Contracts Outline Spring 2012

I. PRINCIPLES OF CONTRACTUAL OBLIGATION-A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty (§1: Contract Defined).-A promise is a manifestation of intention to act or refrain from acting in a specified way, so made as to justify a promisee in understanding that a promise has been made (§2: Promise).-Leonard v. Pepsi, Inc.- Commercial viewer sent check for $700,000 (7 million Pepsi points) in exchange for a fighter jet.

Holding: Summary judgment for manufacturer because (1) the commercial was an advertisement, not a unilateral offer, (2) a reasonable person would conclude that a fighter jet wasn’t really up for grabs, and (3) no writing between parties to satisfy Statute of Frauds.

-Carlill v. Carbolic Smoke Ball Co.- Carlill won her case that she should receive $100 from the company after getting the flu (the advertisement offered a reward because it sought to induce performance and she complied with the terms of the offer). Today if she brought the case, though, she would probably lose because of the idea of the reasonable person.-Ray v. William G. Eurice & Bros., Inc.- Eurice Bros. breached contract to build Ray’s home because they thought that Ray’s specifications were too precise and unreasonable, despite the fact that they had signed the written offer with those updated specifications. There was no fraud or duress here; if there was a mistake, it was unilateral and it existed because the Eurice Bros. did not pay close enough attention to the written agreement.

Holding: D wrongfully breached his K with P and P was entitled to the difference between the cost agreed upon and the cost to complete the house ($5,993.40).

-Hurley v. Eddingfield- Decedent was sick, patient of the doctor, sent messenger for him; Dr. Eddingfield knew there was no one else available and that decedent relied on him, but the doctor refused to treat, without giving reason. Patient died. Estate sued doctor, alleging wrongful refusal to enter employment contract.

Holding: Ct said that D was not liable. A medical license doesn’t require a doctor to practice on any compulsory terms, or at all if he doesn’t want to.

No mutuality here. Even if decedent relied on D, D didn’t do anything to create the reliance or make himself responsible for decedent.

-Three concepts, as described by Fried:1. Traditional concept/ Restatement (Second) concept/ Fried

-“Contract as Promise” was written at a time when there were a few things present: legal realists, critical legal studies, Atiyah’s book “Economic Analysis of Law,” and Gilmore’s little book called “The Death of Contract.” Friend was irritated by these things, so he wanted to write his own book.-The traditional view is that Contract is a kind of neutral framework for voluntary transactions. It isn’t about any particular kind of transaction; it’s a way for people to frame any transaction they wish. This is what contrasts Contracts from Torts and Property.

-Contracts is about creating duties which otherwise do not exist. -Torts, by contrast, deals with transactions and encounters which are almost always involuntary (like a car accident). And the duties aren’t duties that are voluntarily assumed; they are duties that are imposed by the law. *The transactions aren’t always involuntary though.-And Property is the starting point for both kinds of duties.-Restitution:

-Fried gives an example of accidentally sending $250 to a charity instead of to his plumber. If the sender contacts the charity before the charity

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allots or spends the money, does the sender get the money back? Answer: money paid by mistake can be recovered under restitution. The receiver wasn’t entitled to the money, the sender hasn’t done anything wrong, and the sender hasn’t damaged the receiver.

-Fried believes that contracts should be fixed and enforceable at the time that the risk is transferred. One shouldn’t be able to break his/her contract whenever because conditions inevitably change.

2. Legal realists say there’s no such thing as public law. All duties and all rights are imposed by governments for its reasons – law is politics. / Atiyah (“The Rise and Fall of Freedom of Contract”)

-This is the view that Atiyah espouses. Atiyah believes that the traditional view (the view supported by Fried about contracts as promises) is not wrong necessarily, but it’s passé or regressive. Atiyah believes that the traditional view is in favor of the haves (it supports the rich getting richer). He doesn’t like this and says that the traditional idea of contracts as a neutral framework doesn’t work anymore.-Reasons to enforce promises: (1) promises create expectations and people will be disappointed if the promises aren’t performed, (2) contracts and promises are risk-allocation devices, and (3) it may be desirable to uphold the principle of promissory liability.

3. Law and economics/ Posner-Posner believes that the function of law is to increase value and that value is defined by ability to pay. Fried says that Atiyah kind of agrees with Posner. He gives the example of the pituitary gland problem and the poor family wanting stuff to help their child not be a dwarf and the rich family wanting it to make their 5’10” child 6’1”.

A. Grounds for Enforcing Promises1. Formality

-In order for a contract to be enforceable, the promisor must receive something of value in return for the promise.-The promise must be bargained for-Bilateral Contract – Contract involving the exchange of promises-Unilateral Contract – Contract involving the exchange of a promise for performance-Congregation Kadimah v. DeLeo (MA, 1989)- A Jewish synagogue brought this action to compel the administrator of an estate to fulfill the decedent’s oral promise to give $25,000. The Congregation planned to use the $25,000 to transform a storage room into a library.

Holding: Congregation doesn’t get the money; there’s no contract here because (1) neither legal benefit to the promisor nor detriment to the promisee (consideration), (2) a hope or expectation, even though well founded, is not equivalent to either legal detriment or reliance, and (3) it wasn’t written.

2. Bargaina. §17: Requirement of a Bargain – Consideration must be bargained for: Sought by the

promisor in exchange for her promise and given by the promisee in exchange for the promise

i. Except as stated in subsection (2) the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and consideration

ii. Acts of Considerationa. Act other than the promiseb. Forbearance

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c. Creation, modification or destruction of a legal promise-Hamer v. Sidway (NY, 1891)- Uncle promised at an anniversary party that he would give $5,000 to his nephew if he would refrain from drinking, smoking, swearing, and gambling until 21. Nephew did, but uncle died before paying the money.

Holding: The nephew’s promise to refrain from doing something that he had the legal right to do is an act of forbearance and therefore valid consideration for the $5,000.

Consideration means not so much that one party is profiting as that the other abandons some legal right in the present or limits his legal freedom of action in the future as an inducement for the promise of the first (p197).

Unilateral contract (nephew didn’t promise, he just acted; uncle couldn’t have sued nephew if nephew didn’t perform)

-Earle v. Angell (MA, 1982)- Aunt had nephew promise to attend her funeral in exchange for $500.

Holding: Nephew gets the money. “A contract to pay money after one’s own death is valid.”

Doesn’t matter that nephew would have gone to the funeral anywayo §81: Consideration as Motive or Inducing Cause – The fact that what is

bargained for does not itself induce the making of a promise does not prevent it from being consideration for the promise

Bilateral contract (promise for a promise)-Whitten v. Greeley-Shaw (ME, 1987)- P (man) and D (woman) had an affair for some years. D struck up an agreement in which P paid her $500/mo, visited and called at stated intervals, gave trips and jewelry, etc. P signed it. At some point, P loaned D $64,000 to purchase a home. D defaulted on the promissory note and P brought a foreclosure action, to which D filed a counterclaim based on their agreement.

Holding: Agreement unenforceable, because no consideration (no consideration when a clause is the promise is neither “bargained for” by P nor “given in exchange for” his promises).

Fried thinks this case was wrongly decided, that it was actually a bilateral contract, and that the court just didn’t want to uphold an immoral (sex) contract.

-§71: Requirement of Exchange; Types of Exchange- Consideration must be bargained-for: sought in exchange for promise and delivered in exchange for promise. Performance can be act, forbearance, or change in legal relation.-Duncan v. Black (MO, 1959)- Black (D) made a contract with Duncan (P) that Duncan would receive a 65 acre cotton allotment with the 359 acres of farm land he had purchased. P wanted the same arrangement the following year, D refused, and P sued for breach of contract.

Holding- No breach of contract. Contract was invalid from the start because no agreement could be made for future allotment because the allotment is restricted to one-year considerations (public policy reason).

Fried thinks this case is doubly wrong: (1) Duncan should be compensated since he couldn’t get the cotton allotment and (2) the agreement was made in good faith so it should stick.

3. Benefit-Mills v. Wyman (MA, 1825)- P cared for D’s adult son in illness. D sent a letter promising payment but later revoked the promise.

Holding: D owes nothing. No consideration because D was only attempting to fulfill a moral obligation and that doesn’t constitute consideration. “A promise based on moral or past consideration is simply a donative promise and is therefore unenforceable.”

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Promisor (D) didn’t directly benefit from P’s act (D’s son did).-Webb v. McGowin (AL, 1935)- P saved D’s life at work and incurred injury. D promised to pay P a monthly sum. When D died, his executor stopped paying.

Holding: D’s agreement to pay Webb was a valid and enforceable contract. “Where the promisee cares for, improves, and preserves the property of the promisor, though done without his request, it is sufficient consideration for the promisor’s subsequent agreement to pay for the service, because of the material benefit received.”

Promisor directly derived a benefit (different from Mills v. Wyman).-§86: Promise for Benefit Received- Promise based on previous benefit is binding to the extent necessary to prevent injustice. Excludes gifts, unjust enrichment, disproportionate benefit-In re Crisan Estate (MI, 1961)- An elderly woman collapsed and later died. Dr. rendered medical services. She never gained consciousness and therefore, she never consented.

Holding: The court held that the doctor was entitled to damages because they assume that had she been able to consent she would have. The promise to pay is implied by law.

Implied-in-law Contract- party required to compensate another for benefit conferred in order to avoid unjust enrichment (e.g., doctor helps unconscious pededstrian)

Implied-in-fact Contract- promises of parties implied from acts/conduct (e.g., auction, plumber, etc.)

-In re Schoenkerman’s Estate (WI, 1940)- When Schoenkerman’s wife died and left him with two teens, he asked his mother-in-law and sister-in-law to come take care of the home. He promised (in written notes) to pay them. Sister-in-law wanted the full, promised amount.

Holding: Schoenkerman had to pay them because the notes plainly acknowledged a moral obligation and afforded more than ample consideration.

4. Reliance (Promissory Estoppel)-§90: Promise Reasonably Inducing Action or Forbearance- Promise reasonably expected to induce action & forbearance and does induce such action & forbearance is binding if injustice cannot be avoided otherwise. Charitable subscriptions and marriage settlements binding even without showing of inducing action & forbearance.-Kirksey v. Kirksey (AL, 1845)- P was invited by her brother-in-law, D, to leave her home in the country and move her family to him. She did, and after 2 years, D moved her to a crappy house.

Holding: No money for P, because D’s promise was just a gratuity/gift; no consideration. Ormond disagrees though and believe that there was consideration.

This may have come out different if evaluated from a reliance perspective. Compared to Schoenkerman, this was supposed to be a gift instead of a job.

-Ricketts v. Scothorn (NE, 1898)- P (granddaughter Katie) vs. D (grandpa’s executor, Andrew). Katie’s grandpa told her that he fixed things so Katie wouldn’t have to work (since none of his other grandkids worked) and he gave her a note saying he would pay her $2,000/yr plus interest. Katie immediately quit, and after a year, grandpa died. Grandpa expressed regret that he’d been unable to pay Katie the balance.

Holding: Katie gets money because of reliance. We discuss this from a negligence perspective. Fried says this case has a tort feel

because grandpa’s promise caused injury because he wasn’t careful.-Allegheny College v. National Chautaunqua County Bank (Cardozo, NY, 1927)- Allegheny College was raising money and Mary Yates Johnston, in a letter, promised to pay $5,000 (due 30 days after her death). The back of the letter said her gift should be known as the Mary Yates Johnston Memorial Fund. Mary paid $1,000 while she was alive, and then later cancelled her promise. The college brought the action 30 days after her death to collect.

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Holding: Estate must pay because there was consideration: after receiving the $1000, the college named the scholarship after Johnston, creating a bilateral agreement. The contract came into being upon the acceptance of the $1000; before that, it was an offer.

Fried says Cardozo succeeds in turning promissory estoppel from an exception into the rule.

-Siegel v. Spear (NY, 1923)- McGrath (D) told Siegel that he’d set up insurance for Siegel’s furniture because it would be preferable to Siegel getting his own insurance agent to do it. Siegel was to pay for the insurance later, but the furniture was burned before the insurance was bought.

Holding: D’s promise to get insurance was binding. D undertook to store P’s property without compensation (gratuitously), but it was after D’s statements and promises about insurance that the P sent the furniture to the storehouse, so D became responsible because there was detrimental reliance on the part of P.

Bailment (when someone, without payment, entrusts the care of their property to another). The bailment is that the person is supposed to take care of your stuff.

Fried thinks the court is straining to turn detrimental reliance cases into cases in which there’s consideration even when there’s not.

-Feinberg v. Pfeiffer Co. (MO, 1959)- P, Feinberg, worked for Pfeiffer Company for a long time and during a meeting of the higher-ups, they discussed P’s retirement and decided to give her a salary increase and a retirement fund of $200/mo. for life. P continued working an extra 1.5 years after the salary increase and promise of retirement $. Eventually, a new Pres. (Mr. Harris) talked to a lawyer and an accounting firm, both of whom told him he didn’t need to pay. The new President says believed the payments were gifts. P was sent a check for $100 instead of the normal $200, so she declined that amount and brought this action.

Holding: P gets the retirement money. It’s true that she didn’t need to continue working to get the money, but there was promissory estoppel.

The court feels this is a classic §90 case Fried says this isn’t a Webb v. McGowan situation, but Fried thinks that this court got it

right.-D’Ulisse-Cupo v. Board of Directors of Notre Dame High School (CT, 1845)- School board didn’t rehire teacher after giving representations that it would rehire her.

Holding: P doesn’t have a promissory estoppel claim (the representations made weren’t sufficiently promissory), but a negligent misrepresentation claim (requiring reasonable reliance), so she can recover money.

Fried thinks that this court maybe got it wrong, because he thinks that there was a promise to the teacher. Problem is that P was told she’d get something in the future, and that makes it more difficult to say that there was a promise in fact.

B. Defective Consideration1. The Problem of “Inadequate” Consideration

-Batsakis v. Demotsis (TX, 1949)- Eugenia Demotsis borrowed money from Batsakis (she couldn’t get access to her money while she was in Greece during the war). Batsakis lent her approximately 500,000 drachmae ($25), but in her letter, Demotsis promised to pay him back with $2,000. Demotsis says Batsakis required a $2,000 repayment for the loan (p593).

Holding: P gets the $2000 plus interest. Arguments of insufficient consideration are inaccurate here, because D got exactly what she bargained for. It was wartime and she really needed the money, so accepting was reasonable.

-Waters v. Min. Ltd. (MA, 1992)- P was injured in an accident and when she settled the claim, she purchased an annuity contract from D, Commercial Union Ins. Co. She then

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became involved with a dead-beat bf who suggested she sell the annuity contract. Bf and others made a contract for Ds to pay $50K for the annuity contract (worth $189K). Ds paid $18K, deducted $7K towards Beauchemin’s debt, and never paid $25K. P brought suit to recover on the basis of unconscionability.

Holding: Contract unconscionable because of gross disparity in the values exchanged. P only has to return $18K (because that’s what she received).

Fried says it would seem unjust to allow this contract, because a reasonable person wouldn’t have made that contract. She was under the influence of her boyfriend.

-American Home Improvement Inc. v. MacIver (NH, 1964)- An agreement was signed by Ds (homeowners) stating that P would do improvements on the home. At the same time, Ds signed an application with a finance corp. The finance application was incomplete because it did not include the interest rate. The application was approved. Ds asked P to stop construction, which it did, but it had already paid a sales commission of $800 in reliance upon the contract. P seeks to recover damages for breach by the Ds of an alleged agreement for home improvements (since Ds ended the improvements). Ds move to dismiss on the ground that the action could not be maintained because P failed to comply with RSA 399-B, which requires disclosure of finance charges to the borrower by the lender.

Holding: D’s motion to dismiss should be granted; case remanded. Transaction was unconscionable because Ds had to pay total of $2,568 when the cost of improvements was only $959.

Also, the extension of credit to the Ds was in violation of the disclosure statute.-§2-302: Unconscionable Contract or Clause- If a court finds something to be unconscionable, it can refuse the whole contract or omit the problematic terms. Parties get the opportunity to explain why it’s not unconscionable.-§208: Unconscionable Contract or Terms - If a contract or term thereof is unconscionable at the time the contract is made a court may refuse to enforce the contract, or may enforce the remainder of the contract without the unconscionable term, or may so limit the application of any unconscionable term as to avoid any unconscionable result.

2. Contract Revisions and the Legal-Duty Rule-§2-209: Modification, Rescission and Waiver- Modification of a contract does not require fresh consideration.-Alaska Packers’ Ass’n v. Domenico (9th Cir, Appeals, 1902)- Ps entered into a contract with Alaska Packers for $60 and 2 cents for each red salmon caught. Upon arriving at the fishing site, they refused to work unless they were paid $100. A new contract was signed with the superintendent.

Holding: No consideration for the new contract as they had already contracted for the same thing for less money. This wasn’t “fresh consideration.” The plaintiffs coerced the new contract knowing that Ds had no other option.

Why wasn’t this treated as a case of duress? Because P was the bad guy.-Goebel v. Linn (MI, 1882)- Ice company (P) and brewery (d) contracted for the sale of ice. The production fell short that year and the price of ice increased dramatically. D fell short on payment one month, P sued, and D says there was no consideration for the agreement because it was made under duress.

Holding: The court held that the new contract was enforceable. There wasn’t legal duress here. The brewery chose to submit to the new terms and the shortage was not of the ice company’s making.

Different from Alaska, because this situation was external, whereas Alaska’s was internal because the fishermen decided to charge more.

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-Schwartzreich v. Bauman-Basch, Inc. (NY, 1921)- D hired P to design coats.a. Contract #1 - $90 a weekb. Cancellation of contract #1, because P was offered more money from a different

company.c. Contract #2 - $100 a week work for pay.

Holding: Judgment for P for damages affirmed, because “the parties to a contract can rescind it by mutual consent.” There was fresh consideration because the parties decided to drop the first contract.

There was fairness here because of the fresh consideration. Similar to Goebel because of external impact on prices (third party offered more pay

to P).3. “Illusory” Promises (“Empty Bag “) and Related Fairness Issues

-A statement that appears to be promising something but doesn’t actually limit the promissor’s future options (e.g. I’ll buy what from you insofar as I want to/ buy I may terminate this obligation).-Wickham & Burton Coal v. Farmers’ Lumber Co. (IO, 1920)- The company contracted to sell coal for $1.50 a ton to Farmers. Under the contract, Farmers was able to order as much coal as it pleased or none at all. The price of coal rose and Farmers ordered a large amount.

