise would have put him (and so consequential damages shouldn’t be awarded)

(iii) Factors pointing to larger recovery:(a) Policies implicit in the transaction type (e.g., charitable subscriptions,

retirement promises give rise to larger recovery)(b) Reason for non-performance (financial reverses indicate lesser while

dishonest conduct might support greater remedy)(c) Certainty of calculation (if expectation hard to calculate b/c indefinite

promise, award reliance; but if reliance hard to calculate b/c difficulty in valuing detriment, award expectation)

(d) Degree of disproportion associated w/ enforcement of the promise (if expectation recovery much greater than reliance recovery, go w/ reliance)1. E.g.: a promise to obtain insurance can result in very large liability for

promisor, and usually what was promised is best interpreted as using reasonable efforts to obtain insurance, or reliance was only justified for a short time, or not at all. But if proof of promise and reliance are clear—e.g., part of formal writing—then recovery may be justified

5) Exception—charitable subscription or a marriage settlement is binding w/out proof that the promise induced action or forbearance(a) Allegheny College v. National Chautauqua County Bank, NY Ct. of App., 1927.

Donation to be made posthumously, w/ scholarship fund named after donor. Held: donation is supported by consideration. A charity’s assent to condition to name fund after donor is consideration for promise to give money.

E) Moral or Past Consideration1) Definition—a promise is given for moral or past consideration when the promisor

seeks to discharge a moral (but not legal) obligation owed to the promisee and created by some past event.

2) Traditional rule—a promise based on moral or past consideration is unenforceable.3) Exceptions

(a) Promise to pay debt barred by statute of limitations is enforceable despite absence of new consideration. (it is the new promise, not the old debt, that is enforceable)(i) Effect of acknowledgement or part payment—generally, a promise will be

implied from an unqualified acknowledgement of the debt, or from a part payment of it.

(ii) Requirement of writing—most states require such a promise either to be in writing or to be partially performed (part payment) to be enforceable.

(iii) New promise made before statute runs—the above rules also apply if a new promise, acknowledgement, or part payment is made before the SOL has run; the limitations period on the new promise will run from the date of the new promise.

(b) Promise to perform a voidable obligation (e.g., by reason of fraud or infancy) is enforceable despite the absence of new consideration as long as the new promise isn’t also subject to the same defense.

(c) Promise to pay debt discharged by bankruptcy(i) Originally, this was treated like a promise to pay a debt barred by SOL(ii) Now, the Bankruptcy Code places a number of strict conditions on such

promises (e.g., debtor is fully informed, debtor has counsel, etc.)4) Modern rule—promise to pay moral obligation arising out of past economic benefit to

promisor(a) The emerging rule is that even if one of the above exceptions doesn’t apply, such

a promise is enforceable, at least up to the value of the benefit conferred, if the promise is based on a material benefit previously conferred on the promisor that gave rise to an obligation to make compensation.(i) Webb v. McGowin, AL Ct. of App., 1935. Promisee crippled after falling

w/ dropped block, saving promisor’s life, who promises to pay promisee as long as he lives. Held: promise is enforceable as quasi-K. Moral obligation from material benefit conferred is consideration for subsequent promise to pay.

(ii) Gratuitous benefits—if the past benefit was conferred as a gift, even the modern approach wouldn’t enforce the promise since a gift doesn’t create a moral obligation to repay.(a) Examples:

1. Manwill v. Oyler, UT Sup. Ct., 1961. After running of SOL, promise to repay for payments made on promisor’s behalf. Held: promise not enforceable as quasi-K. Where benefit isn’t shown to have been conferred w/ expectation of repayment, a later promise to recompense benefitor after running of SOL isn’t enforceable as quasi-K.

2. Harrington v. Taylor, NC Sup. Ct., 1945. After promisee saves promisor’s life by catching axe blade w/ hand, causing injury, promisor promises to pay. Held: promise not enforceable as quasi-K. Moral obligation from material benefit conferred is consideration only if benefit wasn’t conferred gratuitously.

(b) However, if the benefit was conferred as a gift that both parties intended to be compensated for indirectly, then a promise to pay is binding.1. E.g.: A submits to B at B’s request a plan for advertising products

manufactured by B, expecting payment only if the plan is adopted. Because of a change in B’s selling arrangements, B rejects the plan without giving it fair consideration. B’s subsequent promise to reimburse A's expenses in preparing the plan is binding.

2. E.g.: A contributes capital to B, an insurance company, on the understanding that B is not liable to reimburse A but that A will be reimbursed through salary and commissions. Later A withdraws from the company and B promises to pay him ten percent of premiums received until he is reimbursed. The promise is binding.

(iii) Promise based on expense incurred by promisee—even under the modern approach, such promises generally are unenforceable if the promisor didn’t receive a material (i.e., economic) benefit, even if the promisee incurred expenses.(a) Mills v. Wyman, MA Sup. Judicial Ct., 1825. After the fact, father

promises to pay Good Samaritan’s expenses for caring for his 25-yr-old son. Held: promise not enforceable as quasi-K. Moral obligations are only sufficient consideration for promises where promise is to pay preexisting obligation barred by operation of law (e.g., running of SOL, bankruptcy).

(b) While this seems odd that the benefit must be bestowed upon the promisor, the rule promotes certainty by defining class of enforceable promises. Otherwise, the “test of moral consideration must vary w/ the opinion of every individual” (Williston).

(b) Restatement position: §86: (which emphasizes avoiding unjust enrichment rather than recognizing “moral obligation”)(i) A promise made in recognition of a benefit previously received by the

promisor from the promisee is binding to the extent necessary to prevent injustice

(ii) A promise is not binding(a) If the promisee conferred the benefit as a gift or for other reasons the

promisor has not been unjustly enriched; or(b) to the extent that its value is disproportionate to the benefit.

(c) Hence, the benefit-received principle operates in non-rescue cases to make enforceable promises to pay for benefits conferred:(i) By mistake

(a) E.g.: A is employed by B to repair a vacant house. By mistake A repairs the house next door, which belongs to C. A subsequent promise by C to pay A the value of the repairs is binding

(b) Contrast with: D mows C’s lawn while C is away on vacation and then asks C to pay her whatever C thinks the service is worth. C promises to pay $10 the following Tuesday. Subsequently, C changes her mind and refuses to pay. C’s promise is not binding. Though C has received a benefit and $10 appears to be a reasonable price for the service, but D’s act in imposing the service on C w/out C’s request is obviously a high-pressure sales tactic which one hesitates to reward or encourage. A court would refuse to enforce C’s promise to pay because C has not been unjustly enriched. If D, having been employed to mow a neighbor’s lawn, had simply mowed C’s lawn by mistake, C’s subsequent promise to pay would be binding.

(ii) For emergency services and necessaries

(a) E.g.: A finds B's escaped bull and feeds and cares for it. B's subsequent promise to pay reasonable compensation to A is binding

(d) Where a benefit received is a liquidated sum of money, a subsequent promise to pay is not enforceable beyond the amount of the benefit. Where the value of the benefit is uncertain, a promise to pay the value is binding and a promise to pay a liquidated sum may serve to fix the amount due if in all the circumstances it is not disproportionate to the benefit. (See Webb v. McGowin). A promise that is excessive may sometimes be enforced to the extent of the value of the benefit. In other cases a promise of disproportionate value may tend to show unfair pressure or other conduct by the promisee such that justice does not require any enforcement of the promise.(i) E.g.: A, a married woman of 60, has rendered household services without

compensation over a period of years for B, a man of 80 living alone and having no close relatives. B has a net worth of $3M and has often assured A that she will be well paid for her services, whose reasonable value is not in excess of $6K. B executes and delivers to A a written promise to pay A $25K “to be taken from my estate.” The promise is binding.

(ii) E.g.: The facts being otherwise as stated above, B's promise is made orally and is to leave A his entire estate. A cannot recover more than the reasonable value of her services

(e) Note—even if no enforceable promise to pay moral obligation, check for quasi-K.III) Mutual Assent—Offer and Acceptance

A) Mutual Assent1) Objective theory of contracts. A contract is formed by mutual assent of the parties.

In determining whether the parties have mutually assented to a contract, one should generally use the objective theory of contracts (i.e., determine what a reasonable person to whom an expression has been addressed would have understood the expression to mean). The objective theory operates to protect the parties’ reasonable expectations by permitting each party to rely on the other’s manifested intentions. However, under certain conditions (e.g., Peerless, parties’ have same subjective intent, or one party has reason to know other’s subjective intent), subjective intent is also relevant.(a) Mutual assent is determined by reference to the reasonable understanding of the

parties’ manifestations(i) Embry v. Hargadine, McKittrick Dry Goods Co., St. Louis Ct. of App.,

1907. After employee’s 1-yr K expired, he threatened to quit unless K renewed, to which CEO said “go ahead, you’re all right; get your men out and don’t let that worry you,” but then fired employee 3 mths later. Held: CEO’s comments were sufficient to renew the K. Though CEO didn’t subjectively intend to accept, because his words objectively manifested intent (the reasonable person would’ve thought he accepted), the K is valid.

(b) “Secret” intent is irrelevant. A party is responsible for unintended manifestation of assent.(i) Lucy v. Zehmer, VA Sup. Ct. of App., 1954. Since P had tried

unsuccessfully to buy D’s farm before, while the two were drinking, D offered to sell farm to P for high price as a joke, to which P agreed, memorializing

agreement and both parties signing it. Held: K is valid. Where signed memo of K objectively manifests intent to be bound (they negotiated over terms, committed K to writing, and K was complete), the fact that one party was joking doesn’t invalidate the K.

(c) Note, however, that in certain noncommercial contexts, there is no intent to form a legally enforceable contract. For a finding of no intention to be bound, ct. must find that the parties, if they had thought about it, wouldn’t consider the K legally binding. Much more likely to be inferred in the social/familial sphere than in the commercial sphere (where the presumption runs the other way, toward the finding of intention to be bound).(i) Cohen v. Cowles Media, MN Sup. Ct., 1990. Politico, who reporter

promised confidentiality for leaking criminal history of rival candidate but story named him as source, sued newspaper for breach of confidentiality K. Held: no breach of K since, in the context of an agreement between reporter and source, parties didn’t intend to be legally bound. To be legally binding, parties to a contract must intend to be bound. Other contexts where no agreement to be legally bound: mutual promises to marry, or a dinner invitation.

2) Express and implied contracts(a) Express contracts—mutual assent is manifested in words of agreement, oral or

written.(b) Implied contracts

(i) Implied-in-fact contracts—if the promises of the parties are inferred from their acts or conduct, or from words that aren’t explicit words of agreement, the contract is implied in fact.

(ii) Implied-in-law contracts—these are cases where a ct. fictionally applies a promise to pay for benefits or services to avoid inequities and unjust enrichment.(a) Implied promise to pay arises:

1. Where services are rendered or property expended which confers a benefit,

2. Where the benefit was rendered with the expectation of being paid,3. Where the benefitor was not acting as an intermeddler or volunteer,

and4. Allowing the recipient to retain the benefits w/out paying would result

in the unjust enrichment of the recipient at the benefitor’s expense.a. Volunteered services don’t entitle reimbursement (“officious

intermeddler”)b. Hypo: doctor comes across unconscious person and renders aid.

Doctor entitled to recovery because it’s customary to pay for medical services

(b) If there is no implied-in-fact contract but there is a subsequent promise to pay, the promise may be binding under moral obligation rule.

B) Offers1) Legal significance of an offer—an offer creates a power of acceptance in the offeree

(i.e., the power to conclude a bargain and bind the offeror by giving assent).

2) What constitutes an offer—an offer is a manifestation of present willingness to enter into a bargain, made in such a way that a reasonable person in the shoes of the person to whom it is addressed would believe that she could conclude the bargain merely by giving her assent.(a) Lonergen v. Scolnick, CA Ct. of App., 1954. Seller of real estate sent out form

letters denominated as such, and in response to inquiry based on form letter, gave requested info and closed w/ “If you’re interested, act fast, because I expect to have a buyer in next wk.” Held: last letter was an invitation to make an offer, not an offer. A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of intent; the “act fast, because I expect to have buyer in next wk” language notifies buyer that audience of letter isn’t specific, and that further ratification would have to take place before seller was bound.

(b) Essential elements:(i) Intent to enter into a bargain—offers must be distinguished from

invitations to negotiate. An intent to make an offer is reflected by language and the surrounding circumstances of the statement.(a) The offeror’s intent is determined objectively—as a reasonable person in

the shoes to whom it is addressed would take it—in order to protect the parties’ reasonable expectations.

(b) The words or conduct used in the proposal must be words of offer rather than mere words of preliminary negotiation. Factors to consider:1. The words used;

a. “I bid” suggests an offer, whereas “Are you interested?” suggests preliminary negotiation. Note that even a price quotation can be an offer if it seems to create a power of immediate acceptance in the offeree.i. E.g.: A writes to B asking for lowest price for 10 carloads of

Mason jars with caps. B responds, “we quote you jars: Pints $4.50, Quarts $5.00, half gallons $6.50 per gross, for immediate acceptance, and shipment.” B’s price quotation is an offer.

b. If offeror reserves the power to close the deal, probably not an offer—e.g. “This order not binding unless authorized by home office.”

c. Failure to limit the quantity indicates lack of intent to enter into bargain. However, if proposal specifies a range or an upper limit and gives the offeree the power to make a selection, then there may be an intent to enter into a bargain.i. Look for usage, course of dealing, to find a “standing” offer by

which a seller, for example, engages to furnish a buyer w/ all the goods of a specified kind that the buyer “may order” over a period of time. Though “standing offer” is too indefinite by itself, this can be cured by acceptance, b/c seller has given buyer the power to fill in terms.

2. Surrounding circumstances; anda. Failure to limit the recipients for a proposal of limited quantity

shows lack of intent to enter K.i. Southworth v. Oliver, OR Sup. Ct., 1978. Seller of real estate

sends information giving price and terms for land to two neighbors, both of which know that the other is receiving the same offer, but one neighbor and the seller think the other neighbor is only interested in grazing permits on land. Held: seller’s letter, in context of previous negotiations, is an offer. Though the letter didn’t use the word “offer” and was sent to other parties, because the terms were clear and it was in larger context of sale negotiations (and so reasonable offeree would’ve deemed it an offer), it was a binding offer.

3. To whom made: e.g., proposals made to the public (such as advertisements) are more likely to be construed as mere invitations to make an offer.

(ii) Definiteness of terms—a statement usually won’t be considered an offer unless it makes clear (1) the subject matter of the proposed bargain, (2) the quantity involved, and (3) the price.(a) Intent determinative: Even if an important term is omitted, a statement can

still be construed as an offer if:1. the statement otherwise evidences an intent to conclude a bargain,2. the omission doesn’t indicate a lack of intent to conclude a bargain,

and3. the court can fill in the missing term by implication.

a. See indefiniteness section below for more info, but a ct. can look to usage of trade, prior dealings. The “offer” needs to contain enough terms so that the ct. can tell if there has been a breach, and if so, what remedy is appropriate.

(iii) Communication to the offeree(a) An offer can only be accepted by an offeree—If a person intends to

contract w/ A, B cannot accept unless B had reason to believe that the offeror intended to contract w/ B.1. Corinthian Pharmaceutical System, Inc. v. Lederle Laboratories,

USDC, S.D.IN, 1989. From internal co. memo that buyer wasn’t to receive, buyer learns of impending price increase in vaccine and places large order via automated system, which gives tracking #, and seller sends partial order at low price and note saying, “per normal policy, shipping rest at price when order is shipped.” Held: seller’s price memo wasn’t an offer; the offer was the buyer’s order.

(c) Special rules(i) Advertisements—generally deemed to be invitations to deal rather than

offers. However, a particular advertisement may be construed as an offer if it is definite in its terms and either (1) the circumstances clearly indicate an intention to make a bargain, (2) the advertisement invites those to

whom it is addressed to take specific action w/out further communication, or (3) overacceptance is unlikely.(a) Lefkowitz v. Great Minneapolis Surplus Store, MN Sup. Ct., 1957.

Newspaper ad says “9 am, 3 fur coats worth $100, $1/each, first come, first served.” Held: ad is an offer. Though newspaper ads are normally invitations to make an offer rather than offers, if the ads are specific as to all the terms and specify exactly what conduct manifests an acceptance, leaving nothing for negotiation, they are offers. An offer cannot be modified by undisclosed “house rule.”

(b) Carlill v. Carbolic Smoke Ball Co., Q.B., 1893. D places ad, “if you use our product for 2 wks and get sick in prevailing epidemic, we’ll give you £100”; P gets sick and sues for reward. Held: ad wasn’t too vague to be an offer, and terms of ad impliedly waived notification. Where an offer cannot be accepted by a promise, it is an offer for a unilateral K, and performance pursuant to its conditions is acceptance.

(c) Rewards—an advertisement for a reward is normally construed as an offer.

(ii) Offering circulars—generally deemed to be invitations to deal rather than offers. However, they may be interpreted as offers if a reasonable person in the shoes of the addressee would think the communication had been addressed to him individually rather than as one of a number of recipients.(a) Southworth v. Oliver, OR Sup. Ct., 1978. Seller of real estate sends

information giving price and terms for land to two neighbors, both of which know that the other is receiving the same offer, but one neighbor and the seller think the other neighbor is only interested in grazing permits on land. Held: seller’s letter, in context of previous negotiations, is an offer. Though the letter didn’t use the word “offer” and was sent to other parties, because the terms were clear and it was in larger context of sale negotiations (and so reasonable offeree would’ve deemed it an offer), it was a binding offer.

(iii) Auctions(a) Auction with reserve—placing item on the block is an invitation to deal.

Bids are offers. Item can be withdrawn any time before the auctioneer hammers down and accepts the bid.

(b) Auction without reserve—once the auctioneer calls for bids, the goods cannot be withdrawn unless no bids are made w/in a reasonable time.

(c) Determining whether an auction is with or without reserve—an auction is deemed to be w/ reserve unless otherwise stated.

(iv) Putting contracts out for bid—usually deemed not to be an offer, but the responding bids are usually considered offers. However, the language and circumstances may result in reverse interpretations; e.g., a bid might be interpreted as only an invitation to deal.

3) Termination of power of acceptance(a) Expiration or lapse

(i) Where time for acceptance is fixed in the offer—offeree’s power of acceptance lapses at the end of the stated period w/out any further action by

the offeror. Usually, the stated period runs from the time the offer was received.

(ii) Where no time for acceptance is fixed in the offer(a) The offeree’s power of acceptance lapses after the expiration of a

reasonable time, which depends upon the circumstances.1. Ever-Tite Roofing Corp. v. Green, LA Ct. of App., 1955. 9 days after

hiring, owner of house stops workers as they arrive at his house from starting work under K for re-roofing house on credit that specifies it may be accepted either by commencement of the work or by written acceptance of roofer’s home office. Held: workers had already accepted by “commencement of the work” by loading up truck and driving to house, because 9 days is reasonable time to do credit check. Where offer is silent about length of time given to accept an offer, the offeree has a reasonable time in context of offer to accept.

2. Specific contexts:a. When the parties bargain face to face or by telephone, the time for

acceptance ordinarily doesn’t extend beyond the conversation unless otherwise indicated

b. Acceptance of an offer by mail is timely if mailed by midnight on the day of receipt, or w/in a reasonable time depending on the circumstances.

(b) Rejection by the offeree—the offeree’s rejection of the offer terminates his power of acceptance(i) Includes offers to enter into unilateral K—Rest. §53(3)—where an offer

can only be accepted by a performance, “the rendering of the invited performance does not constitute an acceptance” if the offeree “manifests an intention not to accept” before he renders the performance.

(ii) Exception for options: an offeree’s rejection during the option period doesn’t terminate his power of acceptance because he has a contractual right to have the offer held open during its term.(a) However, this rule doesn’t apply if the offeror relies upon the rejection.

(c) Counteroffer—a counteroffer by the offeree terminates the power of acceptance, and creates a new power of acceptance in the original offeror(i) Minneapolis & St. Louis Railway Co. v. Columbus Rolling-Mill Co.,

USSC, 1886. In responding to offer to sell 2K-5K rails at a certain price, buyer orders 1200 rails, which seller refuses to supply, and then buyer tries to accept original offer. Held: buyer’s attempted acceptance, which varied terms, was a counteroffer. An acceptance to an offer that materially varies the terms is a counteroffer that amounts to a rejection of the offer.

(ii) Compare—inquiries and requests. The offeree’s power of acceptance isn’t terminated by an inquiry regarding the offer or by a request for new terms. The test for distinguishing between a counteroffer and an inquiry is whether a reasonable person would believe the offeree’s communication was itself an offer inviting acceptance.

(iii) Exception for options—a counteroffer made during the option period doesn’t terminate the offeree’s power of acceptance under an option since the

offeree has a contractual right to have the offer held open during the term of the option.(a) Humble Oil & Refining Co. v. Westside Investment Corp., TX Sup. Ct.,

1968. During term of option contract, offeree makes a counteroffer, which is refused, then attempts to accept on terms of original offer as per option. Held: K is valid. Because offeree had option K, he was free to negotiate for better terms while still getting to make sale binding on terms of option, because it is not acceptance of offer that makes K valid but rather the performance of the conditions of the option K.

(d) Conditional or qualified acceptance—this is a purported acceptance that adds to or changes the terms of the offer(i) General rule—except in sales-of-goods contracts (where UCC would

apply), a conditional or qualified acceptance terminates the offeree’s power of acceptance; it is itself an offer.

(ii) Exceptions:(a) Request accompanying acceptance—an unconditional acceptance

coupled with a request doesn’t terminate an offeree’s power of acceptance and instead forms a contract

(b) “Grumbling” acceptances—a grumbling acceptance doesn’t constitute a rejection, and instead forms a contract, if the expression of dissatisfaction stops short of actual dissent.

(c) Implied terms—an acceptance that is conditional or qualified in form, but in substance merely spells out an implied term of the offer, creates a contract.

(iii) Common law mirror image rule—an acceptance had to mirror the terms of the offer; any deviation made the putative acceptance a counteroffer.(a) Last shot rule and form contracts. Typically, merchants use preprinted

form contracts w/ blanks to be filled in w/ individualized terms. While the individualized terms agree, the preprinted terms may not. Under the mirror image rule, if the parties’ preprinted forms didn’t match, so that no contract was formed, but the parties performed anyway, the cts. would treat the last form sent as a counteroffer and the other party’s performance as an acceptance of the counteroffer—the “last shot rule.”

(iv) UCC §2-207: changes the mirror image rule regarding sale-of-goods contracts so that “a definite and seasonable expression of acceptance or a written confirmation that is sent in a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms”(a) Acceptance “expressly made conditional” (presumption against

conditional assent)1. If acceptance is expressly made conditional on the offeror’s

acceptance of additional or different terms, no contract arises.2. However, if the goods are delivered and accepted, the parties’

performance establishes a contract

3. The terms of the contract would then consist of the written terms to which the parties agree, plus any supplemental terms provided by the UCC.a. Leonard Pevar Co. v. Evans Product Co., USDC, DE, 1981.

Written acknowledgement of sale contained warranty disclaimer not contained in offer and expressly limited K to terms in acknowledgment. Held: because acknowledgement expressly limited acceptance to terms in acknowledgement that differed from terms of offer, no K b/c they weren’t later expressly assented to; however, b/c the parties continued dealing, a K is implied in fact, on the terms on which the writings agree plus the gap filler provisions of UCC. Hence, no disclaimer in K.

(b) Effect of additional terms1. Unless both parties are merchants (i.e., persons who deal in the kind

of goods sold or who otherwise hold themselves out as having knowledge or skill peculiar to the practices or goods involved in the transaction), additional terms in the acceptance are construed as proposals for additions to the contract that the offeror may agree to or ignore.a. “Merchant” is defined by §2-104(1) as a person who deals in

goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment.i. Note that this is broader than in common usage. It includes not

only a person who deals in goods of that kind, but also one who, by following a particular occupation, has or represents having knowledge/skill concerning the goods. Thus, the Comment to §2-104 points out that even a person who doesn’t trade in the goods could be a merchant if that person is a “professional” user of the goods, as opposed to a “casual or inexperienced buyer or seller.”

2. However, if the parties are both merchants, the proposed terms become part of the contract unless:a. The offer expressly limits acceptance to the terms of the offer;b. The additional terms would materially alter the contract; or

i. Whether a term “materially alters” the K depends upon whether surprise/hardship would occur if the new term is incorporated into the agreement (b/c a material term is one that is a significant element of the exchange bargained for by a party). (From Comment to §2-207):

ii. Examples of clauses that would normally “materially alter” the K (and so wouldn’t automatically become part of K): (1) a clause negating standard warranties such as merchantability or fitness of purpose; (2) a clause requiring a guaranty of 90% or 100% of deliveries where trade custom is to allow greater

leeway; (3) a clause reserving cancellation rights to seller if buyer fails to meet any invoice when due; (4) clause requiring that complaints be made in materially shorter time than is customary or reasonable.

iii. Examples of clauses that normally would not “materially” alter the K (and so would automatically become part of the K): (1) a clause enlarging upon the seller’s exemption due to supervening causes beyond his control; (2) a clause fixing a reasonable time for complaints; (3) a clause fixing a reasonable time for inspection; (4) a clause providing for interest on overdue invoices or fixing standard credit terms; (5) a clause limiting the right of rejection for defects that fall w/in customary trade tolerances.

c. The offeror notifies the offeree w/in a reasonable time that he objects to the additional terms.i. Thus, the offeror still has an opportunity to eliminate the

proposal by subsequent objection.(c) Effect of different terms—different terms (i.e., terms that contradict

rather than add to the terms of the offer) don’t automatically become part of the contract.1. Knockout rule—majority position—conflicting terms in both the

offer and acceptance drop out, and the contract consists of the agreed-upon terms plus terms supplied by the UCC to replace the conflicting terms.

2. Minority views:a. conflicting terms are treated like additional termsb. different terms in the acceptance always drop out, and thus the

terms of the offer govern(v) Termination by revocation—a revocation (an offeror’s retraction of an

offer) normally terminates the offeree’s power of acceptance, provided that the offer hasn’t already been accepted.(a) Rationale—it is sometime thought that rule of free revocability is corollary

of doctrine of consideration (i.e., b/c promises unsupported by consideration are revocable, offers unsupported by consideration should be revocable). This is non sequitur. However, rule of revocability can also be regarded as consequence of aversion of allowing one party to speculate at the expense of the other. For if offeror wasn’t free to revoke, the offeror would be bound though the offeree wouldn’t, and this would subject the offeror to the risk that the offeree might speculate in a fluctuateing market.

