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CONTRACT FORMATION

A contract is formed in any transaction in which one or both parties make a legally
enforceable promise. A promise is a commitment or undertaking that a given event will or
will not occur in the future. There are three general categories of contractual obligations:

Expressed contractual obligations are found where the parties make oral or written
expressions of commitment
Implied-in-fact contractual obligations are consensual agreements that fail to express
the agreement of the parties in its entirety. (E.g. a service contract where the price is
not discussed is an implied-in-fact contract).
Implied-in-law contractual obligations arise where there is an equitable imposition of
a would-be contract. It is an equitable remedy to prevent unjust enrichment, and arises
in situations where one party bestows a benefit on another. (E.g. emergency medical
care creates an implied-in-law contract to repay).

A promise is legally enforceable where it:

was made as part of a bargain for valid consideration;


reasonably induced the promisee to rely on the promise to his detriment; or
is deemed enforceable by a statute despite the lack of consideration.

Contract formation requires mutual assent to the same terms by the parties, generally
manifested by an offer and acceptance. In general, communications are given the meaning
that the recipient of the communication should have reasonably understood. Nevertheless
subjective intent is relevant in determining whether the parties intended to be bound.
Without such subjective intent, there is no contract.
A validly formed contract must provide a basis for determining the existence of a breach and
for giving an appropriate remedy [Restatement 33; UCC 2-204]. Non-goods contracts,
according to the Restatement, must include terms that are sufficiently definite and certain;
goods contracts, on the other hand, do "not fail for indefiniteness even if one or more terms
are left open if the parties intended to make a contract and there is a reasonably certain basis
for giving an appropriate remedy."
Offer
An offer is a manifestation of an intent to be contractually bound upon acceptance by another
party. An offer created the power to form a contract by an acceptance. [Restatement 24]
In order to constitute an offer, a partys communication must show an outward manifestation
of intent and a signal that acceptance will conclude the deal. The manifestation can oral,
written, or made via conduct; however, inward thoughts or subjective intent are irrelevant
unless they are reasonable apparent to the other party. The key inquiry in an acceptance is
whether the party making the communication expressed a willingness to commit without

further assent. Communications that withhold the privilege of further assent fall short of
constituting an offer.
An offer is only valid when it is received by the offeree or his agent. [Restatement 68] If no
specific time is stated within the offer, it is assumed that the offeror intended to keep the offer
open for a reasonable person of time, to be determined based on the nature of the proposed
contract, trade usage, prior dealings and other circumstances. The time for accepting an offer
begins to run from the time the offer is received. If the offeree is aware of a delay, the time
begins at the instance the offeree should have received the offer.
Revocation
An offer may be revoked by any words that communicate such intent. An offer is also
revoked by action inconsistent with the intent to be bound, once the other party learns of such
action.
An offer is irrevocable where:

When the offeree gave consideration for the offer.


The offeree relied on the offer to his detriment
In the case of a unilateral contract, the offeree began performance. [Restatement 45]
In a goods contract where a merchant indicated in writing that an offer to buy will be
held open for a stated time. [UCC 2-205]
Termination of the Offer

An offeree's power to accept an offer is terminated by:

the death or insanity of the offeror, even without notice to the offeree of such
occurrence
death or insanity of the offeree, unless an offer is irrevocable, such as in the case of
an option contract
death or destruction of a person or thing essential to performance
the offeree's rejection of the offer, which cannot be reinstated by the offeree's
subsequent attempted acceptance.
the offeree's counter-offer, which impliedly manifests a rejection of the offer
revocation of the offer
expiration of the offer

Lonergan v. Scolnick (1954):


-

Defendant placed an ad in a newspaper indicating that he wished to sell some


property. In response to an inquiry from Plaintiff, Defendant sent Plaintiff a form
letter describing the property, giving directions to the property, and indicated the
lowest price he would accept for the property. Plaintiff wrote Defendant to request a
legal description of the property and to suggest an escrow agent should I desire to
purchase the land. Defendant wrote Plaintiff back including a legal description,

approval of the escrow agent, and warning Plaintiff that he expected to have a buyer
soon. Defendant sold land to third party.
Court ruled that no contract was formed. Defendant was soliciting offers not forming
a contract. An invitation for offers does not operate as an offer to create an
enforceable contract.

Lefkowitz v. Great Minneapolis Surplus Store (1957):


-

Defendant advertised the sale of three fur coats and three fur stoles for $1.00 a piece.
The advertisement said first come, first serve. Plaintiff arrived at Defendants store
wishing to buy the garments. Defendant refused, saying the sale was only for women.
Court ruled for the plaintiff. The advertisement clearly stated that Defendant would
sell the fur garments at a definite price to the person who came first. Plaintiff arrived
first, thus, accepted the offer. An advertisement may be considered an offer when
it promises something in exchange for clear, definite action, and leaves nothing
open for negotiation. Otherwise, an advertisement is an invitation for an offer.
Acceptance
Traditional Approach to Acceptance