Holding: Contract is not enforceable because there was no consideration and it was an illusory promise. There was no reciprocity because the seller was bound to sell but the buyer was not bound to buy.

-§77: Illusory and Alternative Promises--Gurfein v. Werbelovsky (CT, 1922)- D (seller) bound itself to sell the glass at a certain price. P had a revocation option and was only bound to buy and accept the glass if it was shipped. P demanded delivery a few times but D refused. D said the agreement wasn’t binding because P had a revocation option.

Holding: Contract is enforceable. Buyer’s option to cancel would last only until the goods were shipped, so there was consideration.

In Wickham, the buyer was completely free to do whatever, but here, the buyer is a little vulnerable because he is bound within the contract as soon as the seller ships. The court said this was enough to make a binding contract.

-Wood v. Lucy, Lady Duff-Gordon (Cardozo, NY, 1917)- Wood contracted with Duff-Gordon to have exclusive rights to place her endorsements on the designs of others. In return, she was to receive ½ of all profits. She breached and sold her endorsements to others. D says the contract wasn’t binding because P doesn’t explicitly promise that he’ll use reasonable efforts to place her endorsements.

Holding: There was valid consideration and that the promise was not illusory. It is implied that Wood bound himself to place the endorsements on the market, because he wouldn’t make money otherwise. Also, D gave P “exclusive rights,” so that’s indicative of their agreement. And P did perform.

Fried says that Lucy giving Wood exclusive rights is an option contract. Cardozo says that “option contracts without consideration, mutuality, are

unforceable,” and Fried dislikes this because he thinks it takes away opportunity (he gives his author and publisher example).

-Omni Group, Inc. v. Seattle First Nat’l Bank (WA, 1982)- After some back-and-forth, the Clarks decided to sell 52 acres to Omni ($104K), but then the Clarks halted the sale because they believed that Omni made an illusory promise when it made its obligation subject to a satisfactory engineer/architect report/survey (p366).

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Holding: Omni’s duty to buy requiring receipt of a satisfactory feasibility report does not render its promise illusory. Promisor’s determination of his satisfaction was based on “good faith” so the promise isn’t illusory.

-§1-203: Obligation of Good Faith- Every contract or duty within the Act imposes an obligation of good faith in its performance or enforcement.-§205: Duty of Good Faith and Fair Dealing- Every contract imposes upon each party a duty of good faith and fair dealing in its performance and its enforcement.-Gianni Sport, Ltd. v. Gantos, Inc. (MI, 1986)- D (retailer) had an agreement with P (manufacturer/distributor) that the buyer (D) could terminate any part of a Purchase Order for goods that haven’t been shipped or which are not delivered on time. D made an order to be delivered in October and then cancelled in late September. Trial court made D pay $27K because it found the cancellation clause to be unconscionable (clause was unreasonable and there was unequal bargaining power).

Holding: Cancellation agreement was invalid [unconscionable because unreasonable (a last-minute cancellation on these made-to-order objects would screw P) and based on unequal bargaining power, and an illusory promise].

C. Freedom of Contract and Public Policy-Unger, “The Critical Legal Studies Movement”

-Venice (business) v. Belmont (love)-In a commercial society, a good amount of formality (and the security it brings) is important. Unger says that the eruption of the Venice world into the Belmont world is problematic because the two are both partners and enemies.

Principle 1: freedom of contract Counter-Principle 1: restriction on who a contracting partner can be (restrictions

made on things that would subvert the communal aspects of social life)o Ex. 1: compulsory contracts (not allowed according to the Kessler article)o Ex. 2: reliance (promissory estoppel) and restitution for unjust enrichmento Ex. 3: discouragement of non-commercial contracts (like btwn friends)

Principle 2: freedom of contract terms Counter-Principle 2: unfair bargains should not be enforced

-In the Matter of Baby M (NJ, 1988)- Sterns contracted to pay Whitehead $10,000 to carry and bear a child and then turn it over to Sterns. She was also to get expenses during the pregnancy and the clinic was to get $7,500 for facilitating the surrogacy. Whitehead tried to jack the baby.

Holding: Case remanded; 1) custody to the natural father was correct, but 2) the surrogacy contract is illegal, perhaps criminal, and potentially degrading to women, so we void the termination of the natural mother’s parental rights and the adoption rights of the wife/stepparent.

o Natural dad gets rightso Surrogate (biological) mom gets [visitation] rightso Best interests of child

Fried says that a completely non-contractual/ Belmontian reasoning determined this outcome.

Fried thinks Judge Wilentz is trying to shut down surrogacy contracts in the same way that Cardozo tried to shut down option contracts.

-Sheets v. Teddy’s Frosted Foods (CT, 1980)- Sheets (Ee) spoke out when he noticed that D (Er) was putting out food products that didn’t comply w/ FDCA regulations. Shortly thereafter, he was fired for “unsatisfactory performance.” P’s contract was terminable at will, but he argues

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that his termination “was a violation of an implied contract of employment, a violation of public policy, and a malicious discharge.”

Holding: Case is remanded because P’s termination violated public policy and seems wrong.

Cause of action here is torts. Fried says that since he’s an employee at will, it’s hard to determine his damages.

-Price v. Carmack Datsun, Inc. (IL, 1985)- D (auto dealer) discharged P (employee sales rep) because P wanted to file a claim under the company health-insurance plan after racking up $7K in medical expenses following an accident.

Holding: The at-will termination here did not violate a clearly mandated public policy (because the matter here only involves the P and the Insurance Code sought to protect insurance companies, not insured individuals like P), so the termination was just.

II. FORMATIONA. The Making of Agreements

-Offer: “The manifestation of willingness to enter into a bargain.”-Validity:

Offer made in jest - An offer that the offeree knows or should know was made in jest is not a valid offer (See Leonard v. Pepsico)

Preliminary Negotiations – Solicitation of bids is not an offer and cannot be accepted Advertisements – Most advertisements are not offers to sell

Specific terms –If the advertisement contains specific words of commitment, especially a promise to sell a particular number of units then it may be an offer

1. Objective vs. Subjective Theories in Contracts-Embry v. Hargadine-McKittrick Dry Goods Co. (MO, 1907)- P’s yearly contract expired on Dec. 15. On Dec. 23, he told his boss (D) that if he didn’t get a renewal contract then he would quit on the spot. D replied “Go ahead, you’re all right. Get your men out, and don’t let that worry you,” OR “Go back upstairs and get your men out on the road.” P then worked for a little over a year and was fired March 1.

Holding: Judgment reversed; the contract was valid, because a reasonable person would believe the contract renewed.

Leonard from Leonard v. PepsiCo didn’t act reasonably, but Embry did. 20 Bishops Rule: Doesn’t matter what Embry’s Er intended, because a reasonable

person would believe that he entered into a contract.-Hotchkiss v. National City Bank of New York (NY, 1911)- Learned Hand’s “20 Bishops Rule:” intention doesn’t matter, words do.

The court found that if either party used words or acts that ordinarily accompany and represent, they are bound whatever their subjective intent. If A knows B had an apparent understanding of words, he is bound by that understanding.

2. Intention to be Bound-Keller v. Holderman (MI, 1863)- Keller (D) wrote a $300 check in exchange for the $15 silver watch of Holderman (P). Holderman sued to get the money.

Holding: No contract was ever made because P didn’t expect to sell and D didn’t expect to buy (no consideration), so there can be no cause of action here.

Fried says that the interest to society here would be to uphold checks, so the court could reasonably enforce the deal between the two men, but it doesn’t.

-Moulton v. Kershaw (WI, 1884)- Ds sent a letter saying they were selling salt at a bargain and they would be pleased to receive an order. P responded, “You may ship me 2,000

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barrels … as offered in your letter.” Following day, D withdrew from the agreement and P sued for $800 in damages.

Holding: There’s no agreement here, because D issued an invitation to deal, not an offer (the word “sell” wasn’t used and there was no language of limitation).

Similar to Wickham v. Farmers, in which buyer didn’t agree to buy any coal and a specific price wasn’t set. No bargain had been concluded (no mutuality of obligation, so no consideration/ no promise to the buyer). In Wickham, no contract because of no consideration; here, no contract because no promise was made (like in Leonard v. PepsiCo).

The court is pretty much saying that it won’t force the salt dealer to stumble into a contract.

-Empro Mfg. Co. v. Ball-Co. Mfg. Inc. (7th Circuit, Appeals, 1989)- Empro sent Ball-Co a “letter of intent” to purchase Ball-Co’s assets. It had lots of “subject to”s. Ball-Co dropped the deal and Empro asked for a temporary restraining order, arguing the letter of intent was binding.

Holding: Empro gets nothing, because letters of intent do no more than set the stage for future negotiations on details. The “subject to” and “general terms and conditions” language suggested that this letter was simply the first step in an agreement.

Empro gave $5000 in “earnest money” (which is a way to secure an option), but Empro also said it could take the money back if it decided not to buy. Easterbrook says this is evidence that Empro didn’t intend to be bound.

Fried thinks this is a wonderful opinion by one of our finest judges, Easterbrook.-Texaco v. Pennzoil (1987)- Pennzoil bid on Getty Oil. They reached a Memo of Agreement and issued a joint press release but some matters were left open. After the press release, Texaco made a higher bid and Getty backs out of the deal with Pennzoil and accepts Texaco’s offer. Pennzoil sues Texaco for knowingly inducing a breach of contract. The issue was whether Pennzoil and Getty had a binding contract in the Memo of Agreement.

Holding (DE court): Pennzoil was awarded damages ($7.53b in actual and $3b in punitive) because a jury found that Texaco intentionally interfered with a binding agreement between Pennzoil and Getty and it caused Pennzoil $7.53 billion in damages.

-Texaco alleged that the proceedings in the Texas case (different from above) violated its constitutional and statutory rights and asked the District Court to enjoin Pennzoil from taking any action to enforce the judgment. The District Ct. granted a preliminary injunction (it believed Texaco had a good chance of proving its case) and the Ct. of Appeals (2nd Cir.) affirmed.

Holding (U.S. Supreme Court): Texaco’s injunctive relief reversed. Fried thinks Texaco got screwed. He also thinks this case is a little like Empro.

3. Indefinitenessi. Default Rules – In certain circumstances, where there is an ambiguity, the

ambiguity will be settled in a certain way but the parties are free to contract around it

1. Zero Default Rule – There is no deal if the terms are not specified (used in Joseph Martin)

2. Market Price Default Rule – Terms to be agreed upon set a market price

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3. Fair/Reasonable Price Default Rule – Terms set a fair price to be determined by the court

4. Penalty Default Rule – Rent free?5. Continuation Default Rule – Continues the current terms (Embry)

ii. Criteria for choosing a default rule – 1. Parties expectations2. Fairness3. To incentivize one party or another to spell out the terms4. Ease of Administration

iii. Immutable Rule – Not free to contract around it. A settled default rule.-Joseph Martin Jr. Deli v. Schumacher (NY, 1981)- Landlord made a renewal agreement with “rentals to be agreed upon.” Landlord initially mentioned $650 rent, then bumped it up to $900 (fair rental value was $545.41). Tenant commenced an action for specific performance, which the Supreme Ct. denied. Appellate Division reinstated tenant’s complaint with a precedent-breaking rule: “A renewal clause in a lease providing for future agreement on the rent to be paid during the renewal term is enforceable if it is established that the parties’ intent was not to terminate in the event of a failure to agree” (p347).

Holding: Appellate Division overruled; an agreement discussing renewal at a rental “to be agreed upon” is not enforceable because it’s not definite enough.

-Lafayette Place Assocs. v. Boston Redevelopment Auth. and Boston (MA, 1998)- LPA sued, claiming Boston & BRA breached contract for the sale of Hayward Parcel. Boston and the BRA were found liable for money damages for breaching contract with LPA. Tripartite Agreement (1978) signed between LPA, the city, and the BRA for a development project. Phase II was contingent on Boston’s decision to remove a parking structure. Boston says the Tripartite Agreement wasn’t binding (too indefinite), and besides, Boston didn’t breach it.

Holding: There was a valid contract between Boston and LPA, but Boston didn’t breach it. There was sufficient specificity in the Tripartite Agreement, contrary to Boston’s argument.

Rule: “If parties specify formulae and procedures that, although contingent on future events, provide mechanisms to narrow present uncertainties to rights and obligations, their agreement is binding.”

-§33: Certainty- Contract terms must be “reasonably certain” such that they provide a basis for determining breach and giving an appropriate remedy. Leaving open terms may show that an intention to contract is still not intended to be understood as an offer/acceptance.-§2-305: Open Price Terms- Settlement on price not required; if term is left open, it will be a “reasonable price” (set by the court). Exception: no intention by parties to be bound; buyer must return the items or, if unable to, pay reasonable price; seller must return price paid.-§2-204: Formation in General- (1): conduct counts as contract for sale if it shows agreement. (2): knowledge of exact moment of contracting not required to enforce. (3): indefiniteness does not destroy a contract if there is intention to be bound and a reasonably certain basis for relief.-Wheeler v. White (TX, 1965)- Wheeler says White breached a contract to obtain the money for improvements on Wheeler’s land and that White should be estopped from saying the agreement wasn’t sufficiently definite. White filed “special exceptions” arguing that the agreement was indefinite and the trial court dismissed Wheeler’s case.

Holding: Trial Ct. was correct in sustaining the special exceptions, but Wheeler’s estoppel pleadings state a cause of action, so we reverse and remand.

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This is a §90 case, but different from DeLeo and Allegheny. In those cases, people promised to make a gift and people claimed to rely on them, but those weren’t really deals. This case looks a lot more like a commercial deal.

White isn’t guity of fraud because his present intention was to secure the money. He changed his mind later.

The court decides that there’s more of a negligent misrepresentation at play here, and the result was detrimental reliance.

There wasn’t a binding contract, but a wrong was committed and damages should be awarded.

-Hoffman v. Red Owl Stores, Inc. (WI, 1965)- Hoffman relied on Red Owl (Hoffman sold his bakery, leased a grocery store in Wautoma for practice, and rented a new home) when Red Owl told him $18K was sufficient to set up a store. Red Owl then upped the price to $34K and Hoffman terminated negotiations. Jury awarded damages to Hoffman and the circuit court wanted a new trial for the Wautoma damages.

Holding: There was no promise, but there was reliance and awards damages based on promissory estoppel.

o If it was a contract, then he would have gotten expectation damages, but they hadn’t reached the level of full contract because important details hadn’t been worked out, Hoffman hadn’t talked to headquarters, and either party was free to back out.

4. Misunderstandings-Raffles v. Wickelhaus (England, 1864)- P and D contracted for delivery of a large amount of cotton. The cotton was to be delivered on the Peerless. There were two ships Peerless and the cotton came on the ship that sailed at the later date and D refused to accept or pay for the goods.

Holding: Judgment for the Ds, because there was “no consensus ad idem, and therefore no binding contract.

Fried notes that there’s something fishy, because the buyer didn’t sue when his October shipment didn’t arrive. Instead, he waited until the December boat arrived before he opened his mouth; probably because the October cotton price was cheaper than what he contracted for (so he bought cheap cotton then and sued later).

This is different than Hoffman, because here, neither party was more careless or more careful – there was simply an honest mistake. In Hoffman, Red Owl was more at fault because it knew that Hoffman would probably need more than $18,000.

-Flower City Painting Contractors v. Gumina Constr. Co. (2nd Circuit, 1979)- P and D had a contract for house painting. D thought the contract was just for interior painting and refused to paint the exterior. The industry custom was for contracts for both interior and exterior painting.

Holding: Dismissal of Flower’s claim (contract unenforceable) because there was no consensus ad idem, so no binding contract. Apparently, D was new to the business.

-§20: Effect of Misunderstanding- Consensus ad idem. If parties attach different meanings to their manifestations of assent, there is no contract. This is unless one party knows or should know of the other party’s interpretation, in which case the knowledgeable party is bound to the other party’s understanding.

5. Termination of Offersa. In General

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-§36: Methods of Termination of the Power of Acceptance- Power of offeree’s acceptance is terminated by rejection/counter-offer, lapse of time, revocation, death/incapacity, and the non-occurrence of any condition of acceptance under the terms of the offer.

b. Lapse of Time-Textron, Inc. v. Froelich (PA, 1973)- P offered a price for steel reinforcing bars. 5 weeks later, the offeree (D) called and agreed to buy some and two days later he called to order some more. In response to both calls, the offeror (P) said, “Fine, thank you.” P believes there was no contract becaue the offer had expired.

Holding: Reversed and remanded for jury to determine whether there was a contract. Probably was a contract, because even if the first contract expired, when the offeree called to order the bars, he became the new offeror and when the offeror said “Fine, thank you,” he accepted the offer. In other words, a new contract was formed over the phone.

c. Death or Incapacitation of Offeror (Ofr) or Offeree (Ofe)-Rules:

-Ofe’s power of acceptance terminated by Ofr’s death/incapacitation whether or not Ofe knows about it.-This isn’t true for an option contract, at least where individual performance by the decedent wasn’t an essential part of the proposed contract.-As noted in §45, Ofe’s power of acceptance isn’t terminated if Ofe began performance (beginning preparations don’t constitute performance though).

-Preparations could constitute reliance under §87(2) though.-Davis v. Jacoby (CA, 1934)- Mr. Whitehead made an offer to Mr. Davis nephew-in-law) that if he and his wife came to help him with his finances he would leave everything to Caro (Mrs. Davis). Mr. Davis writes back accepting. Mr. Whiteheads commits suicide before the Davises can come to CA. They arrive and care for Mrs. Whitehead until her death. Holding: There was a bilateral contract between Mr. W and the Davises, and since

the Davises performed their part of the contract, they deserve compensation for specific performance.

o The letter rather than the performance was the acceptance. o Mr. Whitehead’s death does not constitute a revocation because Davis had

already replied and accepted. Fried says that this case was wrongly decided, because the court wanted to get the

money to Caro. The Davises didn’t perform before the offer was withdrawn (by death), so this unilateral contract should be unenforceable (because there was no longer consideration). The court construed it as a bilateral contract though.

o Fried says this is like the Brooklyn Bridge example. If the Ofr dies before the Ofe finishes crossing the bridge, then the Ofe is entitled to the money. But if the Ofe didn’t start crossing the bridge before the Ofr died, then the Ofe gets nothing.