(b) Check for acceptances of subsidiary promises before allowing revocation of main offer.1. Electrical Construction & Maintenance Co. v. Maeda Pacific Corp., 9th

Cir., 1985. Subcontractor who agreed to provide bid in response to general contractor’s solicitation for bids on the condition that they must be awarded subK if he was the lowest bidder, submits bid that is

lowest, but isn’t hired after general contractor awarded prime K because of bid chopping. Held: general contractor liable for breach of promise to hire subcontractor. The subcontractor’s submission of the bid in the first place was consideration for the contractor’s promise to award the subK.

(c) Communication of revocation—to be effective, a revocation must be communicated by the offeror to the offeree1. Exceptions:

a. Offer to the public—an offer made to the public at large can normally be revoked by publishing the revocation in the same medium as that in which the offer was made.i. The publication terminates the power of acceptance even of

persons who saw the offer but not the acceptance.b. Indirect revocation—an offer is also deemed revoked, despite

the lack of direct communication between the offeror and offeree, if the offeree obtains reliable information that the offeror has taken action showing she has changed her mind.i. Dickinson v. Dodds, Ct. of App., 1876. Seller gives buyer

until Friday to accept offer of real estate, but buyer doesn’t try to communicate acceptance until after he hears from 3rd party that property is being sold to someone else. Held: buyer’s acceptance was ineffective because seller had revoked the offer. An offeree’s power of acceptance is terminated when the offeror takes definite action inconsistent w/ an intention to enter into proposed K and the offeree acquires reliable info to that effect.

(d) Revocability of “firm offers”—an offer that by its terms is to remain open until a fixed date can generally be revoked prior to the expiration of its term.1. Exceptions:

a. Options—an option is irrevocable for the stated period since the offeree has given consideration for the promise to hold the offer open.

b. Nominal consideration—a firm offer is irrevocable if it recites nominal consideration, at least if it’s in writing and proposes an exchange on fair terms w/in a reasonable time.

c. Foreseeable reliance—a firm offer is irrevocable if there is reasonably foreseeable reliance by the offeree prior to acceptance.i. Rest. 2d §87: “an offer which the offeror should reasonably

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

d. UCC §2-205—a (1) signed (2) written offer (3) by a merchant to buy or sell (4) goods, which (5) gives assurance that it will be held open, isn’t revocable during the time stated (or if no time is

stated, for a reasonable time); the period of irrevocability cannot exceed three months.

(e) Revocability of offers for unilateral contracts1. Old rule—offers that were to be accepted by performance of an act

remained revocable until performance was complete.2. Modern rule—do not permit revocation once performance has begun.

a. Petterson v. Pattberg, NY Ct. of App., 1928. Mortgagor says he’ll discount mortgage if it’s paid in full by certain date, but when mortgagee appears at mortgager’s home w/ money, saying he’s there to pay the mortgage, the mortgagor refuses. Held: the mortgagor had revoked the offer to discount the mortgage before the mortgagee had accepted. An offer to enter into a unilateral K may be revoked at any time prior to beginning of performance (here, the payment of the money), even if offeror knows that offeree intends to perform.

3. Codification of modern rulea. Offer converted to option K—(Restatement 2d, §45)—once the

offeree begins the requested performance, the offer to enter into a unilateral K is converted into an option K. The offeror’s duty to perform is conditioned on completion of the invited performance.i. Marchiondo v. Scheck, NM Sup. Ct., 1967. Owner offered

commission to broker if broker sold property to any of specified buyers w/in 6 days. Owner, knowing broker had been negotiating w/ buyers, revokes offer, notification of which broker receives before K for sale of property concluded. Held: broker entitled to commission. Where an offer invites an offeree to accept by rendering a performance, an option K is created when the offeree begins the invited performance, conditioned upon full performance.

b. Preparation vs. performance—(Restatement 2d, §45)—preparation, as opposed to beginning performance, isn’t sufficient to make an offer for a unilateral contract irrevocable. However, if the offeree’s preparation constitutes reliance, the reliance may prevent revocation under Rest. 2d §87 and entitle the offeree to recover reliance or expectation damages, as appropriate.

(f) Revocability of relied-upon bilateral offers.1. In compliment w/ the growth of promissory estoppel, an offeree’s

foreseeable, detrimental reliance on an offer will serve as a substitute for consideration, creating an option K and preventing the offeror from thereafter revoking the offer for a least a reasonable time.

a. Old view—promissory estoppel not available for offers, only for promises.

i. James Baird Co. v. Gimbel Bros., Inc., 2nd Cir., 1933. Linoleum subcontractor submitted miscalculated (actual

cost double what they quoted) bid for linoleum work to contractor’s for public building, saying “If successful in being awarded this contract, it (the offer) will be absolutely guaranteed….” Contractor received bid and used it in making up own bid, which was awarded prime contract; after contractor submitted own bid but before prime K awarded, subcontractor notified general contractor of mistake. Held: Contractor’s use of the subcontractor’s bid in making up his own bid didn’t constitute acceptance of the subcontractor’s offer. Where the subcontractor’s bid calls for acceptance AFTER the contractor is awarded the prime K, making it a condition precedent of the acceptance of the subcontractor’s offer, using the subcontractor’s bid in making up prime bid doesn’t constitute acceptance. Promissory estoppel only triggered when the promise foresees reliance; here, the subcontractor’s offer anticipated the contractor’s acceptance, not his bid (old, narrower view of promissory estoppel).

b. Modern rule—Rest. §87—an offer which the offeror should reasonably expect to induce action or forbearance of a substantial character by 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.

i. Drennan v. Star Paving Co., CA Sup. Ct., 1958. Contractor used subcontractor’s mistakenly-calculated bid to make up own bid, which was awarded prime K; 1 day later, subcontractor notifies contractor of mistake. Held: subcontractor bound to perform under the terms of his bid. Though the subcontractor’s bid wasn’t an option K or a bilateral promise, because the general contractor reasonably and foreseeably relied to his detriment on the subcontractor’s bid, the general contractor’s reliance (using sub’s bid to make up own bid) converts the subcontractor’s offer into an option K. Because contractor justifiably and substantially relied on subcontractor’s offer, it was irrevocable until subcontractor had a reasonable chance to notify contractor of the error and of contractor’s acceptance of subcontractor’s bid.

1. Normal promissory estoppel principles apply—e.g., if contractor should have realized from the low bid that it was probably due to error, his reliance would not have been justifiable.

(vi) Termination by operation of law

(a) Death or incapacity of offeror—terminates offeree’s power of acceptance, whether or not the offeree knows of the death or incapacity.1. Exceptions:

a. Options—at least where the individual performance of the decedent wasn’t an essential part of the proposed K.

b. Unilateral Ks—not terminated by death/incapacity of the offeror once the offeree has begun performance.

(b) Changed circumstances—e.g., supervening illegality of the proposed contract or destruction of its subject matter, also terminates power of acceptance.

C) Acceptance1) Is offer for unilateral or bilateral contract?

(a) Acceptance of offer for a bilateral contract—an offer that calls for acceptance by a promise is an offer for a bilateral promise.(i) General rule—promise mandatory

(a) Ordinarily, such an offer can be accepted only by a promise, not by an act.(ii) Modes of promissory acceptance—oral promise, promise implied in fact,

an act designated by offeror to signify a promise, and, in some cases, silence.(a) If the offer states that it may only be accepted in a certain manner, the

offer is controlling. (The offeror is the master of the offer.)1. La Salle National Bank v. Vega, IL App. Ct., 2nd Dist., 1988. Sale

agreement for real estate states that it must be signed by trustee and buyer for it to be valid K; only buyer has signed. Held: because trustee didn’t sign agreement, no K. Where an offer specifies how it is to be accepted, the acceptance must follow the requirements.

(b) If the offer specifies a manner of acceptance, but it doesn’t reasonably appear intended as exclusive, any reasonable method of acceptance is effective provided that it is consistent w/ the prescribed mode and provides protection to the offeror equal to that of the stated mode.

(c) If the offer doesn’t specify any mode of acceptance, acceptance by the same mode as the offer or any other method of communication that is customary for transactions of that kind or is reasonable under the circumstances is effective.

(iii) Communication of acceptance—generally, an offer to enter into a bilateral contract can be accepted only by a communicated promise.(a) The acceptance must be a promise, not an automated ministerial act.

1. Corinthian Pharmaceutical System, Inc. v. Lederle Laboratories, USDC, S.D.IN, 1989. From internal co. memo that buyer wasn’t to receive, buyer learns of impending price increase in vaccine and places large order via automated system, which gives tracking #, and seller sends partial order at small price and note saying, “per normal policy, shipping rest at price when order is shipped.” Held: tracking # wasn’t acceptance of buyer’s order, which was offer.

(b) Exceptions1. Mailbox rule—where the mail, telegraph, etc. is a reasonable method

of communicating an acceptance, the acceptance is usually effective

when dispatched—even if the acceptance doesn’t actually reach the offeror because it is lost in the mail.

2. Waiver of communication—when the offer provides that the offeree must “accept” or “approve” the offer, but waives notice of such acceptance or approval, a K is formed when the offeree accepts or approves, even though he doesn’t notify the offeror.a. However, although such a K is formed w/out notice, there may be

an implied condition of notice of acceptance before the contract is enforceable.

(b) Acceptance of offer for a unilateral contract(i) Performance mandatory—a unilateral K is a K in which the parties

exchange a promise for an act. Generally, an offer for a unilateral K can be accepted only by performance, not by a promise.(a) Carlill v. Carbolic Smoke Ball Co., Q.B., 1893. D places ad, “if you use

our product for 2 wks and get sick in prevailing epidemic, we’ll give you £100”; P gets sick and sues for reward. Held: ad is an offer that cannot be accepted by a promise, and so is an offer for a unilateral K, and performance pursuant to its conditions is acceptance.

(b) If the offeree manifests intention not to accept prior to rendering invited performance, the performance isn’t an acceptance. (Rest. §53(3)).

(ii) Notice of acceptance—a unilateral K is formed by the offeree’s beginning or completing performance, even though the offeror doesn’t know at the time that the performance has occurred; however, if notice of the completed performance isn’t given to the offeror w/in a reasonable time, the K will be discharged unless: (1) the offer waives notification, or (2) the offeree had exercised reasonable diligence to notify offeror of acceptance.(a) Ever-Tite Roofing Corp. v. Green, LA Ct. of App., 1955. 9 days after

hiring, owner of house stops workers as they arrive at his house from starting work under K for re-roofing house on credit that specifies it may be accepted either by commencement of the work or by written acceptance of roofer’s home office. Held: workers had already accepted (even though offeror didn’t yet have notice) by “commencement of the work” by loading up truck and driving to house, since offer waived notification.

(b) Carlill v. Carbolic Smoke Ball Co., Q.B., 1893. D places ad, “if you use our product for 2 wks and get sick in prevailing epidemic, we’ll give you £100”; P gets sick and sues for reward. Held: ad wasn’t too vague to be an offer, and terms of ad impliedly waived notification. Where an offer cannot be accepted by a promise, it is an offer for a unilateral K, and performance pursuant to its conditions is acceptance, even if offeror not notified until after performance completed.

(c) Sales-of-goods contracts—UCC provides that if the beginning of a requested performance is a reasonable mode of acceptance, an offeror who isn’t notified of the offeree’s beginning of performance w/in a reasonable time may treat the offer has having lapsed before acceptance.

(iii) Subjective intent of offeree

(a) Performance without knowledge of offer1. General rule—if the actor has no knowledge of the offer for a

unilateral K at the time she performs the requested act, no K is formeda. Rest. §51: Effect of Part Performance w/out Knowledge of Offer:

“Unless the offeror manifests a contrary intention, an offeree who learns of an offer after he has rendered part of the performance requested by the offer may accept by completing the requested performance.”i. Glover v. Jewish War Veterans of United States, DC Mun. Ct.

of App., 1949. After being grilled by police, mother of girlfriend of killer tries to claim reward given by private party for information leading to arrest that mother learned about 3 days later. Held: mother’s giving of information wasn’t acceptance. If person’s act constitutes performance of an offer of which person is unaware, the act isn’t acceptance.

2. Exception—reward offers made by gov’t may be accepted by performance w/out knowledge of offer.

(b) Offer not the principal motive for performance1. General rule—if actor knows of the offer for a unilateral K at the

time he performs the requested act, a K is formed even if the offer wasn’t the principal motive for performance.a. Industrial America, Inc. v. Fulton Industries, Inc., DE Sup. Ct.,

1971. Subjectively motivated by other reasons, but knowing of Wall Street Journal ad looking for a company to merge w/, saying “brokers fully protected,” a broker set up the M&A dialogue but was cut out of deal. Held: guaranty was an offer that invited acceptance by performance, which the broker accepted. Where an offer requests acceptance by performance and offeree knows of offer, the rendering of requested performance is an acceptance even if not subjectively motivated by offer.

2. Exception—no K is formed if the act is done involuntarily; e.g., under duress.

(iv) Obligation of offeree—an offeree’s acceptance of a bilateral K binds the offeree as well as the offeror; however, if the offer is for a unilateral K, the offeree is ordinarily not bound, since he never promised anything.(a) Exception—If an offeree who has begun to perform should know that that

her performance is likely to come to the offeror’s notice, that the offeror may treat her beginning of performance as an implied promise not to abandon her performance, and that the offeree’s failure to complete performance will make the offeror worse off than he would have been if the offeree hadn’t begun, the offeror’s reliance on the offeree’s conduct may make the implied promise enforceable.1. E.g.: A makes an offer to enter into a unilateral K to B, the

performance consisting of B’s transporting A’s goods to market. If B begins to transport the goods, there is an implied performance that he

won’t abandon the goods midway. B/c the offer is for a unilateral K and therefore can be accepted only by an act, an implied promise to complete once performance has begun won’t create a bilateral K; however, if A relies upon such an implied promise by B, this relieance might make the implied promise enforceable.

(c) Consequences of unilateral vs. bilateral offer—whether a K is bilateral or unilateral is important when considering:(i) If the mode of acceptance used by the offeree was proper(ii) If an offeree who has begun performance w/out having made a promise is

protected against revocation (if unilateral K, yes)(d) Offers calling for acceptance by either a promise or an act

(i) Restatement 2d and UCC §2-206—where ambiguity exists, an offer is treated as inviting acceptance by either a promise or performance.

(ii) Orders for prompt shipment—under UCC, an offer to buy goods for prompt or current shipment is construed as inviting acceptance by either a promise to ship or prompt and current shipment.(a) Moreover, shipment of nonconforming goods is both an acceptance

and a breach unless the seller seasonably notifies the buyer that the shipment is intended only as an accommodation.1. Corinthian Pharmaceutical System, Inc. v. Lederle Laboratories,

USDC, S.D.IN, 1989. From internal co. memo that buyer wasn’t to receive, buyer learns of impending price increase in vaccine and places large order via automated system, which gives tracking #, and seller sends partial order at small price and note saying, “per normal policy, shipping rest at price when order is shipped.” Held: seller’s price memo wasn’t an offer; buyer’s order was offer; tracking # wasn’t acceptance; partial shipment was accommodation, not acceptance. Under UCC §2-206(b), “a shipment of non-conforming goods doesn’t constitute an acceptance” where “the seller seasonably notifies buyer that shipment offered only as accommodation to buyer.”

2) Silence as acceptance(a) General rule—an offeree’s silence doesn’t constitute acceptance(b) Exceptions—silence constituting acceptance

(i) Offeree’s behavior—silence will constitute acceptance where the offeree, by her own prior words or conduct, has given the offeror reason to interpret her silence as acceptance. (an implied-in-fact K)(a) Ammons v. Wilson & Co., MS Sup. Ct., 1936. Usual course of dealing

between grocery wholesaler and meatpacker is that the wholesaler’s orders aren’t confirmed, but just shipped after 7 days. Order placed, then 12 days’ silence, then order refused. Held: meatpacker’s silence for 12 days, in context of arrangement, was acceptance of order. Where an offeree fails to reply to an offer, his silence and inaction operates as an acceptance when, because of previous dealings, it is reasonable that the offeree should notify offeror if offeree doesn’t intend to accept.

(b) Smith-Scharff Paper Co. v. P.N. Hirsch & Co. Stores, Inc., MO Ct. of App., 1988. P and D had longstanding relationship where P kept a

standing supply of bags to fill D’s orders, and when D had been liquidated before, they had bought all bags, and when liquidated again, CEO said he’d honor all commitments. Held: P and D had K for sale of all of bags. A course of dealing between two parties can create a K even if no written K exists.

(ii) Subjective intent to accept—silence can be acceptance where the offeror has said that silence will constitute acceptance and the offeree remains silent, subjectively intending to accept.

(iii) Exercise of dominion—silence constitutes acceptance where the offeree improperly exercises dominion over property sent for approval, inspection, etc. The offeree is contractually bound to purchase the property at the proffered price (unless manifestly unreasonable), even if she doesn’t have the subjective intent to accept.(a) Russell v. Texas Co., 9th Cir., 1956. Mining company tortiously using

surface to further operation, and so surface owner sends license agreement for use of surface for $150/day, stipulating that continued use of surface is acceptance. Held: mining company’s continued use of surface was valid acceptance. Though general rule is that an acceptance isn’t valid unless offeree manifests intention to accept, where the offeror suggests an ambiguous act (e.g., silence) to signify acceptance; however, here, where the offeree exercises dominion over things which are offered to him, such exercise of dominion in the absence of other circumstances showing a contrary intention is an acceptance—but if circumstances indicate that exercise of dominion is tortious (as here), the offeror can treat it as acceptance despite offeree’s manifested intent not to accept.

(b) Statutory exceptions—several federal and state statutes have created an exception to this rule in the case of the exercise of dominion over unordered merchandise.

(c) Contrast w/ direct sales, where it isn’t feasible for an offeror to make known all of the terms of the offer at the outset of transaction.1. E.g.: “shrink wrapped” Ks, where buyer orders computer over phone,

and when box arrives, it contains a list of terms, said to govern unless customer returns the computer w/in 30 days. Buyer will be held to terms if he doesn’t return computer. Practical considerations support this result—requiring statement of terms to be read to buyer over the phone would anesthetize rather than enlighten. Oral recitations wouldn’t avoid customers’ assertions (true or feigned) that clerk didn’t read term X to them. Customers are better off as a group when vendors skip costly and ineffectual steps such as telephonic recitation, and use instead a simple approve-or-return device.

(iv) Solicitation of offers—acceptance may also occur if:(a) The offeree solicited the offer and drafted its terms,(b) The offer is so worded that a reasonable offeror would deem it accepted

unless notified of its rejection, and

(c) The offeror relies or is likely to have relied upon the belief that silence constituted an acceptance (e.g., solication of orders for goods by traveling salespersons).

(v) Late acceptances—a late acceptance has the legal effect of a counteroffer.(a) Where an offeree sends acceptance after a reasonable time for acceptance

has elapsed, but w/in a period that the offeree might plausibly regard as reasonable, cts. may require the original offeror to notify the original offeree that the acceptance was too late; otherwise, the late acceptance/counteroffer will be deemed accepted by the original offeror’s silence.

(vi) Implied-in-fact contracts—“silence” means inaction. Thus, communicated action (e.g., nodding one’s head) doesn’t constitute silence.

(vii) Quasi-contract—liability may be imposed on a person who silently receives benefits from the plaintiff if the plaintiff can show that:(a) He has conferred a benefit on the defendant;(b) He conferred the benefit with the expectation that he would be paid its

value; and(c) The defendant would be unjustly enriched if allowed to retain the benefit

without paying its value (i.e., plaintiff not an officious intermeddler).1. Not an officious intermeddler if:

a. Benefit was requested (normally, this would be an actual K, but if the request falls short of a contractual commitment, unjust enrichment is the basis of obligation)

b. Benefit conferred in an emergency:i. Immediate action is required,ii. Advance assent is impracticable, andiii. Plaintiff has no reason to believe that the defendant would not

wish for the action to be taken.2. Thus, an officious intermeddler is someone who intentionally deprives

another person of the chance to make a K(d) Recovery will be equal to the measure of the benefit bestowed, which is

the lesser of:1. The cost avoided—the amount needed to obtain same benefit from

another in similar position as plaintiff2. The net enrichment—the amount the defendant’s total wealth has been

increasedD) Time at Which Communications Between Offeror and Offeree Become Effective

1) In general—an acceptance is effective on dispatch and all other communications are effective on receipt(a) “Dispatch” means that the acceptance passes outside the control of the offeree

(i) Hendricks v. Behee, MO Ct. of App., S.D., 1990. Seller tries to revoke offer to sell real estate after the buyer has given letter of acceptance to buyer’s agent but before buyer’s agent has mailed letter to seller. Held: revocation valid. Where the offeror rescinds the offer after it has been accepted but before the acceptance has left the control of the offeree or his agent or

otherwise been communicated to the offeror, the rescission is effective unless the offer specifically waives notification of acceptance.

2) Acceptance—“mailbox rule”: an acceptance is effective on dispatch (except for options, for which many cts. hold that acceptance takes effect on receipt)(a) Adams v. Lindsell, K.B., 1818. Seller mismails offer authorizing mail as medium

of response, and acceptance mailed before deadline but received after. Held: acceptance was effective. Acceptance sent by mail is effective as of date sent, where offer authorizes acceptance by mail and acceptance isn’t mismailed.

(b) Requirements of mailbox rule:(i) Timely dispatch—if no time period is specified in the offer, the offeree

must accept w/in a reasonable time. If a time period is specified in the offer, unless otherwise specified, the time period begins running when the offer is received, and the acceptance must be dispatched w/in that time period.(a) Consequences of late dispatch—if an acceptance arrives too late, it is

ineffective as an acceptance but serves as a new offer that creates a power of acceptance in the original offeror.

(ii) Proper manner—acceptance must be dispatched w/ appropriate care. Unless otherwise specified by the offeror, an offer is deemed to invite acceptance by any medium of communication reasonable in the circumstances.(a) Reasonable medium—a medium of communication is reasonable if:

1. it is the one used by the offeror (unless specified otherwise), or2. it is customarily used in similar transactions at the time and place the

offer is received.3. Even if the medium fails one of the above, it may still be reasonable,

depending on circumstances such as the speed and reliability of the medium, the prior course of dealing between the parties, and usage of trade.

(b) Consequences of unreasonable medium or lack of reasonable care1. If the acceptance was received, the offeree’s failure to use a reasonable

medium or reasonable care won’t by itself prevent contract formation, unless there was a failure to use a required medium.

2. If the medium used was unreasonable or if reasonable care wasn’t used in dispatching the acceptance, generally the acceptance will be effective when it is received, unless the acceptance was sent on time and received on time—such an acceptance is effective on dispatch.

(c) Significance of mailbox rule(i) Crossed acceptance and revocation—because an acceptance is effective on

dispatch and a revocation is effective on receipt, if an acceptance is dispatched before a revocation is received, a K generally is formed.

(ii) Lost or delayed acceptance—a properly dispatched acceptance that is lost or delayed en route to the offeror is still effective under the mailbox rule; risk of loss or delay is on the offeror.

(iii) Effective date of obligation to perform—under the mailbox rule, the obligation to perform becomes effective when the acceptance is dispatched.

(d) Offeror’s power to negate rule—the offeror may negate the mailbox rule by providing in the offer that the acceptance will be effective only upon receipt, but normally only very explicit language will have that effect.

3) Revocation—generally, a revocation is effective only upon receipt.4) Rejection—a rejection of the offer by the offeree is effective only upon receipt.

(a) Where offeree sends both rejection and acceptance(i) Acceptance mailed before rejection—K arises on dispatch of the

acceptance, regardless of which communication is received first by the offer, unless the offeror detrimentally relies upon a rejection that she receives before the acceptance.

(ii) Rejection mailed before acceptance—No K is formed if the rejection arrives first; the mailbox rule doesn’t apply and the acceptance becomes a counteroffer. If the acceptance arrives first, a K is formed; however, if the offeror regards the later-arriving rejection as a repudiation of the K, and relies thereon, the offeree is estopped from enforcing the K.

5) Repudiation of acceptance—a communication sent by the offeree who has already sent an acceptance, stating that he doesn’t intend to be bound by the acceptance.(a) Acceptance arrives first—a K is formed b/c the later-arriving repudiation doesn’t

relieve the offeree of liability under the K; however, if the offeror regards the offeree’s repudiation of the acceptance as a repudiation of the K and relies upon it, the offeree will be estopped from enforcing the K.

(b) Repudiation arrives first—under Rest. 2d, a K is formed. However, if the offeror regards the repudiation as a rejection and relies upon it, the offeree will be estopped from asserting that a K was formed.

6) Withdrawal of acceptance—occurs when the offeree dispatches an acceptance and then manages to retrieve it before it reaches the offeror. Under the Rest. 2d, a K is formed when the acceptance is dispatched, and a withdrawal is ineffective.

7) Crossed offers—K usually not formed by crossed offers, on the theory that an offer isn’t effective until received and cannot be accepted until it is effective. However, the result may differ where the parties had previously agreed on all but one minor point, and in crossed letters they each propose identical terms as to that point.

E) Interpretation1) General rule—expressions used by the parties usually are to be given an objective

interpretation. In applying the objective test, one should ask what interpretation would be given by a reasonable person knowing all that the addressee knew.

2) Exceptions(a) The Peerless rule—when an expression is susceptible of two equally reasonable

meanings and each party understands the terms differently, no K.(b) Both parties have same subjective interpretation—if both parties subjectively

attach the same meaning to a term, that meaning will govern even if it isn’t the reasonable meaning of the term.

(c) One party knows of the other’s different interpretation—if two parties attach different meanings to a term and only one party knows of the meaning that the other party attached to the term, the meaning that the party w/out knowledge attached to the term prevails, even if that party’s meaning is less reasonable.

3) Canons of construction:

(a) If possible, ct. should try to interpret an agreement in a way that gives effect to all its terms.

(b) Ut res magis valeat quam pereat, “The thing should rather have effect than be destroyed.” Ct. should favor meaning that validates the K (e.g., that avoids illegality, that isn’t unconscionable, etc.).

(c) Specific/precise provisions should be given greater weight than general provisions.

(d) Negotiated/handwritten terms should be given greater weight than standardized/boilerplate terms.

(e) Ejusdem generis, “of the same kind.” When specific and general words are connected, the general word is limited by the specific one.

(f) Noscitur a sociis, “known from its associates.” Whenever a series of words are used together, the meaning of each word in the series affects the meaning of the others.

(g) Expressio unius est exclusio alterius, “The expression of one thing excludes another.” When a list is specifically mentioned w/out being followed by general term, the implication is that other things of that same kind are excluded.

(h) Omnia praesumuntur contra proferentum, “All things are presumed against the proponent.” Construe unclear provisions against the drafter.

4) Extrinsic evidence: Traditional rule was that if there was no facial ambiguity in a written K, and no special meaning attached to the words of a written K by custom or usage, extrinsic evidence was inadmissible. Today, however, extrinsic evidence is increasingly allowed to show what the parties intended by their words.