In a unilateral contract, the offer empowers the offeree to only accept by complete
performance of the promise. The offeree's failure to perform does not constitute a breach
since no contract is formed until the offeree renders full performance. The offeror is bound
only when the offeree completes the performance in accordance with the terms; but the offeree
is never bound to perform because he has never promised to perform.
Under the common law, the offeror is free to revoke the offer until the offeree completes
performance. The restatement makes the contract binding upon the beginning of
performance. Although the offeror cannot revoke once the offeree has begun performance,
acceptance is still effective only on completion of the performance.
In a bilateral contract, the offers empower the offeree to only accept by return promise.
Bilateral contracts are formed upon the giving of the promise to perform an obligation in the
future, and failure to fulfill such promise results in breach.
Modern Approach to Acceptance
An offer invites acceptance by any means reasonable under the circumstances, unless
otherwise indicated by language or circumstances. [UCC 2-206; Restatement 30(2)] A
contract may be formed even if an offer clearly indicates that acceptance is to be by promise
if the offeree begins to perform and the offeror learns of the actions and acquiesces to the
manner of acceptance.
Common law holds that one who receives goods with knowledge or reason to know that they
are being offered for a price is bound by the terms of the offer if he exercises dominion over
the goods. Similarly, one who receives benefits from services that he knows or has reason to
know are being offered with the expectation of compensation, and where he has a reasonable

opportunity to reject them, is liable for the reasonable value or stated value of such services.
[Restatement 69]
Silence does not constitute an acceptance except where it is reasonable, based on prior
actions, that the offeree will notify the offeror if he does not intend to accept or "where the
offeror has stated or given the offeree reason to understand that assent may be manifested by
silence or inaction, and the offeree in remaining silent and inactive intends to accept the
offer." [Restatement 69]
There are only two general requirements to constitute effective acceptance, under the mirror
image rule, the acceptance must mirror the terms of the offer; and, the acceptance must be
communicated to the offeror.
Medium of Acceptance
Unless the offeror indicates otherwise, the offeree may use any medium that is reasonable
under the circumstances [UCC 2-206(1)(a)] or, in non-goods contracts, the same medium as
was used to communicate the offer or any other medium "customary in similar transactions at
the time and place the offer is received." [Restatement 65]
Notice of Acceptance
The offeror is entitled to notice of the acceptance. Thus, even if the offeree effectively
accepts an offer and a contract is formed, failure by the offeree to notify the offeror of the
acceptance within a reasonable time may preclude the offerer from enforcing the contract.
[Restatement 54 and 56]
Under common law, where an offer invites acceptance by performance, no notice is required
to make the acceptance effective, unless the offeror so specifies. However, if the offeree has
reason to know that the offeror has no adequate means of learning of the performance with
reasonable promptness and certainty, the offeror's contractual duty will be discharged unless:
the offeree exercises reasonable diligence to notify the offeror of acceptance; or
the offeror learns of the performance within a reasonable time; or
the offer indicates that notification of the acceptance is not necessary.
[Restatement 54]
In transactions for the sale of goods, where commencement of performance is a reasonable
mode of acceptance, if the offeror is not notified of acceptance within a reasonable time, he
may treat the offer as having lapsed prior to acceptance. [UCC 2-206(2)]
Where the offeree accepts by promise, the offeree must exercise reasonable diligence to
notify the offeror of the acceptance or ensure that the offeror seasonably receives the
acceptance. [Restatement 56]
An acceptance becomes effective according to the following rules:
1) The offeror may specify when the acceptance will be effective.
2) Absent such specification, an acceptance is effective when sent, if sent by reasonable
means, e.g., by an authorized medium and with proper postage and correct address.

3) If an acceptance is sent by means that are not appropriate or reasonable under the
circumstances or if it is improperly dispatched, the acceptance will be effective upon
receipt. [Restatement 66] However, if the acceptance is seasonably but improperly
dispatched, it will still be deemed effective when sent if it is received within the time
in which a properly dispatched acceptance would have been received. [Restatement
67]
4) In the case of option contracts, an acceptance is not operative until received by the
offeror. [Restatement 63(b)]
5) In transactions governed by the CISG, the acceptance becomes effective when it
reaches the offeror.
Terms of Acceptance
Under the "mirror image" rule, applied in common law transactions, an acceptance must
conform to the terms set forth in the offer. No contract is formed if the acceptance contains
terms that are different from or additional to those set forth in the offer. Such communication
merely constitutes a counter-offer.
A contract is formed if the offeree unequivocally accepts the offeror's terms, despite a
simultaneous suggestion of alternative terms. Such circumstances merely represent an
attempt to modify the terms of an already formed contract based on the original terms, as
long as the acceptance is not contingent on the offeror accepting the proposed changes.
The UCC rejects the mirror image rule. It give effect to a definite and seasonable expression
of acceptance even though it contains additional or different terms from those offered, unless
the offeree expressly makes the acceptance conditional on the offeror's assent to the different
or additional terms. [UCC 2-207]
Rejection of Offer
A rejection of an offer by the offeree is effective when received by the offeror. If an offeree
dispatches more than one response to an offer, regardless of whether the rejection is sent
before or after the acceptance, if the rejection is received later than when the acceptance was
dispatched, a contract is formed since an acceptance is effective upon dispatch but a rejection
is effective upon receipt. Nevertheless, estoppel may operate to bar enforcement of such a
contract where the offeror receives the rejection before the acceptance, and acts in reliance on
such rejection.
Mutual Assent
For a valid contract to exist, there must be an expression of present contractual intent which
is accepted by the offeree. If the parties have simply negotiated, but have failed to agree in
sufficient certainty about essential terms, there is no contract. Or if the parties have agreed to
agree on some essential terms in the future, there is as yet no contract.
Defenses Affecting Assent
Incapacity to contract