-§31 (Rest. 1 st ): Offer Proposing a Single Contract or a Number of Contracts - presume in favor of bilateral – not unilateral – offers-§32 (Rest. 2 nd ): Invitation of Promise or Performance – in case of doubt, offer accepted by promise or performance

d. Revocation-Rules:

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-Typically should involve communication between Ofr and Ofe, but if Ofe has reliable info that the Ofr has taken action to revoke then you have “indirect revocation” (Dickinson).-Ofr can revoke a “firm offer” (an offer to remain open for a certain period) before the specified time (because it’s an offer without consideration – so it’s nonbinding).-Exceptions:

1. The firm offer has consideration (even nominal consideration), i.e., it’s an option contract.2. Reasonable reliance (Baird is an example that wouldn’t be followed today)3. Signed, written offer by merchant to buy/sell goods is irrevocable for lack of consideration for time stated/reasonable time (this period of irrevocability can’t be greater than three months)

-Offer for unilateral contract (performance) is not revocable after performance has begun-Option contract – a contract where one party has paid to keep the offer open for a certain amount of time.

-Dickinson v. Dodds (England, 1876)- Dodds extended an offer to sell to Dickinson; offer to expire on Friday at 9am. Dickinson accepted before then, but Dodds had made a formal agreement with someone else.

Holding: Dickinson gets nothing because 1) It was only an offer and not a binding contract because both parties hadn’t agreed to anything/ no consideration, AND 2) Dickinson confessed he knew that Dodds had changed his mind about the offer (no consensus ad idem).

-§25: Option Contracts- An option contract is a promise which meets the requirements for the formation of a contract and limits the promisor’s power to revoke an offer.-Petterson v. Pattberg (NY, 1928)- P needed to pay off $5450 on some property, and the bond and mortgage owner (D) said that if the money was paid in full before May 31st, then D would pay P $780. P attempted to pay, but D had already sold the bond and mortgage, so P had to pay the new owner his $5450 and he didn’t get the $780 he was expecting. He’s suing for that $780.

Holding: No recovery for Patterson (P) because “any offer to enter into a unilateral contract may be withdrawn before the act requested to be done has been performed” and D’s offer was withdrawn before payment was made, so D is cool (p321).

-§45: Option Contract Created by Part Performance or Tender- If offer is only to be accepted by performance (unilateral contract), beginning of performance creates an option contract for offeree. A contract is completed and the offeror has duty to fulfill his offer only if performance is completed.-Brackenbury v. Hodgkin (ME, 1917)- Mrs. Hodgkin’s wrote a letter requesting Ps (daughter and her man) to come live at the home in exchange for income from the home and the deed to the house when she died. Ps moved to the home and then the relationship soured and Mrs. Hodgkins told them to leave. Mrs. Hodgkins gave the deed to her son and he sought to remove the Ps.

Holding: Ps are entitled to conveyance of the farm, because (1) there was a binding unilateral contract and Ps are entitled because they performed the required act (based on §45), (2) equitable interest in the land is in favor of Ps,

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and (3) Ps did not breach their duty/performance; all drama was the result of the mom.

-James Baird Co. v. Gimbel Bros, Inc. (2nd Circuit, 1933)- D sent an offer to contractors to provide linoleum, but the offer included the wrong amount of linoleum. P placed a bid right before D was able to withdraw its offer. P sues for damages from breach.

Holding: No binding contract, because 1. P did not formally accept the offer until after the withdrawal, so the acceptance was too late (p266).2. Offer does not become a promise until there is acceptance and consideration, so promisory estoppel does not apply here (p267).3. This was not an option contract (P wasn’t asked to place a bid and then held unbound if P found a better bargain elsewhere)

Learned Hand believes there’s no contract, so he decides that the subcontractor goes free. He said there’s no promissory estoppel because that’s for cases like Siegel and Allegheny (gratuitous/charitable cases, not commercial ones like this. Here, both parties can take care of themselves).

Fried says he doesn’t want to imply a contract or give the benefit of the doubt because he wants to

o Incentivize people to be more preciseo Keep the decision out of the hands of the jury (because who knows

what they’ll do?)-§2-204: Formation in General- (1): conduct counts as contract for sale if it shows agreement, (2): knowledge of exact moment of contracting not required to enforce, (3): indefiniteness does not destroy a contract if there is intention to be bound and a reasonably certain basis for relief.-§2-206: Offer and Acceptance in Formation of Contract- Unless unambiguous, contract can be accepted in ant reasonable manner/medium-Drennan v. Star Paving Co. (CA, 1958)- P (contractor) accepted bids from subcontractors for a job at a school. D had the lowest bid, so P used it in his official bid, and was awarded the school project. P then went to visit D, and D said it would only do the job for twice what it initially said because its original bid was based on errors. P was awarded and D appeals.

Holding: P’s award (new subcontractor’s prize – D’s price) (i.e. “cost of cover”) is affirmed, because

1. No evidence that D offered to make its bid irrevocable in exchange for P’s use of its figures in computing his bid. In sum, “there was neither an option supported by consideration nor a bilateral contract binding on both parties” (p271).2. P reasonably relied on D’s promise, so D should be bound (§ 90). Promissory estoppel applies.3. There was a “subsidiary promise” (§ 45, Comment B) that if part of the requested performance was given (acceptance of bid) then the offeror would not revoke (p271).4. Even if Ds made a mistake, it’s not P’s fault and P shouldn’t be denied recovery under § 90.

This comes out the opposite of Baird. Judge Traynor uses promissory estoppel, because the contractor relied on

subcontractor’s bid. We’ve saved the general contractor at the expense of the

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subcontractor. Now, the general contractor can go out and gamble/shop around. The subcontractor can’t go back on his bid though. This is terribly one-sided.

-§87: Option Contract- An offer is binding as an option contract if a writing so says and has valid consideration. An offer that should be expected to induce action or forbearance, and does induce such action or forbearance, is binding as an option contract to the extent required to avoid injustice.

6. Valid Means of Acceptancea. General Concepts

-Livingston v. Evans (Canada, 1925)- D offered to sell land to P for $1800. P sent a counter-offer: “Send lowest cast price. Will give $1600 cash.” D responds, “Cannot reduce price.” P then accepts the offer, but D had sold it to someone else.

Holding: D couldn’t sell the land to someone else, because he had a contract with P. D’s response was a renewal of his original offer. The counter-offer didn’t terminate the original offer.

b. The Mailbox Rule-Default rule-§63: Time When Acceptance Takes Effect- (a) acceptance is valid as soon as Ofe discharges; (b) for option contracts, acceptance only valid when Ofr receives.-Continental Europe: acceptance takes effect upon receipt

c. Silence as Acceptance-Day v. Caton (MA, 1876)- P built a wall that was on his property AND on D’s property. P says D promises to pay for ½ wall and D denies any “express agreement.” Superior Ct. judge told jury that if P reasonably inferred a promise to pay from D, then the promise should stand, and the jury ruled in favor of P. D feels that it’s incorrect to infer said promise.

Holding: This determination should be handled case-by-case by a jury. The jury ruled for P, so it’s affirmed.

o Allowing a beneficial service to be rendered in your favor and not rejecting it indicates an agreement for you to pay for it.

o Plenty of time went by with D seeing the construction and having knowledge that he’d probably be expected to pay.

o §69(1)(a) §69 speaks of offers, but there was no offer here.

-§69: Acceptance by Silence or Exercise of Dominion- Silence can bind a party to a contract; (1)(a)= expectation of compensation; knowledge of expectation [Day v. Caton]; (1)(c)= prior relationship between parties [Hobbs v. Massasoit]-Hobbs v. Massasoit Whip Co. (MA, 1893)- P sent eel skins to D; D held on to them for months; then destroyed them. D argues there was no contract and he doesn’t have to pay for them. D led P to believe that it wanted eel skins over 22-ft in length. P sent them. P and D had already had these sales in the past. Holmes is the judge.

Holding: Jury determined that D’s conduct seemed like an acceptance. Conduct over intention; 20 Bishops Rule.

-Comment, “The Privilege of Silence” Silence as acceptance

o § 2-207(2) says it can be assumed that an offeree’s additional terms are assented to if the offeror doesn’t say anything.

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o And according to § 69(1)(c), the offeree’s “material alteration” may be reasonable if prior dealings between the two parties suggest that the offeror would be cool with it.

o So an Ofe can get away with making a serious alteration even if the Ofr doesn’t accept (?)

-Austin v. Burge (MO, 1911)- D’s dad-in-law paid for a subscription for D, then stopped paying. P kept sending newspapers to D although D said it didn’t want them. D paid for a few post-subscription newspapers, but then D stopped paying and P wanted to recover.

Holding: “If he continue(s) to receive and use them, under circumstances where he had no right to suppose they were a gratuity, he will be held to have agreed by implication, to pay their value.”

-Morone v. Morone (NY, 1980)- The issues were whether a contract as to earnings can be implied from a live-in relationship (28 years, woman does household duties) and whether an express contract between a couple living together is enforceable.

Holding: There is no implied contract because the services rendered in this case are normally rendered gratuitously but an express contract between the parties is enforceable.

Fried says that NY wasn’t going to imply a contract for a man to pay for a woman’s house services, but California would have. He thinks this holding is harsh, especially considering that contracts were implied for a party wall and newspapers.

d. The “Battle of the Forms”-Mirror Image Rule: under the common law, the offeree’s response operates as an acceptance only itf it is the precise mirror image of the offer-Fried says §59 looks like the mirror image rule, but §2-207 rejects it.-“Contract Formulation through Exchange of Printed Forms”

People in sales relationships often prepare their own standard forms, so buyer and seller usually have different forms.

Often, neither party expressly assents to the other’s form and there’s no effort made to reconcile conflicting terms.

U.C.C. §2-207 gets rid of a formal rule of offer and acceptance and just looks at the gist of the parties’ communications to determine whether there’s a contract. In so doing, the court is to overlook any express terms in those communications that doesn’t fairly reflect the parties’ agreement.

-§2-207: Additional Terms in Acceptance or Confirmation- 1. UCC § 207 – An “expression of acceptance” or “written confirmation”

will act as an acceptance even though the terms are “additional to or different from” those contained in the offer. Rejects the mirror image rule

a. Additional terms in acceptance i. If one party is not a merchant, there is a contract but

the additional term does not become part of the contract unless the offeror explicitly consents to it

ii. If both parties are merchants, the additional term automatically becomes part of the contract unless:

1. It materially alters the contract

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2. The offeror objects to having the additional term become part of the contract

b. Acceptance expressly conditional on assent to changes – An expression of acceptance does not form a contract if it is expressly made conditional on assent to additional or different terms

c. Acceptance silent – Where an issue is handled in the offer but not in the acceptance, the offer controls and the term becomes part of the contract

d. Conflicting terms – If an issue is covered one way on the offer and in a conflicting way in the acceptance, most courts find that the terms knock each other out

e. Divergence – if the acceptance diverges too greatly from the offer, there is no contract

-Idaho Power Co. v. Westinghouse Electric Corp. (9th Circuit, 1976)- Idaho sent an inquiry to Westinghouse for the price of a voltage regulator. Westinghouse responded with a price quotation subject to the terms and conditions on the back (including a disclaimer limiting Westinghouse’s liability). Idaho responded with a purchase order containing additional terms (but silent as to liability) superceding all previous agreements. The regulator failed. Idaho sued for breach of express and implied warranties.

Holding: The language of the purchase order does not indicate that Idaho was unwilling to proceed unless Westinghouse assented to the additional or different terms. Accordingly, Westinghouse was the Ofr and Idaho was the Ofe. So Westinghouse’s disclaimer (which limited liability) is valid.

B. Written Contracts and the Parol Evidence Rule-§2-201: Formal Requirements; Statute of Frauds- Mandatory written contract for sale of goods worth more than $500; written confirmation (and not a contract) is sufficient unless written objection occurs within 10 days; goods that don’t satisfy the requirements in subsection (1) can be enforceable if the goods are specific to the buyer, if there’s an admission of contract, or if the goods have already been transferred (or if there was part payment or if a written confirmation later accompanied an oral contract).-Statute of Frauds

Types of Contracts that must be in Writing:o K for sale of interest in land (including leases for greater than one year)o K for sale of goods (all tangible, movable property, not intangible

securities or services)o K in consideration of marriage, not in consideration of another promise

(ex: dad agrees to give money to daughter if she marries man; non-ex: A and B orally agree to marry)

o K that cannot be performed within one year of contract’s makingo Promises made to a debtors creditor in order to pay for debtor’s debt

(“suretyship”) Components of a Written Agreement:

o Identity of contracting partieso Description of subject matter of contracto Terms and conditions of the agreemento Signature

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If you violate the Statute of Frauds, the majority view is that the contract is voidable (against the person who didn’t sign), but not void (G174).

o Third party can’t raise a Statute of Frauds defense.-Integration – A document is an integration of the parties’ agreement if it is intended as the final expression of the agreement.

Partial Integration – A document that is intended to be final but that is not intended to include all details of the parties’ agreement.

o When a writing is a partial integration, no evidence of prior or contemporaneous agreements or negotiations may be admitted that would contradict the agreement

Total Integration – The final expression of an agreement intended to include all details of the agreement.

o No evidence of prior evidence of prior or contemporaneous agreements or negotiations may be admitted that would contradict or supplement the agreement.

Determining whether the contract is a total or partial integrationo The “four corners” rule [Williston “formal” test] - The judge may decide

only by looking at the document itself. Does the contract look complete on its face?

o The Corbin “actual intent” test - It is determined by looking at all available evidence (including extrinsic). What did the parties intend?

Determining the meaning of an ambiguous termo The “four corners” rule – the judge may not consult any extrinsic

evidence. The meaning is to be determined only by looking at the contract itself

o The “plain meaning” rule – The court will not hear any evidence about the parties preliminary negotiations but may hear evidence regarding context (what the term usually means in contracts of this sort)

o The “liberal” rule – Evidence of the parties statements during their pre-contract negotiations is admissible for determining whether a term s ambiguous

-Parol Evidence Rule: parol evidence will not be admitted to vary, add to, or contradict a written, integrated contract.

Parol evidence admitted wheno It doesn’t conflict/contradicto It’s supported by separate consideration than the rest of the contracto It concerns a “naturally omitted” termo The contract is only partially integrated and the parol evidence discusses terms

that aren’t in the contracto In order to show a lack of consideration (always allowed for this purpose)o To show fraud, duress, or mistakeo To prove that there was a conditional precedent to the legal effectiveness of the

written agreement (G128)o To show what words in a written contract mean

Parol Evidence Rule Both 4 Corners Rule-extrinsic evidence won’t be -both have the purpose/effect of -precludes extrinsic evidence

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allowed in to contradict the terms of the writing-for a fully integrated agreement, you also can’t add stuff to it (for partially integrated, you can add stuff)

creating a “hedge around the writing” (not just writing though)-ambiguity is a trigger for traveling outside the hedge of the words Traynor, Corbin, and Posner

say you can’t tell whether a word is ambiguous unless you’ve looked at the circumstances and the extrinsic evidence.

ONLY the judge can see the extrinsic evidence and determine if there’s ambiguity

-encourages intrinsic evidence (likes looking at language in document to define ambiguous words)

1. Integration and Additional or Inconsistent Terms-Mitchell v. Lath (NY, 1928)- P and D had a written contract for the sale of land. D orally promised and agreed, for and in consideration of the purchase, to remove an ice house on the property. Ice house never got removed and the question was whether the oral agreement could be enforced.

Holding: the oral agreement does not fulfill the third requirement for the admittance of parol evidence (p389), so it won’t be admitted or enforced.o The oral agreement must be collateral (supported by separate consideration).o The agreement must not contradict the provisions of the written contract.o Shouldn’t be something expected to go in the written contract.

Ct. decides that the ice house is so clearly related that it should have been in the main contract. Since it wasn’t, it was probably on purpose.

-Hatley v. Stafford (OR, 1978)- D rented land to P to plant wheat, then D took possession back. The contract is silent as to the duration of the buyout period. P says D orally agreed that the buyout/ repossession only applied 30-60 days after execution of the lease. The issue is how long the buyout period is.

Holding: There is sufficient reason to let in evidence as to the oral provision because the contract seems incomplete and the omission of that information seems natural/reasonable.

Parol evidence only admitted wheno It is not inconsistent with the contracto It was such an agreement as might naturally be made as a separate

agreement by the parties-Hayden v. Hoadley (VT, 1920)- P and D decided to exchange land … written contract for D to make repairs, but no mention of when … D wanted to bring parol evidence/ oral agreement that P said D had 2 months to make repairs and didn’t have to spend more than $60.

Holding: Parol evidence rejected because contract is complete. Ct. determined that although a length of time wasn’t explicitly stated in the

contract, the contract was nevertheless complete because “reasonable time” could be inferred.

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Ct. also thought that an oral agreement about two months to make repairs and a $60 fee didn’t make sense.

-§209: Integrated Agreements- Integrated agreement is a final expression; to be determined by a court; completeness and specificity shows it is integrated; unless there is other evidence. -§213(1): Effect of Integrated Agreement on Prior Agreements (Parol Evidence Rule)- A binding integrated agreement discharges prior agreements to the extent that it is inconsistent with them.-§214: Evidence of Prior or Contemporaneous Agreements and Negotiations- Evidence of prior/contemporaneous negotiations/agreements can be used to provide info about the agreement in question. -§216: Consistent Additional Terms- Consistent additional terms can be considered if the contract wasn’t fully integrated.

2. Ambiguity-Bethlehem Steel Co. v. Turner Constr. Co. (NY, 1957)- P contracted to furnish and erect structural steel for a bldg; D was general contractor for bldg. Contract provision: if the “prices for component materials, labor rates applicable to the fabrication and erection thereof and freight rates” increased or decreased, there was to be a corresponding adjustment of the contract prices. P charged D for increase in price of steel. D refused, saying steel wasn’t covered in the contract provision, because steal was a “component material.”

Holding: Summary judgment for P issued by appellate division is affirmed, because a trial would only be necessary if the contract was ambiguous, and it’s not.

If P had provided evidence that the price of coal and iron (actual component materials) had gone up, then it would have had a better shot of getting D to pay an increased price.