5) Course of performance, course of dealing, usage, and usage of trade—aids in determining what was meant by contracting parties(a) Course of performance—the parties’ repeated, unobjected-to performance during

the course of the K(b) Course of dealing—conduct between the parties prior to the contract(c) Usage—habitual or customary practice(d) Usage of trade—usage regularly observed in a vocation or trade (but must show

that other party was aware or should have been aware of usage)F) The Parol Evidence Rule

1) The Rule—Parol evidence won’t be admitted to vary, add to, or contradict a written K that constitutes an integration.(a) Sometimes a written K may fail to include any treatment of some of the issues

raised in preliminary oral discussions or written documents, or it may deal with these issues in a way that is different from their treatment in the earlier discussions. The parol evidence rule determines to what extent one party may later try to prove in court that earlier oral or written discussions are part of the K, despite their absence from the writing.

(b) A latter agreement usually supersedes an earlier one, if the parties intended it to do so. The Rule applies only where the later expression of agreement is in writing. If the later expression of intent is oral, a jury determines whether the parties intended that this oral agreement should supersede any previous agreement. If it is in writing, the Rule applies and a judge determines whether the parties intended the writing to supersede any earlier agreement

(c) What constitutes an “integration”—it must appear that the parties intended the writing to be the final, complete expression of their agreement(i) Four Corners Approach—the parties’ intent must be determined from

the face of the instrument (the traditional view from Williston)(a) Judge examines the writing itself and look for a merger clause—a clause

indicating that the writing constitutes the sole agreement between the parties. Such a clause will conclusively establish that the document is a total integration, unless the document is obviously incomplete or the merger clause was included as the result of fraud or mistake.

(b) If no merger clause, the writing as a whole is examined:1. If it is obviously incomplete on its face, the writing is treated as a

partial integration. Therefore, consistent additional terms may be demonstrated through parol evidence.

2. If it is a complete expression on its face, it is deemed a total integration unless the alleged oral terms were ones that might naturally have been made as a separate agreement by reasonable parties in the position of the actual parties to the contract.a. I.e. additional terms may be proven only if they are of the sort that

would naturally be put into a separate agreement rather than included in the writing. This is the adoption of a “reasonable man” standard.

3. If the agreement is totally or partially integrated, it supersedes inconsistent terms of prior agreements. To apply this rule, the court must make preliminary determinations that there is an integrated agreement and that it is inconsistent with the terms in question

(ii) Actual intent test—today, most cts. consider a writing to be an integration only if the parties actually intended it to be so; these cts. consider any relevant evidence when determining the parties’ intent (Corbin view)(a) The judge looks to the actual intention of the parties. If all the evidence

introduced shows that they in fact didn’t intend the written K to contain all terms of their agreement, and other oral agreements were made and were intended to be binding, this evidence would be given to the jury. Much less emphasis is placed on the writing.

(b) In other words, all credible parol evidence is admissible to show that the written agreement isn’t integrated (the provisional admission approach). Evidence is credible if it is in a reliable form or obtainable from disinterested third parties.

(c) Twisting of Four Corners Approach: The above test is not repudiated as much as manipulated via the issue of what kind of collateral agreement or term would have been “naturally” put into a separate agreement (i.e., inquiry is subjective; there’s no “reasonable man” standard as to what would be put into a separate agreement rather than included in the writing).

(iii) Merger clauses

(a) Traditional approach—merger clauses are determinative of whether a writing is an integration, unless there is a defense to the clause’s effectiveness (e.g., mistake)

(b) Modern approach—merger clauses are only one factor in determining whether a writing is an integration.

2) Exceptions to the Rule:(a) Separate consideration—where the written agreement and the alleged parol

agreement are each supported by separate consideration, cts. permit the admission of the parol agreement.

(b) Collateral agreement—parol evidence may be admissible if the alleged parol agreement is collateral to (i.e., related to the subject matter but not part of the primary purpose), and doesn’t conflict with, the written integration.

(c) “Naturally omitted” terms—under the Rest. 2d, a term that would be naturally omitted from the writing is admissible. A term will be treated as naturally omitted if doesn’t conflict w/ the written integration and if it concerns a subject that similarly situated parties wouldn’t be expected to include in the written agreement.(i) Four Corners approach—under the traditional approach, cts. determine

whether an abstract reasonable person would naturally have omitted the term from the writing. (Consider the K abstractly: e.g., a K for sale of land)(a) Mitchill v. Lath, NY Ct. of App., 1928. As a corollary to a written K for

sale of land, the seller orally promised the buyer that he’d tear down an unsightly ice house on his property, but later refused. Held: evidence as to oral agreement to tear down ice house inadmissible. For parol evidence of an oral agreement to be admissible, it must be collateral to main K, it cannot contradict express/implied terms of written K, and it must be one that the parties wouldn’t reasonably have been expected to embody in writing. Here, the oral agreement isn’t one that the parties ordinarily wouldn’t have committed to writing.

(ii) Actual Intent approach—under the modern approach, cts. determine whether the actual parties under the particular circumstances of their case might have naturally omitted the term from the writing. (Consider this particular K: e.g., a K b/w family members written in a deed)(a) Masterson v. Sine, CA Sup. Ct., 1968. In a deed of ranch to sister, an

option to repurchase for 10 yrs was silent on the topic of the option’s assignability, but supposedly it was orally agreed upon to be nonassignable. Held: evidence as to oral agreement admissible. The parties wouldn’t have included the term in the writing, where the deed form is awkward and the conveyance was between family members.

(iii) UCC §2-202 test: (even more liberal than Rest.)—parol evidence is admissible in Ks for the sale of goods unless the parol agreement would “certainly have been included”

(iv) Inconsistent terms—parol evidence that is inconsistent w/ a written agreement is not within the parameters of the “might naturally be omitted test” and thus will be excluded.

(a) Whether terms are inconsistent depends upon ct.’s definition of inconsistency. Generally, cts. construe parol evidence to be inconsistent w/ the written terms when it is not reasonably harmonious w/ the language and the respective obligations of the parties (as opposed to only finding an inconsistency when the parol evidence directly negatives a written term).1. Alaska Northern Dev., Inc. v. Alyeska Pipeline Serv., AK Sup. Ct.,

1983. Lengthy negotiations culminated in a letter of intent w/out a price term “subject to final approval of owner’s committee”; negotiators agreed upon a price; K was nixed by committee; other side sued, alleging oral agreement that owner’s committee’s approval limited to reasonability of price. Held: parol evidence that “subject to final approval of owner’s committee” limited to reasonability of price term inadmissible. The parol evidence rule restricts not only extrinsic evidence that doesn’t directly contradict or negate the integrated terms of a written K but also that which isn’t reasonably harmonious w/ language of K.

(d) “Partial” integration—a partial integration is an integration of the subjects actually covered in the writing, but parol evidence is admissible on subjects not covered.(i) Masterson v. Sine, CA Sup. Ct., 1968. In a deed of ranch to sister, an

option to repurchase for 10 yrs was silent on the topic of the option’s assignability, but supposedly it was orally agreed upon to be nonassignable. Held: evidence as to oral agreement admissible. When only part of an agreement is integrated, parol evidence may be used to prove elements of the agreement not reduced to writing.

(e) Lack of consideration—parol evidence is admissible to show a lack of consideration.

(f) Fraud, duress, or mistake—parol evidence is admissible to show fraud, duress, or mistake

(g) Existence of condition precedent—Rest. §217—Where the parties to a written agreement agree orally that performance of the agreement is subject to the occurrence of a stated condition, the agreement isn’t integrated w/ respect to the oral condition.(i) E.g.: A and B sign a written agreement for an exchange of real property

and leave it with C, an attorney, on the oral understanding that it is not to take effect until each has consulted his wife and notified C that he still wishes to close the exchange. There is no contract until each has notified C.

(ii) This rule may be regarded as a particular application of the rule giving effect to consistent additional terms omitted naturally from a writing. So regarded, it has sometimes been limited to requirements of conditions consistent with the written terms. But an oral requirement of a condition is never completely consistent with a signed written agreement which is complete on its face; in such cases evidence of the oral requirement bears directly on the issues whether the writing was adopted as an integrated agreement and if so whether the agreement was completely integrated or

partially integrated. Inconsistency is merely one factor in the preliminary determination of those issues. If the parties orally agreed that performance of the written agreement was subject to a condition, either the writing is not an integrated agreement or the agreement is only partially integrated until the condition occurs. Even a “merger” clause in the writing, explicitly negating oral terms, does not control the question whether there is an integrated agreement or the scope of the writing(a) E.g.: A and B sign a written agreement for the sale of goods, and orally

agree that the writing shall not take effect unless railroad cars are available within ten days. The oral agreement is effective

(b) E.g.: Evidence of the facts stated above is offered, and the writing contains a provision that “delivery shall be made within 30 days.” Evidence of the oral agreement is excluded only if the ct. makes a preliminary determination that performance of the written agreement could not in the circumstances reasonably be found to have been subject to the oral agreement

(h) Evidence to explain or interpret terms of the written agreement—such evidence may be used to show what the parties meant by the words in the written K.(i) Plain meaning rule—bars explanatory or interpretive evidence if

there is no facial ambiguity and no special meaning attached to the words by custom or usage; (a) Rationale for plain meaning rule—promotes certainty in Ks. Parties can

rely on written Ks w/ confidence that ct. won’t construe it to import a different meaning.

(b) Criticism—growing recognition that meaning of language may vary greatly according to curcumstances

(ii) Modern approach—allow all credible extrinsic evidence to show what the parties intended by their words, so long as this process of “interpretation” doesn’t contradict the written terms.(a) Whether terms are inconsistent depends upon ct.’s definition of

inconsistency. Generally, cts. construe parol evidence to be inconsistent w/ the written terms when it is not reasonably harmonious w/ the language and the respective obligations of the parties (as opposed to only finding an inconsistency when the parol evidence directly negatives a written term).

(b) P.G.E. v. G.W. Thomas Drayage & Rigging Co., CA Sup. Ct., 1968. D contracted to do some repair work on D’s turbine. In the contract, D promises to indemnify P “against all loss, damage, expense and liability resulting from … injury to property, arising or in any way connected with the performance of this contract.” During the work, the turbine is damaged. D seeks to argue that by this clause, the parties meant for D to pay only for damage to the property of 3rd persons, not for damage to P’s own property. Held: the test of admissibility of extrinsic evidence to explain the meaning of a written instrument is not whether it appears to the court to be plain and unambiguous on its face, but whether the offered evidence is relevant to prove a meaning to which the language of the

instrument is reasonably susceptible. If the court decides, after considering this evidence, that the language of a contract, in light of all the circumstances, is fairly susceptible either to one of the two interpretations contended for, extrinsic evidence relevant to prove either of such meanings is admissible.

(c) If meaning contended for by party proffering parol evidence isn’t one to which the K is reasonably susceptibleevidence inadmissible.1. A. Kemp Fisheries, Inc. v. Castle & Cooke, Inc., 9th Cir., 1988. In

lease of fishing boat, renter wanted to introduce extrinsic evidence that boat had warranties. K provided for a complete waiver of all warranties. Held: b/c evidence proffered argues for a meaning that the K cannot reasonably be susceptible to, so evidence is inadmissible.

(iii) Course of performance, course of dealing, and usage—extrinsic evidence is admissible to show special meanings of words derived from course of performance, course of dealing, and usage—sometimes even if the meaning is contradictory.(a) Strictly speaking, evidence of course of dealing, course of performance, or

trade usage isn’t parol evidence, b/c it doesn’t concern agreements between the parties. Indeed, in Ks for sale of goods, UCC §1-201(3) defines “agreement” to mean “the bargain of the parties in fact as found in their language or by implication from other circumstances including course of dealing or usage of trade or course of performance.” Literally, therefore, under the UCC, course of dealing, etc., aren’t parol evidence but rather part of the agreement—and therefore admissible even if they contradict the writing. Cts. are increasingly tending toward this view by admitting such evidence, at least if the evidence isn’t logically inconsistent w/ the explicit language of the agreement (i.e., directly negatives a written term). Other cts. still view the admissibility of such evidence as a parol evidence rule issue, and exclude such evidence on that ground if there is a lack of reasonable harmony between the course of dealing, etc., on the one hand, and the writing on the other.

(iv) Filling in gaps—if a K term is missing, extrinsic evidence is admissible to show what a reasonable term would be and, under the modern approach, what the parties actually agreed concerning the term (as long as the agreement doesn’t contradict the written K).

(i) Modifications—a later oral agreement modifying an existing written K doesn’t fall under the parol evidence since it is subsequent; however, to be enforceable, the agreement needs consideration (except in Ks for the sale of goods) and must comply with any application of the Statute of Frauds.(i) Contractual requirements—a provision in a K requiring all modification to

be in writing will normally not be enforced. This principle doesn’t apply to modifications of sale of goods Ks under the UCC. If a K for the sale of goods includes such a provision, modification must be in a signed writing.

(a) Waiver—UCC also provides that an oral modification of a sale of goods K can operate as a waiver of a writing requirement. If so, check to see if the waiver has been retracted.

IV) DefensesA) Indefiniteness

1) General rule—certainty of terms required. An apparent agreement won’t be enforced if (1) the ct. finds that the incomplete terms indicate that the parties didn’t regard the K as complete, or (2) the ct. cannot determine the terms of the K w/ reasonable certainty nor fashion an appropriate remedy for breach (UCC §2-204(3)).(a) Definitions:

(i) A term is vague if it is stated so obscurely that one cannot reasonably determine what it meansno K

(ii) A term is ambiguous if it is capable of more than one meaningK on interpreted term, unless incurably ambiguous.

(iii) If a term is omitted, the agreement has a gap.(a) Indicates either that parties failed to reach an agreement on this term (no

K), or (b) They intended to adhere to some “off-the-shelf” market or legal standard

they thought of as too obvious to need articulationK(iv) An unresolved term is a term over which the parties have negotiated but

not yet settled, leaving it for a later timeno K2) Ambiguities—arise where the parties’ expressions are susceptible to more than one

logical interpretation.(a) Latent ambiguity—where the offer or acceptance itself appear certain, but

uncertainty arises in light of extrinsic facts.(b) Patent Ambiguity—where the uncertainty is obvious on examination of the

parties’ expression, i.e., where the words or the acts are themselves uncertain in meaning. E.g. An offer to sell “my property.” There is probably no enforceable K: the patent ambiguity deprives the agreement of sufficient certainty and definitiveness.

(c) Subjective intent of parties may be determinative:(a) Both parties unaware of the ambiguity: If both interpretations of an

ambiguous term are reasonable, and neither party to the contract knows or has reason to know the ambiguity at the time of contracting, there will be a binding contract only if both parties attach the same meaning to the ambiguous words, i.e., only if they subjectively intend the same thing. Restatement §20(1)(a).1. Raffles v. Wichelhaus, Ct. of Exchequer, 1864. In a contract for the

sale of cotton aboard the ship “Peerless,” each party, not knowing of other ship, meant a different “Peerless.” Held: contract rescinded since mutual error meant there was no mutual assent to be bound. Where the K is subject to two equally possible interpretations and the parties contracted w/ different interpretations in mind (neither knowing of other’s interpretation, nor having reason to know), there is no mutual assent to be bound.

2. Konic Internat’l Corp. v. Spokane Computer Services, Inc., ID Ct. of App., 1985. An employee sent to buy a surge protector buys one at a quoted price of “fifty-six twenty,” which he thought was $56.20 but the seller meant $5,620. Held: contract rescinded for lack of mutual assent due to mutual mistake. Where the parties each have a reasonable but different understanding of a material term of the K, there is no mutual assent.a. Cts. try to avoid using Peerless rule, b/c of risk of unreimbursed

reliance. Ct. should’ve interpreted the price against the drafter, since the seller could’ve been clearer about the price. Rest. §206—interpret term against the drafter (the least cost avoider).

(b) One party knows or should have known of meaning understood by other: there is a binding contract based on the understanding of the unknowing party. Restatement §20(2)(a).1. E.g.: The facts being otherwise as stated Raffles, A knows that B

means Peerless No. 2 and B does not know that there are two ships named Peerless. There is a K for the sale of the goods from Peerless No. 2, and it is immaterial whether B has reason to know that A means Peerless No. 1. If A makes the K with the undisclosed intention of not performing it, it is voidable by B for misrepresentation. Conversely, if B knows that A means Peerless No. 1 and A does not know that there are two ships named Peerless, there is a contract for the sale of the goods from Peerless No. 1, and it is immaterial whether A has reason to know that B means Peerless No. 2, but the K may be voidable by A for misrepresentation.

2. Frigaliment Importing Co. v. B.N.S. International Sales Corp., USDC, S.D.NY, 1960. A agrees to sell and B to buy a quantity of eviscerated chickens. A delivers “stewing” chickens and B rejects on grounds he wanted “broilers or fryers.” The Ks specified that the chickens to be delivered as “U.S. Fresh Frozen Chicken, Grade A, Gov’t Inspected, Eviscerated.” Held: “chicken” includes “stewing” chickens. Even if both parties subjectively mean different things and have no actual knowledge of the other party’s meaning, where the K incorporates by reference a “dictionary” for terms, that “dictionary” is controlling.

3) Required terms:(a) A K must cover (expressly or impliedly) the following four essential terms:

(i) Parties to the K;(ii) Subject matter of the K;(iii) Time for performance;(iv) Price

(b) Filling gaps by implication—a ct. can fill in gaps in an agreement through the process of implication, but only when there is a basis for the implication (e.g., resort to practice of industry both parties participate in, prior dealings, etc.)(i) Metro-Goldwyn-Mayer, Inc. v. Scheider, NY Ct. of App., 1976. A broad

agreement for actor to star in series was completed when pilot shot, with supplemental agreements filling in all terms except starting date of shooting

for series. Held: K enforceable, with starting date provided by industry practice. Where K omits a material term but course of dealings between parties indicates intent to have enforceable K and missing term can be provided by an objective method (e.g., practice of industry that both parties participate in), K is enforceable.

(ii) Joseph Martin, Jr., Delicatessen v. Schumacher, NY Ct. of App., 1981. Renewal clause in lease stated that renewal rate was “to be agreed upon,” but didn’t say how it would be agreed upon. Held: renewal clause not enforceable. Ct. may not supply a term to a K if there is no indication from the K or context of execution of K as to parties’ intent as to how that term would be determined (e.g., market price, pegged to index, pegged to tenant’s revenues).

4) Examples of recurring types of omissions(a) Price—modern trend (and UCC) hold that where the K is totally silent as to

price, a reasonable price can be implied provided the ct. is satisfied that the parties intended to conclude a K and there is some objective standard for determining a reasonable price.(i) Indefinite standard—if the parties attempt to define the price through

an indefinite standard, the cts. refused enforcement b/c it couldn’t be inferred that the parties intended a “reasonable price.”(a) Varney v. Ditmars, NY Ct. of App., 1916. To dissuade an employee from

quitting, employer offered a raise and “fair share of profits.” Held: the promise to give “fair share” too vague to be enforceable as an offer. For K to be valid, the intent of the parties must be ascertainable to a relative degree of certainty. Whether the words “fair” and “reasonable” have a definite enforceable meaning depends on intention of parties in use of words and their subject matter. Where use of words is definite under the circumstances (e.g., tied to market price), parol evidence regarding them may be admitted (e.g., what is market price). “Reasonable” can mean different things in different Ks. “Reasonable value” can mean market value in real estate, but “reasonable profit sharing” embraces personal satisfaction and things to which there is no market standard.

(b) UCC, and cts. influenced by UCC in non-sales-of-goods Ks, would probably enforce such an agreement using the standard of a reasonable price at the time of delivery.

(b) Time of performance—generally, the cts. will fill a gap as to time of performance by holding that a reasonable time was implied. What is considered a reasonable time will depend on the nature of the K, custom, usage, and prior dealings.(i) Special cases

(a) Employment contracts—employment at will is terminable by either party, even if K describes a pay period. Even an agreement for permanent employment is usually terminable at will by either party, unless the agreement specifically limits the employer’s power to terminate (e.g., “only for good cause”) or the circumstances clearly indicate permanent employment was intended by the parties. Most cts. would enforce an

employer’s promises contained in an employee handbook (e.g., “no discharge w/out good cause”).

(b) Distributorship and franchise contracts—when the duration is left open, the law implies that such Ks will last a reasonable time (e.g., the time it takes the distributor to recover her investment).

5) UCC provision—“Even though one or more terms are left open, a K for the sale of goods doesn’t fail for indefiniteness if the parties have intended to make a K and there is a reasonably certain basis for giving an appropriate remedy.” (UCC §2-204(3))(a) Gap fillers—UCC provisions fill in gaps (i.e., reasonable price, delivery at

seller’s place of business, reasonable time for delivery and shipment, and payment when and where buyer receives goods). Thus a bargain may be enforceable under the UCC despite the omission of such terms.(i) No gap filler for quantity.

6) Modern trend toward liberalization—cts. apply the UCC approach to Ks generally, rather than only to sale-of-goods Ks. Thus, if a ct. is convinced that the parties intended to make a K, it is more willing to supply reasonable terms to fill in gaps.

7) Indefiniteness cured by part performance—an agreement otherwise unenforceable as too indefinite may be enforceable if the parties have begun performance.

8) Bargains capable of being made certain—a bargain lacking an essential term is nevertheless enforceable if it makes reference to an objective standard to be used to fill in the missing term (e.g., output and requirements Ks, custom or usage).

9) “Agreements to agree”—bargains in which the parties explicitly reserve some term to be agreed on in the future.(a) Traditionally, such bargains were unenforceable.

(i) Joseph Martin, Jr., Delicatessen v. Schumacher, NY Ct. of App., 1981. Renewal clause in lease stated that renewal rate was “to be agreed upon,” but didn’t say how it would be agreed upon. Held: renewal clause not enforceable. Ct. may not supply a term to a K if there is no indication from the K or context of execution of K as to parties’ intent as to how that term would be determined (e.g., market price, pegged to index, pegged to tenant’s revenues).

(b) Modern trend (Rest. §33; UCC §2-305(1))—enforce them if the parties manifested an intent to conclude a K. Furthermore, an agreement to agree may also give rises to an enforceable obligation to negotiate in good faith.(i) Under the UCC, even if the parties fail to reach an agreement as to price

for a sale of goods, the price is the reasonable price at the time of delivery. (UCC §2-305(1))

(ii) Oglebay Norton Co. v. Armco, Inc., OH Sup. Ct., 1990. Long term contract that fixed rate at a published index or a rate “mutually agreed upon” disputed when index no longer published. Held: K enforceable at “reasonable” market rate. Due to longstanding and close relationship of parties, a party may enforce a long-term K where price isn’t specified because former rate pricing mechanism no longer working and parties must periodically resort to ct. to determine reasonable price. Gap filled by reference to UCC principles (even if UCC doesn’t apply because not a sale of

goods)—if parties intend K but price not settled, price is a reasonable price at time of delivery if the K requires price to be set by some standard and it isn’t so set for some reason.

10) Bargains subject to power of one party concerning performance(a) Unrestricted option

(i) Common law rule—if either party retains an unlimited option to decide the nature/extent of his performance, his promise is too indefinite to be enforced.

(ii) UCC and Restatement rule—under the UCC and Rest. 2d, as long as the parties intended to be bound, an agreement for the sale of goods at a price to be fixed by the seller or buyer is enforceable if done in good faith.

(b) Promise dependent on ability to pay—a bargain in which a party agrees to pay “as soon as he is able” is enforceable b/c the party’s ability to pay is capable of objective determination.

11) Bargains where written contract contemplated—where parties enter into a bargain on the understanding that a formal K will be executed and such an execution doesn’t occur, the issue then arises as to what function the parties intended the writing to serve.(a) Empro Mfg. Co. v. Ball-Co, Inc., 7th Cir., 1989. Potential buyer of another

company sent letter of intent of definite terms, signed by both parties but “subject to” execution of formal agreement and “subject to” stockholder approval. Held: letter of intent not enforceable. Party to a letter of intent may not enforce sale contemplated by letter when the language of the letter makes the sale “subject to” execution of formal K not yet completed. Letter isn’t binding because formal K wasn’t just to memorialize deal but rather was to be consummation of deal. Signing of letter of intent doesn’t create an option K that is binding on seller (because only buyer has out from “subject to” stockholder approval clause), because letter indicated that seller had power to negotiate terms in addition to those in letter.

(b) Writing as evidentiary memorial—oral agreement is enforceable(c) Writing as consummation of agreement—oral agreement isn’t enforceable(d) Determining intent—factors to consider:

(i) Whether the K is of a type usually put in writing;(ii) Whether there are few or many details;(iii) Whether the amount involved is large or small;(iv) Whether a formal writing is necessary for full expression;(v) Whether a party explicitly reserves the right to be bound only when a

written agreement is signed;(vi) Whether one party has partially performed, and that performance has been

accepted by the party disclaiming the K;(vii) Whether there was literally nothing left to negotiate, so that all that

remained to be done was to sign what had already been agreed to.(e) Preliminary agreements—cts. distinguish between two kinds of agreements made

in contemplation of a future final K:

(i) Agreement contemplating formalization—if the parties reach agreement on the negotiated issues but intend later to formalize the agreement as an evidentiary memorial, their agreement is binding as a K at the time it is made.

(ii) Agreement contemplating further good faith negotiations—this is a preliminary agreement that expresses a mutual commitment to a K on agreed major terms, while recognizing the existence of open terms that will be negotiated in good faith in the future (e.g., letter of intent containing general terms and demonstrating an intent to negotiate further).(a) An express agreement to negotiate in good faith is enforceable.(b) Even w/out an express agreement, a ct. may find an implied mutual

commitment to negotiate in good faith so that a final agreement can be executed.

12) Reliance on indefinite contract—even where an agreement is too indefinite to enforce, if (1) the agreement was one on which the promisor should have realized the promisee would rely; (2) the agreement induced such reliance; (3) the promisee suffered a loss; and (4) injustice could be avoided only by compensating the promisee, the promisee may recover reliance damages on the basis of promissory estoppel.(a) Hoffman v. Red Owl Stores, Inc., WI Sup. Ct., 1965. D was involved in franchise

proposal with P, whereby D would grant franchise to P for $18K. P purchased small profitable store to get experience at D’s suggestion. D then required P sell the store to D just before profitable summer months. P was then required to put up $1K for an option on land to build the store. P was told he’d get franchise as soon as sold his bakery, which he did. But price was raised and additional $2K. P brought action for damages based on reliance. Held: Promissory estoppel applies even though promise does not contain essential elements to form a K and negotiations were highly indefinite (none of the proposed details of the proposed bargain were sufficient to constitute an offer, let alone a K). Injustice would result if P was not granted some relief because of D’s failure to keep promises for which they induced P to act to their detriment.