Contracts entered into by a minor (an "infant") one below the age at which state law deems
persons to possess capacity to contract, currently 18 years old in most states are generally
voidable by the minor-party, even if he misrepresented his age. A minor can furthermore
avoid contractual obligations for a reasonable time after attaining the age of majority.
However, if he fails to disaffirm within a reasonable time, the contract will become binding
against him.
Mental incapacity can result from mental illness or defect e.g., senility, insanity, retardation
or drug or alcohol intoxication.
A party that suffers a mental illness or defect at the time the contract is made may avoid the
contract where the mental impairment prevented him from understanding the nature of the
transaction or acting in a reasonable manner in relation to the transaction.
A party that was intoxicated when the contract was made may avoid the contract only if the
other party had reason to know that, by reason of intoxication, the party was unable to
understand the nature and consequences of the transaction or was unable to act in a
reasonable manner in relation to the transaction. [Restatement 16]
Duress
If assent to a contract was obtained by coercion constituting duress, the contract may be
avoided by the person subjected to the duress. An improper threat of harm that induces the
other party to assent to contract terms constitutes duress. "Improper threat" is established
where:

the threatened act would harm the recipient and would not significantly benefit the
party making the threat;
the effectiveness of the threat in inducing the manifestation of assent is significantly
increased by prior unfair dealing by the party making the threat; or
What is threatened is otherwise a use of power for illegitimate ends. [Restatement
176(2)]

Austin Instrument, Inc. v. Loral Corp.:


-

Loral was awarded a large contract by the Navy for radar sets. The contract had a
schedule of deliveries, a liquidated damages clause, and a cancellation clause in case
Loral defaulted. Loral then awarded Austin a subcontract to supply parts. Later,
Loral was awarded a second Navy contract for more radar sets. Austin threatened to
stop deliveries of the parts unless Loral consented to a substantial price increase and,
also, gave them the subcontract on the second Navy contract. After looking for
alternatives, Loral accepted. After Austins last deliver under the second subcontract,
Loral sought recovery for the price increase.
The court found the contract unenforceable. Economic duress, as with other duress is
seen as a contractual vice when it causes a party to give up its own free will. In this
case, Plaintiffs knowledge of Defendants desire to meet its own contractual
commitment put Plaintiff in a position of coercion.

Mistake
The adversely affected party may void a contract based on mutual mistake made at the time
of the contract formation where:
1. the mistake concerned a basic assumption on which the contract made;
2. the mistake materially affects the agreement; and
3. the adversely affected party does not bear the risk of the mistake. [Restatement 152]
Common law provides that a party may avoid a contract based on a unilateral mistake where
the mistake was palpable, i.e., the other party knew or had reason to know of the mistake,
such as where the contract contains an egregiously erroneous recording of a price. If the
unilateral mistake is not palpable, the aggrieved party may avoid the contract where:
1) enforcement of the contract against the mistaken party would be unconscionable; and
2) avoidance would not result in substantial hardship to the non-mistaken party.
Mistakes that prevent a meeting of the minds render a contract void, such as where:
the offeree knows that the offer is the product of a mistake
the offeror makes the offer to a party intending it for another who is aware of the
mistake
the parties attach a materially different meaning to the communications and neither
party is aware or has reason to be aware of the meaning attached by the other.
Lucy v. Zehmer (1954:
-

Zehmer wrote a contract to sell land on a napkin. Lucy tries to enforce it but Zehmer
claims to have been joking. Lucy sued Zehmer for specific performance.
Court ruled for Lucy. Court held that, while Zehmer may have been joking, Lucy
believed him to be serious. Court will not consider secret intent only outward
manifestations. If a party to the contract has a reasonable belief that the other
party has the requisite intent to enter into the agreement when he does not, the
contract is still enforceable. Zehmer and wife signed contract, Zehmer was not
drunk enough to not remember.

Raffles v. Wichenhaus (1864):


-

Plaintiff contracted to sell cotton arriving on a ship called the Peerless to the
defendant. As it happened, there were two ships called the Peerless, and the contract
did not specify which ship carried the cotton. Defendant refused to accept the cotton
when it arrived, and Plaintiff sued.
Court ruled for the defendant. Because there is no meeting of the minds, there can
be no contract.
Unconscionability

Generally, a defense based on unconscionability must present both procedural and


substantive unconscionability.
Procedural unconscionability, which is manifested by unfair surprise, relates to the
aggrieved party's understanding of the contract terms due to factors such as:

inconspicuous print in the writing.


unintelligible legal language.
lack of opportunity to read the contract or seek clarification of terms.
illiteracy.
imbalanced bargaining positions (such as in adhesion contracts).

Substantive unconscionability relates to contracts that are, in whole or in part, deemed to be


oppressive, such as:
provisions that deprive one party of the benefit of the agreement or an adequate
remedy for the other party's breach.
provisions that bear no reasonable relation to the risk involved.
provisions that are substantially disadvantageous to one party without producing a
commensurate benefit to the other party.
a great disparity between the cost and the selling price of the item that is the subject of
the contract in absence of objective justification for such disparity.
Contract can be found unconscionable by looking at price alone
o Uniform Consumer Credit Code 1.301, 5.108
o Federal Trade Commission Regulations Door-to-Door Sales
o Interest rates can be found unconscionable. Rationale behind this: principle +
interest is equal to price of the loan
Williams v. Walker-Thomas Furniture Co.:
-

Williams made a series of purchases on credit from plaintiff, but defaulted on her
payments buyer didnt own any of it out-right because of pro rata clause.
Court found the contract unenforceable due to unconscionability. Can set aside bargain
if terms are excessively unfair or biased towards one side. Where theres a contract
made between parties where a gross inequality of bargaining power exists and the terms
of the contract to one party reflects that the one party has no meaningful choice, a court
should refuse to enforce such a contract on the ground that its unconscionable.