4 Corners Rule: o Fried says New York is still pretty 4 Corners-y.

-Robert Indus., Inc. v. Spence (MA, 1973)- Takeaway Points:

o “A contract is to be read in light of the circumstances of its execution, which may enable the court to see that its words are really ambiguous” (p438)

o When a written agreement is ambiguous, look to context/circumstances “for the purpose of elucidating, but not of contradicting or changing its terms” (p438)

o Doesn’t follow 4 Corners Rule, more like Traynor Rule.-P.G.&E Co.. v. G.E. Thomas Drayage & Rigging Co. (CA, 1968)- D was to do work on upper metal cover of P’s steam turbine. D agreed to perform at own risk and expense and to “indemnify P against all loss, damage, expense and liability resulting from … injury to property arising out of or in any way connected with the performance of this contract” (p434). During project, the cover fell and cost P $25,144.51. P sued for money and D said the indemnity clause meant to cover injury to the property of third parties, not to P’s property (contract followed classic contract language to that effect). Trial court said contract had plain meaning and no extrinsic evidence was allowed (4 Corners Rule).

Holding: Judgment reversed; the extrinsic evidence about the indemnity clause should have been admitted (it was relevant and gave support for an interpretation of the clause).

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Judge Traynor says we should try to figure out what the parties meant and if extrinsic evidence helps, then it should be admitted [conditionally]. And before getting to what the parties meant, we want to look at what the words mean.

Traynor Rule: Look to context; admit extrinsic evidence to figure out meaning of words/ intention

o Fried says that the Traynor Rule applies to both the Parol Evidence Rule and the 4 Corners Rule.

o Fried also mentions that the Parol Evidence Rule and the 4 Corners Rule are really similar. They’re in the same family.

-Fed. Deposit Insur. Corp. v. W.R. Grace & Co. (7th Circuit, 1978)- Judge Posner The fact that parties disagree about the meaning of a contract does not mean that

the contract is ambiguous – the words of the contract are not to be ignored. It’s therefore critical to allow proof of the words’ meaning(s) to be admitted.

-§2-202: Final Written Expression: Parol or Extrinsic Evidence- Non-contradictory parol evidence can be admitted.-§212: interpretation of Integrated Agreement- Interpreted integrated agreement in light of the circumstances (like Traynor Rule). Jury question if depends on credibility of evidence or on choice among reasonable alternatives.-Cofman v. Acton Corp. (MA, 1991)- Confusion about how much one share of stock costs [$20.54 (D) or $35 (P)]. Case turns on interpretation of settlement agreements, and effect of reverse stock split on those agreements. Ps were partners at D Acton Corp, which agreed to pay X times 7500 where X = price of Acton Corp common stock minus $7 (effectively making $7 the trigger price at which the partners could cash in)

o Acton then went through reverse stock split, so that new value of stocks was approximately five times old value.

o Ps then demanded payment, saying the stock price was well over the trigger price of $7 from the agreement. Ds argued that because of the stock split, the trigger price had been raised.

o Ps argued that the plain language of the agreement supports their view and that Ds accepted risk of stock split by not negotiating for an anti-dilution clause.

Holding: Ct. ruled for D. Ct says have to look to parties’ manifested meaning guided by “form, structure, sense and internally manifested design of the contract itself—the mutual expression of the parties.” Looking at the agreement, clear that the parties didn’t contemplate a reverse stock split and its impact at the time of the agreement. Although Ps say otherwise, Ct says it’s clear that they would not have been okay with accepting the risk of a normal stock split and long delaying when they could ever cash in. Judge Keeton says it defies common sense to follow P’s argument.

Cynical Acid Wash: when an agreement doesn’t address an issue, consider how each assertion/interpretation would have fared during negotiations.

-Big East v. Boston College (MA, 2004)- Boston College chose to leave the Big East Conference and the Big East imposes huge penalties for leaving. Big East tried to make an amendment to increase withdrawal penalty from $1mil with 12-mo withdrawal notice to $5mil with 27-mo notice. Boston College says the Big East’s amendment wasn’t valid because it didn’t follow voting protocol.-Relevant agreement secionts: Article VII: Amendments (Big East amendment invalid), and §5.05: Actions Without a Meeting (Big East amendment valid)

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Holding: summary judgment for Boston College. Specific controls over general. Article VII is more specific straightforward. Judge Van Gestel believes that to allow §5.05 to prevail would be to make Article VII purposeless.

Fried represented the Big East.-Frigaliment Importing Co. v. BNS Intl. Sales Corp. (NY, 1960)- Question of whether “chicken” is a young chicken suitable for broiling and frying (buyer/P) or stewing/chicken (seller/D).

Holding: P loses. D wins because (1) D incorporated Government’s definition of chicken, (2) the $0.33 cost was indicative of fowl, and (3) P wouldn’t have allowed the second contract for chicken if it was dissatisfied with the first.

It’s not that D’s arguments were so good, but that P didn’t meet its burden of proof.-In re Katrina Canal Breaches Litigation (5th Circuit, 2007)- Is “flood” in the insurance contract (1) a natural event or (2) manmade/ something caused by negligence? Was the flood caused by the levee break excluded by the insurance policy (since floods are excluded)? District ct. judge said “flood” was ambiguous and he chose the meaning in favor of the insured, because in the case of ambiguity, you construe against the drafters (contraproferentum).

Holding: The inundation that occurred after the levee break was a flood and was excluded from insurance coverage; there is no ambiguity.

Court determined that “flood” was unambiguous by looking to o Dictionarieso Generally accepted meanings –“Johnstown Flood,” news articles about

“Katrina flood.”o Jurisprudence (other cases)

Ps said that earth movements get distinguished for natural and non-natural causes, so the insurance policy should distinguish for non-natural flooding too.1. Ct. counters that “earth movement” doesn’t have the same presence in

common parlance that “flood” does, so “earth movement” requires a technical distinction and “flood” doesn’t.

C. Mistake1. Mutual and Unilateral Mistake

a. GenerallyMutual Mistake – Both parties have a mistaken belief

K voidable by adversely affected party if 1. the mistake was to a “basic assumption on which the K was made,” 2. the mistake had a material effect on the agreed exchange of performances,

and 3. the adversely affected party didn’t “bear the risk” of the mistake

*not voidable where adversely affected party bears the risk of the mistake

Unilateral Mistake – Only one party has a mistaken belief Typically involves a mechanical error If non-mistaken party is aware of the error, mistaken party can void the K

o This doesn’t apply to an error in judgment about value (like selling a $1200 car for $500)

If non-mistaken party unaware of erroro Binding K; mistaken party can try to void, but probably has to pay

reliance

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Existing Fact – The doctrine is applicable only to a belief about an existing fact not about what will happen in the future

b. Mutual Mistake-Sherwood v. Walker (MI, 1887)- Judgment for P in justice’s court and circuit court. Ds bring error. P claims that the title passed; D says contract was executory and hadn’t passed. 05/15 - D gives order confirmation for “Rose 2d of Aberlone,” believed to be farrow. 05/21- P goes to pay for cow ($80, because price is based just on the value of meat) and is denied because the cow is pregnant ($750-$1000).

Holding: Judgment reversed. No contract because there’s a substantive mistake (barren v. breeding), and it’s a mutual mistake.

Dissent: There was a unilateral mistake here. The purchaser was taking a gamble (probably believed the cow wasn’t barren, just farrow) and he won, so he should get to keep the cow.

-Beachcomber Cons., Inc. v. Boskett (NJ, 1979)- P bought coin for $500 then found out they were counterfeit. P and D both believed the dime to be Denver-minted and genuine. In reality, the coin was nearly worthless.

Holding: Contract rescinded, P not bound, because “classic case or rescission for mutual mistake”

Restatement §502: If both parties have doubt about a certain assumption and contract anyway, then there can be no rescission because they assumed the risk. But here, both parties were certain that the coin was genuine. It was a mutual mistake.

Fried says Raffles v. Wickelhaus was another case of mutual mistake.-§152: When Mistake of Both Parties Makes a Contract Voidable- Where a mistake of both parties at the time a contract was made as to a basic assumption on which the contract was made has a material effect on the agreed exchange of performances, the contract is voidable by the adversely affected party unless he bears the risk of the mistake under the rule stated in §154.-Smith v. Zimbalist (MN, 1982)- Sale of imitation violins based incorrectly on assumptions of makers (Stradivarius, Guarnerius). Zimbalist, not Smith, claimed that the violins were Stradivarius. Charged $8000 (D only paid $2000 up front), but really cost no more than $300. Smith (P) is suing for the remaining $6000.

Holding: Judgment for D affirmed (D doesn’t have to pay the remaining money) because “both parties were honestly mistaken as to the ‘identity of the subject matter’.”

Fried said Smith could argue that there was a unilateral mistake here (and not a mutual mistake) because Zimbalist was the one who labeled the violins, and so Smith should be entitled to the money because Smith didn’t violate a warranty (a promise that something is what it’s stated to be), but Fried said the court wouldn’t be receptive to that. The court would rather just leave things alone.

c. Unilateral MistakeModern View – Where a mistake is unilateral, it is more difficult to void the contract.Requirements – must have the three for mutual mistake plus either:

1. Unconscionability – The mistake must be such that the enforcement of the contract would be unconscionable

2. Reason to know – The other party had reason to know of the mistake or caused the mistake

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-Elsinore Union Elem. School Dist. v. Kastorff (CA, 1960)- A contractor made a mistake in calculating the bid (so his bid was $11K less than the next lowest bid). The school district (P) allegedly did not know about the mistake when they accepted (although they asked D if he was sure about his bid and D said yes). The next morning D checked the numbers and informed P of the mistake. P refused to let him out of the contract and wanted to hold D to his erroneous bid.

Holding: Contract is unenforceable. D made an honest clerical mistake and attempted a prompt rescission. It was an unfair, inequitable, and unintended bargain.

Fried compares this case to Lemogeo In Lemoge, the guy did the work and then tried to get paid the amount

he would have gotten if (1) he didn’t make the clerical error and (2) his bid had been accepted. He should have spoken up earlier. Here, Kastorff (D) tried to rescind immediately and that made a big difference.

Fried says the cousin case to this is Drennan. The mistaken party doesn’t get off in Drennan, but he does here. Fried says CA courts are doling out mercy. In this case, nobody gets hurt if you don’t enforce the K, and in Drennan, the general contractor would be hurt if the subcontractor’s negligence went unenforced.

-S.T.S. Transport Serv. Inc. v. Volvo White Truck Corp. (7th Circuit, 1985) “Courts will generally grant relief for errors which are ‘clerical or mathematical’”

becauseo they are difficult to prevento there is no useful purpose served by enforcing the mistaken termo no incentives exist to make the mistakes (it’s not for the mistake-

maker’s benefit) “A merely mathematical or clerical error occurs when some term is

o either 1/10th or 10x as large as it should be; o added in the wrong column;o added rather than subtracted; oro overlooked

-Comment The Grounds for Rescission

o Unilateral mistakes are generally not grounds for rescission, but exceptions occur (see Elsinore)

o Kemper and Elsinore established that a unilateral mistake can be authorized when enforcement of the contract would be unconscionable (p506).

o As in Elsinore, a party who is promptly informed of the other’s discovery of a mistake should not be permitted to demand enforcement.

Information and Mistakeo Relief is routinely given in “mistaken bid” cases if the error should have

been reasonably known by the offeree (bid receiver) before acceptance (see Elsinore, Kemper, and Lemoge) (p507)

-Hinson v. Jefferson (NC, 1975)- P bought a plot of land, intending to build a home – as the land was restricted to residential use – but couldn’t get a septic system because the land was subject to flooding. Neither P nor D knew of this. Procedure: D wins, then P wins (granted rescission and restitution on grounds of “mutual mistake of material fact” and

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“total failure of consideration”), and now D appeals. P argues there was a mutual mistake and since the land was restricted to residential use, it must be able to fulfill that purpose. D relies on caveat emptor (“let the buyer beware”).

Holding: P is entitled to full restitution because D breached implied warranty (decision based on implied warranty, not mutual mistake doctrine).

Implied Warrantyo Caveat emptor relaxed in case of defect in dwelling of which purchaser was

unaware and couldn’t discover by reasonable inspectiono Implied warranty at time of deed passing that the dwelling and its fixtures

are free from major structural defects.o Doesn’t extend to defects which are visible or should be visible to a

reasonable man.o Hatley used the implied warranty doctrine and provides the legal precedent

(seems like they use Hatley, but reject Miller, although both had a type of builder/vendor)

-McRae v. Commonwealth Disposals Commission (Australia, 1951)- Commission places a newspaper ad offering an oil tanker on Jourmaund Reef, but neither the reef for the tanker exists. Ps sent letter and check on 04/11, and on 04/15, Commission accepts (“Your offer to purchase, the general conditions contained in Form O, and this acceptance, shall constitute the contract. Kindly acknowledge receipt of this communication”). Other terms were set out in the letter. P never responded. Commission argues that no contract came into existence and P says that the 08/15 letter was just an ineffective attempt to add further terms to an already completed contract. P sued for breach of contract, deceit, and negligence, was awarded 756 lbs, and wants more.

Contract Holding: There was a contract, and the Commission contracted that a tanker existed in the position specified. Since there was no such tanker, there has been a breach of contract.

Damages Holding: It’s true that Ps expended a lot of money for salvage operations, but D says that even if the tanker had been discovered, it may have been found worthless, so Ps can’t say that their expenditure was wasted because there was no tanker. Court defeats that argument and say that Ps expenses flowed prima facie from the fact that there was no tanker, so Ps are entitled to reliance damages.

o Fried says the court puts the burden of proof on D to prove that the 3000lbs for salvaging was a waste. This is like Res Ipsa Loquitur (the victim doesn’t have to prove the exact details of his damages, because D is clearly responsible).

D. Assent to Standardized Forms-Mundry v. Lumberman’s Mut. Cas. Co. (1st Circuit, 1986)- Burglar took Mundrys’ silver. Mundrys want more than $1000 in insurance. Policy was changed, new info sent to Mundrys with two notices about $1000 change before the burglary occurred.

Holding: Summary judgment for Ds affirmed because Breyer says the company’s notice was adequate (readable English, good-sized print, and important words bolded).

Conspicuous warning = no recovery-Comment: Form “Contracts”-

Economic/efficient for businesses to use standardized (aka “boiler-plate”) contract terms (avoids/reduces legal risks, confers leeways and advantages to business, omits bargaining process, etc.) (p660)

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When a person agrees to standardized/boiler-plate provisions, they actually only assent to (1) the dickered terms, (2) the broad transaction, and (3) any terms that aren’t unreasonable, indecent, or materially-altering (p662).

Any contract with boiler-plate terms results in 2 contracts: (1) the dickered deal and (2) the collateral deal of supplementary boiler-plate terms.

-§2-314: Implied Warranty: Merchantability; Usage of Trade- A warranty that goods from a merchant/seller shall be merchantable (fit for their purposes, in proper shape, etc.) is implied. Other implied warranties may arise from course of dealing or usage of trade.-§2-315: Implied Warranty: Fitness for Particular Purpose- Implied warranty that goods are fit for their particular purpose-§2-316: Exclusion or Modification of Warranties- To exclude an implied warranty of merchantability or fitness, it must be written explicitly/conspicuously.-Richards v. Richards (WI, 1994)- Leo Richards was a truck driver and his wife wanted to ride with him, so she signed the “Passenger Authorization” exculpatory agreement. Wife sustained injuries in an accident. (This is a case of respondeat superior. That’s why it’s Richards v. Richards. The husband is a joint tortfeasor with the trucking company).

Holding: Contract (exculpatory agreement) invalid because it violates public policy (none of the factors alone would necessarily have warranted invalidation of the exculpatory contract, but together, they do).

Fried says Judge Abrahamson is trying to make the agreement seem unfair. Fried doesn’t like Abrahamson’s argument about unequal bargaining power.

Fried notes how the Policy of Contract Law (freedom of contract) and the Policy of Tort Law (compensation for injury incurred by unreasonable conduct of another) conflict with one another, and in this case, we rule in favor of tort law.

-Broemer v. Abortion Services of Phoenix (AZ, 1992)- 21yo decided to get abortion, given “Agreement to Arbitrate” to sign (with two other forms), she was apparently really emotional and didn’t know/ pay attention to what she was signing. P suffered punctured uterus due to abortion.

Holding: Agreement to Arbitrate unenforceable against P, because there was inequality of bargaining power (terms couldn’t be bargained, and the arbitrator would be a doctor so that skewed in favor of the clinic) and P didn’t know what she was signing (no informed consent because no one explained it to her and she was under stress).

Court determines that the inequality of bargaining power was unfair and that’s a reason to deny the agreement’s enforceability, but adhesion contracts are by nature unbargainable and they’re often allowed, so the court restricts the holding to this case.

-Silverstein v. St. Paul (NY, 2003)- Question of whether or not the September 11th attacks were one ($3.5b) or two ($7b) occurrences. Did WilProp insurance or Travelers insurance control? WilProp: “occurrence” shall mean all losses or damages that are attributable directly or indirectly to one cause or to one series of similar causes ($3.5b definition). As of September 11th, none of the insurers had issued a final policy form. On September 14 th, Travelers issued its final policy form. P believes Travelers insurance form (which doesn’t define “occurrence”) is controlling because the WilProp form was just the starting point for negotiations and the insurers had agreed to follow the Travelers form.

Holding: The binders issued by Harford, Royal, and St. Paul were based on the WilProp form, so the attack on the towers was one occurrence.

Since the Traveler’s form was ambiguous about “occurrence,” the court decided to look to extrinsic evidence.

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-§209: Integrated Agreements- Integrated agreement is a final expression, to be determined by a court, completeness and specificity shows it is integrated (unless there is other evidence) to say it’s not a final expression. -§211: Standardized Agreements- Fried argues that (3) does all the work. If you have reason to believe that other party would not agree to a term if it knew the term was present, then the term is not part of the contract.

III. REMEDIES FOR BREACH OF CONTRACTA. Damages

EXPECTATION RELIANCE RESTITUTIONGoal: Put P in the position as if K had been performed.

Goal: Return P to status quo ante.

Goal: Restore value of benefit conferred on D.