(b) If the promisee has already begun to perform, rather than merely preparing to perform, the ct. may allow recovery of expectation damages instead of reliance damages.

(c) Alternative doctrine—the duty of good faith negotiation may be a better alternative to handle cases in the above situation.

B) Mistake1) Mutual mistake:

(a) Old rule—where the mistake concerns the substance of the K, it is voidable, but if the mistake merely concerns valuation, the K stands. The distinction between mistakes of value and mistakes of substance proved unworkable.

(b) Modern rule—where parties enter into a K under a mutual mistake (1) as to a basic assumption of fact, and (2) the mistake has a material effect on the agreed exchange, the K is voidable by the adversely affected party if (3) he didn’t assume the risk of the mistake.(i) Basic assumption—determining whether something was a basic

assumption involves a judgment as to the parties’ motivation—it must be

so fundamental to the shared intent and purpose of both parties that it is reasonable to conclude that they wouldn’t have made the K at all but for the mistake.(a) In making such determinations, cts. look at all circumstances, including:

1. the terms of the K; 2. foreseeability—the fact that the event was unforeseeable is significant

as suggesting that its non-occurrence was a basic assumption. However, the fact that it was foreseeable, or even foreseen, doesn’t, of itself, argue for a contrary conclusion, since the parties may not have thought it sufficiently important a risk to have made it a subject of their bargaining;

3. relative bargaining positions of parties—goes to the relative ease with which either party could have included a clause;

4. effectiveness of market in spreading risk—for example, where the obligor is a middleman who has an opportunity to adjust his prices to cover them.

(b) E.g.: A pays B, an insurance company, $100K for an annuity contract under which B agrees to make quarterly payments to C, who is 50 years old, in a fixed amount for the rest of C’s life. A and B believe that C is in good health and has a normal life expectancy, but in fact C is dead. The contract is voidable by A.

(ii) Material effect—it is not enough for adversely affected party to prove that he would not have made the K had it not been for the mistake. He must show that the resulting imbalance in the agreed exchange is so severe that he cannot fairly be required to carry it out (i.e., show prejudice—that the mistake not only makes the exchange less desirable for him, but also more advantageous for the other party).(a) E.g.: A contracts to sell and B to buy a dredge which B tells A he intends

to use for a special and unusual purpose, but B does not rely on A’s skill and judgment. A and B believe that the dredge is fit for B’s purpose, but in fact it is not, although it is merchantable. The contract is not voidable by B because the effect on the agreed exchange of performances is not material.

(b) Significance of other relief—Rest. §152(2)—“In determining whether the mistake has a material effect on the agreed exchange of performances, account is taken of any relief by way of reformation, restitution, or otherwise.” Thus, if you can get K reformed, you can’t also void it too.1. E.g.: A contracts to sell and B to buy a tract of land, described in the K

as containing 100 acres, at a price of $100K, calculated from the acreage at $ 1K/acre. In fact the tract contains only 90 acres. If B is entitled to a reduction in price of $10K, the K isn’t voidable by B because when account is taken of the availability to him of a reduction in price, the effect on the agreed exchange of performances is not material.

(iii) Where a party assumes risk of mistake—mutual mistake isn’t a defense where the adversely affected party bore the risk that the assumption was mistaken (e.g., both parties knew their assumption was doubtful).

(a) Rest. §154: a party bears the risk of a mistake when:1. The risk is allocated to him by agreement of the parties,

a. this can be express (an “as is” clause) or impliedi. Lenawee Cty. Board of Health v. Messerly, MI Sup. Ct., 1982.

Intending to purchase income-producing property, buyers purchase, “as is,” an apartment building that, unbeknownst to both parties, has raw sewage seeping out of ground causing it to be condemned. Held: K not rescindable. Though the parties made a mutual mistake as to basic assumption of both parties that was basis of transaction and materially affects agreed performances of the party, the K is only rescindable to extent justice requires—which it doesn’t since risk allocated to buyer by “as is” clause in contract.

ii. E.g.: A contracts to sell and B to buy a tract of land. A and B both believe that A has good title, but neither has made a title search. The K provides that A will convey only such title as he has, and A makes no representation with respect to title. In fact, A’s title is defective. The K is not voidable by B, because the risk of the mistake is allocated to B by agreement of the parties.

2. He is aware, at the time the K is made, that he has only limited knowledge w/ respect to the facts to which the mistake relates but treats his limited knowledge as sufficient, ora. E.g.: A contracts to sell and B to buy a tract of land, on the basis of

the report of a surveyor whom A has employed to determine the acreage. The price is, however, a lump sum not calculated from the acreage. A proposes to B during the negotiations the inclusion of a provision under which the adversely affected party can cancel the K in the event of a material error in the surveyor’s report, but B refuses to agree to the provision. Because of an error in computation by the surveyor, the tract contains 10% more acreage than he reports. The K is not voidable by A, because A bears the risk of the mistake.

b. Beachcomber Coins, Inc. v. Boskett, NJ Sup’r Ct., App. Div., 1979. A coin dealer bought a rare 1916 Denver dime, both parties thinking it genuine, but it later turned out to be counterfeit. Held: K rescindable. Where neither party has doubts about the true value of an article, and custom is silent as to who assumes the risk that the value is greater or lesser than the amount paid, the K is voidable where there is a mutual mistake of fact that was basis of transaction.

3. The risk is allocated to him by the ct. on the ground that it is reasonable in the circumstances to do so.a. Here, the cts. look to custom or policy (e.g., in favor of bringing

the true value of objects/resources to light and into the market).

b. E.g.: the seller of farm land generally cannot avoid the K of sale upon later discovery by both parties that the land contains valuable mineral deposits, even though the price was negotiated on the basic assumption that the land was suitable only for farming and the effect on the agreed exchange of performances is material.

(iv) Mistake in judgment no defense—mutual mistake isn’t a defense if the mistake concerns prediction or judgment(a) E.g.: A contracts to sell and B to buy stock amounting to a controlling

interest in C Corporation. At the time of making the K, both A and B believe that C Corporation will have earnings of $1M during the following fiscal year. Because of a subsequent economic recession, C Corporation earns less than $500K during that year. Although B may have shown poor judgment in making the K, no mistake.

(b) Contrast with—e.g.: A contracts to sell a tract of land to B. Both parties understand that B plans to erect an office building on the land and believe that he can lawfully do so. Unknown to them, two days earlier a municipal ordinance was enacted requiring a permit for lawful erection of such a building. There is a mistake of both A and B.

(v) Mutual mistake and breach of warranty—though buyers of goods generally have better shot at breach of warranty claims, sometimes they aren’t available, in which case the buyer may still be able to void the K on the basis of mutual mistake.(a) E.g.: A, a violinist, contracts to sell and B, another violinist, to buy a

violin. Both A and B believe that the violin is a Stradivarius, but in fact it is a clever imitation. A makes no express warranty and, because he is not a merchant with respect to violins, makes no implied warranty of merchantibility under UCC §2-314. The contract is voidable by B.

(b) Hence, when dealing w/ counterfeit goods, if the K can’t be set aside for fraud or misrepresentation (b/c can’t be shown), then it will be set aside for mutual mistake.

2) Unilateral mistake—one party’s error (1) concerning a basic assumption on which the K was made, (2) that has a material effect on the agreed exchange of performances, (3) for which he doesn’t bear the risk of the mistake, and (4) the effect of the mistake is such that enforcement of the K would be unconscionable.(a) Nonmistaken party aware of error—if the nonmistaken party knows or should

know that the other party has made a unilateral mistake, the mistake is known as a palpable unilateral mistake. A palpable unilateral mistake makes the K voidable by the mistaken party if the effect of the mistake is such that enforcement of the K would be unconscionable.(i) Unconscionable effect of mistake—show that adversely affected party

is really disadvantaged, and nonmistaken party would get a windfall.(a) E.g.: In response to B’s invitation for bids on the construction of a

building according to stated specifications, A submits an offer to do the work for $150K. A believes that this is the total of a column of figures, but he has made an error by inadvertently omitting a $50K item, and in fact the total is $200K. B, having no reason to know of A’s mistake, accepts

A’s bid. If A performs for $150K, he will sustain a loss of $20K instead of making an expected profit of $30K. If the court determines that enforcement of the K would be unconscionable (which is probable), it is voidable by A.

(b) E.g.: The facts being otherwise as stated above, the item that A inadvertently omits is a $35K item which would have made the total $185K, so that if he does the work for $150K he will sustain a loss of $5K rather than make a profit of $30K. The court may reach a result contrary to that above, on the ground that enforcement of the K would not be unconscionable, and hold that it is not voidable by A.

(ii) Errors in judgment—the rule of palpable mistake only applies to mechanical errors of computation or perception. It doesn’t apply to errors in judgment as to the value or quantity of the work done or goods contracted for.(a) E.g.: The facts being otherwise as stated above, the $50K error in A’s bid

is the result of A’s mistaken estimate as to the amount of labor required to do the work. A cannot avoid the K. (The ct. will say that A assumed the risk of the mistake, or that the mistake was due to “culpable” negligence.)

(b) Morta v. Korea Insurance Corp., 9th Cir., 1988. After seeking medical/legal advice, a driver who was injured in a car accident reluctantly accepts a lowball settlement offer from other driver’s insurance company, signing an unread release that agent said was “for your claims,” and later wants to get out of release. Held: release is valid. Release not rescindable for unilateral mistake because the mistake was result of breach of legal duty to read, rather than because of a clerical error.

(b) Nonmistaken party unaware of error—if the nonmistaken party neither knew nor had reason to know of the error, the traditional rule is that there is a binding K on the terms proposed by the mistaken party. If the mistaken party refused to perform, he is liable for expectation damages.(i) Modern trend—if the mistaken party notifies the other party of a

unilateral mistake before the other party has changed her position in reliance, the mistaken party can rescind the K. If the nonmistaken party has changed her position, her recovery is limited to reliance damages.(a) Boise Junior College Dist. v. Mattefs Construction Co., ID Sup. Ct., 1969.

On a K the school expected to pay $150K for, due to a clerical error contractor bid $141K but promptly gave notice of error, and next highest bid was $149K. Held: bid not enforceable. A bidder is entitled to equitable rescission of the K where it submitted a bid containing a material error, where enforcement of the K as is would be unconscionable, where the mistake was due to clerical error rather than error in judgment, the party to whom bid is submitted wouldn’t be prejudiced except by loss of this specific bargain, and prompt notice given.

(c) Mistranscription—where, because of mistake, the written agreement doesn’t correctly embody the oral agreement, the aggrieved party is entitled to the equitable remedy of reformation (correction of the writing) if he proves his case by clear and convincing evidence.

(d) Misunderstanding—this occurs where the parties’ expressions are susceptible of two different but equally reasonable interpretations, and each party subjectively intends a different meaningno K.(i) If one meaning is more reasonable than the other, a K is formed on the

more reasonable interpretation.(e) Mistakes in transmission by intermediary—where an intermediary used by the

offeror to transmit the offer makes a mistake in transmitting it to the offeree:(i) Offeree aware of mistake—if the offeree knew or should have known of

the mistakeno K.(ii) Offeree unaware of mistake—if the offeree neither knows nor should have

known of the mistakea K is formed on the terms conveyed by the intermediary.(a) Intermediary’s liability—the intermediary is liable in negligence for any

loss suffered by either party.(b) Ayer v. Western Union Telegraph Co., ME Sup. Ct., 1887. Lumber dealer

transmits offer to sell laths at a certain price, but telegraph company garbles message and sends lower price, which the lumber dealer honors. Held: lumber company bound by lower price from garbled transmission of offer. Because offeror selects medium of transmission, offeror assumes the risk of error in transmission, assuming that nothing in the transmission, the circumstances, the prior dealings of the parties, etc. gives offeree reasonable suspicion of error, in which case must investigate in good faith.

C) Contracts Induced by Misrepresentation, Nondisclosure, Duress, or Undue Influence1) Misrepresentation—a K is voidable by the innocent party if (1) there is a factual

misrepresentation that is either fraudulent or material, and (2) the innocent party justifiably relied upon the misrepresentation to her detriment.(a) Misrepresentation must be of fact

(i) A statement of a party having superior knowledge or in a fiduciary relationship may be regarded as a statement of fact although it would be considered an opinion if the parties were dealing on equal terms.(a) Vokes v. Arthur Murray, Inc., FL Ct. of App., 1968. Flattering dance

instructor sells widow tens of thousands of dollars of dance lessons despite her inaptitude as a dancer. Held: K rescindable for fraud. A statement of a party having superior knowledge or in a fiduciary relationship may be regarded as a statement of fact although it would be considered an opinion if the parties were dealing on equal terms.

(ii) If the innocent party is particularly vulnerable or susceptible to a misrepresentation of the type involved, reliance upon an assertion of opinion may be justified.(a) E.g.: A, seeking to induce B, whom A knows to be particularly

inexperienced and gullible, to make a contract to buy property, tells B that its value is $ 35,000. A knows that it is practically worthless. B is induced by A's statement to make the contract. If B's reliance is justified because his inexperience and gullibility make him particularly susceptible to such a misrepresentation, the contract is voidable by B.

(b) Morta v. Korea Insurance Corp., 9th Cir., 1988. After seeking medical/legal advice, a driver who was injured in a car accident reluctantly accepts a lowball settlement offer from other driver’s insurance company, signing an unread release that agent said was “for your claims,” and later wants to get out of release. Held: release is valid. There is no fraud because there are no representations of fact, and there is no constructive fraud because no fiduciary duty. No undue influence because parties negotiated at arms length, driver had medical/legal advice, and no special hurry to get money. Release not rescindable for unilateral mistake because the mistake was result of breach of legal duty to read.

(b) Fraudulent misrepresentation—a misrepresentation is fraudulent if:(i) A party makes it with the intent to induce the other party to enter an

agreement and she either: (1) knows or believes the assertion is untrue; (2) lacks confidence in the truth of the assertion but presents it as fact; or (3) says or implies that there is a basis for the assertion when there is not.

(ii) Hence, there must be scienter (knowledge of falsity or recklessness as to truth/falsity) and an intent to mislead.(a) E.g.: A, seeking to induce B to make a contract to buy his house, tells B

that the plumbing is of pipe of a specified quality. A does not know the quality of the pipe, and it is not of the specified quality. B is induced by A's statement to make the contract. The statement is a fraudulent misrepresentation, both because A does not have the confidence that he implies in its truth, and because he knows that he does not have the basis for it that he implies. The contract is voidable by B.

(c) Innocent misrepresentation—must be material(i) A misrepresentation is material if it will induce a reasonable person to

agree to a K or the misrepresenting party knows that the assertion probably will make the particular person agree.(a) E.g.: A, while negotiating with B for the sale of A's race horse, tells him

that the horse has run a mile in a specified time. A is honestly mistaken, and, unknown to him, the horse has never come close to that time. B is induced by A's assertion to make a contract to buy the horse. A's statement, although not fraudulent, is a material misrepresentation, and the contract is voidable by B.

(b) E.g.: A, while negotiating with B for the sale of A's race horse, tells him that the horse was bred in a specified stable. A is honestly mistaken, and, unknown to him, it was bred in another stable of better reputation. The specified stable was, unknown to A, founded by B's grandfather, and B is therefore induced by A's assertion to make a contract to buy the horse. A's misrepresentation is neither fraudulent nor material, and the contract is not voidable by B.

(c) E.g.: The facts being otherwise as in Illustration 4, A knows that the named stable was founded by B's grandfather and that B would like to own a horse bred there. A's misrepresentation, although not fraudulent, is material, and the contract is voidable by B.

(d) When a misrepresentation makes the K void vs. when the K is voidable:

(i) Void—Rest. §163—where the misrepresentation goes to the execution of the K.(a) E.g.: A and B reach an understanding that they will execute a written

contract containing terms on which they have agreed. It is properly prepared and is read by B, but A substitutes a writing containing essential terms that are different from those agreed upon and thereby induces B to sign it in the belief that it is the one he has read. B's apparent manifestation of assent is not effective.

(ii) Voidable—Rest. §164—where the misrepresentation goes to the inducement to enter the K.(a) E.g.: A, seeking to induce B to make a contract to sell him goods on

credit, tells B that he is C, a well-known millionaire. B is induced by the statement to make the proposed contract with A. B's apparent manifestation of assent is effective. However, the contract is voidable by B.

2) Nondisclosure(a) General rule—a party who proposes a contract doesn’t have an obligation to

affirmatively disclose material facts concerning the subject matter of the K.(b) However, an action or a non-disclosure can sometimes be equivalent to an

assertion that a fact doesn’t exist (and if fraudulent or material, makes the K voidable).(i) Action equivalent to assertion (concealment)—action intended or

known to be likely to prevent another from learning a fact is equivalent to an assertion that the fact doesn’t exist.(a) E.g.: A, seeking to induce B to make a contract to buy his house, paints

the basement floor in order to prevent B from discovering that the foundation is cracked. B is prevented from discovering the defect and makes the contract. The concealment is equivalent to an assertion that the foundation is not cracked, and this assertion is a misrepresentation.

(ii) Non-disclosure—a party’s non-disclosure of a fact known to him is equivalent to an assertion that the fact doesn’t exist if:(a) Correct previous assertion—disclosure necessary to prevent a previous

assertion from being a misrepresentation or from being fraudulent or material.1. E.g.: A, seeking to induce B to make a contract to buy a thoroughbred

mare, tells B that the mare is in foal to a well-known stallion. Unknown to A, the mare has miscarried. A learns of the miscarriage but does not disclose it to B. B makes the contract. A's non-disclosure is equivalent to an assertion that the mare has not miscarried, and this assertion is a misrepresentation

(b) Correct mistake—disclosure necessary to correct other party’s mistake as to basic assumption on which the party is making the K and if non-disclosure would be failure to act in good faith and in accordance w/ reasonable standards of fair dealing. (Have to disclose hidden defects but can keep secret market info.)

1. A seller of real or personal property is, for example, ordinarily expected to disclose a known latent defect of quality or title that is of such a character as would probably prevent the buyer from buying at the contract price.a. Hill v. Jones, AZ Ct. of App., 1986. Seller of house doesn’t

disclose termite damage. Held: K rescindable. Where the seller knows of facts materially affecting the value of the property that are not readily observable and not known to buyer, the seller is under a duty to disclose.

b. E.g.: A, seeking to induce B to make a contract to buy land, knows that B does not know that the land has been filled with debris and covered but does not disclose this to B. B makes the contract. A's non-disclosure is equivalent to an assertion that the land has not been filled with debris and covered, and this assertion is a misrepresentation

2. A party may reasonably expect the other to take normal steps to inform himself and to draw his own conclusions. If the other is lazy, inexperienced or ignorant, or if his judgment is bad, his adversary is not generally expected to compensate for these deficiencies. A buyer of property, for example, is not ordinarily expected to disclose circumstances that make the property more valuable than the seller supposes. A ct. is more likely to expect a party to disclose if that party is in a position to have special knowledge or a special means of knowledge not generally available to those in the position of the other party. Hence, sellers often have burden while buyers don’t.a. E.g.: A, seeking to induce B to make a contract to sell A land,

learns from government surveys that the land contains valuable mineral deposits and knows that B does not know this, but does not disclose this to B. B makes the contract. A's non-disclosure does not amount to a failure to act in good faith and in accordance with reasonable standards of fair dealing and is therefore not equivalent to an assertion that the land does not contain valuable mineral deposits. The contract is not voidable by B.

b. E.g.: The facts being otherwise as stated above, A learns of the valuable mineral deposits from trespassing on B's land and not from government surveys. A's non-disclosure is equivalent to an assertion that the land does not contain valuable mineral deposits, and this assertion is a misrepresentation.

c. Laidlaw v. Organ, USSC, 1817. Purchaser of tobacco gets up early and learns of signing of Treaty of Ghent, but says nothing when seller asks him if he heard any news that might affect market price of tobacco. Held: no fraud. Buyer has no duty to disclose information that the seller could have learned w/ due diligence.

(c) Error in writing—disclosure necessary to correct other party’s mistake as to contents/effect of a writing.

1. E.g.: A, seeking to induce B to make a contract to sell a tract of land to A for $100K, makes a written offer to B. A knows that B mistakenly thinks that the offer contains a provision under which A assumes an existing mortgage, and he knows that it does not contain such a provision but does not disclose this to B. B signs the writing, which is an integrated agreement. A's non-disclosure is equivalent to an assertion that the writing contains such a provision, and this assertion is a misrepresentation.

(d) Special relationship—if prospective parties are in relationship of trust and confidence, the party w/ superior info has a duty to affirmatively disclose material facts concerning the subject matter of the K (i.e., constructive fraud).1. E.g.: A, who is experienced in business, has raised B, a young man, in

his household, and B has habitually followed his advice, although A is neither his parent nor his guardian. A, seeking to induce B to make a contract to sell land to A, knows that the land has appreciably increased in value because of a planned shopping center but does not disclose this to B. B makes the contract. A's non-disclosure is equivalent to an assertion that the value of the land has not appreciably increased, and this assertion is a misrepresentation.

3) Duress—if consent was induced by wrongful threats, the K is voidable on grounds of duress(a) Compare—physical duress, where assent is induced by violence or threat of

violence, K is void.(b) Economic duress—economic duress is a defense only where (1) one party

makes an improper threat; (2) that induces the victim into assenting to the K; and (3) no adequate means are available to prevent the loss other than entering the K.(i) Austin Instrument, Inc. v. Loral Corp., NY Ct. of App., 1971. Contractor

awarded big Navy K w/ liquidated damages and strict delivery schedule held up by subcontractor for more money, and no other “approved vendors” can deliver in time. Held: K is voidable. For duress claim, you must show (1) wrongful threat (2) that leaves no reasonable alternative, and (3) lack of adequate remedy for breach. A threat is wrongful if it is a breach of good faith, the resulting exchange isn’t on fair terms, and the threat leaves no reasonable alternative but to accede.

(c) Improper threat—Rest. §176—every offer is a threat by one party, the offeror, not to make the contract unless his terms are accepted by the other party, the offeree. Such threats are an accepted part of the bargaining process. A threat does not amount to duress unless it is so improper as to amount to an abuse of that process. A threat is improper if the threatened behavior goes beyond the legitimate rights of the party applying the pressure, or that constitutes an abuse of those rights.(i) A threat is improper if:

(a) What is threatened is a crime or tort, or the threat itself would be a crime or tort if it resulting in obtaining property;

(b) What is threatened is a criminal prosecution;(c) What is threatened is the use of civil process and the threat is made in bad

faith; or(d) The threat is a breach of the duty of good faith and fair dealing under a K

w/ the recipient.1. Machinery Hauling, Inc. v. Stell of WV, WV Sup. Ct., 1989. Shipper

ordered to pay for defective goods or else manufacturer would sever business relations w/ shipper, which would be a huge financial blow. Held: no duress. Where the threat is something the threatener can do legally—e.g., sever business relations when there’s no ongoing K—threat isn’t wrongful.

(ii) A threat is improper if the resulting exchange isn’t on fair terms and:(a) The threatened act would harm the recipient and wouldn’t significantly

benefit the party making the threat;(b) The effectiveness of the threat in inducing the manifestation of assent is

significantly increased by prior unfair dealings by the party making the threat, or

(c) What is threatened is otherwise a use of power for illegitimate ends.(iii) Breach of K.  A threat by a party to a K not to perform his contractual

duty is not, of itself, improper. Indeed, a modification induced by such a threat may be binding, even in the absence of consideration, if it is fair and equitable in view of unanticipated circumstances. The mere fact that the modification induced by the threat fails to meet this test does not mean that the threat is necessarily improper. However, the threat is improper if it amounts to a breach of the duty of good faith and fair dealing imposed by the K. Under the UCC, the “extortion of a ‘modification’ without legitimate commercial reason is ineffective as a violation of the duty of good faith. . . . The test of ‘good faith’ between merchants or as against merchants includes ‘observance of reasonable commercial standards of fair dealing in the trade’ (§2-103), and may in some situations require an objectively demonstrable reason for seeking a modification. But such matters as a market shift which makes performance come to involve a loss may provide such a reason even though there is no such unforeseen difficulty as would make out a legal excuse from performance under §§2-615 and 2-616.” (Comment 2 to UCC § 2-209.) However, a threat of non-performance made for some purpose unrelated to the contract, such as to induce the recipient to make an entirely separate contract, is ordinarily improper. Furthermore, a threat may be a breach of the duty of good faith and fair dealing under the contract even though the threatened act is not itself a breach of the contract. This is particularly likely to be the case if the threat is effective because of power not derived from the contract itself.(a) E.g.: A contracts to excavate a cellar for B at a stated price. A

unexpectedly encounters solid rock and threatens not to finish the excavation unless B modifies the contract to state a new price that is reasonable but is nine times the original price. B, having no reasonable alternative, is induced by A's threat to make the modification by a signed writing that is enforceable by statute without consideration. A's threat is

not a breach of his duty of good faith and fair dealing, and the modification is not voidable by B.

(b) E.g.: A makes a threat to discharge B, his employee, unless B releases a claim that he has against A. The employment agreement is terminable at the will of either party, so that the discharge would not be a breach by A. B, having no reasonable alternative, releases the claim. A's threat is a breach of his duty of good faith and fair dealing, and the release is voidable by B.

(d) Induces the contract—in order to constitute duress, the improper threat must induce the making of the contract. A party's manifestation of assent is induced by duress if the duress substantially contributes to his decision to manifest his assent. The test is subjective and the question is: did the threat actually induce assent on the part of the person claiming to be the victim of duress (whether a person of average firmness would have been affected by the threat is irrelevant).(i) E.g.: A, seeking to induce B to make a contract to sell land to A, threatens

to poison B unless B makes the contract. The threat would not be taken seriously by a reasonable person, but B is easily frightened and attaches importance to the threat in deciding to make the contract. The contract is voidable by B.

(e) No reasonable alternative—a threat, even if improper, does not amount to duress if the victim has a reasonable alternative to succumbing and fails to take advantage of it. It is enough if the threat actually induces assent on the part of one who has no reasonable alternative. The alternative may take the form of a legal remedy. For example, the threat of commencing an ordinary civil action to enforce a claim to money may be improper. However, it does not usually amount to duress because the victim can assert his rights in the threatened action, and this is ordinarily a reasonable alternative to succumbing to the threat, making the proposed contract, and then asserting his rights in a later civil action. This alternative may not, however, be reasonable if the threat involves, for instance, the seizure of property, the use of oppressive tactics, or the possibility of emotional consequences. The standard is a practical one under which account must be taken of the exigencies in which the victim finds himself, and the mere availability of a legal remedy is not controlling if it will not afford effective relief to one in the victim’s circumstances. The alternative to succumbing to the threat need not, however, involve a legal remedy at all. In the case of a threatened denial of needed goods or services, the availability on the market of similar goods or services may afford a reasonable means of avoiding the threat.(i) E.g.: A makes an improper threat to commence civil proceedings against

B unless B agrees to discharge a claim that B has against A. In order to avoid defending the threatened suit, B is induced to make the contract. Defense of the threatened suit is a reasonable alternative, the threat does not amount to duress, and the contract is not voidable by B.