Maxwell v. Fidelity Financial Services, Inc.:


-

Maxwell sought a declaration that a contract to purchase a water heater which was
never installed properly and never worked properly was unenforceable on the grounds
that it was unconscionable.
Court found the contract unenforceable due to unconscionability. Claim of
unconscionability can be estimated with a showing of substantive
unconscionability alone.

CONTRACT INTERPRETATION
Three approaches to contract interpretation
1. "Plain meaning" rule If a writing or term appears to be unambiguous on its face, it
must be interpreted solely on the basis of such writing. The majority of jurisdictions
apply this rule, despite growing criticism.

2. Williston's rules ("reasonable person" approach) If a writing is an integration,


the meaning given to it as a whole or any individual terms therein is that of a
reasonably intelligent person in the circumstances that surrounded the making of the
contract. If the writing is not an integration and is unambiguous, the terms are to be
interpreted by an objective test the interpretations that a reasonable person would
give them. If the writing is not an integration and is ambiguous, subjective intent of
the parties is relevant.
3. "Reasonable expectations of the parties" approach This approach, espoused by
Corbin and incorporated by the Restatement and UCC, allows all relevant extrinsic
evidence to assist in interpretation, including the subjective intent of the parties.
In both common law and goods contracts, course of performance, course of dealing and trade
usage may supply both additional terms and aid in construction of existing terms.
A course of performance is present when a particular contract involves repeated occasions for
performance by a party and the other party, with knowledge of the nature of the performance
and opportunity to object, accepts the performance. [UCC 2-208(1)]
A course of dealing is a pattern of conduct concerning previous trade actions that is fairly to
be regarded as establishing a common basis of understanding their conduct. [Restatement
223; UCC 1-205(1)]
A usage of trade is any practice or method of dealing with such regularity of observance in a
place or trade as to justify an expectation that it will be observed with respect to the contract.
[UCC 1-205(2)]
Typically, courts prefer the course of performance interpretation over the course of dealing
interpretation over the usage in trade interpretation.
The following rules have developed to aid courts in interpretation:
1. Words and conduct of the parties are to be interpreted in light of all circumstances,
giving weight to the principal purpose of the parties in making the contract, if such
purpose is ascertainable.
2. A writing is to be interpreted as a whole, and if multiple writings pertain to the same
transaction, all are to be interpreted together.
3. Language is to be interpreted in accordance with its general prevailing meaning, if
any.
4. Technical terms and terms of art are to be given effect when used in relevant
transactions.
5. Wherever possible, the manifestations of the parties' intentions are to be interpreted as
consistent with each other and with any relevant course of performance, course of
dealing or trade usage.
Standards of Preference
1. An interpretation which gives a reasonable, lawful and effective meaning to terms is
preferred to an interpretation which imparts an unreasonable, unlawful or null effect.
2. In order of their significance and the weight to be given each are: express terms,
course of performance, course of dealing and trade usage.

3. Specific terms are to be given greater weight than general terms.


4. Negotiated terms are to be given greater weight than standard terms.
5. In some cases, such as adhesion contracts, ambiguous language may be construed
against the drafter. [See Restatement 203, 206; UCC 2-208]
Certainty of Terms
Contract terms must be reasonably certain; terms are deemed reasonably certain if they
provide a basis for determining the occurrence of a breach and an appropriate remedy.
In goods contracts, even if terms are left open, e.g., regarding price, time and place delivery,
the contract does not fail for indefiniteness if the parties have intended to make a contract and
there is a reasonably certain basis for giving an appropriate remedy. [UCC 2-204(3)]
Unspecified terms can be supplied by course of performance, course of dealing, trade usage,
and "gap fillers," provided in UCC 2-305 through 2-311.
Where a contract is sufficiently defined but omits an essential term, the court may supply a
term which is reasonable under the circumstances. [Restatement 204]
A contract may provide that one of the parties is to specify a term of performance. Both the
common law and the UCC provide that such a term may be enforced as long as the discretion
is exercised in good faith and "within limits set by commercial reasonableness." [UCC 2311(1)]
Where the parties attach different meanings to a term, the interpretation that prevails is that of
the party that did not know (or had no reason to know) of any different meaning attached by
the other, and the other knew (or had reason to know) the meaning attached by the first party.
[Restatement 201]
Frigaliment Importing Co. v. B.N.S. International Sales Corp. (1960)
- Defendant B.N.S. International Sales Corp. contracted to sell chicken to Plaintiff,
Frigaliment Importing Co. Defendant sent chicken complying with the weight
requirements of the contract. Plaintiff argues that the chicken sent did not comply
with the terms of the contract because the term chicken means young chicken.
- Court ruled for plaintiff. To interpret a disputed term in a contract, the court will
consider (in order of importance): (1) the language of the contract, (2) the
preliminary negotiations, (3) trade usage, (4) legal standard, (5) course of
performance, and (6) maxims. Language of the contract was unclear, defendants
definition fits with government definition. Plaintiff had not met the burden of proof.

ENFORCEABILITY OF A CONTRACT
With some exceptions, a promise must be supported by consideration in order to be
enforceable. Consideration requires a bargained exchange in which each party engages in an
act that the party was not previously obligated to perform or refrains from exercising a legal
right.