Remedies based on the contract (affirmance)Remedy based off the

contract – theory of unjust enrichment (disaffirmance)

1. The Basic Measure: Expectation Damages-Based on K price and aims to put P in the position they would have been in without breach-Hadley Rules: party injured by breach can only recover damages that

Arise naturally from the breach Might reasonably have been supposed by both parties when K was made

-Modern trend is not to cut off damages on the ground of uncertainty (like amount of lost profits) unless the uncertainty is fairly severe.-Duty to Mitigate: injured party can’t recover damages that were reasonably avoidable

K for sale of goods: if seller doesn’t deliver, buyer can recover for substitute goods Employment K: if Er wrongfully terminates Ee, Ee should look for comparable job Construction K: contractor can’t add to owner’s duty by continuing construction

after owner breached (Rockingham v. Luten Bridge)*Expenses incurred while trying to mitigate damages are reasonable (like paying an employment agency)

-Calculating Damages: (what you were supposed to get/ “warranty” minus what you actually got)

Gross profit (total K price – direct costs)+ reliance ($ you spent) – payments or proceeds ($ you received or saved) + consequential/incidental damages (other $ you spent)

-Hawkins v. McGee (NH, 1929)- P went to a surgeon to repair scar tissue on his palm. D promised to make the hand “100% perfect.” D grafted skin from P’s chest onto his hand and the skin sprouted hair and the hand was useless.

Holding: P should be awarded expectancy damages. The aim was to put P in as good a position as he would have been had D fully performed. Expectation damages are the difference between what he got and what he was promised.

Dr. spoke in contract language and solicited P’s dad’s business; that’s why this is a contract case.

Fried says this wasn’t a malpractice case because malpractice requires expert testimony and it’s difficult to get one doctor to testify against another.

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If this was a tort case (which Fried says it would be today), then P could get money for pain and suffering. Court said pain and suffering were expected with surgery though and it was part of P’s contribution to the contract.

-Groves v. John Wunder (MN, 1939)- D leased property from Groves and as part of the lease promised to level the land but D breached and did not level the land (keep uniform grade). P sues for the cost of completion, $60,000. The fair market value of the land as leveled was only $12,000 and was probably not substantially different from the cost of the land unleveled.

Holding: P was entitled to the cost of completion ($60,000) because to do otherwise would favor the faithless contractor. This was a willful and intentional breach. The law doesn’t protect people from making foolish contracts. Freedom of contract argument.

Fried believes this case is wrongly decided. The court granted cost of completion for this commercial deal, but P should have gotten the diminutive value. Ps didn’t care about the land enough to complete it (they left the land unfinished and uneven for 12 years).

-Peevyhouse v. Garland Coal & Mining Co. (OK, 1962)- Ds leased land from P for the purpose of mining coal and promised to fill the strip mining holes at the end. Ds breached and left the land with the holes. The cost of completion was $29,000 but the decrease in the value of land was $300.

Holding: P recovers the diminutive value (~$5000). No person can recover a greater amount in damages that he would have gained by full performance on both sides. Efficiency/economic waste argument.

“Where the contract provision breached was merely incidental to the main purpose in view, and where the economic benefit to the lessor by full performance of the work is grossly disproportionate to the cost of performance, the damages are limited to the diminution in value of the premises.”

Fried says this case was wrongly decided. This was more of a personal transaction (unique property). Ps cared about the land and should have received cost of performance.

Restatement Examples:-“Ugly Fountain”

You build an ugly monument for your beloved, dead dog. The land costs $100,000, but the monument would drop the property value to $60,000. It costs $30,000 to build the monument and you pay up front, but the builder decides he’ll keep the money, not build the fountain, and save you $40,000.

This wouldn’t fly, because you want the fountain (it represents something important to you) and our society believes that people should be able to contract for what they want.

-“Dry Hole” You want to build a well and it costs $12,000. It’s clear that there’s no oil there,

so the builder doesn’t want to complete the contract. You could try to sue for damages, but you’ll lose because it’s clear that you

don’t really want anything (there’s no oil and no one wants to drill for nothing)-Acme Mills & Elevator Co. v. Johnson (KY, 1911)- On 4/26, parties made a contract for 2,000 stacks of wheat at $1.03 per bushel to be delivered on 7/29. Johnson failed to deliver the wheat on time and breached. Before breaching, however, Johnson sold wheat to a different

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party on 07/13 for $1.16. On 7/29, the price of wheat was 97 ¢. The plaintiff sued for the difference between $1.03 and $1.16.

Holding: There can be no recovery because P suffered no financial harm. He was no worse off as a result. In fact, he was probably better off because he could buy for 97 ¢. (He was asking for restitution damages).

-Laurin v. DeCarolis Construction Co. (MA, 1977)- D sold a wooded lot to P and before title had passed, D removed the timber and gravel from the land.

Holding: D must pay P for the value of the goods removed. They were non-fungible goods and P most likely made the contract with the assumption that they would be on the land when he received it.

-Jacob & Youngs v. Kent ( )- D contracted to have P build him an expensive vacation home using a specific brand of pipe (Reading pipe). D used a different brand for the majority of the piping, because D didn’t pay attention to that provision of the K. Accordingly, P withheld final payment as a result.

Holding: D must make the final payment and P need not replace the piping. The court (Cardozo) decides that D got essentially what he bargained for because there was no real difference in the piping. Also, it would be unreasonably expensive to force P to take out the old piping and install Reading piping.

The dissent believes that this holding violates freedom of contract. D specifically asked for Reading pipe and that’s what he should get.

Fried says that Cardozo wants to play both sides of this argumento He pretty much says this is a “Dry Hole” case, but he doesn’t say it outright

because he says this is an “innocent” mistakeo He wants to save the “Ugly Fountain” case though, by saying that a person

can always contrast to say that every term must be satisfied or recovery is merited (but that’s not true).

Fried thinks Cardozo’s judgment is the law though.-Comment: “Damages as Punishment for Contract Breach”--§347: Measure of Damages in General- Normally, damages = loss in value + incidental/consequential loss – cost/loss avoided-Louise Caroline Nursing Home, Inc. v. Dix Construction Co. (MA, 1972)- P and D entered into a contract for work on P’s nursing home, but D halted work and did not finish. P sued for breach and had another contractor finish the job. P wanted the difference between the value of the unfinished building and the value of the completed house.

Holding: No damages should be awarded because P suffered no compensable damage, because the cost of completion is less than what normal expectation damages would be (house worth contract price minus payments already made by P). So, P can use the money it didn’t end up spending to complete the construction, and it will still have a little money left over.

You don’t get a windfall because you are the victim of a breach. They had already recovered the cost of completion.

Fried says this is “reverse-Peevyhouse”2. Rationales for the Expectation Measure (and the Limitations)

-Goodman v. Dicker (DC, 1948)- Dicker (appellee) applied for a dealer franchise with Goodman (appellant, local distributor). Goodman induced Dicker to incur expenses, and then Goodman finally told Dicker that Dicker wouldn’t get the franchise. Lower court awarded Dicker $1500 ($1150 spent and $350 in lost profits).

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Holding: This is a case of detrimental reliance, and damages should be based on money spent in reliance – not on lost profits. Damages - $1150.

- D’Ulisse-Cupo v. Board of Directors of Notre Dame High School (CT, 1987)- Failure of a school board to rehire a teacher despite representations that it would.

Holding: P doesn’t have a promissory estoppel claim here, but negligent misrepresentation.

-Note: Promissory Estoppel Damages- These reliance damages should return the victim to the status quo ante Williston, Reporter of the Restatement, says that if the status quo can be restored,

then there’s no need to enforce the promise, but if the status quo cannot be restored, then the court should enforce the contract.

-§348: Alternatives to Loss in Value of Performance- Alternatives to loss in value when you don’t know the specific amount lost: diminution in value or reasonable cost of completion (if not clearly disproportionate to probable loss in value)

3. Limitations on Recovery of Expectation Damages-Efficient Breach = when nonperformance benefits the promisor and the promisee doesn’t actually lose anything-Example:

B = breacher, V = victim, X = third partyB has to sell widgets to V and he sells/delivers the first half of V’s order. Then X comes and B sells widgets to X at a higher price, but B is now late in delivering to V (B breached his contract). V lost $1000 as a result. Because of how much money B received from X, B can pay V’s $1000 damages and still have money left over. So, it benefited B to breach and didn’t really damage V.

1. Default Rule: Breacher is free to breach as long as he compensates the difference between the market price at the time of performance (what you currently have) and the contract price (what you were supposed to get). So, normal expectation damages.

2. Posner - Advocate of the efficient breach.-Efficiency. The goods find their way to those who need them most.-It’s pareto superior = at least one person is better off and no one is worse off, not Kaldor-Hicks efficiency (those who are better off could help those are worse off, but those better off don’t have to compensate the others).

3. Freidmann – Opposed to efficient breach-Breaching party should not be able to capture the increase in price. If a profit is to be made, it should go to the victim, not to the breacher. -Keeping B involved adds transaction costs-Argument that since the widgets are going to be V’s property, B is pretty much stealing by selling those widgets to X (but V doesn’t actually own the widgets until delivery; before then, V only has an expectation).

4. Conflict between efficient breach and freedom of contract-Make money however possible – Posner-One should keep promises.

a. Avoidable Damages-Duty to Mitigate: Where P might have avoided a particular item of damage by reasonable effort, he may not recover for that item.

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-Rockingham County v. Luten Bridge (4th Circuit, 1929)-The county revoked a contract to build a bridge after Luten had spent $1,900 on the construction. Luten continued to build in defiance and sued for $18,301.07 for completion of the bridge.

Holding: P can only recover the amount expended prior to the revocation. P can’t get damages for injury that could have been avoided. Duty to mitigate. So, Damages = $ for labor + materials + expenses incurred in part performance + profit that would have been realized.

Treat the contract as broken when P receives notice and recover such damages as he may have sustained at that point. Efficiency argument.

-Leingang v. City of Mandan Weed Board (ND, 1991)- City awarded Leingang a contract to cut weeds on lots of more than 10,000 sq. ft. Leingang brought suit upon discovery that the City had improperly assigned large lots to the small lot contractor. Leingang claims $ 1,722 in damages ($1.933 (contract price for the work that should have gone to P) - $211 (gas, oil, repair and blade replacement saved)). They city argued that only “net profits” were recoverable minus some overhead.

Holding: A plaintiff is to be compensated for all detriment cause by the breach. Constant overhead costs are not included in the cost of performance. Contract price should only be reduced by expenses saved.

Note: pure economic damages are not compensable- so workers in Luten cannot be compensated.

-Parker v. Twentieth Century-Fox Film Corp. (CA, 1970)- P contracted with D to play the lead in “Bloomer Girl” a musical for $750,000. D cancelled the film and offered her a part in “Big Country,” a western. P declined the role and sued for the entire contract price. D claimed P unreasonably failed to mitigate damages by declining the role in “Big Country.”

Holding: P is entitled to full expectancy damages. The part in “Big Country” was “substantially different” and inferior. The employer must show that the alternative employment was comparable and substantially similar to that which the employee was deprived. P need not accept inferior work to mitigate damages.

-Billetter v. Posell (CA, 1949)- P was hired by D to be a floor lady and designer for $75/week plus a Christmas bonus of $500. D then decided to transfer P to replace a different floor lady for $55/week. P refused, quit, and sued for $65/week from Jan. 1-June 30 and for $300 unpaid on the Christmas bonus.

Holding: P’s damages affirmed. State unemployment money isn’t a satisfactory replacement, and P doesn’t have to accept work for less pay in order to mitigate damages.

-§350: Availability as a Limitation on Damages- Duty to mitigate damages = cannot recover damages you could have avoided without undue risk, burden or humiliation, unless you made reasonable but unsuccessful efforts to avoid them.

b. Consequential Damages-Include loss of profit or loss of revenue and may be recovered if such damages were reasonably foreseeable or “within the contemplation of the parties” at the time the contracts was made. Part of expectancy.

a. Naturally arisingi. No intervening or exacerbating circumstances

(hindsight)ii. Ought to know (foresight)

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b. Reasonable contemplation-Hadley v. Baxendale (England, 1854)- Ps were millers. The crank shaft on the mill broke. They contracted with carriers to transport the shaft and get a new one. They delivered the shaft to the transporters the next day by noon. The delivery was delayed by D’s neglect and Ps did not receive a new shaft for several days. As a result, the mill was stopped and they lost profits.

Holding: New trial with rule on damages given. P may not recover profits because the loss was not foreseeable as a result of a breach (no reason for D to foresee mill stoppage as a result of a breach in delivery). One may only recover for damages naturally arising from the breach or such as may have reasonably been in contemplation of the parties at the time they made the contract.

-Lamkins v. International Harvester Co. (AK, 1944)-P bought lights for his tractor and they were delivered a year late. He sued for non-delivery and consequential damages.

Holding: D is not liable for consequential damages because dealer did not tacitly or otherwise consent to be bound for more than ordinary damages. Also, such damages would be out of proportion to the consideration agreed to be paid ($100 in lost profits for $20 light accessory). Just because one knows that a risk is present does not mean that party agreed to the transfer of risk.

-Victoria Laundry v. Newman Industries (1949)- Parties contracted for the delivery of a boiler on June 5th but it was not delivered until November 8th.

Holding: Ps can recover for loss of “business profits” D is liable for the losses that were reasonable foreseeable as a result of the breach and were actually incurred. Depends on the knowledge possessed by the parties.

o During negotiations, Ps expressed their intention to have the boiler as soon as possible

o D (engineers) had to know that a boiler was essential to a Laundromat Bearing the loss - Put the risk on the person who knew it and should have

spoken Default Rue – Shippers pay the difference between express and standard

shipping or $ back.-Hector Martinez & Co. v. Southern Pacific Transp. Co. (5th Circuit, 1979)- D carrier was a month late in delivering a dragline which P intended to use in strip mining. Trial court, applying Hadley, dismissed P’s claim for the fair rental value of the dragline for the period of delay.

Holding: Reverse trial court’s ruling/ application of Hadley. Ct. awards for loss in rental value because a dragline has a value (unlike the

shaft in Hadley, which was not an indispensable element of the mill) and may have been resold. Also, it’s reasonable that delay would decrease the dragline’s rental value.

-§2-715: Buyer’s Incidental and Consequential Damages- Buyer’s incidental damages: inspection, receipt, transportation… any other reasonable expense incident to the delay/breach. Buyer’s consequential damages: any loss from what seller knew/had reason to know and which could not be prevented; any injury from breach of warranty.-§351: Unforeseeability and Related Limitations on Damages- Consequential damages for foreseeable damages that are: 1) in normal course of events; 2) beyond the normal course of events, but party in breach had reason to know.-Valentine v. General American Credit, Inc. (MI, 1984)- P tries to recover mental distress damages arising out of an alleged breach of an employment contract.

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Holding: a person discharged in breach of an employment contract can’t recover for mental distress because (1) under the Hadley rule, mental distress would be recoverable for virtually every breach of contract (which is ridiculous) and (2) it wouldn’t comport with the economic purpose of employment contracts.

P’s case would be best as a tort, but she hasn’t proven the requisite purposeful tortious conduct.

-§353: Loss Due to Emotional Disturbance- No loss for emotional disturbance unless 1) accompanied by bodily harm or 2) emotional disturbance was a particularly likely result of the breach

c. Uncertain Damages-Freund v. Washington Square Press (NY, 1974)- P contracted with D to have his book published. D breached and P sued for (1) delay in academic promotion (2) loss of royalties and (3) cost of publication. The court of appeals awarded $10.000 (cost of publication).

Holding: The damages granted by the Court of Appeals would put phim in a better position than he would have been in had there been full performance. The other damages claimed could not be proven with sufficient certainty to allow recovery. Damages should be reduced to about $0.06.

Could maybe have sued for reliance damages (Fried).-Fera v. Village Plaza, Inc. (MI, 1976)- Ps signed a 10-year lease with D. D breached by giving the space to another tenant and P refused alternate space as unsuitable. Jury awarded Ps $200,000 for lost profit (despite that it was a new business so there was no proof of past profits). An intermediate appellate court ordered a new trial on damages because P’s proof of anticipated profits were entirely speculative.

Holding: Jury made a reasonable determination, so the damages they chose should be reinstated. Where injury is found to some degree, recovery is not precluded for lack of precise proof (this is NOT the general rule; it actually goes against §352).

-§352: Uncertainty as a Limitation on Damages- No damages for loss that evidence does not establish “with reasonable certainty.”

4. Alternative Interests: Reliance and Restitutiona. Reliance Damages in Lieu of Expectation Damages

-Damages needed to put the plaintiff in the position she would have been in had the contract never been made. Usually equal to the amount the plaintiff spent performing or preparing to perform. Used where expectation damages cannot be accurately calculated or where there is no contract but some relief is justifiable.

Profit too speculative – Where expectation damages cannot be calculated because P’s lost profits are too speculative or uncertain reliance damages may be used

Vendee in a Land Contract – Where the plaintiff is a vendee in a land contract and the defendant fails to convey reliance damages may be used.

Promissory Estoppel – Where a P successfully brings a suit based on promissory estoppel, reliance damages may be used (a suit in quasi contract).

Limits – a. Contract price as a limit – Reliance damages will almost always

be limited to the price of the contract

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b. Recovery Limited to Profits – Most courts do not allow reliance damages to exceed expectation damages. D bears the burden of proving what P’s loss would have been.

c. Expenditures Prior to Signing – P will normally not be allowed to recover reliance expenditures made before the contract was signed since they were not made in reliance on the contract.

-Security Stove & Mfg. Co. v. American Express Co. (MO, 1932)-P and D contracted to ship a furnace by a certain to date for P to display at an exhibition. D breached and did not deliver one of the packages (an essential part). P sued on reliance damages for the amount spent in preparing for the convention ($801 $1000).

Holding: Held – P may recover reliance damages. Where the breaching party has notice of particular circumstances that will result in unusual loss in the case of breach, the party is responsible for the damages actually sustained.

Trying to determine expectation damages wouldn’t yield a precise sum. Without these reliance damages, P wouldn’t get anything, and that won’t fly.

-§349: Damages Based on Reliance Interest- Can collect reliance damages for expenditures based on preparation for performance or in performance. Reduced by amount injured party would have suffered had contract been performed.-L. Albert & Son v. Armstrong Rubber Co.(2nd Circuit, 1949)- Armstrong (D) contracted to buy 4 Refiners (machines that recondition old rubber) from L. Albert (P). P delayed delivery of the last 2 Refiners, so D refused to accept/pay for all 4. P wants the price of the 4 Refiners. D says P breached the contract and wants reliance costs (~$150,000).

Holding: P may recover damages for his outlay in preparation for performance subject to the privilege of D to reduce the award by as much as he can show P would have lost as a result of performing the contract.