(ii) E.g.: A, with whom B has left a machine for repairs, makes an improper threat to refuse to deliver the machine to B, although B has paid for the repairs, unless B agrees to make a contract to have additional repair work

done. B can replevy the machine, but because he is in urgent need of it and delay would cause him heavy financial loss, he is induced by A's threat to make the contract. B has no reasonable alternative, A's threat amounts to duress, and the contract is voidable by B.

(iii) E.g.: A, who has contracted to sell goods to B, makes an improper threat to refuse to deliver the goods to B unless B modifies the contract to increase the price. B could buy substitute goods elsewhere but does not attempt to do so. The purchase of substitute goods and a claim for any damages is a reasonable alternative, the threat does not amount to duress, and the contract is not voidable by B.

4) Undue influence—unfair persuasion of a party, A, who is under the domination of the person exercising the persuasion, B, or who by virtue of the relation between them is justified in assuming that B won’t act in a manner inconsistent w/ A’s welfare. The K is voidable by the victim.(a) E.g.: A, who is not experienced in business, has for years been accustomed to rely

in business matters on the advice of his friend, B, who is experienced in business. B constantly urges A to make a contract to sell to C, B's confederate, a tract of land at a price that is well below its fair value. A is thereby induced to make the contract. Even though B's conduct does not amount to misrepresentation, it amounts to undue influence because A is justified in assuming that B will not act in a manner inconsistent with his welfare, and the contract is voidable.

(b) Third Party Influence—if the victim’s assent is induced by one who isn’t a party to the transaction, the K is voidable by the victim unless the other party to the transaction in good faith and w/out reason to know of the undue influence either gives value or relies materially on the transaction.

D) Unconscionability1) Development of doctrine—UCC §2-302 provides that “if a ct. as a matter of law finds

a K or any clause of the K to have been unconscionable at the time it was made the ct. may refuse to enforce the K, or it may enforce the remainder of the K w/out the unconscionable clause, or it may so limit the application of any unconscionable clause as to avoid any unconscionable result. This principle also applies to non-sale-of-goods Ks and is embodied in Rest. 2d §208.

2) Meaning and scope of doctrine—still a growing doctrine; look for both procedural and substantive unconscionability(a) Procedural unconscionability—unfair surprise. Many cases of

unconscionability involve unfair surprise; i.e., the disputed term isn’t one that a reasonable person would expect to find in the type of K in question and the drafter, who has reason to know this, nevertheless fails to call it to other party’s attention.(i) Adhesion contracts—unfair surprise particularly prevalent in printed form

adhesion Ks(ii) Party’s lack of knowledge of provisions in contract—modern cases hold

that in form adhesion Ks, a party is bound only by provisions that aren’t unfairly surprising. The harsher the provision, the more scrupulous the cts. usually are in making certain that the weaker party had knowledge.

(a) Cutler Corp. v. Latshaw, PA Sup. Ct., 1953. In tiny print on back of form K for house repairs is a warrant of attorney and confession of judgment. Held: warrant of attorney and confession of judgment not enforceable. A contract is voidable for unconscionability where there’s procedural and substantive unconscionability. Hiding powerfully unfair clauses in tiny print on reverse is procedurally unconscionable; the confession of judgment is substantively unconscionable.

(iii) Alternatively, procedural unconscionability could be thought of as an absence of a meaningful choice. Look to relative sophistication of the parties, relative bargaining power, burdensome clauses buried in fine print, adhesion contracts on a “take it or leave it” basis, high pressure salespeople, monopolies, and the like.(a) Williams v. Walker-Thomas Furniture Co., DC Cir., 1965. Welfare

recipient bought a series of items on credit, defaulting on the last one, from a rent-to-own store whose credit terms provided that all credit transactions of a buyer were to be lumped into one account and each installment payment made was to be spread pro rata over all items purchased until all items were paid off; and if the buyer defaulted, the store could replevy all items. Held: provision on repossession was unconscionable. Where one party had no real choice as to whether to accept the terms of the K, and the terms of the K are so extreme as to appear unconscionable according to the mores and business practices of the time and place, the K is unenforceable.

(b) Zapatha v. Dairy Mart, Inc., MA Sup. Ct., 1980. College graduate becomes franchisee of grocery store chain under K that allowed either party to terminate w/out cause on 90 days notice. Held: termination clause not unconscionable. Termination w/ notice isn’t unconscionable, especially where both parties are sophisticated.

(b) Substantive unconscionability—whether the cts. can apply a doctrine of substantive unconscionability (i.e., terms unfair in and of themselves) is unresolved. The UCC suggests that unconscionability is limited to prevention of oppression and unfair surprise; the Rest. 2d says substantive unconscionability is possible but ordinarily unconscionability involves a combination of procedural and substantive factors.(i) The test is whether the terms are so grossly unfair that no reasonable

person would enter K given the circumstances. E.g., excessive price disparity between consideration and value of the benefit and no risk undertaken.(a) Cutler Corp. v. Latshaw, PA Sup. Ct., 1953. In tiny print on back of form

K for house repairs is a warrant of attorney and confession of judgment. Held: warrant of attorney and confession of judgment not enforceable. The confession of judgment is substantively unconscionable.

(c) Hence, unconscionability is (1) an absence of meaningful choice combined with (2) unreasonably favorable terms. If you have more of one, then you need less of the other.

3) Examples of unconscionability:

(a) Exculpatory clauses—clauses relieving one of liability for her own intentional or reckless wrongs causing personal injuries aren’t upheld.(i) Weaver v. American Oil Co., IN Sup. Ct., 1971. Unsophisticated high

school dropout runs gas station under oil company lease that provides that he will indemnify them for any of their own negligence on the premises; tenant, assistant are injured and his station are burned down by negligence of oil company employees. Held: indemnity clause unconscionable. A party having disproportionately greater bargaining power cannot disclaim liability for its own negligent acts.

(b) Disclaimers and limitations of warranty liability(i) Disclaimers—a seller may disclaim liability under an implied warranty.

To disclaim an implied warranty of merchantability, the word “merchantability” must be mentioned and the disclaimer must be conspicuous. Disclaimer of the implied warranty of fitness must be in writing and conspicuous.

(ii) Limitation of remedies—UCC provides that agreements for the sale of goods may limit damages (e.g., to repair and replacement). There are two exceptions:(a) Where exclusive remedy fails its purpose—where circumstances cause

the limited remedy to fail its purpose, other appropriate UCC remedies may be applied. This provision is frequently invoked where the remedy is limited to repair and replacement, and the seller doesn’t or cannot comply in a reasonable time.1. Murray v. Holiday Rambler, Inc., WI Sup. Ct., 1978. P bought motor

home from D. Sales K disclaimed all warranties, express or implied, and provided the limited remedy of 52 wks of repair/replacement of defective parts. P experienced numerous problems w/ just about everything. D never refused to attempt to repair, but P sought to revoke acceptance of K. Held: limited remedy falls away and P entitled to all UCC gap fill remedies, including revocation of acceptance. Where a limited remedy fails of its essential purpose—i.e., to give the buyer goods which conform to the contract within a reasonable time after the discovery of the defect—the limitation will be disregarded. Here, the cumulative effect of all the nonconformities substantially impaired the value of the motor home. The limited remedy failed of its essential purpose whether or not D’s failure to restore the motor home to a nondefective condition w/in a reasonable time was willful. P may therefore invoke any remedies available under UCC, including the right to revoke acceptance and the right to recover consequential damages (UCC §2-715).

(b) Where there is personal injury—the UCC provides that a limitation on consequential damages for injury to the person resulting from consumer goods is prima facie unconscionable. Limitation of damages for commercial losses isn’t prima facie unconscionable.1. Henningsen v. Bloomfield Motors, NJ Sup. Ct., 1960. P buys

Plymouth from D and wife is injured when steering wheel fails. P sues

D and Chrysler on implied warranty theory. D claims warranty was disclaimed by provision buried in a sea of fine print on the back of the contract, limiting liability for breach of warranty to replacement of defective parts. Held: disclaimer ineffective as unconscionable. Clause part of a standardized, industry-wide contract used by Big Three. If P wanted to buy a car, he had to take the disclaimer from anyone. This is gross bargaining inequality. P almost certainly did not understand what he was giving up. The wording would not indicated that claims for personal injury were given up as well. Hence, the clause is against public policy which one cannot avoid or contract around.

E) Statute of Frauds1) In general—requires that certain kinds of Ks be in writing, or at least evidenced by a

signed, written memorandum of essential terms.2) Rationale—to prevent fraud and perjury.3) Types of contracts that must be memorialized in writing

(a) Contracts for the sale of land—this includes the sale of any interest in land (as opposed, say, to a short term lease or a license)(i) Leases: covered by sale-of-an-interest-in-land, unless specifically

excepted. Many jurisdictions provide that leases for one year or less don’t have to be in writing.

(ii) Interest in land—a promise to share the proceeds from purchase/sale of land is not an interest in land, because it is not a contract for sale and doesn’t promise to convey an interest in land.

(iii) Part performance doctrine: part performance of an oral K for the sale of land operates different on buyers and sellers(a) Sellers: a seller who has performed his part of oral K for sale of land by

conveying his interest to buyer can recover purchase price even though K not in writing

(b) Buyers: part performance by the purchaser of an interest in land may take a K out of the Statute for purposes of an action in equity but not at law; i.e., you can get specific performance but not damages1. Requirements: traditionally, must be able to show that you (1) made

valuable improvements, or (2) took or retained possession and paid a part of the purchase price

2. Reliance doctrine—under modern law, a purchaser’s part performance that doesn’t meet the traditional test, but that constitutes reliance, may estop the other party from pleading the Statute of Frauds (and purchaser can get money damages).

(b) Contracts for the sale of goods—Ks for sale of goods priced at $500 or more must be in writing.(i) “Goods” are all tangible moveables. Doesn’t include intangible securities

or services.(ii) Sale of goods vs. contract for services—when a K requires both the

supplying of goods and the rendering of services (e.g., providing parts to

repair a television), the predominant factor of the K determines whether it falls w/in the Statute.

(iii) Exceptions:(a) Receipt and Acceptance: The buyer accepts and receives all or part of the

goods—the K becomes enforceable as to the goods accepted and received;(b) Part Payment: The buyer makes part payment for the goods—the K

becomes enforceable as to the goods paid for;(c) Special Manufacture: The contract calls for manufacture of special goods

for the buyer, and the goods aren’t suitable for sale to others in the ordinary course of the seller’s business. The seller must also have made a substantial beginning in the manufacture of the goods or commitments for their procurement;

(d) No objection to confirmation: The contract is between merchants and w/in a reasonable time a written confirmation (which satisfies the Statute of Frauds as to the sender) is sent and the receiving party doesn’t dispatch a written objection w/in 10 days; or

(e) Admission: The contract is admitted by the party against whom enforcement is sought in his pleadings or testimony at ct.

(iv) Modifications—a modification of a K for the sale of goods is w/in the Statute if the K as modified is w/in the Statute.

(c) Contracts in consideration of marriage—marriage settlement Ks must be in writing.

(d) Contracts that cannot be performed within one year of making—Ks that by their terms cannot be performed w/in one year must be in writing.(i) Statute is inapplicable if performance w/in one yr is possible although

unlikely (e.g., promise of “lifetime employment,” promise to maintain equipment “as long as you need it”)

(ii) Exception for performance: even if a K cannot be performed w/in a year, if the K has been fully performed on one side, the oral K is enforceable.(a) Rationale: even if K was unenforceable, the party who performed could

sue in restitution for the benefit conferred; however, allowing the suit on the K itself avoids the difficulty of measuring the value of the benefit conferred.

(e) Suretyship contracts—promises made to another person’s creditor to “answer for” that person’s debt must be in writing (note, however, that an oral suretyship promise made to a debtor is enforceable)(i) Exceptions:

(a) Promise to debtor: if promise is made to the debtor (“I promise to pay your VISA bill”), the promise is enforceable even though oral.

(b) Promisor is primary debtor—the Statute only applies to promises to be secondarily liable for a third party’s obligation (e.g., “send a widget to John and bill it to me”), not to promises to be primarily liable (e.g., “I will pay for the widget John is buying from you if John doesn’t pay for it”).

(c) Main purpose to benefit promisor—a suretyship promise is enforceable, although oral, if it appears that the promisor’s main purpose in guaranteeing the obligation of another was to secure an advantage for

himself; e.g., homeowner prevents unpaid subcontractor from walking off her building project by guaranteeing the general contractor’s payment of the subcontractor.

4) Type of writing required(a) Memorandum of essential terms—a writing is sufficient if it

(i) is signed by the party to be charged, and contains:(ii) the identity of the contracting parties,(iii) a description of the subject matter of the K, (iv) the terms and conditions of the agreement, and(v) a recital of the consideration.

(b) UCC provisions—in a sale of goods, the writing need only be “sufficient to indicate that a K for sale has been made” and specify the quantity term.(i) Written confirmations sent by one merchant to another merchant in a form

sufficient to bind the sender bind the recipient absent an objection.(c) Signatures—can be handwritten, typed, or printed

(i) Agent’s signature(a) Traditionally, a writing is sufficient if it is signed by an authorized agent

of the party to be charged(b) Modern rule—under most states’ equal dignity statutes, there must also be

a recitation of the agent’s authority to bind the principal in the writing.(ii) Party to be charged must sign—only the signature of the party sought to

be held liable must appear.(d) Integration of several documents—the required writing may consist of several

documents, provided each document refers to or incorporates the others, or they are otherwise integrated (e.g., by being physically attached).

5) Effect of noncompliance with the Statute of Frauds(a) Majority view—contract voidable

(i) Effect—although suit cannot be brought on an oral K that is w/in the Statute, the K is valid for all other purposes. For example, if an oral K is confirmed in a later writing, the K becomes enforceable against the signing party, even though no new consideration is given. Similarly, once a K has been performed on both sides, neither party is entitled to recover what he has given based merely on the fact that the Statute of Frauds wasn’t satisfied.

(ii) No third party defense—only the parties to the K can raise the Statute of Frauds

(b) Minority view—contract void6) Recovery in restitution—normally, cts. grant restitution for benefits conferred

pursuant to a K that is unenforceable under the Statute.7) Reliance on contracts within the Statute of Frauds—modern cts. will estop one party

from asserting the Statute of Frauds as a defense if the other party has detrimentally relied on the K.

F) Lack of Contractual Capacity1) Minors—a minor’s Ks are voidable at the option of the minor, although the minor

may enforce the K against the adult. However, the minor is always liable in restitution for the reasonable value of any necessaries (e.g., food, shelter) furnished to her.

(a) Necessaries—includes whatever is needed for the minor’s subsistence, taking into consideration the minor’s age and condition in life. The inquiry is personal to the each minor. Hence, a car may be a necessary for one minor and not for another.(i) Bowling v. Sperry, IN App. Ct., 1962. 16-yr-old, who bummed rides to

and from work, bought car with money borrowed from aunt and used it for leisure until main bearing burned out. Held: K rescindable. A minor may rescind a K for purchase of car, when his aunt was w/ him when he purchased car, and he said he was going to use car for work but didn’t really need it for work. An article is a “necessary” only if it is factually necessary. The fact that damage to article due to minor’s negligence is immaterial; minor merely has to give back what’s left but doesn’t have to account for use or depreciation.

(ii) Note that minors are only liable for reasonable value of necessaries, not the K price.

(b) Tender back—minors merely have to return what’s left (e.g., the wrecked car). Even if if minor willfully destroys the goods, K is still voidable.

(c) Ratification—once minor reaches age of maturity, he can ratify the K through any manifestation of intent that K is binding.(i) Still has reasonable amount of time after reaching age 18 to disaffirm K.

(a) E.g.: minor makes 11 monthly payments on stereo, 10 after reaching age of majority—can’t disaffirm.

(b) E.g.: minor uses stereo for 2 mths after reaching age of majority—can disaffirm.

(d) Misrepresentation of age—cts. are split: some still allow minor to disaffirm, others estop him from disaffirming, while others still allow him to disaffirm but hold him liable in tort for misrepresentation (and thus allow restitution).

2) Mental incapacity(a) Traditional view—mental capacity exists only if a person’s mental processes are

so deficient that he lacks understanding of the nature, purpose, and effect of the transaction

(b) Restatement 2d view—(more liberal)—a person’s Ks are voidable if by reason of mental illness or defect:(i) He is unable to act in a reasonable manner in relation to the

transaction and (ii) The other party has reason to know of his condition.

(c) Standard of incompetency—incompetency is transaction-specific. Someone can be generally insane yet be lucid at the moment of the K. (i) Relevant factors include:

(a) Person’s prior or subsequent condition;(b) Person’s physical condition;(c) Whether the transaction was improvident;(d) Whether there was a relation of trust and confidence between the parties.

(ii) E.g.: A, a school teacher, is a member of a retirement plan and has elected a lower monthly benefit in order to provide a benefit to her husband if she dies first. At age 60 she suffers a "nervous breakdown," takes a leave of absence,

and is treated for cerebral arteriosclerosis. When the leave expires she applies for retirement, revokes her previous election, and elects a larger annuity with no death benefit. In view of her reduced life expectancy, the change is foolhardy, and there are no other circumstances to explain the change. She fully understands the plan, but by reason of mental illness is unable to make a decision based on the prospect of her dying before her husband. The officers of the plan have reason to know of her condition. Two months after the changed election she dies. The change of election is voidable.

(iii) Heights Realty, Ltd. v. Phillips, NM Sup. Ct., 1988. 84-yr-old w/ history of deterioration, who had recently hurt foot and was bedridden, guessing at value of home, entered into listing agreement with acquaintance, who produced buyer offering greater than asking price. Held: K voidable. A person may be deemed incompetent even when there is no evidence that the K is not unreasonable, if there is evidence of incompetence, such as the following: person’s prior or subsequent condition; the person’s physical condition; whether or not the transaction was improvident for person (not just for reasonable value); the relation of trust and confidence between the parties to the transaction.

(d) Effect of incapacity—the K is voidable by the incompetent or a guardian acting on his behalf, but not by the contracting party. However, if a person has been adjudicated insane or incompetent, typically his Ks are entirely void by statute.

(e) Fair Contracts—where the K is made on fair terms and the other party doesn’t know of mental defect, the power of avoidance is terminated to the extent that the K has been performed or to the extent that avoidance would be unjust (i.e., where the parties can’t be returned to their previous positions, etc.)(i) E.g.: A, an incompetent spouse not under guardianship, mortgages land on

fair terms to B, a bank which has no knowledge or reason to know of the incompetency, for a loan of $2K. At A’s request the money is paid to the other spouse, C, who absconds with it. The contract is not voidable.

3) Drunken or drugged persons—the test for this temporary incapacity defense is the same as for mental incapacity—whether the person (1) was so intoxicated as to be unable to understand the nature, purpose, and effect of what he was doing at the time of the transaction, and (2) the other party has reason to know of the intoxication.(a) E.g.: A, while in a state of extreme intoxication, signs and mails a written offer on

fair terms to B, who has no reason to know of the intoxication. B accepts the offer. A has no right to avoid the contract.

(b) E.g.: A has been drinking heavily. B, who has also been drinking, meets A, offers to buy A’s farm for $50K, a fair price, and offers A a drink which A accepts. In drunken exhilaration A, as a joke, writes out and signs a memorandum of agreement to sell, gets his wife to sign it, and delivers it to B, who understands the transaction as a serious one. A’s intoxication is no defense to B’s suit for specific performance.

G) Illegal Contracts1) In general—if the subject matter of a K was legal when the offer was made but

became illegal before acceptance, the offer is terminated as a matter of law. If

the K was legal at the time it was made but became illegal afterwards, the K is discharged.(a) Sinnar v. Le Roy, WA Sup. Ct., 1954. A and B contract wherein A gives B

money for B to pay a bribe so A can get a liquor license, but after the bribe is paid, no license is awarded, and so A sues B for the money back. Held: K unenforceable. Cts. will not enforce Ks the subject matter of which is illegal, such as the payment of a bribe to a public official.

2) What constitutes “illegality”—if the K’s consideration or purpose is illegal, the K is illegal. An otherwise valid K isn’t illegal merely because its performance will indirectly aid the accomplishment of an illegal object, provided that it doesn’t involve a serious crime or great moral turpitude.(a) Unenforceable as against public policy (Rest. §178)—even if K isn’t explicitly

illegal, it may be unenforceable if the interest in its enforcement is clearly outweighed in the circumstances by a public policy against the enforcement of such Ks.(i) In weighing the interest in the enforcement of a term, look to:

(a) The parties’ justified expectations,(b) Any forfeiture that would result if enforcement were denied, and(c) Any special public interest in the enforcement of the specific term.

(ii) In weighing a public policy against enforcement of a contractual term, look to:(a) The strength of that policy as manifested by legislation or judicial

decisions,(b) The likelihood that a refusal to enforce the term will further that policy,(c) The seriousness of any misconduct involved and the extent to which it was

deliberate, and(d) The directness of the connection between that misconduct and the K’s

term.(b) Examples of balancing:

(i) E.g.: A and B make an agreement for the sale of goods for $10K, in which A promises to deliver the goods in his own truck at a designated time and place. A municipal parking ordinance makes unloading of a truck at that time and place an offense punishable by a fine of up to $50. A delivers the goods to B as provided. Because the public policy manifested by the ordinance is not sufficiently substantial to outweigh the interest in the enforcement of B’s promise, enforcement of his promise is not precluded on grounds of public policy.

(ii) E.g.: A promises to pay B, a competitor, $10K if he will refrain from competing with A for a year. Although B's refraining from competing with A would not in itself be improper, A’s promise unreasonably tends to induce B to refrain from competition and is unenforceable on grounds of public policy.

(iii) E.g.: A and B make an agreement for exclusive dealing that is unenforceable because unreasonably in restraint of trade. A sells and delivers goods pursuant to the unenforceable agreement to C, who promises to pay the price. Because the relation between C’s promise to pay the price and the

unreasonable restraint is too remote, enforcement of C’s promise is not precluded on grounds of public policy.

(iv) E.g.: A agrees to reimburse B for any legal expenses incurred if B will go on C’s land in order to test a right of way that is disputed by A and C. B goes on C’s land. Enforcement of A’s promise is not precluded on grounds of public policy, even if it is later determined that B has committed a trespass.

(c) Examples of public policies:(i) Restraints of trade

(a) Covenants not to compete1. Are invalid if (1) the restraint is greater than is needed to protect

the promisee’s legitimate interest, or (2) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.

2. If covenant is too broad, cts. will reasonably alter it to make it enforceable if the parties entered into it in good faith by the employer.a. Data Management, Inc. v. Greene, AK Sup. Ct., 1988. Employee

signs covenant not to compete in computer industry in entire state for five years after leaving employment. Held: covenant not to compete too restrictive. A court may modify an overly restrictive covenant not to compete if it can be reasonably altered to render it enforceable, if the covenant was drafted in good faith

3. Factors to consider in evaluating the reasonableness of covenant:a. Reasonableness of limitations as to time and space;b. Whether the employee represents the sole contact w/ the customer;c. Whether the employee is possessed w/ confidential info or trade

secrets;d. Whether the covenant seeks to stifle the inherent skill and

experience of the employee;e. Whether the employee’s talent which the employer seeks to

suppress was actually developed during the period of employment;f. Whether the covenant is directed at unfair or ordinary competition;g. Whether the benefit to the employer is disproportionate to the

detriment to the employee;h. Whether the covenant precludes the employee’s sole means of

support.4. Examples:

a. E.g.: A employs B as a fitter of contact lenses under a one-year employment K. As part of the employment agreement, B promises not to work as a fitter of contact lenses in the same town for three years after the termination of his employment. B works for A for five years, during which time he has close relationships with A’s customers, who come to rely upon him. B’s contacts with A’s customers are such as to attract them away from A. B’s promise is not unreasonably in restraint of trade and enforcement is not precluded on grounds of public policy.

b. E.g.: A employs B to work with rapidly changing technology, some parts of which entail valuable confidential info. As part of the agreement B promises not to work for any competitor of A for 10 yrs after the termination of the employment. The confidential info made available to A will probably remain valuable for only a much shorter period. The time fixed is longer than is necessary for A’s protection. B’s promise is unreasonably in restraint of trade and is unenforceable on grounds of public policy.

(ii) Impairment of family relations(a) E.g.: A and B, the parents of a 10-yr-old, promise to give up custody of

the child to C, a stranger, in return for C’s promise to support the child. The promises of A, B and C affect A’s and B’s custody rights in a minor child and unless the court finds that these promises are consistent with the best interest of the child, they are unenforceable on grounds of public policy.

(iii) Interference w/ protected interests(a) Promise involving commission of a tort(b) Promise inducing violation of fiduciary duty(c) Promise interfering w/ contract of another(d) Disclaimers of liability for harm caused intentionally or recklessly

1. Also negligently, if duty of care (e.g., employer-employee, common carrier-passenger).

2. Disclaimer of liability for personal injuries for products can be disclaimed only in rare circumstances (e.g., two merchants fairly bargain for it, and the product is experimental).

(e) Terms exempting liability for misrepresentations3) Effects of “illegality”—generally, if a ct. is illegal, the ct. won’t intercede (even by

restitution) to aid either wrongdoer. However, there are some exceptions:(a) Severable portion may be enforced—if the illegal portion of the K is severable,

not malum in se, and doesn’t go to the essence of the bargain, the legal portion may be enforced.(i) Watts v. Watts, WI Sup. Ct., 1987. Unmarried couple who held

themselves out as man and wife separate after being together for 12 years, having two kids together, and the ersatz wife performing homemaking services and helping with the ersatz husband’s business. Held: the couple’s property can be judicially divided. An unmarried person who cohabited w/ another can obtain judicial division of property when they separate under the theories of implied-in-fact contract, unjust enrichment, or through partition of property acquired as tenants in common. The fact that the implied K involved sexual relations doesn’t make it unenforceable for illegality b/c that portion is severable.

(b) “Locus penitentiae” doctrine—some cts. hold that where one party to an illegal K repents and repudiates the K before its illegal purpose is carried out, he may obtain restitutionary recovery for the value he gave in performance.