Consideration is a bargained-for performance or return promise which is given by the


promisee in exchange for the promisor's promise. Consideration need not be furnished by ogr
to the parties themselves as long as it is part of the bargained exchange.
Even if the promisor's promise induced performance or a return promise by the promisee, if
such inducement was not sought by the promisor, there is no bargained exchange. In such
circumstances, the promise is merely an unenforceable gift.
Contracts Lacking Consideration
Donative Promises
A donative promise is a promise to make a gift. Generally, donative promises are
unenforceable due to a lack of consideration. Donative promises may be enforceable if relied
upon or to compensate for a material benefit that was previously received by the promisor. In
addition, once completed, the gift is recognized as a legally binding transaction.
A conditional donative promise views performance as the means to make the gift. If the
condition is a necessary part of the gift, the promise is donative; if the condition is the price
of the gift, it is a bargain.
Dougherty v. Salt
-

Aunt gives nephew a promissory note for $3,000, payable on or before her death. The
note had the language value received on the form. Aunt later died. Dougherty
brought suit to collect on the note.
Court held that the note was unenforceable. Since nothing was exchanged between
the aunt and nephew, there was no consideration. A moral obligation to pay is
insufficient grounds for concluding a legal obligation to pay exists.

Hamer v. Sidway:
-

Uncle made promise to his nephew to pay him $5,000 if he didnt drink, smoke,
swear, etc. until he turned 21. Nephew fulfilled promise, but uncle died before paying
out the money
Court ruled that the promise was enforceable. A valuable consideration, in the sense
of the law, may consist either in some right, interest, profit, or benefit accruing to
the one party, or some forbearance, detriment, loss, or responsibility given,
suffered, or undertaken by the other.

Hancock Bank & Trust Co. v. Shell Oil Co.:


-

Shell occupied premises under a written lease, under terms that stated lease was for 15
years with option to extend term for another 15 yrs and Shell may terminate lease at any
time by giving Lessor at least 90 days notice. Lease also provided for fixed monthly
rental (as time passed, rent was well below market rent), etc
Court ruled that the lease was enforceable. Consideration existedt. Shell had been
fulfilling their side of bargain by paying rent. Just because a contracts terms seem

biased now, does not mean that a bad bargain was made and that the lessor is able
to get out of the contract.
Nominal Consideration
Courts do not concern themselves with whether consideration was adequate, honoring the
freedom to contract. Courts do concern themselves with whether the consideration was
sufficient, with relates to whether there is a legal detriment incurred as part of a bargained
exchange.
If a bargain gives a party a choice of alternative obligations, each alternative on its own must
constitute sufficient consideration for the return promise. If a promise is void or voidable
e.g., due to the incapacity of the promisor the sufficiency of the consideration is not
necessarily negated. [See Restatement 78, comment a]
Surrender of a validly disputed claim or release of a validly asserted defense is sufficient
consideration for a return promise. Forbearance of a invalid claim can serve as consideration
if the proponent of such claim has a good faith belief in its validity and there exists an
objective uncertainty of its validity.
Schnell v. Nell:
-

Out of consideration for his deceased wife Schnell agreed to pay Nell $200 in return
for Nells payment of one cent and agreement to forebear all claims against wifes
estate. Schnell then didnt pay.
Court ruled promise was unenforceable. A consideration of one cent is nominal
consideration and doesnt support Ds promise. Therefore, promise isnt
enforceable. Past consideration is no consideration (love and affection of his wife
is past)

Batsakis v. Demotsis:
-

Batsakis sued Demotsis to recover $2,000 with interest at the rate of 8%. Contract said
that Plaintiff would give Defendant 500,000 drachmae in return for $2,000 USD.
Court ruled that the contract was enforceable. Inadequacy of consideration wont void
a contract. Defendant received exactly what was contracted for.
Past Consideration

Past consideration is defined as an act done before a contract is made. It is consideration that
is already given or some act that is already performed and therefore cannot be induced by the
other party's thing, act, or promise in exchange.
A promise made in recognition of a benefit previously received by the promisor from the
promisee is binding to the extent necessary to prevent injustice. A promise is not binding, if
the promisee conferred the benefit as a gift or for other reasons the promisor has not been
unjustly enriched; or to the extent that its value is disproportionate to the benefit.
[Restatement 86]

Mills v. Wyman:
-

Mills took in Wymans grown son, who no longer lived at home, and cared for him.
Wyman promised, in writing, to repay Millss expenses, then refused to honor his
promise. P sued to recover the expenses
Court held that the contract was unenforceable. A moral obligation incurred
through past events is generally not sufficient consideration for an express
promise. Wyman did not ask Mills to care for his son. Wyman had no obligation to
care for his adult son. Wyman was influenced by a transient feeling of gratitude.

Webb v. McGowin:
-

P was cleaning the upper floor of a mill and was about to drop a heavy weight to the
floor below. P noticed McGowin and, to avoid hurting him, fell and sustained
permanent injuries. McGowin promised to pay him a monthly sum for life for saving
his life. He paid him for 8 years, but then McGowin died and payments stopped. P
sued estate.
Court held that the contract was enforceable. Where the promisee cares for,
improves, and preserves the property of the promisor, though done without his
request, it is sufficient consideration for promisors subsequent agreement to pay
for the service, because of the material benefit received.
o A moral obligation is sufficient consideration to support a subsequent
promise to pay where the promisor has received a material benefit,
although there was no original duty or liability resting on the promisor.
Illusory promises

Illusory promises cannot serve as consideration. Illusory promises exist where a promise is
subject to a condition which is within the control of the promisor or when the promisor
knows that the condition cannot occur. Under the mutuality rule, if one party makes an
illusory promise in exchange for anothers real promise, neither party is bound.
Agreements for exclusive dealings may appear to be based on an illusory promise since the
promisor's performance is subject to conditions within its control. Nevertheless, common
law and the UCC have recognized an implied promise to use best efforts in an agreement for
exclusive dealings, which furnishes the necessary consideration. [UCC 2-306(2)]
Four step method for dealing with illusory promises
1. Identify an illusory promise and argue that the bargain is unsupported by
consideration and therefore unenforceable by either party
2. Look for some form of commitment from the other party, no matter how small, to
make it binding.
3. If no express commitment exists argued that a commitment should be implied.
4. If no implied commitment, look for another theory to enforce the promise.
Scott v. Moragues Lumber Co.:

Scott promised Moragues that if he bought a ship, he would ship lumber for a set
price. Scott bought ship and contracted to 3rd party to move their lumber and thereby
rendered himself unable to comply with contract with Moragues.
Court held the contract enforceable. A contract isnt void at its inception for lack of
mutuality of obligation if one of the parties conditions his performance upon the
happening of an event solely w/in his control. Scott was not bound to fulfill the
contract until the point where he purchased the ship.