Ct. cites §333-§90: Promise Reasonably Inducing Action or Forbearance- Promise reasonably expected to induce action & forbearance and does induce such action & forbearance is binding if injustice cannot be avoided otherwise. Charitable subscriptions and marriage settlements binding even without showing of inducing action & forbearance.

b. Restitution as a Remedy for Breach of Contract-The plaintiff’s restitution interest is the value to the defendant of the plaintiff’ performance. The goal is to prevent unjust enrichment. No restitution where full or substantial performance has occurred. Also, in most courts, restitution isn’t limited to contract damages.-Normally, if D has committed a material breach, P will prefer expectation damages because they’re usually larger and easier to prove.

-Major exception is where P made a losing K (market value of what P has to perform for D is higher than K price).

-Uses: A non-breaching party who has partly performed before the other party

breached may bring a suit on the contract and not be limited by the contract price

The breaching plaintiff who has not substantially performed may bring a suit in quasi-contract and recover the value she has conferred on the defendant. Such damages are limited by the contract price.

-Quantum Meruit = work and labor done

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-United States v. Algernon Blair, Inc. (4th Circuit, 1973)- A subcontractor (Coastal Steel Erectors) began performance of a contract but Blair (general contractor) refused to pay for the crane rental so the sub ceased work (28% complete). Blair is suing for damages quantum meruit – the reasonable value of performance undiminished by any loss that would have been incurred by complete performance.

Holding: P is entitled to recover damages under quantum meruit (not on the contract) for the reasonable value of labor and equipment. P could not collect the full contract price in the case of partial performance.

The contract price is evidence of reasonable value but it is not conclusive or limiting. The court is seeking to prevent unjust enrichment

Case brought by U.S. because of the Miller Act, which protects subcontractors Fried says P was in a losing contract, so suing on the contract would have left

him screwed. Fried says, “The miracle of restitution is that if you’re the victim of a breach, you

can ignore the contract (which you’ll do if you have a losing contract) and sue for the value conferred, which is probably more than the K price.

-Kearns v. Andree (CT, 1928)- P worked really hard to give D what he wanted (including installing ugly wallpaper) so that D would finally agree to buy the property, but then D refused.

Holding: the contract was indefinite as to mortgage, so it is unenforceable. Even though the K is unenforceable, P may recover if there was a reasonable expectation of compensation for P’s work.

-Oliver v. Campbell (CA, 1954)- P, a lawyer, contracted to represent D in a divorce proceeding for a fee of $850. D fired the attorney right before the verdict was returned (so like 99% of the performance was completed). P tried to sue for the reasonable value of his services ($5,000).

Holding: P can only recover $300, the remaining balance due on the original fee because there had been full performance so he is bound by the terms of the K.

The remedy of restitution is not available to one who has fully performed. *The performances here and in Blair are both non-transferable and non-

refundable. Fried says that before substantial performance, all the court has to figure out is

what value has been conferred (e.g. Blair). Alternatively, when there’s substantial performance, then you’re so close to the K price that it’s just easier to go with the K price than to figure out some other amount (e.g. Oliver).

“Dirty Hands Idea” – breacher shouldn’t be able to invoke the K that he has broken. He shouldn’t be able to wear that armor anymore.

-§373: Restitution When Other Party is in Breach- If a party breaches, the injured party can collect restitution damages for benefit conferred by part performance or reliance. This does not hold if there was full performance and the only breach was for payment of a definite sum.-Britton v. Turner (NH, 1834)-P contracted with D to work for 1 year for $120. P breached and left work after 9.5 months and sued for quantum meruit.

Holding: P is entitled to the reasonable value of the labor for work done, because his work (farm work) was irrevocably conferred on D. To allow the party in breach no remedy would unjustly enrich the other party. Where a party benefits from partial performance, he (D) must pay for the value of such performance even if the other party breaches.

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P can’t sue on the contract because he breached the contract. P can’t get damages exceeding the contract price when P is the breacher. Different from Blair because P here is the breacher. Quantum meruit is capped

by proportionate K price. If you’re the breacher suing then you can’t get more than the contract price, but if you’re a non-breacher suing then you can.

Fried says that the fairy dust being sprinkled here (and in Vines) is that the court says that the contractors could use express words to determine damages, but Fried says that’s bull because sometimes judges ignore that express language.

-Kehoe v. Rutherford (NJ, 1893)- P had contracted to level out some land for D, but P had to stop when some of the land turned out to be private property. He had been paid $1,850, but he wanted recovery under quantum meruit ($3153).

Here, P was in a losing contract (P would get $3,153 for completing 3/5ths of the work, but only $2,743 for full performance). P’s damages are limited to the contract price, because It would be absurd to award P the $3,153.

-§2-718: Liquidation or Limitation of Damages; Deposits- Damages for breach by either party may be liquidated in the agreement but only at an amount which is reasonable in light of the anticipates or actual harm caused by breach-Vines v. Orchard Hill, Inc. (CT, 1980)- Ps wanted to buy condo and put down 10% for the down payment. The contract designated the down payment as liquidated damages. Then Ps wanted out because P was being transferred to NJ for work, and Ps sought to recover the down payment. By the time of the trial, the condo’s market value had gone from $78,000 at the time of the contract to about $160,000.

Holding: New case to determine whether Ps get to recover and whether the liquidated damages clause is invalid. In order for the purchaser to recover, he must prove that the seller was unjustly enriched – that the down payment was more than seller’s expectancy (penalty clauses are presumptively invalid).

The relevant moment for assessing damages is the time of breach (look at the $78,000 value, not the $160,000 value).

The default rule forbids parties from creating their own damage clauses – restricts freedom to contract.

Fried’s comments:o 1st Order = contract (breach of contract gives standard damages)o 2nd Order = liquidated damages

Judge Peters says that liquidated damages will be enforced if it’s a reasonable attempt to figure out what damages might be. If it doesn’t look like a reasonable estimate of what damages will be at the time of the contract (not at the time of the breach) then it won’t be upheld.

Peters also says that for liquidated damages to have a chance, P must prove that D/seller was unjustly enriched.

o Demonstrating a breach leads to 1st order damages, but you need the reasonable estimate to get 2nd order damages.

o A penalty is a liquidated damages clause that the court doesn’t think was a reasonable estimate of what damages would be that at the time of the contract.

o The liquidated damages clause shifts the burden of proof to the P to prove that the seller has been unjustly enriched.

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o He who attacks the clause (P in Vines and D in Muldoon) has the burden of showing that it was unreasonable.

5. Contractual Provisions Setting Damages (Liquidated Damages and Penalties)-Liquidated Damages are valid if

Damages are difficult to estimate when the contract is made The damages in the provision are a reasonable forecast at the time of contractingOtherwise, you have an unenforceable penalty.

-City of Rye v. Public Service Mutual Insurance Co. (New York, 1974)- City of Rye got developers to build 6 buildings. In the contract, P required that the developers post a $100,000 bond and $200/day for each late of lateness. The purpose of the bond was to compel the developers to finish construction on-time.

Holding: The bond did not reflect a reasonable estimate of probably monetary harm or damages (because the damage of late construction posed to P would be minimal), so it’s not a liquidated damage, but a penalty. Also, there’s no statutory authority for the city to impose such bonds.

-Muldoon v. Lynch (CA, 1885)- A widow contracted with D to erect a headstone of Italian marble at her husband’s grave. The agreed price was $18,788 and the contract provided for a penalty of $10 a day if the contract had not been performed after 12 months. The marble waited in Italy for 2 years and the widow claimed a deduction in the contract price.

Holding: This is a penalty clause and is unenforceable because it is disproportionate to actual damages.

Think “Ugly Fountain”-§356: Liquidated Damages and Penalties- Damages for breach by either party may be liquidated in an agreement, but only if those damages are reasonable forecast.-§2-718: Liquidation or Limitation of Damages; Deposits- Damages may be liquidated in an agreement, but only if the damages are a reasonable anticipation at the time of contracting. An unreasonably large unliquidated damage is void as a penalty.-Lake River Corporation v. Carborundum Company. (7th Circuit, 1985)- Carborundum makes Ferro Carbo and Lake River distributes it to customers. In order to make a 20% profit, Lake River imposed a minimum-quantity guarantee. Unfortunately for D, the demand for Ferro Carbo plummeted, so D was expected to pay $241,000 according to the minimum-quantity guarantee. D refused, claiming that it was a penalty. There was also an issue of whether P could keep the product that D had shipped to it as a lien.

Holding: This is a penalty and therefore unenforceable (the minimum-guarantee clause would give P 130-400% of its expected profits, and that’s way too much).

Also, it wasn’t a lien, but some other form of ransom.B. Specific Performance

-The provision for specific performance is a bar to efficient breach.-Advantage: you get what you contracted for-Disadvantages:

(1) bar to efficient breach, (2) requires a court intervention which courts don’t like because money damages are easier and quicker, and (3) the problem of supervision over performance arises (so the court has to stay involved).

-The default rule is to avoid specific performance except when dealing with real property, because all real property is sufficiently unique that it may have more value to a person than the market would assign it.

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-We saw this in Peevyhouse-In the reverse (Groves), there was no unique value to the land; it was completely commercial for him

-Van Wagner Advertising Corp. v. S&M Enterprises (NY, 1986)- The owner of property leased billboard space to the plaintiff. The owner then sold the property to S&M who terminated the lease with 60 days notice. P sues for specific performance because it really wanted that billboard space. Also, P believes that only the previous owner (and not the purchaser) can terminate the lease, so S&M shouldn’t be able to terminate P’s lease.

Holding: There was a breach because according to the terms of the lease, only the original owner may terminate the lease to Van Wagner. However, the court declines to order specific performance and instead awards monetary damages because the damages are quantifiable; uniqueness of property is not a magic door to specific performance.

Where monetary damages can be adequately quantified, there is no need for specific performance. If specific performance imposes an undue burden, it should not be imposed.

Fried notes that based on the court’s reasoning that only the original owner can terminate a lease, it would be possible for P to find itself in this same situation if S&M sold to property to yet another owner (because then, S&M would be the “original” owner and would be able to terminate the lease). Fried suggests that it may have been preferable to grant specific performance so that P could get the billboard and not have to worry about losing it later.

-Curtice Brothers Co. v. Catts (NJ, 1907)- D, a farmer, agreed to sell his entire tomato crop to P, a tomato canning company, but then D backed out. P wants specific performance.

Holding: Specific performance granted because there was no other adequate/monetary remedy. It was a short tomato season, and if P didn’t get the tomatoes, they could lose a year’s worth of work. Also, the farming industry is really important in NJ and the court doesn’t want farmers to violate these economically important contracts. Also, if the farmer was sued for lost profits, then he probably wouldn’t be able to afford it.

Fried says this is like Alaska Packers, which we learned in our discussion of consideration.

-§360: Factors Affecting Adequacy of Damages- Determine damage adequacy by considering (1) the difficulty of proving damages with reasonable certainty, (2) the difficulty of procuring a suitable substitute, and (3) the likelihood that damages would be collected.-§2-716: Buyer’s Right to Specific Performance or Replevin- Specific performance allowed when goods are unique-Eastern Rolling Mill Co. v. Michlovitz. (MD, 1929)- D dropped contract to provide scrap metal to P.

Holding: Specific performance was granted to P because it’s easier to enforce the equity (based on the scrap that was actually made) than determining contract price (expectation damages for how much scrap will be produced in the future are uncertain).

-Posner, “Economic Analysis of Law”- Not a fan of specific performance. Ordering specific performance may not be ideal, because it has an economic cost (as

additional negotiations are not costless). Also, a damages remedy is a one-shot deal, but specific performance requires more court involvement and supervision.

-Schwartz, “The Case for Specific Performance”- Fan of specific performance. We should make it more readily available, because (1) damages are often under-compensatory, (2) promisees have

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more incentive to sue for damages when damages are fully compensatory, and (3) people would commonly prefer to make substitute transactions promptly and sue later for damages.

IV. POLICING THE BARGAINA. Duress

-Any wrongful act or threat which overcomes the free will of a party.a. A subjective standard is used to determine whether the party’s free will has been

overborne.-The defense of duress is available if D can show that he was unfairly coerced into entering the contract.-A threat to withhold something that a person needs isn’t in itself duress.-A contract is voidable under a duress defense if:

Consent was induced by wrongful threats (i.e., the threats must overcome the free will of the party)

Consent follows an unavoidable threat (i.e. the threat would cause definite, unavoidable damage) to your property/finances (economic duress)

-§§174-176 deal with duress.-Silsbee v. Webber (MA, 1898)- P’s son was accused of embezzling money from his employer, D. P executed an assignment of a share of her estate to D. When he sues, she claims the defense of duress because D threatened to tell her husband, who was allegedly in frail mental condition.

Holding: Case remanded for trial to determine whether duress existed. Dissent says that duress means that you’re really deprived of your free will; you have to

be mass of quivering jelly. Holmes says that that’s not the law, but he doesn’t say what the law is.

-Austin Instrument, Inc. v. Loral Corp. (NY, 1971)- D had a contract with the Navy to provide radar sets. D subcontracted to P to get a special part to produce the radar sets. P was awarded the first subcontract, but not the second subcontract (because other people bid lower). P replied, “You will either pay more on your existing contract AND accept our bid for the second contract, or we’ll stop delivery on what you bought.” D couldn’t find another supplier so it accepted P’s deal reluctantly, and as soon as the last shipment was made, D sued for the price increase on the first contract. P sued for the amount remaining on the 2nd subcontract.

Holding: Duress found. Case remanded to determine Loral’s damages. Duress because Loral didn’t have an alternative but to accept Austin’s crappy deal. Austin is guilty of blackmail/extortion.

P didn’t breach the second contract because it hadn’t been formed, but P breached the first contract when it decided to withhold D’s goods as a type of ransom.

Fried mentions that it didn’t make sense for D to fuss about the second contract because he wouldn’t be able to prove any damage.

-Hackley v. Headley (MI, 1881)- P was to be paid, under contract, $6200 for cutting, hauling, and delivering logs. D said that he believed P was only entitled to ~$4000, so P could take it or leave it. P signed the receipt for the $4000 because he feared financial ruin, and now he’s suing for the rest of the money.

Holding: Case remanded for new trial. Ct. doesn’t want to say that Headley was under duress because it would create a dangerous/unequal doctrine to say that duress can be grounded on a plaintiff’s necessities (being poor) instead of on a defendant’s conduct.

Where the party threatens nothing he does not have a legal right to do, there is no duress.

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There is a presumption that someone who settles for less is not acting under duress. This is the more typical treatment of duress. (*This was in an old outline, but I haven’t seen anything to specifically support it).

B. Unconscionability-Henningsen v. Bloomfield Motors (NJ, 1960)- P bought a car from D and a defective steering wheel led to a car crash. Ps (husband and wife) filed claims based on an alleged breach of an implied warranty of merchantability. The disclaimer of D’s warranty, however, limited liability for warranty breach to the replacement of bad parts. The disclaimer was in small font and difficult to read.

Holding: The seller may not free itself of liability by a waiver. The buyer is in a much weaker bargaining position and has little choice but to accept the terms of the contracts as written (especially since the other car companies had similar disclaimers). Also, no one explained or pointed out the disclaimer to P, so P didn’t know about it.

Fried says this is similar to an “implied warranty of habitability” because there are rules here that are imposed by the government (statute) to protect the public (Fried says the same thing about Lochner).

-Gilmore – Ethically, we feel that the weak should be protected against the strong, and we find breaches of contract to be very serious and immoral.-Superwood v. Siempelkamp. (MN, 1981)- P bought a press from D and the press failed and couldn’t be repaired. P sued in a federal district court and files claims in negligence, strict tort, breach of warranty, and breach of contract, and for $600,000 in lost profits and damage to the press itself.

Holding: Economic losses that arise out of commercial transactions, except those involving personal injury or damage to other property, are not recoverable under the tort theories of negligence or strict product liability. (I’m not sure what the actual finding was).

-Williams v. Walker-Thomas Furniture Co. (DC, 1965)- P (a poor woman with seven children) and D contracted for the sale of furniture. In the contract is a clause permitting the seller to repossess all items until the balance due on all items was liquidated if she defaulted. P challenges the contract as unconscionable.

Holding: The court remanded for a determination on unconscionability, because the clause could be unconscionable and the lower court didn’t think that a contract could be voided on that ground. It was within the power of the court to declare the contract as unconscionable as against public policy.

Why make Walker-Thomas “wrong” (not actually wrong, but the court didn’t say the contract was unconscionable) and Hennigsen correct? Because there’s a social harm involved in people being injured (Henningsen) rather than in goods being repossessed (Walker-Thomas). One shouldn’t be able to exclude liability for physical harm, but excluding for commercial damages can be done.

Henningsen Walker-ThomasUnconscionability declared (social concern)

Unconscionability not declared (potential commercial damage only)

Alaska GoebelNo consideration Consideration

Silsbee AustinBoth deal with duress

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-Lochner v. New York (U.S. Supreme Ct., 1905)- NY passed a law restricting bakery workers hours. The employer was charged with violating the statute and challenged the law’s constitutionality under the 14th Amendment.

Holding: The baker work hour legislation violates the 14th Amendment. It’s not connected to enough to health or safety to constitute a valid exercise of police power. However, the Court concedes that there are instances where the state can override freedom of contract (health and safety).

This decision was later overruled. Fried says this is similar to an “implied warranty of habitability” because there are rules

here that are imposed by the government (statute) to protect the public.-West Coast Hotel v. Parris. (U.S. Supreme Ct., 1937)- Argument that minimum wage regulation for women is a deprivation of the freedom of contract.

Holding: Minimum wage legitimate/ not unconstitutional. Fried said this case is an example of a million pieces of modern legislation that say what

the relations between parties are even when they don’t make a contract.C. Duty to Disclose Information

1.Misrepresentation - If one party can show that the other made a misrepresentation prior to the signing of the contract, he may:

a. Use this as a defense for breachb. May use it as grounds for recission or damagesc. Elements of Proof:

a. State of Mind – P does not generally have to prove that the misrepresentation was intentionally made. A negligent or even innocent misrepresentation will be sufficient to void a contract if it is made as to a material fact.

b. Justafiable Relance – The party asserting misrepresentation must show that she justifiably relied on the statement.

c. Fact – The misrepresentation must be one of fact rather than opinion.2.Non-disclosure - As a general rule, only affirmative statements can serve as the basis for

a misrepresentation action. A party’s failure to disclose will generally not justify the one in obtaining recission.

a. Exceptionsa. Half Truth – If part of the truth is told but not all so as to create an

overall misleading impression.b. Positive Concealment – If a party takes a positive action to conceal the

truth.c. Failure to Correct Past Statements – If the party knows that disclosure of

facts is needed to prevent some previous assertion from being misleading, and does not disclose it.

d. Fiduciary Relationship – If the parties have a fiduciary relationship, there is a duty to disclose

e. Failure to Correct a Mistake – If one party knows the other is making a mistake as to a basic assumption, the former’s failure to correct will be actionable for a “failure to act in good faith.”