(c) Not “in pari delicto”—a party who isn’t guilty of a serious moral turpitude and isn’t as blameworthy as the other party may be able to bring a suit in restitution

for the value of the benefit conferred. However, this exception is inapplicable if the K is malum in se.(i) Watts v. Watts, WI Sup. Ct., 1987. Unmarried couple who held

themselves out as man and wife separate after being together for 12 years, having two kids together, and the ersatz wife performing homemaking services and helping with the ersatz husband’s business. Held: the couple’s property can be judicially divided. Even if cohabitation agreements are contrary to public policy in favor of marriage (though that’s arguable in a “no-fault” divorce state that doesn’t criminalize cohabitation), that doesn’t mean one party can retain all the tangible benefits of the relationship even though the parties were at equal “fault.”

(ii) Member of a protected class—where one party is a member of a class for whose benefit a statute is enacted, he is usually not considered in pari delicto and may recover in restitution (e.g., an employee who works a greater number of hours than permitted by statute isn’t in pari delicto w/ his employer).

(d) Malum prohibitum—if the K is only malum prohibitum, restitutionary recovery may be available to the relatively innocent party.

(e) Licensing requirements—if an unlicensed party contracts to perform services, whether the K is enforceable depends upon whether the licensing statute’s purpose is for protection of the public (K unenforceable) or for fiscal regulation/taxation (K enforceable).

V) Performance and BreachA) Obligation to Perform in Good Faith—each party has an obligation to perform in

good faith.1) Requirements/output Ks

(a) Feld v. Henry S. Levy & Sons, Inc., NY Ct. of App., 1975. P, a bread products retailer, entered into a K w/ D, a wholesale bakery, by which D agreed to sell to P all breadcrumbs produced in its Brooklyn factory. After 250 tons of crumbs were sold, D stopped crumb production because the operation was uneconomical. Held: where a K calls for all of one party’s production, which is stopped b/c it was uneconomical, cessation wouldn’t be violation of good faith only if the losses from continuance would be nontrivial. Good faith and reasonable diligence in light of the commercial background and the parties’ intent, not economic feasibility, is the standard and must be read into every output contract if not otherwise stated.

2) Patterson v. Meyerhofer, NY Ct. of App., 1912. P contracted to sell land that he planned to acquire at auction to D. D showed up at auction and bid up price to just under the contract price. P sued D for the difference between the contract price and the amount D purchased the land for at auction. Held: D liable for difference between contract price and price he paid at auction. In every K there is an implied undertaking on the part of each party that he won’t intentionally and purposely do anything to prevent the other party from carrying out the agreement on his part.

B) Express Conditions1) In general—an express condition is an explicit contractual provision providing that

either (1) a party to the contract isn’t obliged to perform his duties unless some event

or state of the world occurs (or fails to occur), or (2) if some event or state of the world occurs or fails to occur, the performing party’s obligation to perform is suspended or terminated.

2) Conditions and promises distinguished(a) In general—a promise is an undertaking to perform (or refrain from performing)

some act. The fulfillment of a condition creates or extinguishes a duty to perform by the promisor.

(b) Difference in legal effect of promises and conditions—an unexcused failure to perform a promise is always a breach of contract and always gives rise to liability; nonfulfillment of a condition isn’t a breach of K and doesn’t give rise to liability. Breach of a promise by one party may or may not excuse the other party’s duty to perform under the K; nonfulfillment of a condition normally will excuse a duty to perform hat was subject to the condition.

3) Interpretation of a provision as condition or promise(a) Parties’ intent controls—where the K language is ambiguous, the ct. construes

the words used to determine whether the parties intended the provisions to be a promise or a condition. If the parties intended a specified state of affairs to be a state of affairs that one party undertakes to bring aboutpromise. If state of affairs must exist before some other provision of the agreement that is a promise gives rise to a duty of performancecondition.

(b) Where parties’ intent unclear—several factors are considered in determining the parties’ intent.(i) Words such as “provided,” “if,” etc. usually indicate a condition; the

words “promises,” “agrees,” etc. generally indicate a promise. (ii) Custom—would the business community treat the provision, in context,

as a condition or a promise?(iii) Which interpretation best protects the expectancies of the parties?

(a) Most important factor, since the fundamental test is to determine the intentions of the parties.

(c) In case of doubt, contractual provisions ordinarily will be construed as promises to reduce forfeiture, unless the event is w/in the obligee’s control or the circumstances indicate that he has assumed the risk of the event’s nonoccurrence, b/c to do so upholds the K and preserves the parties’ expectations, since failure to perform a promise will entitle the other party to damages whereas failure of a condition excuses the duty of counterperformance but otherwise imposes no liability.(i) Measure of time vs. condition—under a provision that a duty is to be

performed “when” an event occurs, it may be doubtful whether it is to be performed only if that event occurs, in which case the event is a condition, or at such time as it would ordinarily occur, in which case the event is referred to merely to measure the passage of time. In the latter case, if the event doesn’t occur some alternative means will be found to measure the passage of time, and the nonoccurrence of the event won’t prevent the obligor’s duty from becoming one of performance. I.e., if ct. interprets provision as a promise to pay only if a condition has occurred, the promise to pay is unenforceable unless the condition occurs. However, if a ct. interprets a provision as an

unconditional promise to pay w/ payment postponed until the stated condition occurs, the payment must occur w/in a reasonable time, even if the condition doesn’t occur.(a) E.g.: A, a general contractor, contracts with B, a sub-contractor, for the

plumbing work on a construction project. B is to receive $100K, “no part of which shall be due until five days after Owner shall have paid Contractor therefor.” B does the plumbing work, but the owner becomes insolvent and fails to pay A. A is under a duty to pay B after a reasonable time.

(b) E.g.: A, a mining company, contracts with B, the owner of an untested experimental patented process, to help reopen one of its mines for $5K paid in advance and an additional “$15K to be payable as soon as the mine is in successful operation.” $10K is a reasonable compensation for B's services. B performs the required services, but because the process proves to be unsuccessful, A abandons the attempt to reopen the mine. A is under no duty to pay B any additional amount. In all the circumstances the risk of failure of the process was, to that extent, assumed by B.

4) Implication of a promise from a condition—in some cases, a contractual term that operates as a condition also gives rise to a promise by implication (e.g., condition of 3rd party’s approval gives rise to promise to seek 3rd party approval)

5) Provision both promise and express condition (promissory condition)—in this situation, a party may promise to bring about a given state of events and the K pertaining to that promise may also expressly state that the other party’s duty to perform is conditioned on the occurrence of the state of events.(a) Only when the occurrence of the event is w/in the obligee’s control will a

provision be a promissory condition. If the occurrence of the event is w/in the obligor’s control (e.g., his honest personal satisfaction w/ obligee’s performance) or w/in a 3rd party’s control (e.g., an architect’s satisfaction w/ performance), a provision will generally be a promise.(i) E.g.: On August 1st, A contracts to sell and B to buy goods, “selection to

be made by buyer before September 1.” B merely has a duty to make his selection by September 1st, and his making it by that date is not a condition of A’s duty. A failure by B to make a selection by September 1st is a breach, and if material it operates as the nonoccurrence of a condition of A’s duty.

(ii) E.g.: Trucker promises to get A’s goods to New Orleans by June 1st, and the K expressly provides that “time is of the essence.” A will have no duty to pay Trucker unless the goods arrive by that time. Getting the goods to New Orleans by June 1st is both a promise by Trucker and a condition to A’s liability.

6) Conditions precedent and conditions subsequent(a) Conditions precedent—condition under which some state of affairs must occur

before a party has a duty to perform(b) Conditions subsequent—condition under which the occurrence or nonoccurrence

of a state of affairs extinguishes or terminates a previously absolute duty to perform.

(i) True condition subsequents are rare. Many provisions are worded as conditions subsequent in form, but are conditions precedent in substance. For example, A insures B against loss by fire. The policy provides, “any liability of insurer under this policy is discharged if either (1) proof of loss is not submitted w/in 30 days after the accident, or (2) suit isn’t brought against the insurer for the claimed loss w/in 12 mths. from the date of accident.” The first provision (the proof-of-loss provision) is a condition subsequent in form, but in substance it is a condition precedent to the A’s duty to pay b/c that duty doesn’t arise unless and until a proof of loss is filed w/in 30 days after the accident. In contrast, the 2nd provision, requiring suit w/in 12 mths., is a true condition subsequent. This condition has the effect of a private SOL—A’s duty to pay arises when the proof of loss is submitted, but if the suit isn’t brought w/in 12 mths. from the date of the accident, the duty is effectively discharged.

7) Conditions of satisfaction(a) Performance to satisfaction of promisor as condition precedent to promisor’s duty

to perform—where personal satisfaction isn’t expressly specified, cts. construe a provision requiring the promisor’s satisfaction as follows:(i) Subject matter involves mechanical fitness, utility, or marketability—

satisfaction means performance that would satisfy a reasonable person(ii) Subject matter is personal—condition is satisfied only if the promisor is

personally satisfied. However, the dissatisfaction must be honest and in good faith, or the condition of satisfaction will be excused.

(b) Performance to the satisfaction of a third party—3rd party must be personally satisfied. However, the dissatisfaction must be honest and in good faith, or the condition of satisfaction will be excused.(i) E.g.: A contracts with B to repair B's building for $ 20,000, payment to be

made “on the satisfaction of C, B's architect, and the issuance of his certificate.” A makes the repairs, but C refuses to issue his certificate, and explains why he is not satisfied. Other experts in the field consider A's performance to be satisfactory and disagree with C's explanation. A has no claim against B. The quoted language is sufficiently clear that if C is honestly not satisfied, B is under no duty to pay A, and it makes no difference if his dissatisfaction was not reasonable.

(ii) E.g.: The facts being otherwise as stated above, C refuses to issue his certificate although he admits that he is satisfied. A has a claim against B for $ 20,000. The quoted language will be interpreted so that the requirement of the certificate is merely evidentiary and the condition occurs when there is, as here, adequate evidence that C is honestly satisfied.

(iii) E.g.: The facts being otherwise as stated above, C does not make a proper inspection of the work and gives no reasons for his dissatisfaction. A has a claim against B for $ 20,000. In using the quoted language, A and B assumed that C would exercise an honest judgment and by failing to make a proper inspection, C did not exercise such a judgment. Since the parties have omitted an essential term to cover this situation, the court will supply a term requiring A to pay B if C ought reasonably to have been satisfied.

(iv) E.g.: The facts being otherwise as stated above, C makes a gross mistake with reference to the facts on which his refusal to give a certificate is based. A has a claim against B for $ 20,000. In using the quoted language, A and B assumed that C would exercise his judgment without a gross mistake as to the facts. Since the parties have omitted an essential term to cover this situation, the court will supply a term requiring A to pay B if C ought reasonably to have been satisfied.

8) Excuse of conditions—generally, no duty to perform unless all conditions fulfilled. However, a duty may arise where the condition has been excused.(a) Excuse by prevention or hindrance—a condition will be excused if the party

favored by the condition wrongfully prevents or hinders its fulfillment.(i) E.g.: A gives B an option. It is a condition to the exercise of the option

that B “tender the purchase price to A at A’s office during business hours on January 15.” If A goes into hiding, the condition is excused.

(ii) Element of wrongfulness—doesn’t mean bad faith or malice, but rather means that under the circumstances, the other party wouldn’t have reasonably anticipated the type of prevention or hindrance that occurred.(a) E.g.: Facts as in option example above, but A merely forgot about option

and wasn’t on office on January 15. Condition still excused b/c B wouldn’t have reasonably anticipated that A would be out of the office on January 15.

(iii) Termination of a business—requirements and output Ks are conditioned on the continued operation of a business. In such a K, whether closing down the business constitutes wrongful prevention and therefore excuses the condition, depends upon whether the party closing up shop had valid economic reasons for the closing other than losses resulting from the requirements/output K.

(b) Waiver—fulfillment of a condition may be waived (but not merely by acceptance of performance). There must be (1) words or conduct that condition is waived, and (2) an intent not to require compliance with the condition. (This is a voluntary abandonment of a nonmaterial contractual right.)(i) To be binding, waiver must either be supported by separate

consideration or be nonmaterial.(ii) Clark v. West, NY Ct. of App., 1908. P sued D for breach of K. P and D

entered into K for P to write law books for $6/pg, but if P drank intoxicating liquors during the writing, the compensation was to be $2/pg. P drank moderately during the writing; D knew and said that even though P would still be paid $6/pg. P sued for the extra $4/pg. Held: condition may have been waived. Although D’s silence and acceptance of the book alone wouldn’t constitute waiver, P’s allegation that D expressly waived the condition ought to be heard by the trial ct.

(iii) Waiver by estoppel:(a) A person may not assert a right when (1) by deliberate words or

conduct, (2) and with knowledge or reason to know that the words or conduct will likely be relied on by another, (3) the actor causes the

other party detriment by inducing the justifiable belief that the right doesn’t exist or that it won’t be asserted.

(c) Illegality—if fulfillment of condition requires occurrence or nonoccurrence of event against public policy, the condition may be excused if it wasn’t a material part of the exchange.(i) E.g.: A employs B as advertising manager of his retail clothing store. As

part of the employment agreement, A promises to pay B a pension on B's retirement on condition that B not work in the retail clothing business in the same town. B works for A for 15 yrs, but doesn’t deal with customers and acquires no confidential trade information in his work. The restraint is unreasonable as a restraint of trade, but the condition is not an essential part of the agreed exchange and its nonoccurrence will be excused. A’s promise to pay the pension is enforceable even though B works as an advertising manager in the retail clothing business in the same town.

(d) Impossibility—impossibility or impracticability may excuse performance of a condition if (1) it isn’t a material part of the agreement and (2) forfeiture would otherwise result(i) E.g.: A, an insurance company, issues to B a policy of accidental injury

insurance which provides that notice within 14 days of an accident is a condition of A’s duty. B is injured as a result of an accident covered by the policy but is in a coma so that he is unable to give notice for 20 days. B gives notice as soon as he is able. Since the giving of notice within 14 days is not a material part of the agreed exchange, and forfeiture would otherwise result, the non-occurrence of the condition is excused and B has a claim against A under the policy.

(e) Forfeiture—if nonfulfillment of a condition would result in a disproportionate forfeiture (bad for one party and windfall to the other), the condition may be excused unless fulfillment of condition was a material factor(i) E.g.: A contracts to build a house for B, using pipe of Reading

manufacture. In return, B agrees to pay $75K in progress payments, each payment to be made “on condition that no pipe other than that of Reading manufacture has been used.” Without A’s knowledge, a subcontractor mistakenly uses pipe of Cohoes manufacture which is identical in quality and is distinguishable only by the name of the manufacturer that is stamped on it. The mistake is not discovered until the house is completed, when replacement of the pipe will require destruction of substantial parts of the house. B refuses to pay the unpaid balance of $10K. A court may conclude that the use of Reading rather than Cohoes pipe is so relatively unimportant to B that the forfeiture that would result from denying A the entire balance would be disproportionate, and may allow recovery by A subject to any claim for damages for A's breach of his duty to use Reading pipe.

C) Implied Conditions1) In general—often, even though a condition isn’t expressed in a K, it is nevertheless

clear that the obligation to perform is subject to a condition. In such cases, the condition is “implied” or “constructive.”

2) Implied conditions of performance—the most important type of implied condition to the duty of each party to perform is the performance (or tender of performance) of the other party.(a) Kingston v. Preston, KB, 1773. P and D made K for P to work for D for 1 ¼ yrs

and then D, upon P’s presenting of good security, would transfer his business and stock in trade to P at a “fair valuation.” D refused to perform and defended his action by claiming that P didn’t offer sufficient security. Held: presenting of good security is a condition precedent to D’s obligation to perform. Performance by one party depends upon the prior performance of the other party, and until the prior condition is performed, the other party isn’t liable.

3) Implied conditions of cooperation and notice—a party’s duty to perform may be conditional on the other party’s cooperation or giving of notice that performance is due.(a) Wal-Noon Corp. v. Hill, CA Ct. of App., 1975. P had leased the building from D.

P went ahead and replaced roof at his own expense, discovering later that the lease agreement w/ D indicated that it was D’s responsibility to maintain the roof. Held: notice of a need to repair is a condition of D’s duty to perform. Where not requiring notice would allow the lessee to unilaterally and conclusively determine the burden of responsibility w/out offering the lessor the opportunity to dispute liability or exercise any advantage it might have had in solving the problem, notice is an implied condition to duty to perform.

D) Warranties1) Express warranties (UCC §2-313)

(a) Express warranties are created by the seller are created as follows:(i) Any affirmation of fact or promise made by the seller to the buyer which

relates to the goods and becomes part of the basis of the bargain creates an express warranty that the goods shall conform to the promise.

(ii) Any description of the goods which is made part of the basis of the bargain creates an express warranty that the goods shall conform to the description.

(iii) Any sample or model which is made part of the basis of the bargain creates an express warranty that the whole of the goods shall conform to the sample or model.

(b) It’s not necessary to create an express warranty that the seller use formal words such as “warrant” or “guarantee” or that he have a specific intention to make a warranty, but an affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or commendation of the goods does not create a warranty.

2) Implied warranties(a) Implied warranty of merchantability (UCC §2-314)

(i) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.(a) Merchantability is not self-defining, but the core meaning is that the

goods “are fit for the ordinary purposes for which such goods are used.” UCC §2-314(2)(c).

(b) Implied warranty of fitness for a particular purpose (UCC §2-315)(i) Where the seller at the time of contracting (1) has reason to know any

particular purpose for which the goods are required and (2) that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

(c) Thus, warranty of merchantability only applies to merchants of “goods of that kind,” whereas the warranty of fitness for a particular purpose could potentially apply to non-merchants as well.

3) Disclaimer of warranties (UCC §2-316)(a) Unless circumstances indicate otherwise, all implied warranties are excluded

by expressions such as “as is,” “with all faults,” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty(i) To modify/exclude the implied warranty of merchantability, the

disclaimer (1) must mention merchantability and in case of a writing, (2) must be conspicuous.

(ii) To exclude/modify any implied warranty of fitness, the exclusion must (1) be by a writing and (2) conspicuous. Language to exclude all implied warranties of fitness is sufficient if it state, e.g., that “there are no warranties which extend beyond the description on the face hereof.”

(b) If buyer inspects goods or refuses to inspect goods when allowed to do sono implied warranty with regard to defects which an examination reasonably would have been disclosed.

(c) Thus, to disclaim the implied warranty of merchantability, a seller must either conspicuously use the shibboleth, “merchantability,” or use words which clearly disclaim all implicit warranties.

(d) When the exclusive limited remedy of the contract fails of its essential purpose, the buyer is entitled to invoke any of the remedies available under the UCC (§2-719(2)).

E) Order of performance1) Protracted performance is condition to performance of single act—if one party’s

performance will take a period of time, while the other’s may be performed in a moment, completion of the performance that will take time is an implied condition to the duty to render the momentary performance.

2) Earlier performance is condition to later performance—if one party promises to perform prior to the time the other party promises to perform, the first party’s performance is an implied condition to the other’s later duty to perform.

3) Simultaneous performances are conditions concurrent—if a K fixes the same time for the performance of both promises, and both are capable of simultaneous or nearly simultaneous performance, each party’s performance is an implied condition concurrent to the other’s performance; i.e., each must tender his performance as a condition to the other party’s duty to perform.

4) No time set for either performance—conditions concurrent will also be implied if no time is set for performance and the promises are capable of nearly simultaneous performance.

5) Time set for one performance but not the other—conditions concurrent will be implied if both promises are capable of nearly simultaneous performance

6) Anticipatory repudiation—a performance or tender that normally would be an implied condition to the other party’s performance or tender will be excused if the other party repudiates the K prior to the time when performance was to occur. In addition to being excused from holding himself ready to perform and from tendering performance, the nonrepudiating party can normally sue the repudiating party for breach even before the scheduled time for performance.

7) Prospective inability to perform—when circumstances make is appear that one party will be unable to perform. Prospective inability to perform excuses the other’s duty to perform. If prospective inability to perform arises from voluntary conduct, it may constitute anticipatory breach(a) UCC—either party can demand assurances if reasonable grounds for insecurity

exist and may suspend performance until assurances are given. Unjustified failure to give assurances w/in 30 days constitutes a repudiation.

(b) Rest. §251—extends UCC rule to all Ks.F) Doctrine of Substantial Performance

1) Generally—where one party’s performance is an implied condition to the other party’s duty of counterperformance, the implied condition will normally be satisfied by substantial performance. Thus, if the doctrine of substantial performance is applicable and one party renders substantial performance, the other party comes under a duty of counterperformance, although she can deduct any damages suffered because the first party’s performance was less than complete.

2) What constitutes “substantial” performance—whether the performance meets the essential purpose of the K. The factors to consider:(a) the extent of the contracted-for benefits that the innocent party has received;

(i) Context specific—the margin of departure on a sale of chattels would be less than w/ respect to the construction of a skyscraper. Similarly, where personal preferences are really important, the margin of departure is much smaller.

(ii) Dove v. Rose Acre Farms, Inc., IN Ct. of App., 1982. P worked on construction project for D, who ran various employee bonus plans that were intended to promote motivation and dependability while discouraging absenteeism and tardiness. D’s bonuses were lost if the employee was late, even just a minute, but days missed could be made up on weekends. P worked more than enough overtime to satisfy total # of hrs, but, when sick, missed two days of bonus period and didn’t make them up. Held: perfect attendance and punctuality a condition—P forfeits bonus. Where the terms are clear and understood by both parties, and primary purpose of K is to deter abseentism/tardiness, missing two days is material breach and no substantial performance.

(iii) O.W. Grun Roofing & Const. Co. v. Cope, TX Ct. of Civ. App., 1975. D contracted to put a new brown roof on P’s house. However, D used shingles that created yellow streaks along w/ the brown and P complained. D replaced many of the shingles but they still don’t match. P wouldn’t pay for D’s work. Held: D cannot recover K price. Where the unperformed part of a K is

material, as in a defect that goes to heart of K (here, an attractive roof for a home), there is no substantial performance. The defect can only be fixed by tearing the roof down, so no restitution.

(b) the extent to which damages will be an adequate compensation for the breach;

(c) the extent to which forfeiture will occur if the doctrine isn’t applied; and(d) the extent to which the breach was wrongful or in bad faith.

3) Application—primarily applied to construction Ks, where it would be unjust to allow an owner to retain the value of a building free of charge just because the builder deviated somewhat from the agreed specifications(a) Jacob & Youngs v. Kent, NY Ct. of App., 1921. P contracts to build house for D.

K specifies use of Reading pipe, but P inadvertently uses Cohoes pipe of virtually same quality. D refuses to pay. Held: P may recover on the K due to substantial performance, but correct measure of damages is trivial diminution of value, not the cost of replacement, which would be great. Otherwise, P would suffer a forfeiture without any corresponding benefit to owner; cost of performance would be “grossly and unfairly out of proportion to the good to be attained” due to need to destroy what has been done, which would be economic waste.

(b) UCC—in theory, the UCC adopts the “perfect tender” rule, thus not recognizing the doctrine of substantial performance in sale of good Ks. In practice, exceptions to the rule (e.g., seller’s right to cure defect, or if seller reasonably believes tender conforms [§§2-508 and 2-612]) have left little of the general rule.

4) Damages—a party receiving substantial performance may deduct from the payment due any damages suffered from the defective performance.(a) The usual measure of damages is cost of completion.(b) However, if this would result in substantial economic waste, diminution of

value is used as a measure of damages.5) Remedy in restitution—even if substantial performance isn’t found, a party still may

recover in restitution for the reasonable value of benefits conferred by her. In practice, the measure of recovery when performance is incomplete but readily remedial is usually the unpaid K price less the cost of completion, up to the value of the benefit received by the defendant.(a) O.W. Grun Roofing & Const. Co. v. Cope, TX Ct. of Civ. App., 1975. D

contracted to put a new brown roof on P’s house. However, D used shingles that created yellow streaks along w/ the brown and P complained. D replaced many of the shingles but they still don’t match. P wouldn’t pay for D’s work. Held: D cannot recover K price. Where the unperformed part of a K is material, as in a defect that goes to heart of K (here, an attractive roof for a home), there is no substantial performance. The defect can only be fixed by tearing the roof down, so no restitution (no benefit provided).

G) Divisible Contracts—a K is divisible if the parties’ performances can be apportioned into pairs of matching or corresponding parts that the parties treat as equivalents.1) Significance—if a K is divisible, a party who has performed one or more parts is

entitled to collect the K price for those parts even though she is in breach as to the other parts. However, since there still one K, the right to collect is subject to an offset for damages resulting from breach of the other parts.

(a) Factors to look for in deciding whether a K is divisible:(i) Ease of which the agreed consideration can be apportioned to

separate performances;(ii) Fungibility of performances;(iii) Lack of evidence that parties would have refused to deal for less than

the whole K.(b) Lowy v. United Pac. Ins. Co., CA Sup. Ct., 1967. D contracted to excavate,

grade, and otherwise prepare for the construction of streets in a subdivision owned by P. After D performed 98% of the excavation work, a dispute arose over payment for additional work (making curbs, etc.) occasioned by changes in P’s plans and D ceased work. Held: K divisible. Where the K is severable into agreed equivalents, the doctrine of substantial performance applies to severable parts.

2) “Entire” contract—a K that isn’t divisible is said to be “entire”(a) New Era Homes Corp. v. Foster, NY Ct. of App., 1949. P entered a written K w/

D by which P was to make extensive alterations to D’s home. According to the K, D was to pay $150 upon signing the K, $1K upon the delivery of the materials and start of the work, $1500 upon completion of the rough carpentry and plumbing, and $425 upon job completion. After the 1st 2 payments were made and P had completed the requirements for the 3rd, D refused to pay the $1500 third payment. P sued for the remainder of the payments but stipulated at trial a reduction of the amount due to $1500. Held: K not divisible. A K is divisible only if the parties intended it to be, and the fact that the K provides for a schedule of payments is not conclusive evidence of divisibility.

3) Employment contracts—if an employment requires periodic salary payments (e.g., $1K/mth), cts. usually hold the K to be divisible.(a) Britton v. Turner, NH Sup. Ct., 1834. P worked for D under a contract to work

for a year for $120. P worked for only 9 ½ mths then left w/out cause. Held: P entitled to reasonable value of services bestowed for 9 ½ mths. Though generally, there’s a constructive condition that when there’s a contract where one party performs instantaneously (e.g., pays money) and the other party performs over time (performs some sort of service), the instantaneous performance needn’t be tendered until after the performance over time is complete; however, in the context of employment Ks, such Ks are divisible rather than entire.