Office Pavillion s. Florida, Inc. v. ASAL Prods., Inc.


-

Contract between parties to purchase a minimum of 1,000 keyboard trays per year.
Volume discounts possible. Later expanded to chairs. ASAL attempted to expand
outside German market, which went against original contract.
Court held that the keyboard contract was enforceable, but not the chair contract.
Acceptance of the chair contract involved no performance and did not constitute
consideration. Chair contract unenforceable due to quanity of chairs that must
be ordered. Pavilion agreed to sell ASAL any chairs it chose to order at the price set
forth. While ASAL may have agreed, its acceptance involved no promised
performance and

Wood v. Lucy, Lady Duff-Gordon:


-

Duff-Gordon is a fashion designer and employed Wood to market her designs.


Written agreement didnt say Wood had to do anything, but Duff-Gordon gave Wood
exclusive right to market for a year. Duff-Gordon started to go around and market her
own name and keeping profits.
Mutuality may be implied from the circumstances. Implied promises are
enforceable. Parties expected Wood to make some effort to market.

Grouse v. Group Health Plan, Inc.


-

Grouse, accepted Defendants offer for at-will employment and quit his current job.
Defendant rescinded the offer and Plaintiff had difficulty finding a comparable job.
Contract enforceable. An illusory promise can still be enforceable where the
promisor should reasonably expect to induce action on the part of the promisee
and which does induce such action if injustice can be avoided only be
enforcement of the promise. The Defendant knew the Plaintiff would have to resign
from his current job in order to accept their offer. Therefore, it would be unjust to
allow the Defendant to avoid there promise.
Legal Duty

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of
honest dispute is not consideration; but a similar performance is consideration if it differs
from what was required by the duty in a way which reflects more than a pretense of bargain.
[Restatement 73]

Official duties: Under the preexisting legal duty rule, the promise of an official to perform an
act that falls within the scope of the officials duties is not consideration, and neither is the
performance of such an act
Preexisting contractual duties: General rule is that a promise to perform, or the actual
performance of, a preexisting contractual (as opposed to public) duty thats owed to the
promisee is not consideration.
A promise modifying a duty under a contract not fully performed on either side is binding (a)
if the mod. is fair and equitable in view of circumstances not anticipated by the parties when
the contract was made; or (b) to the extent provided by statute; or (c) to the extent that justice
requires enforcement in view of material change of position in reliance on promise.
[Restatement 89]
Analyzing a legal duty problem:
-

Was a new contract made? How it works if they destroy the old contract, no one
had any duty.
Was there a compromise or settlement?
Were the circumstances changed? (asking for modification) Lingenfelder, there were
no changed circumstances.
Restatement 89: A promise modifying a duty under a contract not fully performed
on either side is binding.
a) if the modification is fair and equitable in view of circumstances not
anticipated by the parties when the contract was made; or
b) to the extent provided by statute; or
c) to the extent that justice requires enforcement in view of material change of
position in reliance on the promise. Was there additional consideration?
UCC 2-209 Modification, Rescission, and Waiver
UCC Art 2, 2-210, UCC 1-207 Performance of Rights
UCC 3-311 Accord and Satisfaction
UCC 3-103(4) Good Faith
UCC 3-104 Negotiable Instrument

Gray v. Martino:
-

Martino entered into an oral contract to pay a reward to Gray, a police officer who
also worked for the prosecutor, if his information lead to the recovery of stolen
jewelry
Court found the contract unenforceable. Public policy and sound morals alike
forbid that public officer should demand and receive, for services performed by
him in the discharge of official duty, any other or further remuneration or
reward than that prescribed and allowed by law.

Lingenfelder v. Wainright Brewery Co.:

Ligenfelder agreed to design a building for Wainwright, and then because of a


business dealings, decided he wouldnt continue unless paid a higher wage.
Wainwright accepted because he felt he had not alternative
Court ruled that the contract was unenforceable. When a party merely does what he
has already obligated himself to do, he cannot demand and additional
compensation therefore, and although by taking advantage of the necessities of
his adversary he obtains a promise for more, the law will regard it as nudum
pactum, and will not lend its process to aid the wrong.