-Laidlaw v. Organ (U.S. Supreme Ct., 1817)- D bought and received tobacco, but then P (seller) repossessed it, because P didn’t know that the price of tobacco had gone up as a result of the

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Treaty of Ghent and D didn’t disclose the information when P asked if there was anything that would have an effect on the tobacco price.

Holding: The contract was upheld because there was no misrepresentation. Simple non-disclosure/omission will not void an otherwise valid contract. This was a case of unilateral mistake. There was no duty to disclose the information, BUT the jury instructions were wrong, so the judgment is reversed.

The fact that D was silent when P asked for information reminds Fried of the party wall case (Day v. Caton). Caton didn’t agree to anything in that case (silence implied as acceptance) and here, D’s silence to the question about important information could be considered to be an answer of “no.” Silence as acceptance when that’s the reasonable inference.

-Reed v. King (-)- D didn’t tell P that a multiple murder had occurred in a home when D sold the house to P.

Holding: If P proves the murder materially altered the value of the house, then there’s a duty to disclose.

Fried mentions the 1924 Palmer Supreme Court case. In discussing whether or not a murder in a home merits a duty to be disclosed, Fried

says, “It’s not about irrationality but about whether or not it goes against social/public policy.”

o There’s no duty to disclose about the Black family moving in next door, but there is probably a duty to disclose about a home murder because there’s no policy about that but there is policy about race and how it is to be dealt with.

-Eytan v. Bach. (D.C. 1977)- Ps wanted money back for fake paintings they bought. They believed the paintings were authentic antiques, but they weren’t.

Holding: There’s no duty to disclose about the obvious. At $50/painting (on average), Ps should have known that they weren’t authentic.

Similar to Smith v. Zimbalist. Fried notes that the court there decided that there was a mutual mistake.

Fried says that the “duty to disclose” doctrine and the “unilateral/bilateral mistake” doctrine are virtually the same.

-Hill v. Jones (-)-Does the seller have a duty to disclose evidence of past termite infestation to the buyer in a contract for the sale of real property?

Holding: The seller does have a duty to disclose and the contract is void for non-disclosure. This is more of a case of active concealment than a simple duty to disclose.

The buyer does not usually have a duty to disclose where he has information that would make the property more valuable than the seller supposed but the seller has a duty to disclose all material facts.

There is a general reluctance to impose a duty to disclose where one party did not disclose information known only to him that he invested in learning.

-§161: When Non-Disclosure Is Equivalent to an Assertion- Duty to disclose when would correct a mistake as to a basic assumption underlying the sale.

V. PERFORMANCE AND NON-PERFORMANCEA. Conditions and the Duty to Perform

1. Types of ConditionsDefinition- An event that must occur before a particular performance.Three Types:

Dependent

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Independent Concurring – a condition precedent which exists only when the parties to a

contract are to exchange performances at the same time.a. Express Conditions

An event that the parties explicitly agree is a condition to a duty Strict Compliance – Strict compliance with an express condition is ordinarily

required Avoidance of Forfeiture – Courts often avoid applying strict compliance where

forfeiture would result. Satisfaction of a Party – Where a contract makes one party’s duty to perform

expressly conditional on that party being satisfied with the performance, the court will generally presume an objective standard.

a. However, the intent of the parties controls and it can be a subjective intent if they so intended.

b. If the condition is the satisfaction of a third party, a subjective standard usually controls.

c. There is still the duty of good faith.-Gray v. Gardner (MA, 1821)- Parties contracted for the delivery of whale oil at a certain price ($12.381.30) with a condition precedent which would entitle the seller to a subsequent payment ($5,158.87 with 2 mo. interest) on the condition that no greater quantity of whale oil than came last year arrive in Nantucket harbor between April and October of that year (so if there was an oil surplus then it would only cost $.65/gal, but if there was a deficit then it would cost $.85/gal). A ship carrying whale oil arrived in sight of Nantucket by October 1st but didn’t anchor in the harbor before midnight.

Holding: D must pay because the ship hadn’t anchored before midnight on the final day of the condition window. Strict compliance with express conditions.

Fried said the purpose of this case is to illustrate the concept of condition. If the condition had been that the cost of oil would depend on whether or not

the DOW ended in an even number then that would be a gambling contract and the court wouldn’t uphold it because it violates public policy.

o The Gray contract isn’t a gambling contract because it has a bearing on the price of oil and it’s an attempt to have a flexible price that depends on the market.

o And having to be anchored before midnight may seem a little arbitrary, but “you have to draw the line somewhere” (Fried like this phrasing).

*Random: Substantial performance cases include Jacob & Youngs v. Kent, Plante v. Jacobs, Stewart v. Newbury, and Oliver v. Campbell.

-The Lady Adams, The Contract, and the Arrival – The Lady Adams was the ship with the oil from Gray.

A futures contract sets a definite price for goods to be delivered in the future. The contract in Gray is the opposite because the goods were delivered immediately, but the price wasn’t to be set until months later.

The captain of the Lady Adams learned of the deal between P and D and tried to speed up the ship, but there was no reason to speed up because his arrival time would not have had any economic effect on him (he wasn’t making any money on the deal).

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-Comment, Burdens of Pleading and Proof - Gray turns on the distinction between condition precedent and condition subsequent.-Parsons v. Bristol (CA, 1965)- Bristol entered into a contract for P to be an architect on a project. The project was to be completed in two phases. The architect completed Phase I (design building) and was paid $600. For Phase II (supervise construction) 25% of P’s fee would be paid up front and 75% would come “only from construction loans.” D ordered P to commence with work on Phase II and paid him $12,000 (25%), so P drafted final plans and specs for the building. P completed 95% of the work. Unfortunately, D was not able to secure a loan, so D told P to stop working and P brought suit to recover for services performed (quantum meruit/ restitution?).

Holding: P may not recover. By the terms of the contract, the risk that Bristol may not secure a loan was contemplated and P chose to proceed knowing that the funds had not been secured.

One is entitled to the value he confers when he are wrongfully thrown off the job, but here, P wasn’t wrongfully thrown off.

Compare to Algernon Blairo If you breach before completion of a contract, you are entitled to the

reasonable value of services rendered but damages are not to exceed the terms of the contract

o If the other party breaches, you get the reasonable value of the work regardless of the contract terms (unless there has been substantial performance).

Fried says this should remind us of Luten Bridge. The court (Judge Traynor) thinks D shouldn’t have to pay for a building that

won’t be built (like the bridge to nowhere in Luten Bridge), so the court isn’t feeling P’s promissory estoppel argument.

There’s a good faith assumption here that D tried to get the loan and couldn’t (like there was a good faith assumption in Lady Duff Gordon.

b. Constructive Conditions and the Order of Performance1. An event that is made a condition of a duty because the court so determines2. General Rule

a. Where each party makes more than one promise to the other, each party’s substantial performance of his promise is generally a constructive condition to the performance of any subsequent duties by the other party

3. Order of Performance – The intent of the parties generally controlsa. Periodic Alternating – The parties may agree that their performance is

to be alternating. This is true of most installment contracts. Each party’s obligation to perform his duty is constructively conditioned on the other’s performance of the prior duty.

b. No order of performance agreed uponi. If each party’s performance can occur at the same time as the

other’s, the court will normally require the two to occur simultaneously.

*The next three cases are about independent and dependent promises.-Nichols v. Raynbred (England, 1615)- Contract for the sale of a cow for 50 shillings. Nichols (seller) is suing for the price of the cow, but the buyer claims that he never got the cow.

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Holding: P wins. This was a promise for a promise, so P doesn’t need to deliver the cow first necessarily. Independent conditions here.

Since D didn’t pay, P can sue. Since P didn’t perform either, D can sue P too. This would be an unreasonable interpretation today (it seems that these are

actually dependent, simultaneous conditions. The performance of one is a condition of a duty to perform the other).

-Kingston v. Preston (England, 1773)- P entered into a contract to work as an apprentice for D for a year and a quarter at a rate of £ 200. D also agreed to transfer his business and stock to P. Deal was that P would accept the stuff and have “good and sufficient security” in order to then pay D £ 200/mo. D breached by refusing to surrender his business, but D didn’t transfer his business and stock because P didn’t offer sufficient security.-P believes that the promises are mutual and independent, but D believes they’re dependent.

Holding: D does not have to surrender his business until he receives payment. P offering sufficient security was a condition precedent to D’s surrender.

Judge William Murray, Earl of Mansfield, explains that there are three kinds of covenants: (1) mutual and independent, (2) conditions and dependent, and (3) mutual conditions to be performed at the same time.

-Lafayette Place Associates v. Boston and BRA (MA, 1998)- LPA wanted to buy Hayward Parcel and LPA sued, claiming Boston & BRA breached contract for the sale of the land.

Rule: When performance under a contract is concurrent, Party A cannot put Party B in default unless the Party A is ready, able, and willing to perform and has manifested this by some offer of performance.

Holding: P did not demonstrate that it was ready, able, and willing to close the sale on Hayward Parcel, so it can’t say that D breached. Neither party tendered performance, and neither was in breach or default.

o P didn’t specify when, where, or how Campeau (worked with P) was to tender payment.

o There were contractually specified appraisal and arbitration procedures and neither was invoked.

o Accordingly, P wasn’t ready, able, and willing to put the D in default. Fried explains that this was an option contract and the contract had to be

exercised by a drop dead date. *This is a little like Gray, becauseif you didn’t act by the specified date then the option was closed.

Why didn’t Boston want to give up the land? Probably because the option price for the land was less than what the city thought the land was worth.

Fried thinks that LPA didn’t have the money it needed to buy the land, so LPA wanted to put Boston into default so that LPA could gain some assets with which to buy the land.

Fried thinks that here, we have mutual conditions to be performed at the same time (Mansfield’s third type of covenant) and this rejects the Nichols idea of maybe having the city sue you for nonperformanceand then you sue them in return for the same.

-Williston, Contracts (§619)- With express conditions, courts should uphold the manifested intention of the parties. Within constructive conditions, a court can do what it wants.

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-§234: Order of Performances- If performances can be rendered simultaneously, they should be rendered simultaneously (unless the contract specifies otherwise).-§238: Effect on Other Party’s Duties of a Failure to Offer Performance- If performances are to be rendered simultaneous, then it’s a condition of each party’s duties to perform that the other party perform simultaneously.-Conley v. Pitney Bowes (8th Circuit, 1994)- P sued D (employer) after he had been denied disability benefits for continued coverage. Issue: whether P must exhaust administrative procedures (as required by the terms of the plan) when, contrary to the requirements of the plan, the letter denying him benefits didn’t inform him of the appeals procedure.

Holding: Verdict reversed and remanded (in favor of P), because notice and instructions were required.

Notice of the appeals procedure is a condition precedent to the requirement of exhaustion of the appeals procedure. P need not exhaust the appeals procedure if D does not inform him of the appeals procedure. A condition upon a condition. Constructive notice through the plan itself is not enough because of the contractual right to notice in the letter.

Fried says that we have a condition on a condition here: a condition that administrative remedies be exhausted, but a condition that notice and information be given about that condition.

-Stewart v. Newbury (NY, 1917)- P (contractor) agreed to build a concrete mill building for D. The contract didn’t specify the terms of payment. P does some work and then sends a bill (P said the custom was to pay 85%/mo, with 15% being retained until the work was complete). *This system is called “progress payment” and it’s common in construction contracts. D refuses to pay the bill. P stopped work on the project and sued for the work already completed and expectancy damages. P was awarded the contract price, but not damages for breach of contract.

Holding: Reversed and remanded because of bad jury instructions (it’s untrue that payment should just occur on a reasonable basis when payment details aren’t set in the contract).

Rule: Without payment set in the agreement, work must be substantially performed before payment can be demanded.

*This result suggest that the owner gets the already completed work for nothing. P could sue for unjust enrichment but recovery would be capped at the pro rata contract price.

Fried says this case goes to show that you can’t sue on the contract if you didn’t substantially perform.

This case can be compared to Jacob & Youngs. Fried says that if he contracted for a Mack truck and you give him a toy, model

truck, then Fried can decide not to pay and you won’t recover because you didn’t substantially perform. You’re not ready, willing, and able. Fried can count the deal as off for failure to perform. He says that his example mirrors the Stewart case.

If we were Stewart’s lawyers, we’d know he couldn’t get the process payments, so we would advise him to sue for restitution (quantum meruit) because of the benefit conferred. P can’t get more than the contract price here (because he breached by stopping the work).

o This is like Britton v. Turner.

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o Algernon Blair is different because D breached contract there and could get more than contract price; but here, P breached.

-Patterson, Conditions and Contracts- -Common practice was for an Er to pay only after Ee had performed (condition precedent). That has been mitigated by statutes requiring that wages be paid at short intervals, to certain classes of employees, etc.-§2-307: Delivery in Single Lot or Several Lots- Under otherwise agreed, all contracted goods should be delivered together and payment is due on tender, but if it’s agreed that the goods can be delivered in lots, then price can be divvied up for each lot.

2. Conditions and Promises DISTINCTION: If an act is a condition on a duty and the act fails to occur, the other

party will not have to perform. If the act is a promise and it does not occur, then one party has breached and the other party can sue for damages.

-Jacob & Youngs v. Kent (NY, 1921)- “You didn’t give me my piping and I have to deal with it” case-Howard v. Federal Crop. Ins. Corp. (4th Circuit, 1976)- P sued to recover for losses to their tobacco crop due to alleged rain damages. The FCIC insured the tobacco crop, and they require that their inspector get evidence of the damage. Unfortunately, P plowed the field so the rain damage wasn’t visible to the inspector. D said “the failure of the insureds to comply worked a forfeiture of benefits for the alleged loss” and they looked to 5(b) and 5(f) of the insurance policy. District court granted SJ to D and dismissed all three actions.

Holding: Case remanded because it was improper to grant summary judgment and to find that 5(f) was a condition precedent constituting forfeiture.

o 5(f) is actually a promise (based on Restatement illustration #2 and the lack of “condition precedent” language)

o No condition is set in 5(f) to determine whether or not benefits will be granted.

Fried believes this case was wrongly decided and that the inspection was a condition precedent to FCIC insurance coverage.

o Fried says this court sprinkled some Cardozian fairy dust in order to uphold the policy of finding for the insured over the insurer. Court determined that inspection is not a condition precedent, but the language of the contract definitely made it appear to be. Since the court finds this to be “mere promise” instead of a condition, a party can sue for damages.

Fried says this case is similar to Jacob & Youngs. Tthere, the court decided not to uphold a condition. The court decided to treat the pipe request as a promise and not a condition, and said that if the homeowner could prove damage incurred (which, of course, it couldn’t) then he could recover for damages.

b. Unjustified Non-Performance and the Problem of Forfeiture1. The perfect-tender rule and the doctrine of substantial performance

A constructive condition of the party’s duty to perform is substantial performance by the other party. a. If one party fails to substantially perform and the defect could be easily cured,

the other party’s duty is merely suspended until the defect has been curedb. Materiality – The breach must be material to recover damages

i. The more the non-breaching party is deprived of the benefit which he reasonably expected, the more likely the breach was material

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ii. The greater the part performance which has been rendered, the less likely it is that the breach will be deemed material

iii. If the breaching party seems likely to be willing and able to cure the defect, the breach is less likely to be material than where the cure seems impossible.

iv. A willful breach is more likely to be regarded as material than a breach caused by negligence and other factors.

v. A delay, even a substantial one, will not necessarily constitute a lack of substantial performance.

The Perfect Tender Rule UCC § 2-601

a. As long as a contract does not involve installments, “unless otherwise agreed…if the goods or tender of delivery fail in any respect to conform (in any way) to the contract, the buyer may”

i. Reject the whole1. Rejection must occur within a reasonable time2. Rejection must not be preceded by acceptance

a. Will have a reasonable time to inspect3. May revoke after “acceptance”

a. Must make a stronger showing of non-conformity than the buyer who rejects

b. Must show that the non-conformity “substantially impairs” the value of the goods

ii. Accept the wholeiii. Accept any commercial unit or units and reject the rest

b. Cure – Both the buyer’s right to reject and his right to revoke are subject to the seller’s right to cure the defect

i. UCC § 2-508 c. However, in reality, courts usually only allow buyers to reject the delivery if the

defect is a substantial one.-Oshinsky v. Lorraine Mfg. Co. (2nd Circuit, 1911)- D refused its order for shirtings because delivery was late. P alleges that goods were tendered in accordance with the contract.

Holding: Trial court was wrong; judgment should be directed for D. Trial court said that delivery didn’t necessarily have to occur “on” the 15th, but “on or about” the 15th. The language is unambiguous: delivery on/by November 15th. The delivery came on November 16th, so D was justified in refusing it.

-Prescott & Co. v. J.B. Powles & Co. (WA, 1920)- Buyer (D) placed order with seller (P) for 300 crates of Australian onions to be delivered in March. The only ship that could deliver in March was the Sonoma, but it could only fit 240 crates because it was also carrying the Govt’s wheat cargo. D refused to accept the crates at contract price, so P sold them for less than contract price and sued for the difference.

Holding: Seller’s action dismissed. “Delivery of goods [must general] be of the exact quantity ordered, otherwise the buyer may refuse to receive them.”

No excuse that wasn’t in the contract will justify a recovery when performance is partial/incomplete.

A new contract was made because the old one became void when D decided to reject the partial performance.

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-Ramirez v. Autosport (NJ, 1982)- Judge expresses concerns that the perfect tender rule may be too strict, allowing for the rejection of foods over trivial matters.-The U.C.C. retains the perfect tender rule, but mitigates its harshness.-Beck and Pauli Lithographing Co. v. Colorado Milling and Elevator Co. (8th Circuit, 1892)- D was to buy more than 300,000 copies of engraved letterhead et. al. P tendered delivery of all five boxes before January 8th, but D refused to receive or examine them, asserting that delivery was too late.