H) Material vs. Minor Breach—an actual breach of K at the time performance is due gives rise to an immediate c/o/a for damages. Whether a breach also excuses the duty of counterperformance depends on whether it is material or minor.1) Distinguishing material from minor breach—look to following factors:

(a) The extent to which the breaching party has already performed (breach at the outset is more likely to be material);

(b) Whether the breach was willful, negligent, or the result of purely innocent behavior;

(c) The extent of uncertainty that the breaching party will perform the remainder of the K;

(d) The extent to which the nonbreaching party will obtain (or has obtained) the substantial benefit he bargained for;

(e) The extent to which the nonbreaching party can be adequately compensated for the defective/incomplete performance;

(f) The degree of hardship imposed upon the breaching party by holding the breach material and terminating all his contractual rights.(i) Repudiation—words or conduct by a party that a reasonable person would

interpret as an expression of refusal to perform further. An act considered to be a minor breach will likely be treated as a material breach if accompanied by an express repudiation.

(ii) Effect of parties’ agreement—the K, either expressly or impliedly, may make the time, manner, or other details of performance material, in which case the specified deviations normally will be considered material (e.g., “time is of the essence”).

2) Effect of material breach—gives rise to immediate c/o/a for breach of the entire K; excuses further performance by innocent party.

3) Effect of minor breach—gives rise to immediate c/o/a for whatever damages were caused by the breach, but not a c/o/a on the entire K. The minor breach may suspend, but doesn’t excuse, the duty of counterperformance.

4) Response to breach—if the breach is material, the innocent party may sue for damages and let the K continue, or terminate the K and sue for total breach. A minor breach permits a suit for damages but not termination.

5) Material breach vs. substantial performance—both distinguish between major or important breaches and minor or less important breaches. But the two are used differently. Substantial performance is usually invoked by a party who has breached but seeks the contract price minus a setoff for damages, whereas material breach usually is invoked where one party has breached in a minor way, the other party terminates the K as a result, and the first party wants to argue that there was no right to terminate b/c his breach wasn’t material.(a) Substantial performance—goes to question of when a party who has breached can

bring a suit for damages rather than unjust enrichment.(b) Material breach—goes to question of whether a victim of a breach can terminate

the K and be entitled to damages for the whole K, or cannot terminate the K and is entitled only to damages for partial breach.

I) Anticipatory Breach—if either party repudiates the K prior to the time set for performance, the other party may treat the anticipatory repudiation as a present, material breach of K and bring an immediate action for the entire value of the promised performance.1) Acts sufficient—words or voluntary act that disables the promisor from performing2) Insistence on terms not part of the contract—constitutes an anticipatory breach3) Requirement of unequivocal repudiation—an anticipatory repudiation requires a

positive, unconditional refusal to perform as promised in the K. Ambiguous expressions (“I doubt”) are insufficient. They may, however, constitute a prospective inability to perform whereupon the other party may suspend counterperformance.

4) Exception where nonrepudiating party has completed performance—anticipatory repudiation doesn’t apply where the only remaining duty of performance is a unilateral duty of the repudiating party, especially a duty to pay money in

installments. Usually, in such a case, the innocent party must wait to sue until an actual breach occurs at the time set for the other party’s performance.(a) John Hancock Mutual Life Ins. Co. v. Cohen, 9th Cir., 1958. Cohen was the

beneficiary under a life insurance policy, which provided for Cohen to receive monthly payments during a 20-yr period and a final $5K lump sum payment. After paying for 15 yrs, John Hancock tendered the final lump sum, claiming a mistake had been made and that the parties to the policy intended protection for 15 yrs. Cohen sued for the amount owing for the remaining 5 yrs. Held: doctrine of anticipatory breach doesn’t apply in breach of K to pay definite sums at specified future dates.

5) Retraction—generally, the repudiator may retract his repudiation at any time prior to the date set for his performance, unless the innocent party has either accepted the repudiation or has changed his position in detrimental reliance thereupon.

6) Determining damages—generally, the injured party must act promptly to mitigate damages after learning of the repudiation(a) UCC—the measure of damages for a buyer’s anticipatory repudiation of a K for

sale of goods is the difference between the K price and the market price at the time and place for tender. If the seller anticipatorily repudiates, the buyer may either cover or recover damages equal to the difference between the market price at the time the buyer learned of the breach and the K price.

7) Mitigation of damages—the innocent party owes a duty to mitigate damages (e.g., to stop performance), and if he fails to do so, he isn’t entitled to recover damages he could have otherwise avoided.

8) Prospective inability to perform—if the prospective inability to perform is caused by voluntary conduct, it may constitute anticipatory breach.

J) Changed Circumstances—Impossibility and Frustration1) General rule—performance of a K will normally be excused when it has been

made impossible—more accurately, impracticable—by the occurrence of an event the nonoccurrence of which (1) was a basic assumption on which the K was made, unless the adversely affected party (2) has assumed (expressly or impliedly) the risk that the event might occur.(a) Basic assumption—determining whether something was a basic assumption

involves a judgment as to the central motivation of the K.(i) In making such determinations, cts. look at all circumstances, including:

(a) the terms of the K; (b) foreseeability—the fact that the event was unforeseeable is significant as

suggesting that its non-occurrence was a basic assumption. However, the fact that it was foreseeable, or even foreseen, doesn’t, of itself, argue for a contrary conclusion, since the parties may not have thought it sufficiently important a risk to have made it a subject of their bargaining;

(c) relative bargaining positions of parties—goes to the relative ease with which either party could have included a clause;

(d) effectiveness of market in spreading risk (who is the superior risk bearer?)—for example, where the obligor is a middleman who has an opportunity to adjust his prices to cover them.

(ii) Generally, death or destruction of a thing is a basic assumption, but continuation of existing market conditions and financial situation of the parties isn’t

(b) Assumption of the risk—can be express or implied. Express = force majeure clauses. Can be implied from a warranty, an undertaking to obtain insurance, or a term expressly allocating the risk of another type of events (raising inference that the other assumed the risk of events not enumerated). If K terms don’t settle the issue, its context, including normal commercial practices and expectations must be examined.(i) Parties are generally deemed responsible for risks w/in their control.

Thus, parties should bear the risk of the occurrence of an event if the party could have shifted this risk to a third party by K—e.g., by obtaining insurance. For example, consider a wholesaler who contracts to sell goods obtained from specific supplier. The wholesaler can easily make a second K w/ that supplier to obtain the goods. This won’t shift the risk a loss of production b/c of a natural disaster, b/c the supplier would be excused on the grounds of impracticability. Therefore, in the event of such a loss the wholesaler should be excused from delivering, whether it has made a K w/ the supplier or not. But if supplier cuts production, the wholesaler isn’t excused, b/c he could have gotten second K. (Canadian Indus. Alcohol Co. v. Dunbar Molasses Co.) Furthermore, financial inability and other kinds of subjective impossibility are generally considered to be sufficiently w/in the control of one party that they are assumed by that party.

(ii) Examples:(a) E.g.: A, who has had many years of experience in the field of salvage,

contracts to raise and float B’s boat, which has run aground. The contract, prepared by A, contains no clause limiting A’s duty in the case of unfavorable weather, unforeseen circumstances, or otherwise. The boat then slips into deep water and fills with mud, making it impracticable for A to raise it. If the court concludes, on the basis of such circumstances as A’s experience and the absence of any limitation in the contract that A prepared, that A assumed an absolute duty, it will decide that A’s duty to raise and float the boat is not discharged and that A is liable to B for breach of K.

(b) E.g.: Several months after the nationalization of the Suez Canal, during the international crisis resulting from its seizure, A contracts to carry a cargo of B’s wheat on A’s ship from Galveston to Iran for a flat rate. The K doesn’t specify the route, but the voyage would normally be through the Straits of Gibraltar and the Suez Canal, a distance of 10,000 miles. A month later, and several days after the ship has left Galveston, the Suez Canal is closed by an outbreak of hostilities, so that the only route to Bandar Shapur is the longer 13,000 mile voyage around the Cape of Good Hope. A refuses to complete the voyage unless B pays additional compensation. A’s duty to carry B’s cargo is not discharged, and A is liable to B for breach of K.

(c) U.S. v. Wegematic Corp., 2nd Cir., 1966. D won a contract to deliver a computer system to the Federal Reserve. K included liquidated damages clause and penalty damages for late delivery of system. Development of the system took longer than expected and eventually, D requested cancellation of the K. Held: K not rescindable. Basic engineering difficulties that prevent timely delivery don’t constitute commercial impracticality excusing performance, where liquidated damage clause and penalty for late delivery allocates risk to D.

(d) E.g.: A contracts to sell a specified machine to B for $10K, warranting its merchantability. At the time the K is made, the machine is not merchantable because of an uncurable defect not due to the fault of A, but A has no reason to know this. Because of A’s warranty, he is under a duty to deliver a merchantable machine in spite of the impracticability of doing so, and A is liable to B for breach of K.

2) Recurring types of impracticability cases:(a) Supervening illegality—where performance of a K has become illegal due to

changes in the law or through some other act of gov’t after the time of contracting, performance is excused.

(b) Supervening destruction or nonexistence of subject matter—where this situation occurs through no fault of the promisor, the promisor’s duty is excused.(i) Taylor v. Caldwell, KB, 1863. . P contracted w/ D for a music hall for

four days to give concerts, but before the concerts were to be given, the hall was destroyed by fire. Neither party was responsible for the fire. Held: landlord’s duty to perform discharged. In a contract where the performance depends on the continued existence of a person or thing, a condition is implied that impossibility of performance arising from the perishing of that person or thing shall excuse the performance of the K.

(c) Specific source of supply contemplated—the seller’s duty to furnish goods under a K for sale may be excused on the failure of a particular source of supply specified or contemplated by both parties (e.g., failure of a particular crop specified by the parties)(i) Mineral Parkland Co. v. Howard, CA Sup. Ct., 1916. D contracted w/ P to

remove from P’s land all the gravel and earth necessary for the construction of a bridge across the ravine. The parties estimated that D would remove about 114K cubic yds, but D took only 50K cubic yds b/c rest was underwater and would cost 10x to extract. Held: D excused for impracticability. Here, the parties thought all gravel that was needed was on P’s land. P’s land didn’t have the gravel needed; the gravel under water wasn’t reasonably available.

(ii) However, even if a specific source of supply is contemplated, if seller doesn’t take steps to limit foreseeable risk of interruption of supply, it will have been deemed to have assumed the risk.(a) Canadian Ind. Alcohol Co. v. Dunbar Molasses Co., NY Ct. of App.,

1932. P and D entered into a K for the sale of 1.5 million gallons of molasses. It was stated in the contract that D was to buy the molasses from the National Sugar Refinery; the amount was about 60% of the refinery’s normal run. However, D shipped only 344K gallons since the

total output of the refinery was only 485K gallons, much below capacity. D had no K w/ the refinery itself, but got sugar through a middleman. Held: D’s duty not discharged. A seller will not be excused for ordinary supply fluctuations, which it can guard against.

(d) Construction contracts—generally, a contractor’s duty to construct a building isn’t excused by destruction of the work in progress since the building can be rebuilt.

(e) Repair contracts—however, a contractor’s duty to repair/renovate an existing building is excused if the building is accidentally destroyed w/out fault by either party. The contractor may recover in restitution the reasonable value of the work done prior to the destruction.

(f) Land sale contracts—traditionally, the purchaser, as the equitable owner from the time of contracting, bears the risk of loss due to destruction of improvements. However, the modern trend, absent a contrary agreement, is to place the risk on the seller until closing or a change in possession, so that destruction of improvements excuses payment by the buyer.

(g) Sale of goods—under the UCC, if contracted-for goods are identified when the K was made and are destroyed w/out the fault of either party before the risk of loss passes, the K is avoided. If goods are to be shipped to the buyer, the risk of loss passes to the buyer when the seller delivers them to the carrier, unless the K requires delivery to a particular destination, in which case the risk of loss passes when the goods are tendered at the destination. If no shipment is involved, the risk of loss passes to the buyer upon his receipt of goods if the seller is a merchant; if seller isn’t a merchant, the risk of loss pass on tender.

(h) Death or illness—if a specific person is necessary for the performance of the promise, death/incapacitating illness of that person excuses the duty to perform. A service is personal if the right to command the services cannot be validly assigned/delegated.

3) Temporary impracticability—merely suspends rather than excuses the promisor’s duty. After the impracticability ends, the duty reattaches, but only if performance thereafter wouldn’t substantially increase or make different the burden on either party.

4) Partial impracticability—the promisor is still bound to perform the practicable remainder of performance if she is able to render substantial performance and the remainder isn’t made materially more difficult or disadvantageous. The promisee is bound to accept the modified performance w/ an appropriate offset.

5) Recovery in restitution for part performance—either party may recover in restitution for the reasonable value of her performance due to a K’s being discharged for changed circumstances. A few cases allow recovery for reliance damages.

6) Frustration—even if a bargained-for performance is still possible, a K is discharged under the doctrine of frustration where the purpose or value of the K has been destroyed w/out fault by some supervening event that wasn’t reasonably foreseeable at the time of contracting.(a) Requirements:

(i) Some supervening act or event;(ii) The supervening act or event wasn’t reasonably foreseeable at the time the

K was entered into;

(iii) The avowed purpose or object of the K was known and recognized by both parties at the time they contracted;

(iv) Must be substantial frustration—not just unprofitable, but so severe that it isn’t fairly w/in the risk assumed under the K (whether express or implied).

(b) Examples:(i) E.g.: A and B make a K under which B is to pay A $1K and is to have the

use of A’s window on January 10 to view a parade that has been scheduled for that day. Because of the illness of an important official, the parade is cancelled. B refuses to use the window or pay the $1K. B’s duty to pay is discharged, and B is not liable to A for breach of K. (Krell v. Henry)

(ii) E.g.: A contracts to sell and B to buy a machine, to be delivered to B in the U.S. B, as A knows, intends to export the machine to Japan for resale. Before delivery to B, a government regulation prohibits export of the machine to Japan. B refuses to take or pay for the machine. If B can reasonably make other disposition of the machine, even though at some loss, his principal purpose of putting the machine to commercial use is not substantially frustrated. B’s duty to take and pay for the machine is not discharged, and B is liable to A for breach of K.

(iii) Wash. State Hop Prods., Inc. v. Goschie Farms, Inc., WA Sup. Ct., 1989. Under a USDA marketing order program in effect from 1965-1985, hop growers couldn’t market their hops w/out a federal allotment called a “hop base.” B/c hop base was scarce, it became the subject of trading. P was a trust organized to deal in the market for hop base, from whom D contracted to buy hop base, when the USDA suddenly cancelled the program. Held: termination of gov’t program is supervening frustration of purpose of K. The purpose of the K was for D to purchase hop base created by the USDA marketing order. Once the program was terminated, there was no need to purchase hop base; the hop base wouldn’t even exist—this is an unforeseen event the nonoccurrence of which was a basic assumption on which the K was made.

VI) RemediesA) Basic Measures of Damages

1) Damage measures(a) Expectation damages—based upon the K price and have purpose of putting the

victim of breach in the position he would have been if the promise had been performed.(i) Incidental damages—these include expenses such as the seller’s costs of

shipping goods to and from a buyer who has breached or a buyer’s costs of finding substitute goods after a seller breaches. Incidental damages are normally added to the general damage award.

(ii) Formula = loss in value caused by breacher’s nonperformance + consequential damages + incidental damages – any cost or loss avoided by not having to perform. Alternatively, think of this as profit + reliance – payments received and salvage.

(b) Reliance damages—based on the nonbreaching party’s costs and have purpose of putting the nonbreaching party in the position she would have been in had the promise not been made.(i) Generally used where promise is enforceable only b/c it was relied upon

(e.g., promissory estoppel)(ii) Can be used where neither expectancy nor restitution damages would

be appropriate for policy grounds.(a) Sullivan v. O’Connor, MA Sup. Ct., 1973. P, an entertainer, contracted w/

D, a plastic surgeon, to perform several operations on her nose, whereby D promised to enhance P’s beauty. D performed the surgery but failed to achieve the promised result. P sued for breach of K. Held: P entitled to reliance damages. For breach of physician-patient agreements, restitution seems too meager and expectancy recovery too excessive (since the performance of such results is usually too uncertain, medical science itself being uncertain). The propriety of expectancy damages is strongest when the promises are made in the commercial context, and weakest in the noncommercial context.

(c) Restitutionary damages—based on the reasonable value of a benefit conferred by the promisee on the promisor and are generally sought in a variety of circumstances:(i) Benefit conferred under a contract that turned out to be unenforceable;(ii) Where there was an enforceable K that was breached, but it was a losing K

for the nonbreaching party; or(iii) No contract was formed but a benefit was conferred in a precontractual

stage when the parties believed they had concluded or would conclude a contract.

B) Limitations on Expectation Damages1) Principle of Hadley v. Baxendale—a party injured by a breach can recover only

those damages that (1) should reasonably be considered as arising naturally (i.e., in the usual course of things) from the breach, or (2) might reasonably have been contemplated by the parties at the time the K was made.(a) General damages—damages that flow from a given type of breach regardless of

the breach victim’s particular circumstances and are always recoverable; e.g., if a seller breaches by not delivering contracted-for goods, the buyer may recover either the market price minus the contract price or the cost of substitute goods minus the contract price.

(b) Consequential damages—damages above and beyond general damages that result from the buyer’s particular circumstances; e.g., factory’s loss of profits if a needed replacement part isn’t delivered. They are recoverable only if the seller knew or had reason to foresee the damages as a probable result of the breach. Today, “probable” is often interpreted as a significant likelihood that the damages would result. (Functionally, this is a duty to pre-mitigate damages in case of breach.)(i) Contrast these two examples:

(a) E.g.: A and B make a written K under which A is to recondition by a stated date a used machine owned by B so that it will be suitable for sale

by B to C. A knows when they make the K that B has contracted to sell the machine to C but knows nothing of the terms of B’s K with C. Because A delays in returning the machine to B, B is unable to sell it to C and loses the profit that he would have made on that sale. B’s loss of reasonable profit was foreseeable by A as a probable result of the breach at the time the K was made.

(b) E.g.: The facts being otherwise as stated above, the profit that B would have made under his K with C was extraordinarily large because C promised to pay an exceptionally high price as a result of a special need for the machine of which A was unaware. A is not liable for B’s loss of profit to the extent that it exceeds what would ordinarily result from such a K. To that extent the loss was not foreseeable by A as a probable result of the breach at the time the K was made.

(ii) In addition to lost profits, the injured party may be able to collect for other foreseeable damages indirectly caused by breach, e.g., litigation costs:(a) E.g.: A contracts to supply B with machinery for unloading cargo. A, in

breach of K, furnishes defective machinery, and C, an employee of B, is injured. C sues B and gets a judgment, which B pays. The amount of the judgment and B’s reasonable expenditures in defending the action were foreseeable by A at the time the K was made as a probable result of the breach.

(iii) Policy limitation on consequential damages—even if consequential damages are foreseeable, cts. may withhold them if the K arises informally, indicating a lack of attention to allocation of the risks, or where the there is a huge disproportion between the loss and the K price.(a) E.g.: , a plastic surgeon, makes a K with B, a professional entertainer, to

perform plastic surgery on her face in order to improve her appearance. The result of the surgery is, however, to disfigure her face and to require a second operation. In an action by B against A for breach of K, the court may limit damages by allowing recovery only for loss incurred by B in reliance on the K, including the fees paid by B and expenses for hospitalization, nursing care and medicine for both operations, together with any damages for the worsening of B's appearance if these can be proved with reasonable certainty, but not including any loss resulting from the failure to improve her appearance. (Sullivan v. O’Connor)

(iv) When the K when entered into leaves some terms to be mutually agreed upon at a later date, the nonbreaching party can recover for consequential damages that were not foreseeable at the time the K was executed, but were foreseeable at the time the gaps in the K were filled in.(a) Spang Ind., Inc., Ft. Pitt Bridge Div. v. Aetna Casualty and Surety Co., 2nd

Cir., 1975. P contracted w/ Torrington to provide structural steel for construction of a bridge, “delivery to be mutually agreed upon.” The parties later agreed that delivery should be in late June 1970. However, P was unable to supply the steel until mid-September. Torrington was therefore forced to delay the pouring of concrete until late into the fall, when there was an imminent danger of freezing temperatures which

wouldn’t allow the concrete to set properly. Torrington incurred extra costs associated w/ a crash program to pour the concrete in one day and P’s failure to provide proper unloading when the first steel shipments arrived. Held: P can recover for consequential damages incurred in late pouring of concrete. When an agreement is entered into which provides for the future determination of a time for performance, knowledge of the consequences of failure to perform will be imputed as of the time when the date for performance was set.

2) Certainty—Rest. §352—only damages that are “reasonably certain” of computation are recoverable; speculative damages aren’t recoverable. Thus, lost profits from an existing business can be awarded, but lost profits from a new business are trickier. However, even lost profits from a new business may be awarded based upon the profits of similar existing businesses. The modern trend is not to cut off remedies unless the uncertainty is severe (UCC §1-106: “the remedies provided by this Act shall be liberally administered”).(a) Hydraform Prods. Corp. v. Am. Steel & Aluminum Corp., NH Sup. Ct., 1985. P

contracted to buy steel from D, telling D of his special need for timely deliveries to make woodstove selling season. D delivered late, but included a clause on delivery receipt insulating himself from liability for consequential damages. P didn’t make season, and so sold woodstove division and sued for lost profits for this season and additional seasons. Held: D liable for lost profits from current season only. Seller is liable for consequential damages for late deliveries when buyer’s vulnerability to late deliveries is known. Damages for lost profits on sales in additional years are too speculative to calculate; P wouldn’t necessarily have gone out of business from loss of supply in one season, so decrease in profits in subsequent years resulting from breach is unknowable. Clause negating liability for consequential damages falls out of K b/c it is different term that materially alters K.

(b) Patterson v. Meyerhofer, NY Ct. of App., 1912. P contracted to sell land that he planned to acquire at auction to D. D showed up at auction and bid up price to just under the contract price. P sued D for the difference between the contract price and the amount D purchased the land for at auction. Held: D liable for difference between contract price and price he paid at auction. P’s damages are limited to difference between contract price and the amount D bid up the land for at the auction even though if D hadn’t interfered the land would probably have sold for less at the auction—any damages in addition to the amount awarded would be speculative.

3) Duty to mitigate—an injured party cannot recover damages that could’ve been avoided “without undue risk, burden, or humiliation.” (Rest. §350(1))(a) Contracts for the sale of goods—if a buyer fails to cover (buy substitute goods)

when she could have, she won’t be permitted to recover consequential damages that could have been avoided by covering. Similarly, if the buyer repudiates, the seller cannot run up charges by packing, shipping, etc., and must cease manufacturing goods contracted for unless the completion would facilitate resale and thereby reduce the buyer’s damages.

(i) Reliance Cooperage Corp. v. Treat, 8th Cir., 1952. Doctrine of anticipatory repudiation is intended to aid the injured party. There is no duty to mitigate damages until there are damages to mitigate, and here this would not occur until a later date after notice of repudiation. D was obligated to perform and could produce items in question up until that date.

(b) Employment contracts—if an employer wrongfully terminates employment, the employee must look for a comparable job.

(c) Construction contracts—a contractor cannot continue to work after the owner breaches, but generally isn’t under a duty to find an alternative construction job during the period he would have been working on the cancelled K.

(d) Expenses recoverable—the nonbreaching party may recover the reasonable costs of mitigation efforts, even if the efforts are unsuccessful. (Rest. §350(2))(i) E.g.: the fees paid to an employment agency by a wrongfully discharged

employee seeking a new job are added to the employee’s damages, whether or not the job search was successful.

(e) Lost volume—where the injured party can make other arrangements for the disposition of the goods/services he was going to give to breacher, he doesn’t necessarily avoid loss. If injured party could have entered into both transactions but for the breach, he has lost volume.(i) E.g.: A contracts to buy grain from B for $100K, which would give B a

net profit of $10K. A breaks the K by refusing to receive or pay for the grain. If B would have made the sale to A in addition to other sales, B’s efforts to make other sales do not affect his damages. B’s damages for A’s breach of K include his $10K loss of profit.

(ii) E.g.: A contracts to pay B $20K for paving A’s parking lot, which would give B a net profit of $3K. A breaks the K by repudiating it before B begins work. If B would have made the K with A in addition to other contracts, B's efforts to obtain other contracts do not affect his damages. B’s damages for A’s breach include his $3K loss of profit.

C) Specific Performance1) Specific performance is an equitable remedy that is available only if the remedy at

law is inadequate. This includes cases where the subject matter is unique, including all Ks for interests in land and Ks for the sale of unique goods. Specific performance won’t be awarded to force someone to work under a service K, even if the services are unique, but cts. might issue an injunction against the breaching party to prevent her from working for competitors.(a) Factors to consider in deciding whether to grant specific performance:

(i) Ease of administration of injunction by ct. w/out constant and long-continued supervision;(a) Laclede Gas Co. v. Amoco Oil Co., 8th Cir., 1975. P and D entered into

longterm requirement K for propane at a published rate, but D repudiated the K when the price of propane rose. P sued D for specific performance, because due to market shifts, no one else would enter into longterm requirements K and so P cannot cover. Held: P entitled to specific performance. Where the nonbreaching party cannot recover, it is entitled to specific performance. Requirements Ks are not too indefinite for a

remedy of specific performance to be administered where price is published rate.

(ii) Definiteness of the K—specific performance only granted where the terms of the K being enforced are sufficiently certain that the ct. can determine what it must order each party to do in order to carry out the agreement;

(iii) Inadequate remedy at law—money damages are insufficient to restore the benefit of the bargain to the nonbreaching party (including the likelihood that an award of damages couldn’t be collected from the breacher);(a) Note that even fungible goods can be “unique,” so long as there is an

inability to cover in the open market.1. Curtice Bros. Co. v. Catts, NJ Ct. of Chanc., 1907. P contracted to

purchase D’s tomato crop in time for the canning season. D repudiated the K, and P sued for specific performance because his business depended upon a steady supply of tomatoes and market couldn’t guarantee to produce tomatoes at reliable quality/quantity when needed. Held: specific performance granted. Even where goods are fungible, if the nonbreaching party cannot cover and consequential damages would be nonrecoverable b/c too speculative, then specific performance is available.

(iv) Hardship—specific performance won’t be granted if the enforcement will cause great hardship (balance the disutility of granting specific performance against the disutility of denying specific performance);(a) ABC v. Wolf, NY Ct. of App., 1981. In sportscaster’s K w/ network, he

had duty to negotiate for renewal in good faith, which he breached by jumping to a rival network. Network sued for negative injunction, prohibiting sportscaster from working for rival network for length of K entered into in breach of duty to negotiate in good faith. Held: specific performance denied. Once a personal service K terminates, it is no longer possible to decree negative specific performance. If there is an express anticompetitive covenant, it will be strictly construed and enforced only when necessary to protect the former employer. Public policy disfavors the loss of a person’s livelihood. Thus, specific enforcement of a personal service K after the term of employment has expired will be ordered in few cases.

(v) Clean hands—specific performance not available where K results from misrepresentation, mistake, sharp practice, or other unfair acts (e.g., unfair consideration, etc.)