Foakes v. Beer (1884)


-

Defendant owed plaintiff money. Entered into agreement to repay 500 immediately
and the rest on installments. Beer brought suit for payment of interest, arguing lack of
consideration.
Court found for Beer, no consideration. An agreement to accept less that what is
owed is not binding unless there is consideration.
Statute of Frauds

Certain agreements must satisfy the statute of frauds, which requires the agreement to:
1.
2.
3.
4.

be memorialized in a writing or record;


be signed by or on behalf of the party against whom enforcement is sought;
indicate that a contract has been made between the parties;
state with reasonable certainty the essential terms of the unperformed promises, in the
case of non-goods contracts;
5. specify the term of quantity, in the case of contracts for the sale of goods. UCC 2201 specifically states that "a record is not insufficient because it omits or incorrectly
states a term agreed upon but the contract is not enforceable . . . beyond the quantity
of goods shown in the record."
The following types of agreements fall within the statute of frauds:
1. Agreements that by its terms cannot be performed within a year from the making of
the contract The statute of frauds only applies if the contract specifically precludes
performance within one year, not merely if performance would appear impossible to
complete within one year of the making of the contract. (see 6.04[3] for an
exception to this writing requirement)
2. Promise to answer for the debt, default or miscarriage of another A promise by a
surety or guarantor to a creditor to pay the debt or perform the obligation of a
principal debtor must be in writing where the creditor has reason to know of the
surety/guarantor relationship. Many states likewise require a writing to memorialize a
promise by an executor or other personal representatives to pay the obligations of the
estate which they represent with their own funds. This requirement does not apply
when the promise merely involves payment of another's debts with funds that belong
to the debtor or which the promisor holds for the purpose of paying the debtor's
obligations.
3. Agreements made upon consideration of marriage, other than mutual promises to
marry, e.g., to provide a dowry or child support.
4. Agreements for the sale of land and for an interest in land (see 6.04[2] for an
exception)

5. Agreements for the lease of real property for longer than one year
6. Agreement by a purchaser of real property to pay an indebtedness secured by a
mortgage or deed of trust upon the property, unless assumption of the indebtedness by
the purchaser is specifically provided for in the conveyance of the property.
7. Contracts for the sale of goods for the price of $500 or more [UCC 2-201]; under
the proposed revision, the price threshold is raised to $5,000 (see 6.04[1] for an
exception)
8. Contracts for sale of other personal property e.g, intellectual property, royalties in
the amount or value exceeding $5,000 [UCC 1-206]
9. Leases of goods in the total amount of $1,000 or more [UCC 2A-201]
10. Agreements which creates a security interest in personal property if it is not in
possession of the secured party, and agreements for the assignment of contract rights
[UCC 9-203(1)(a)]
Other types of agreements upon which different states have imposed a writing
requirement include:
1. agreements that by its terms cannot be performed during the lifetime of the promisor;
2. agreements by which a principal appoints an agent to execute a contract which is itself
within a provision of the statute of frauds ("equal dignities" rule)
3. promises to pay debts, the enforcement of which was barred by the statute of
limitations
4. promises to pay debts discharged in bankruptcy
5. to pay a commission to a real estate agent
Signature
An agreement that falls within the statute of frauds must be signed by or on behalf of the
party against whom enforcement is sought. An agreement may consist of several writings or
records and only one need be signed if the circumstances clearly indicate that the various
writings relate to the same transaction.
A signature may include any mark or symbol with which the signer intends to authenticate
writing. The signature may be written, printed, stamped, engraved, or otherwise marked on
the writing. Signatures may include initials, imprinted signatures, letterhead, and firm logos.
Avoidance of the Writing Requirement
Contracts for the sale of goods that fall within the statute of frauds may be enforced, at least
partially, in the absence of a writing, in the following circumstances:
1. where payment has been made and accepted or the goods have been received and
accepted Such partial performance makes only the portion performed and accepted
enforceable, not the oral contract in its entirety.
2. in a contract for specially manufactured goods where the seller cannot sell such goods
to third parties in the normal course of his business, once the seller has made a
substantial beginning in manufacturing or procurement of such goods, provided that
the seller can establish that the goods were intended for the buyer.
3. where the party against whom enforcement is sought admits in a pleading, testimony
or otherwise under oath that a contract was made but the contract is only enforceable
up to the quantity of goods admitted. [UCC 2-201(3)(c)]

Contracts for the Sale of Real Estate


Despite failure to satisfy the statute of frauds, a contract for the sale of real property will be
enforceable if the buyer has taken possession and has made permanent improvements upon it.
The extent of the improvements made that will justify enforcement varies from jurisdiction to
jurisdiction. [See Restatement 129, comment a]
Contracts That Cannot be Completed Within One Year
In a contract which cannot by its terms be completed within one year, lack of a writing will
not preclude enforcement once full performance has been completed.
Equitable Estoppel
Where the promisor makes a representation pertaining to the writing and the party seeking to
enforce the contract relied to his detriment upon such representation e.g., that the writing
has been executed, that the statute of frauds will not be raised as a defense to the
enforcement, or that the statute of frauds does not apply to the transaction in question the
promisor may be estopped from raising the lack of writing as a bar to enforcement.
Promissory Estoppel
A promise which the promisor should reasonably expect to induce action or forebearance on
the part of the promisee or a 3rd persona and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise. Remedy granted for
breach may be limited as justice requires. [Restatement 90]
A non-goods contract that fails to satisfy the statute of frauds may nevertheless be
enforceable if the promisor's promise foreseeably induces action or forbearance on the part of
the promisee or a third person and enforcement is the only means of avoiding an injustice.
[Restatement 139] Mere reliance on the oral contract itself is generally not enough to
justify estoppel; most cases require some additional statement or promise.
Some courts have refused to apply promissory estoppel to cases involving goods contracts
because UCC 2-201(3), which enumerates the circumstances under which the writing
requirement may be avoided, does not include estoppel. However, section 1-103, which
applies to all commercial transactions, indicates that principles of law and equity, including
estoppel, are to supplement the specific provisions.
Enforceability of Promises Without Consideration
1.
2.
3.
4.