Holding: Unfair for D to reject boxes because they were a few days late. The goods were made-to-order, and nothing in the contract stressed the importance of time.

This holding seems very much based on reasonableness, like in Jacob & Youngs.-Comment: “Goods” and “Services” ()--Bartus v. Riccardi (NY, 1927)- D order Model A-660 hearing aid from P. P provided the newer model, Model A-665, which didn’t work for D. P offered to send D Model A-660, but D refused and wanted to cancel his contract. P is suing for the balance due on the contract (contract price minus down payment). *D can’t recover on his down payment, because his claim was untimely.

Holding: Judgment for P because P attempted to cure the tender in accordance with §2-508(2). Under the circumstances, P had reasonable grounds to believe that the newer model would be accepted by D. The P acted within a reasonable time to notify D of his tender of a conforming model.

-§2-508: Cure by Seller or Improper Tender or Delivery; Replacement--Plante v. Jacobs (WI, 1960)- P (builder) sued for unpaid balance of the contract price plus extras of building a house for Ds. Ds respond that there was no substantial performance, and counterclaims for damages due to faulty workmanship and incomplete construction. Both P and Ds were awarded some stuff in trial court, but P won the majority.

Holding: P’s victory affirmed. Substantial performance was rendered, diminished value damages should be awarded, and it would be unreasonable to redo the wall (like Jacob & Youngs v. Kent).

Recovery on the contract requires substantial performance. Otherwise, you get quantum meruit.

-Note: Restitution for the “Willful” Defaulter- MA continues to adhere to the overall view that a contractor’s failure to perform in full bars recovery on the contract, but that one who both substantially performs and makes a “good faith” effort to perform fully may recover in quantum meruit.

-This is counter to U.C.C. rule.

b. Other Justifications for Non-Performancei. Impossibility and Impracticability

Impossibility – A court will generally discharge both parties where the performance of a contract has been rendered “impossible.”

a. Destruction of Subject Matter – If the performance involves particular goods, a particular building or some other tangible thing, which through the fault of neither party is destroyed or otherwise made unavailable, the contract is discharged.

i. Discharge is proper only if the party seeking to be discharged specifically referred to it in the contract. It is not enough that she intended to use a particular item that was later destroyed.

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b. Impossibility of an intangible but essential mode of performance – If an essential but intangible aspect of the contract becomes impossible, the parties may be discharged.

c. Death or Incapacity – If a contract specifically provides that performance shall be by a particular person, that person’s death or incapacity discharges both parties.

Impracticability – Modern courts generally equate “extreme impracticability” with impossibility and the parties will be discharged.

a. UCC § 2-615(a) – A seller’s non-delivery is an excuse if “performance as agreed has been made impracticable by the occurrence of a contingency or a non-occurrence of which was a basic assumption on which the contract was made”

b. Most impracticability cases relate to extreme cost increases suffered by sellers who have signed fixed-price contracts. Sellers generally lose.

Fried calls these the “All Bets Are Off” caseso He said that in §266 the writers just give up and that in §272(2), the writers

say, “Here are the rules. If you don’t like them then make them up.”o Impracticability and Frustration are separate in the Restatement. U.C.C. §2-

615 lumps the two together though.o §266: Existing Impracticability or Frustration - If a party’s performance is

impracticable or his principal purpose frustrated (without his fault and unbeknownst to him) at the time the contract is made, then there’s no duty to render the performance unless the language or circumstances indicate to the contrary.

o §272: Relief Including Restitution - If following the other rules won’t avoid injustice, then just grant whatever relief avoids injustice, including protecting of the parties’ reliance interests.

2. Development of the Doctrine-Taylor v. Caldwell (England, 1863)- P rented concert space (Music Hall) for four days at a price of 100 lbs/day, but the Music Hall burned down before the first rental day without the fault of either party. P wants to recover for damages it sustained (lost profits).

Holding: Verdict for D, because both parties are excused (P excused from using the space and paying the money; D excused from renting/providing the space).

Implied condition that the parties shall be excused in case, before breach, performance becomes impossible from the perishing of the thing without default of the contractor. Same for examples of death or an act of God removing a necessary personal skill (e.g. an artist going blind).

Rule: “In contracts in which the performance depends on the continued existence of a given person or thing, a condition is implied that the impossibility of performance arising from the perishing of the person or thing shall excuse the performance” (p531).

Fried said it would have been difficult to calculate lost profits because we don’t know how many tickets and how much popcorn would have been purchased.

P may have also sued for reliance or for the “cost of cover.”-Tompkins v. Dudley (NY, 1862)- P wanted D to construct a schoolhouse for $678.50 to be completed on 10/1. The building burned down on 10/5 when it had been

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substantially completed but had not yet been turned over. P sues for the money it advanced and for damages from the non-performance of the contract.

Holding: D must pay damages for non-performance. The builder created the liability (because he promised the building would be done and delivered on a certain day) and his duty was not performed. A party who agrees to do an act should perform unless absolutely impossible.

Whoever is the owner at the time of the fire is liable. The builder is in a better position to insure.

Fried says the difference between this and Taylor is that Taylor is a less standardized contract, so it just didn’t enter their heads to include such a provision to cover their cases in of fire; a provision for a clear allocation of risk.

*Jay suggests that Tompkins came out the way it did because D was a guarantor, not the insurer, so D was effectively impleding the insurer. That means that D, the builder, got to put the cost on its insurer (so maybe D wasn’t in a rush to get it turned over on time?). Fried liked this idea.

3. Modern Approach-American Trading & Prod. Corp. v. Shell Int’l. Marine (2nd Circuit, 1972)- P is appellant/owner. D is appellee/charterer. The parties contracted for D to hire the owner’s tank vessel, “Washington Trader,” to ship lube oil from TX to India via the Suez Canal (D paid $417.327.36). The Suez Canal rate was used in calculating the trip fee, but while the ship was in transit, the Arab-Israeli war broke out and the canal closed. The ship then went around the Cape of Good Hope, adding 8,000 miles (i.e. an additional fee of $131,978.44). P sued D for that additional fee.

Holding: P is not entitled to the additional fee. The parties may have expected the Suez to be the route taken but it was not an express condition of performance. D makes no reference to the route in the contract; the contract was to deliver the oil, NOT to use the Suez Canal. The implied expectation is not adequate proof of the allocation of the risk of closure to the promisee.

The increase in expense was not enough to amount to impracticability – not unreasonable or extreme difficulty (increase of less than 1/3 of the agreed on price of $417.327.36).

Additionally, the owner could have mitigated the loss because they knew of the risk of closure and continued on the route anyway (ship master – working for owner, was told on May 29th of the crisis, but two days later, he continued towards the Canal), adding additional miles and expense.

Owner had the responsibility to insure and didn’t. Fried says there’s no impossibility here, just more time and expense. Fried references §266.

-Mishara Constr. Co. v. Transit-Mixed Concrete Corp. (MA, 1974)- P was the general contractor for a housing project. D was the subcontractor that provided concrete. Contract was made in 09/66 and things were cool until labor disputes began the following year. A picket line was maintained from 1967 until the project was completed in June, and D made very few deliveries despite requests from P. After notice to D, P bought contract from elsewhere at a higher price. P wants to recover for the cost of cover. Jury found for D, and P is upset because P wanted jury to be told that D “was required to comply with the contract regardless of picket lines, strikes, or labor difficulties.”

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Holding: Affirmed; the trial court properly ignored P’s desired jury instruction because D’s compliance with the contract should be conditioned on the severity of the strikes.

-Dawson, “Judicial Revision of Frustrated Contracts” Westinghouse Electric Example: Westinghouse had agreements to supply 49

nuclear plants with uranium at prices of $8-10/lb, but then the price of uranium skyrocketed to $40/lb and if Westinghouse performed its contracts fully then its damages would be at least $2 billion. Westinghouse breached its contracts, and the judge ruled that it was liable for all expectancy damages. Ultimately, the parties settled though (which was good for Westinghouse).

Dawson asks whether it’s appropriate for judges to rewrite contract terms when contracts appear complex or unworkable, and he answers “no,” because (1) judges are not qualified for that and (2) no source gives a court the power to do that.

-Aluminum Co. of America (ALCOA) v. Essex Group, Inc. (in Spiedel reading)- ALCOA was processing aluminum and tried to breach its contract.

Holding: Court didn’t let ALCOA out of its contract, but the court reworked the contract to split the difference between the parties.

Fried said there’s typically reluctance for courts to do this because contracts aren’t things to be imposed on parties. And Dawnson says courts shouldn’t.

ii. Frustration of Purpose Where a party’s purpose in entering into a contract is destroyed by supervening

events, most courts will discharge him from performing.a. Foreseeability – The less foreseeable the event that thwarts the purpose,

the more likely the courts are to discharge the parties.b. Totality – The more totally frustrated the parties are, the more likely they

are to be discharged.-Krell v. Henry (England, 1903)- Edward VII Coronation Case. D leased a room from P for June 26-27th in order to watch the procession of the King. Cost was £75 (to be paid on June 24th) with £25 down payment. The coronation and procession did not occur because of the King’s illness; info of his illness came on the morning of June 24th. D declined to pay the remaining £50 and P is suing for it. *D had a claim to get his down payment, but he withdrew it.

Holding: D doesn’t have to pay because there is an implied condition that the event should occur for performance of the contract. The procession was regarded by both parties as the foundation of the contract.

One must ascertain from the surrounding circumstances what the purpose of the contract was by asking: (1) what was the foundation of the contract? (2) Was the performance prevented? (3) Was the event that prevented the performance not contemplated at the time of the contract. If the answer to all three questions is “yes,” then both parties should be discharged from further performance of the contract.

Compare to Raffles v. Wickelhaus and Sherwood v. Walker – Here there was a deal but is has been discharged due to frustration, but in those two cases, there was no deal due to mistake.

Court gives the “cab to horse race” example: say a person hires a cab to drive him to the horse race for 20 pounds, but the horse race has been cancelled. The person can’t get his 20 pounds back because even if the driver knew that the guy’s purpose

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was to see the horse race, the cab driver’s purpose was just to provide transportation (which he did). So the horse race wasn’t the common foundation/purpose.

-Comment: “Relief Following Discharge” The court in Chandler v. Webster (1904) said that in Krell, “the parties were to be

left at the point where they contracted to be at the moment when the unexpected event occurred” (so D’s down payment, but not the remaining £50 would have been due).

This “suspension in midair” approach has been rejected by almost all American courts and was rejected by England in the Fibrosa case:

o An English manufacturer/seller was to deliver and install textile machinery for Fibrosa (Polish company), but couldn’t do so because of the German invasion of Poland and Britain’s declaration of war. Fibrosa had paid £1000/4800. Fibrosa demanded the £1000 back and the House of Lords awarded it, without any deduction for the seller’s loss in working on that made-to-order project (seller got screwed).

The Law Reform (Frustrated Contracts) Act of 1943 allowed restitution of money paid, and of the value of any “benefit” conferred through part performance of a frustrated contract. And if the court considers it just, then it may allow deduction of expenses incurred by the receiver of the benefit if these expenses were incurred before the supervening event and were “in, or for the purpose of, the performance of the contract.”

Rest. §272 Comment (b) says that recovery in impossibility and frustration cases “may go beyond mere restitution and include elements of reliance by the claimant even though they have not benefitted the other party.” (p560)

Fried says that §377 and §272(2) say, “We’re just going to split the difference in a way that seems fair.”

-Chase Precast Corp. v. John J. Paonessa Co. (MA, 1991)- P entered into two contracts to supply D with concrete median barriers for highway improvements. Residents protested the concrete barriers and the government told D that it didn’t want anymore concrete. D had already compensated P for the concrete delivered (about 50%) and P suffered no out-of-pocket expenses.

Holding: Judgment affirmed, P cannot recover the profits it lost from the cancellation of its contract with D.

D bore no responsibility for the government’s elimination of the concrete barriers P knew the barriers were for the government and that the government had the

power to decrease the quantity of contract items “All parties were well aware that lost profits were not an element of damage in

either of the public works projects at issue” Doctrine of Frustration of Purpose (§265): Where, after a contract is made, a

party’s principal purpose is substantially frustrated without his fault by the occurrence of an event which the non-occurrence of which was a basic assumption on which the contract was made, his remaining duties to render performance are discharged, unless the language or the circumstances indicate the contrary (p563).

iii. The Code-§2-614: Substituted Performance-

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a. If original manner of delivery (including loading/off-loading site, type of carrier, etc.) is commercially impracticable but another commercially reasonable substitute is available, that substitute must be tendered and accepted.

b. If payment fails due to government regulation, seller can withhold until buyer tenders sufficient substitute payment. If delivery already happening, the payment of the regulation discharges the buyer’s obligation unless the regulation is discriminatory/oppressive/predatory.

-§2-615: Excuse by Failure of Presupposed Conditions-a. Delay in delivery, or non-delivery, is not a breach if it is caused by a contingency

the non-occurrence of which was a basic assumption of the contract or a contingency which complies in good faith with a government regulation

b. If the contingency affects only a part of the seller’s capacity to perform, seller must allocate production/deliveries among his customers

c. Seller must notify the buyer seasonably that there will be a delay, non-delivery, or allocation

-§2-616: Excuse by Failure of Presupposed Conditions-a. In § 2-615 cases, after notification, buyer can terminate and discharge any

unexecuted portion of the contract or modify the contract by agreeing to take available quota in substitution

b. Then seller must respond to buyer in a reasonable time (at least < 30 days) or else contract lapses

VI. THIRD PARTIESA. Third Party Beneficiaries

-Lawrence v. Fox (NY, 1859)- Holly owed $300 to Lawrence and lent that $300 to Fox, who was to give $300 to Lawrence the following day. Lawrence didn’t receive his money, so he sued Fox. Jury found for Lawrence for the $300 plus interest and Fox appealed.

Holding: Judgment affirmed (for P), because “Fox, upon ample consideration received from Holly, promised Holly to pay his debt [of $300] to Lawrence; the consideration received and the promise to Holly made it as plainly his duty to pay Lawrence as if the money had been remitted to him for that purpose.”

Dissent says that Lawrence wasn’t a party to the promise and shouldn’t be able to sue for the money (no privity between P and D).

Lawrence was a creditor beneficiary.-Seaver v. Ransom (NY, 1918)- P is the niece of Beman, a woman who wanted to leave her house to P, but didn’t have time to include it in her will (because she feared death would interfere) so her husband, Judge Beman, promised to leave the house to P in his will. Judge Beman didn’t fulfill his promise, so when he died, the house didn’t go to P. P sued for the value of the house and won because equity was in her favor.

Holding: Judgment affirmed (for P). The contract was made for P’s benefit and she alone is substantially damaged by the breach. Judge Beman made a promise to pass along the gift and it’s the tendency of American authority to sustain gifts.

Seaver was a donee beneficiary.-§302: Intended and Incidental Beneficiaries: A beneficiary is intended is performance is supposed to provide him with payment (creditor beneficiary) or if performance is supposed to give him some benefit (donee beneficiary). An incidental beneficiary is a beneficiary who isn’t intended.

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-Anderson v. Fox Hill Village Homeowners Corp. (MA, 1997)- P slipped and fell on property (a retirement community) that D is responsible for maintaining.

Holding: Judgment for D, because P is an incidental third party beneficiary. There is no indication, express or implied, that any obligations were imposed for the benefit of employees of the nursing facility (like P). Since P isn’t an intended third party beneficiary, but instead an incidental third party beneficiary, she can’t sue on the contract.

P also can’t sue on Torts, because there would only be a duty owed to P based on a contract (no duty by a landowner to remove a natural accumulation of snow/ice), and since P isn’t an intended beneficiary of the contract, she has nothing to sue on.

-H.R. Moch Co. v. Rensselaer Water Co. (NY, 1928)- D is a water works company that had a contract with the city of Rensselar to supply water. P’s warehouse burned down because D didn’t supply enough water with enough pressure to put out its fire.

Holding (Cardozo): Judgment for D, because P is an incidental third party beneficiary. D’s contract is with the city, not individual members of the public. There’s no specific intention to benefit or contract with individuals.

Cardozo also says that P’s action isn’t maintainable as one for common law tort because placing liability on D would unduly and indefinitely extend the zone of duty.

Fried notes a few common rules:o No private right of action against public works companieso No private right of action against Medicare/Medicaido Implied private right of action in Securities laws

-Doyle v. South Pittsburgh Water Co. (PA, 1964)- D supplied water to the city of South Pittsburgh. P’s home burned down because D didn’t make sure that fire hydrants were operative.

Holding: Judgment for P because it’s foreseeable that D’s breach of duty would injure a third person (like P) so D owes a duty to those third persons. Also, not holding D liable here would lead to inattention and indifference on the part of public works companies.

This case is atypical. This is not how things usually work.-Robson v. Robson (IL, 1981)- Father and son, who shared equal portions of P.B. Services, Inc., made a contract that when either of them died, a monthly endowment would be given to his widow. Ray Jr. divorced P and changed the contract to remove her as the beneficiary of the monthly endowment. Ray Jr. then died and P (his ex-wife, Birthe Robson) sued to get the money.

Holding: Judgment for D, because P is a donee beneficiary, and unlike a creditor beneficiary, a donee beneficiary does not have an automatically vested right to a certain interest/gift and her reliance is not to be presumed. Since the contract rights didn’t vest, P didn’t detrimentally rely, and Ray Jr. used his right to alter/rescind the contract before it vested, P cannot get the money.

Fried says that the court’s justification on vesting is strange and begs the question, because how do we know if the gift is vested? He doesn’t like that the court is trying to use this vesting distinction in its argument.

Also, the Robson case says that you can modify against a donee beneficiary, but not a creditor beneficiary, but the Restatement doesn’t say this.

-§311: Variation of a Duty to a Beneficiary: (1) can’t change the duty to a beneficiary if a term in the promise forbids it(2) without a forbidding term, things can be discharged or modified

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(3) #2 gets ignored if beneficiary justifiably relied on the promise before the change was implemented(4) If the promisor (B) gives something to the promisee (A) to discharge/modify B’s duty to X (i.e. B gives A $100 to keep the watch that A intends for X) then X can assert a right to that consideration (the $100).

B. Assignment*-Langel-§ 328-Herzog-Macke-Crane-Allhusen-Homer v. Shaw

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