D) Expectation Damages and Specific Performance in Certain Contexts1) Contracts for the sale of goods

(a) Breach by seller(i) General damages for breach as to accepted goods—if buyer accepted

goods that don’t conform to the K (usually giving rise to breach of warranty action), the buyer’s general damages are normally measured by the value the goods would have had if they had been conforming minus the value of the

accepted goods. This difference in value may be measured indirectly by the cost of repairing the goods such that they are in their warranted state.

(ii) General damages where seller fails to deliver or buyer rightfully rejects or revokes acceptance—the buyer can recover either (1) the market price at the time he learned of the breach minus the K price, or (2) the cost of cover minus the K price, if the buyer covers in good faith and in a commercially reasonable manner (UCC §2-712).

(iii) Specific performance and replevin—UCC §2-716 permits a buyer to get specific performance “where the goods are unique or in other proper circumstances” (e.g., where the buyer reasonably cannot cover).

(iv) Buyer’s incidental damages—incidental damages generally include reasonable expenses incident to the seller’s delay or other breach, such as inspection costs, expenses relating to cover, etc.

(v) Buyer’s consequential damages—consequential damages include any loss resulting from the requirements of the buyer of which the seller had reason to know at the time the K was made and that couldn’t have been prevented by cover.(a) Also includes any injury to person or property proximately caused by

breach of warranty.(vi) Damages for late performance—if the seller breaches by late performance

and she knew or had reason to know that the goods would be resold by the buyer, the buyer can recover the reduction in market value of the goods between the time performance was due and the time performance was rendered.

(b) Breach by buyer(i) General damage measures

(a) Market damages—if a buyer refuses to purchase the goods, the seller can recover the K price minus the market price at the time and place of tender.

(b) Lost volume—if the market price formula won’t put the seller in as good a position as performance would have (e.g., cases where the seller has lost the volume of sales he otherwise could have made but for the breach), the seller can recover lost profits—i.e., the K price minus either the seller’s cost of purchasing the goods (where the seller is a dealer) or the costs of manufacture (where the seller is a manufacturer).1. lost volume measure only available where goods are fungible and in

relatively deep supply.(c) Resale—alternatively, the seller can resell the goods in good faith and in a

commercially reasonable manner and recover the K price minus the resale price (UCC §2-706).

(ii) Action for price (specific performance)—a seller can maintain an action for the full price if (1) the buyer refuses goods that have been identified in the K and (2) the seller is unable to resell the goods after reasonable efforts, or such efforts would be unavailing (e.g., where the seller has specially manufactured goods for the buyer that are unsuitable for sale to others, such as calendars printed w/ the buyer’s name).

(iii) Incidental damages—the seller may also be able to recover expenses incurred as a result of buyer’s breach, such as extra transportation, sales, and commission costs.

2) Contracts for the sale of realty(a) Breach by seller

(i) Damages—many states limit a buyer’s damages for a seller’s refusal to convey real property to the buyer’s out-of-pocket expenses unless the breach is in bad faith, in which case the buyer can recover the market price minus the K price.

(ii) Specific performance—alternatively, the buyer is entitled to specific performance in the form of a decree ordering the seller to convey. Damages are considered an inadequate remedy b/c every piece of land is unique to some extent and b/c (for that reason) the value of land is always to some extent conjectural.

(b) Breach by buyer(i) Damages—if the buyer refuses to purchase, the seller is entitled to recover

the K price minus the fair market value of the land.(ii) Specific performance—alternatively, the seller can obtain a decree of

specific performance, which will usually provide that if the buyer doesn’t pay by a specified date, the seller can resell and collect any deficiency between the resale price and the K price from the buyer.

3) Employment contracts(a) Breach by employer—the employee is entitled to the remainder of her wages

minus wages actually received from substitute employment or that would have been received had substitute employment been sought.(i) Note that the duty to mitigate is only to find work of the same type and in

the same locale.(b) Breach by employee—the employer is entitled to recover the wages that must be

paid to a replacement minus the employee’s wages(c) Specific performance—this remedy isn’t available, but a ct. may issue an

injunction barring the employee from working for a competitor. However, where such an injunction would amount to ordering specific performance (b/c the employee cannot get a good job except w/ a competitor), the ct. will deny an injunction barring the employee from competing.(i) ABC v. Wolf, NY Ct. of App., 1981. In sportscaster’s K w/ network, he

had duty to negotiate for renewal in good faith, which he breached by jumping to a rival network. Network sued for negative injunction, prohibiting sportscaster from working for rival network for length of K entered into in breach of duty to negotiate in good faith. Held: specific performance denied. Once a personal service K terminates, it is no longer possible to decree negative specific performance. If there is an express anticompetitive covenant, it will be strictly construed and enforced only when necessary to protect the former employer. Public policy disfavors the loss of a person’s livelihood. Thus, specific enforcement of a personal service K after the term of employment has expired will be ordered in few cases.

4) Construction contracts and other contracts for services

(a) Breach by owner—the contractor is entitled to recover the K price minus out-of-pocket costs to be incurred, with an offset for amounts already paid by the owner. Alternatively, the contractor can recover lost profits plus out-of-pocket costs prior to the breach, with an offset for amounts already paid by the owner. (The two formulas give the same result unless the contractor has made a losing K.)

(b) Breach by contractor(i) Cost of completion—if the contractor breaches materially, the owner

normally is entitled to recover the difference between the K price and the cost of completing the K by hiring a substitute contractor.(a) Rivers v. Deane, NY Sup. Ct., App. Div., 1994. Ps sued D for breach of K

whereby D was to construct an addition to P’s home. The third floor of the “completed” addition, which was P’s intended master bedroom and bath, was unusable due to the inadequate structural support installed by D. Held: the proper measure of damages is the market value of the cost to repair the faulty construction. The difference in value rule is limited to cases in which the builder’s failure to perform is both trivial and innocent, such that damages may be measured by the diminution in value of the building rather than the cost of completing the project properly. Here, the defect was so substantial as to render the addition partially unusable and unsafe.

(ii) Diminished value damages—if the above measure would lead to waste or would be disproportionate to the owner’s gain, the owner will recover the value of what she received minus the value of what she would have received had the K been performed in full.(a) Economic waste—occurs when existing and substantially conforming

structure must be torn down to remedy defect, not just anytime the cost of completion is greater than the added value to the property. Note that a structure isn’t substantially conforming when there is a subjective valuation problem. For example, a functional roof w/ yellow streaks might be fine for a factory, such that it would be economic waste to fix it and entitling the factory owner to diminished value damages, the same streaks in a functional roof on a home would not be a substantially conforming roof, and thus the measure of damages would be cost of completion.

(b) Willful breach—diminished value damages not available to contractor who intentionally breaches1. Am. Standard, Inc. v. Schectman, NY Sup. Ct., App. Div., 1981. P

contracted to convey the buildings and equipment to D, a demolition contractor, for $275K and D’s promise both to remove all structures and equipment and to take the foundations down to one foot below the grade line. D failed to take the foundations down to the specified depth. P was still able to sell the property for $183K, $3K below its full market value. The cost to complete taking the foundations down as agreed was $110,500. Held: measure of damages is cost of completion, not diminution of value. To be eligible for the diminution

of value measure, the contractor’s breach must have been in good faith; i.e., unintentional and trivial.

(c) Specific performance—generally, a K for construction won’t be specifically enforced.

5) Contracts for carriage—if the subject matter of a K for carriage consists of goods to be sold by the shipper (and this was reasonably foreseeable), the shipper can recover for the reduction in market value between the time performance should have been rendered and the time it was performed. Alternatively, the shipper’s damages are often measured by the reasonable daily rental value of the shipped goods during the delay.

E) Limits on Reliance Damages1) Damages must flow from the breach (e.g., overhead costs that would have been

incurred anyway aren’t recoverable even under reliance).2) Reliance damages cannot exceed what the nonbreaching party would have made

if the K had been completed. If nonbreacher would have made a loss in full performance of the K, then his reliance damages are cut back to bring his recovery into line w/ his expectations.(a) Burden of proof to show that K would be at a loss for injured party is on the

breacher. Rest §349: reliance damages = “expenditures made in preparation for performance or in performance, less any loss that the party in breach can prove w/ reasonable certainty the injured party would have suffered had the K been performed.”(i) L. Albert & Son v. Armstrong Rubber Co., 2nd Cir., 1949. When market

price for rubber was very high, P contracted to buy refiners to recondition rubber from D, who shipped them very late, when the market price for rubber had plummeted. P had spent lots of money preparing his factory for refiners, and sued for reliance costs. Held: P can recover for reliance costs, less the amount D can show that P would have lost on the contract if it had been performed. An award for reliance damages cannot place a nonbreaching party in a better position than it would have been in if the contract had been completed as promise. The burden of proof that nonbreaching party would have suffered a loss is on the breaching party.

(b) Pro rata reduction of reliance in losing Ks is not appropriate if the purpose of the K was not to make a profit (e.g., the ugly fountain).

3) Duty to mitigate.F) Nominal Damages—if a victim of breach can’t prove a loss, she is entitled at least to

nominal damages (normally $1)1) However, if there’s really no loss from a breach, no damages—the law “ignores

trifles”(a) Harris v. Time, Inc., CA Ct. of App., 1987. Junk mail said “if you open this

envelope, you get a calculator watch,” but upon opening envelope, you see offer further conditioned on buying magazine subscription. P sues for $15M. Held: suit dismissed. Even though valid offer, acceptance, and consideration, the ct. ignores trifles and refuses to grant relief where only damage resulting form breach is effort in opening an envelope.

G) Liquidated Damages—liquidated damages provision won’t be enforceable if the provision is a penalty. The name the parties give to the provision isn’t controlling.1) Requirements:

(a) Damages that would result from breach must have been impracticable or extremely difficult to assess at the time the K was made; and

(b) The amount of damages fixed must be a reasonable estimate of the damages that would result from the breach.(i) Exception: even if amount of damages fixed wasn’t a reasonable forecast,

liquidated damages are still recoverable if they are reasonable in light of the actual harms caused by the breach.

(ii) UCC §2-718(1): “Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipated or actual harm caused by the breach, …”

2) Limits on liquidated damages:(a) Subsequent events

(i) Traditional view—cts. enforced an otherwise enforceable liquidated damages provision even if subsequent conditions made actual damages ascertainable or it was clear that actual damages were substantially different from the liquidated amount.

(ii) Modern view—a liquidated damages clause may be ruled unenforceable, even if it was a reasonable forecast at the time of drafting, if it turns out to be completely disproportionate to actual damages suffered. Some cts. following this view apply the doctrine of unconscionability to reach this result(a) Leeber v. Deltona Corp., ME Sup. Ct., 1988. In K for sale of

condominium, liquidated damages were amount of deposit—15% of total price. When buyers of a unit breached the K, their deposit was seized. Developer promptly resold the unit for an even higher price. Buyers sued in restitution for their deposit, arguing that seizing deposit as liquidated damages was unconscionable where developer promptly resold unit at a profit. Held: liquidated damages clause upheld. Where liquidated damages clause is otherwise enforceable, it may nevertheless be deemed unenforceable as unconscionable. The determination of unconscionability of a liquidated damages clause must be based on circumstances existing at the time of the breach, not subsequent events. Here, buyer was claiming unconscionability based on subsequent events.

(b) Penalty—if the court thinks that the purpose of the clause is to act as a spur to encourage, say, timely delivery, then the court won’t uphold the clause. However, if the clause seems calculated to compensate for damages that the parties reasonably could have forecast at the time of the execution of the contract, then it’s not a penalty and the clause will be upheld.(i) Southwest Engineering Co. v. U.S., 8th Cir., 1965. In K for construction of

radio facilities was a liquidated damages clause that provided for a certain amount per day, where delay is contractor’s fault. Contractor sued for liquidated damages for significant delays, even though no actual damages resulted from delays. Held: liquidated damages awarded. The fact that no

actual damages were suffered doesn’t preclude recovery under a liquidated damages clause if the liquidated damages provision was a reasonable forecast of just compensation as of the time the K was executed and damages at that time were difficult to accurately estimate.

(ii) Where anticipated probable harm or harm actually caused by breach is minimal, nonpecuniary, or speculative, liquidated damages provision is unenforceable as a penalty.(a) City of Rye v. Pub. Serv. Mutual Ins. Co., NY Ct. of App., 1974. In order

to get certificate of occupancy for its buildings, developer agreed to K w/ liquidated damages provision that assessed damages for late completion. After very long delays, city sued for liquidated damages, but developer objected, saying that the only harms city could reasonably (actually did) suffer were minimal, nonpecuniary, or speculative. Held: liquidated damages clause unenforceable. Where anticipated probable harm or harm actually caused by breach is minimal, nonpecuniary, or speculative, liquidated damages provision is unenforceable.

(b) Muldoon v. Lynch, CA Sup. Ct., 1885. P hired D to build marble monument to her late husband, w/ K providing for liquidated damages in event of delay. Completion delayed for two years because of difficulty in shipping marble from Italy. Held: liquidated damages unenforceable. Where a party cannot show actual damages from breach, nor that measure was appropriate as reasonable forecast of probable damages from breach, a liquidated damages provision is an unenforceable penalty used as a spur to encourage timely completion.

(c) Size—even if the liquidated damages provision provides for very large award in event of breach, it is still enforceable if the amount fixed is a reasonable estimate of the damages that would result from the breach at the time the K was executed.(i) United Air Lines, Inc. v. Austin Travel Corp., 2nd Cir., 1989. Liquidated

damages clause in K for use of computerized booking system was 80% of the total K price for use of the system. Held: liquidated damages clause enforceable. Liquidated damages clauses are upheld unless the sums called for amount to a penalty because they are grossly disproportionate to the probable loss anticipated by the parties when the K was executed. Liquidated damages must bear a reasonable proportion to the probable loss, and the amount of the actual loss is incapable or difficult of precise estimation. In this case, even though the liquidated damages were large in amount, they were reasonable because most of P’s costs were fixed or determined early on in the relationship. The costs P would save by D’s breach were less than 20% of the revenue, so D received an adequate credit for those costs saved.

3) Deposits—deposits may serve the same purpose as liquidated damages provisions, and a deposit that was made by a party in breach often may be recovered to the extent that it exceeds the innocent party’s actual damages unless the deposit is also a valid liquidated damages provision.

H) Punitive Damages—not available in K actions1) Tort—punitive damages may be available if the breach also constitutes a tort, has

tortious elements, or (sometimes) is fraudulent or outrageous.

2) Good faith—punitive damages may also be available where there is a breach of the duty of good faith, in particular by insurers against their insureds.

I) Restitutionary Damages1) The goal here is to return the breaching party to the position before the

transaction (and so if there has been no value conferred to the breacher, the injured party cannot recover damages in restitution.)(a) E.g.: A contracts to sell B a machine for $100K. After A has spent $40K on the

manufacture of the machine but before its completion, B repudiates the K. A cannot get restitution of the $40K because no benefit was conferred on B.

(b) Bernstein v. Nemeyer, CT Sup. Ct., 1990. Ps, investors, put over $1M as limited partners into a real estate partnership. Ds induced Ps to invest by making negative cash flow guaranty—they would lend the partnership the operating cash it would need in excess of cash flow. After loaning $3M to Ps under the guaranty, Ds defaulted on the negative cash flow guaranty, and the mortgages on the real estate property were foreclosed. Ps and Ds lost everything. P sued for restitution. Held: no restitution. Where no benefit conferred upon the breacher, there’s no unjust enrichment, and thus no restitutionary damages.

2) The measure of restitutionary damages is the market value of benefit conferred (“the reasonable value to the other party of what he received in terms of what it would have cost him to obtain it from a person in the claimant’s position” [Rest. §371]).(a) E.g.: A, a surgeon, contracts to perform a series of emergency operations on B for

$3K. A does the first operation, saving B’s life, which can be valued in view of B’s life expectancy at $1M. The market price to have an equally competent surgeon do the first operation is $ 1800. A’s restitution interest is equal to the benefit conferred on B. That benefit is measured by the reasonable value to B of A’s services in terms of the $1800 that it would have cost B to engage a similar surgeon to do the operation regardless of the rule on which restitution is based.

(b) Limitation—though restitutionary damages can ordinarily exceed K price, the K price is a limit if the injured party has fully performed and the breacher merely owes a definite sum of money. (The ct. doesn’t want to rewrite the agreement for the parties.)(i) E.g.: A contracts to work for B for one month for $10K. After A has fully

performed, B repudiates the K and refuses to pay the $10K. A can get damages against B for $10K, together with interest, but cannot recover more than that sum even if he can show that the benefit to B from the services was greater than $10K.

3) Unenforceable contracts—restitutionary damges are available to recover the value of a benefit conferred under a K that is unenforceable because of the Statute of Frauds, impossibility, mistake, etc.

4) Losing Ks—restitutionary damages may also be awarded as an alternative to expectation damages against a party who has materially breached. This remedy usually is sought where the nonbreaching party has made a losing K. In such a case, restitutionary damages usually aren’t limited to the K price. (Note that injured parties in losing Ks will often go for reliance damages rather than restitution damages to get around requirement that the benefit must be conferred upon the other party.)

(a) E.g.: A contracts to sell a tract of land to B for $100K. After B has made a part payment of $20K, A wrongfully refuses to transfer title. B can recover the $20K in restitution. The result is the same even if the market price of the land is only $70K, so that performance would have been disadvantageous to B.

5) Plaintiff in default—even a party who has materially breached may be able to bring an action for restitution for reasonable value of conferred benefits, such as where a deposit exceeds the innocent party’s damages. Where what is being recovered is the value of a benefit bestowed rather than money paid, the less generous of either (1) how much it would cost another in breacher’s position to bestow the benefit or (2) the extent to which the other party’s property has been increased in value.(a) E.g.: A contracts to sell land to B for $100K, which B promises to pay in $10K

installments before transfer of title. After B has paid $30K he fails to pay the remaining installments and A sells the land to another buyer for $95K. B can recover $30K from A in restitution less $ 5,000 damages for B’s breach, or $25K. If A does not sell the land to another buyer and obtains a decree of specific performance against B, B has no right to restitution.

(b) E.g.: A contracts to make repairs to B’s building in return for B’s promise to pay $ 10,000 on completion of the work. After spending $8K on the job, A fails to complete it because of insolvency. B has the work completed by another builder for $4K, increasing the value of the building to him by a total of $9K, but he loses $500 in rent because of the delay. A can recover $5K from B in restitution less $500 in damages for the loss caused by the breach, or $4500.

VII) Fundamental Policies and Values of Contract LawA) Freedom of Contract

1) Principle of individual autonomy—no one may be bound in contract in the absence of that person’s consent.(a) E.g.: duress, incapacity, unconscionability, contract modifications, etc.(b) Corollary: both parties must be reasonably well informed—e.g., mistake, fraud,

duty to disclose, unconscionability.2) Right to property—people have the right to hold and deal w/ property.3) Ideological basis of freedom of K reinforced by pragmatic consideration that

economic intercourse is most efficient when its participants desire it and are free to bargain with each other to reach mutually desirable terms

4) Limits on freedom of K:(a) Limited by corresponding rights held by other persons—there must be some

policing of the bargaining process to ensure that the dominant party does not so diminish the weaker party’s exercise of contract freedom as to defeat it.

(b) Limited by state’s legitimate interest in appropriate regulation—e.g., policies prohibiting criminal enterprise, protecting the environment, forbidding anticompetitive behavior, protecting whistleblowers.

B) The Morality of Promise—Pacta Sunt Servanda (agreements must be kept)1) There is an ethical as well as legal obligation to keep one’s contractual promises—it

is morally wrong to break promises.2) Belied by the theory of the efficient breach, but cts. nonetheless react w/ express

disfavor to deliberate breaches, especially if motivated by bad faith.

3) Influence of social norms—social pressure and the desire for preserving business relationships can provide disincentives to treat contractual undertakings in a cavalier fashion. Not clear how much the rules matter (especially considering that most rules are merely default rules).

C) Accountability for Conduct and Reliance1) Objective theory of contracts—not only for evidentiary purposes, but also because

one of the fundamental values of K law is that a person ought to be held accountable for words or acts reasonably manifesting intent to contract, and that the other party, acting reasonably, should be entitled to rely on that manifestation of assent.

2) This is important not only specifically (i.e., that a person in a K has the right to rely on the undertakings in a particular K), but also generallysecurity of contracts. If there was no general security of contracts, there would be little incentive to enter into them.

3) Thus, we preserve some of the old formalities of classic contract law.(a) E.g.: consideration doctrine, parol evidence rule, etc.(b) The purpose of the formality principle is to guide the courts in helping people

cooperate, and to prevent fraud. The formalities show that the parties intended to be bound (evidentiary) and serves to protect people from improvident oral promises.

(c) Though this conflicts somewhat with the doctrine of promissory estoppel, the reason we go prefer more than reliance is for general security of contracts.

4) This reflects the tension in the doctrines relating to interpretation. On the one hand, the courts want to defer to whatever the parties to the contract are trying to accomplish—what did the parties intend? On the other hand, the courts don’t want to write a contract where the parties are too far apart in their intentions (mistake, etc.); however, sometimes, the courts will enforce the contract against one of the parties (where one party was more sophisticated, etc.).(a) Thus, the courts engage in social engineering through the guise of interpretation

(e.g., “the warranty wasn’t sufficiently disclaimed”) to prevent the less sophisticated from being exploited.

(b) People also don’t have the time to write perfect contracts. There are costs included in making contracts.

(c) So courts have to figure out what the parties would have intended if the specific occurrence had been contemplated.

D) Social Justice and the Protection of the Underdog1) Modern K law is sensitive to the imposition of contractual obligations as a result of

coercion, dishonesty, or lack of meaningful choice resulting from power imbalance. This is a function of the balancing of freedom of K and accountability for manifested conduct against the need to protect vulnerable parties from unfair imposition.

2) Cts. policing the bargaining process requires balancing competing policies. On the side of enforcement are the policies favoring the autonomy of the parties, the protection of justified expectations, and the stability of transactions. On the other side stand the policies favoring the prevention of unfairness and the protection of the parties from overreaching. There are three different perspectives from which cts. view the task of policing agreements:(a) Substance—inquires into whether K is fair. The least employed perspective.

(i) The rise of the bargain theory contributed to judicial reluctance to evaluate substantive unfairness by helping to strip from the doctrine of consideration any vestige of concern w/ the adequacy of consideration. The doctrine of consideration shields improvident promisor from liability if promise is gratuitous, but not if the promisor has received but a peppercorn by way of bargained-for exchange.(a) Three reasons why judges won’t inquire into substance: (1) efficient

administration of law requires that cts. not prescribe prices; (2) test of enforceability should be certain and not clouded by vague terms such as “fair” or “reasonable”; and (3) somewhat old-fashioned notion that persons of maturity and sound mind should be free to contract imprudently as well as prudently.

(ii) However, reluctance to police agreements for substantive unfairness wasn’t shared by equity cts.

(b) Status—focuses on characteristics of the party involved.(i) Involves balancing of competing policies: on the one side favoring

protection of the party lacking capacity, and on the other favoring protection of the other party’s expectation, reliance, and restitution interests. Furthermore, the question may not be whether a particular rule would work toward a desired end, but whether its application comes at too great a cost. Case-by-case analysis may be too costly and too uncertain. Arbitrary rules may be better suited to enabling others to identify and avoid contractual arrangements with members of the protected class—who may, incidentally, find limitations on their participation in commercial life a mixed blessing at best.

(c) Behavior –how the parties acted during bargaining process(i) Misrepresentation, duress, undue influence, procedural unconscionability

E) Fairness1) Cts. do not mechanically apply rules of law. Judges and juries are sensitive to the

equities of individual cases and the circumstances of the parties, and where a mechanical application of rules achieves a result that seems to be unjust, there is likely to be some adjustment or even manipulation of the rule to avoid it.(a) For example, contracts of adhesion have much to commend them—

standardization of terms reduces transaction costs and helps make risks calculable b/c all Ks will be skillfully drafted: unforeseeable contingencies can be taken care of, and can exclude/control the danger that a court will be swayed by irrational factors to decide against a powerful defendant.(i) However, danger of overreaching: (1) only one party has advantage of

time/experts in preparing K; (2) other party unfamiliar w/ terms and has scant time to read it; (3) and it’s on a take-if-or-leave-it basis.

(ii) Traditionally, duty to read. However, there are several ameliorative judicial techniques:(a) Writing not an offer—refuse to hold a party to a writing on the ground that

it wasn’t of the type that would reasonably appear to the recipient to contain the terms of a proposed K (e.g., a K on the back of a ticket stub).

(b) Terms not part of offer—refuse to hold a party to a term on the ground that, although the writing was an offer, the term wasn’t one that an unititiated reader ought reasonably to have understood to be part of offer (e.g., terms on unused reverse side, in small print—Cutler Corp. v. Latshaw)

(c) Interpretation of terms—to avoid holding a party to a term, cts. interpret the language of the term to favor that party (contra proferentum rule, and maxim that separately negotiated terms given greater weight than standardized terms).

(d) Statutory reinforcement—UCC may require term to be “conspicuous” (e.g., disclaimer of warranty).

(iii) These techniques inadequate, b/c cts. also don’t want to hold parties who have actual knowledge (b/c they’re meticulous and read the K) to these terms either. Moreover, they seem to provide a roadmap for evasion; given enough time, these terms will be written to pass muster. Finally, since these techniques purport to construe but do not, nor are intended to, but are instead tools of intentional and creative misconstruction, they seriously embarrass later efforts at true construction. Covert tools are never reliable tools.

2) Express doctrines to temper application of harsh rules: unconscionability, good faith requirement, and constructive fraud.

F) The Economic Aspect of Contract Law1) The goals of contract law are to facilitate trade and commerce, to regulate the manner

in which people deal w/ each other in the marketplace, and to enforce contractual obligations. Thus, contract law responds to and reflects prevailing economic conditions and philosophy—in the U.S., capitalistic and geared towards the ideal of a free market.

2) Ongoing debate between so-called “conservative” and “liberal” economists. Contemporary K law has tended to move away from strong laissez-faire approach of the late 19th and early 20th centuries, but there continues to be a conflict between those who stress economic values such as efficiency and those who advocate a greater emphasis on other social or moral values.

G) Remedies1) Ideally, all damages would be liquidated damages. Liquidated damages—often kind

of crude when present, and often missing b/c parties didn’t think of it or couldn’t agree on it, etc.

2) One way of thinking of remedies is interpretation—what would the parties have intended had the instant breach been anticipated?

3) Alternatively, we can think of remedies as a method to compensate the victim. If we take this mechanism, then we don’t think of deciding on remedies as a question of interpretation. It is under this rubric that courts invalidate liquidated damages clauses for being “penalties.”