promises that induce a foreseeable and detrimental change of position by the promisee
a promise to pay a debt that has become barred by the statute of limitations
a promise to perform a pre-existing obligation that has been discharged in bankruptcy
where an original promise is voidable due to the promisor's incapacity, a new promise
by such promisor upon attaining capacity
5. where an original promise is voidable due to a valid defense by the promisor such as
mistake, misrepresentation or undue influence, a subsequent promise by such
promisor

6. in contracts for the sale of goods, contract modifications [UCC 2-209(1)], release of
a claim by a signed writing [UCC 1-107], and a written promise by a merchant not
to revoke an offer [UCC 2-205]

Exceptions to the Bargain Principle


Promissory Estoppel
A promise which the promisor should reasonably expect to induce action or forebearance on
the part of the promisee or a 3rd persona and which does induce such action or forbearance is
binding if injustice can be avoided only by enforcement of the promise. Remedy granted for
breach may be limited as justice requires. [Restatement 90]
A non-goods contract that fails to satisfy the statute of frauds may nevertheless be
enforceable if the promisor's promise foreseeably induces action or forbearance on the part of
the promisee or a third person and enforcement is the only means of avoiding an injustice.
[Restatement 139] Mere reliance on the oral contract itself is generally not enough to
justify estoppel; most cases require some additional statement or promise.
Requirements for Promissory Estoppel
1.
2.
3.
4.

That there was actual reliance on the contract or promise


That the reliance was foreseeable to the breaching party.
That it was clearly detrimental.
That injustice can only be avoided by enforcement.

Kirksey v. Kirksey:
-

Plaintiff was the widow of defendants brother. Thought defendant offered her place
to life. Moved to take up residence but was asked to leave after two years.
Court found contract unenforceable. Dissent argued reliance. Promise was only
conditional donative, unsupported by consideration.

Feinberg v. Pfeiffer Co.:


-

Plaintiff previously worked for the defendant. Plaintiff began work at 17. Board of
Directors voted to give her pension in 1947. Plaintiff continued working until June
1949. Defendant refused to give pension.
Contract enforceable. A promise that induces an action or forbearance is binding
if injustice can be avoided only by enforcement of the promise. Decision based on
Restatement 90.

D&G Stout, Inc. v. Bacardi Imports, Inc.:


-

General was in a weakened financial state. Promise that Bacardi would continue to use
General as their distributor, no specified time limits as to how long the contract would be.
In reliance to promise, General turned down a contract to sell to National. Later that day
Bacardi decided to withdraw its line from General.. General learned of this and reapproached National, sold for $550,000 lower than original offer.

Court ruled D&G was entitled to damages. Bacardi shouldve expected reliance on
their promise to keep D&G as their distributor when they knew D&G was
negotiating selling the company but would stay open if they kept main distributor.
Modification

A modification is an agreement to change contract terms. Modifications must be bilateral. In


addition, they require consideration, changed circumstances (under Rest. 89) or good faith
(under UCC). Modifications cannot be retracted without another agreement
Angel v. Murray:
-

Trash collector for city asked city for more money when there were an unanticipated
number of new houses built. Some constituents of city are suing to get money back
Restatement 89(a)
o Replaces old rule that have to have consideration for modification of contract
for it to be enforceable
o This allows good faith mods. without having to go through formality of
tearing up old contract and creating new one
Agreement is enforceable when there was an unforeseeable circumstance costing one
party more than he anticipated
Waiver

A waiver is a voluntary and intentional relinquishment of something of value, or foregoing of


some advantage which the party waiving it may at its option have demanded or insisted upon.
A waiver can be unilateral and does not require consideration.
Clark v. West:
-

Parties entered contract where plaintiff was supposed to prepare law books, at rate of
$2 per page or $6 per page if did not drink. While Plaintiff was writing, the Defendant
assured him that strict compliance to this condition is not necessary. Clark brought
suit for the additional $4 per page.
Court found for Clark, abstinence was a waiveable condition not consideration. A
condition in a contract may be waived, but no waiver is implied by mere
acceptance of the proffered performance. Modification of promise requires new
consideration; Waiver of condition does not.

BREACH OF CONTRACT
Any non-performance of a contractual duty which has become due constitutes a breach. An
anticipatory repudiation of obligations also serves to breach a contract.
In contracts for the sale of goods, in addition to repudiation, a seller breaches the contract by
offering a tender or delivery of non-conforming goods, and the buyer breaches by wrongfully
rejecting goods, wrongfully revoking acceptance of goods, or failing to make a payment
when due.

If a party fails to perform a promise and the breach is material, and no cure is forthcoming,
the aggrieved party may:
cancel the contract and sue for all damages under the contract; or
continue the contract and sue for partial damages
If the breach is not material, the aggrieved party may not cancel the contract and can only sue
for partial damages.
Factors which are relevant to a determination of whether a breach is material are:
the extent to which the aggrieved party will be deprived of the benefit he reasonably
expected;
the extent to which the aggrieved party can be adequately compensated for the benefit
of which he will be deprived;
the extent to which the breaching party will suffer forfeiture;
the likelihood that the breaching party will cure his failure, taking into account all the
circumstances including any reasonable assurances;
the extent to which the breaching party has acted according to standards of good faith
and fair dealing. [Restatement 241]
Theory of Efficient Breach
Breach of contract is efficient and desirable if a promisors gain from breach, after payment
of expectation damages, will exceed the promisees loss from the breach. This theory can
only be evaluated under paradigm cases. In the overbidder paradigm, a seller who has
contracted to sell a commodity to a buyer breaches the contract in order to sell the commodity
to a third party for a higher price. In the reseller paradigm, society is benefited by selling
goods contracted to another by the creation of wealth.
Two basic criteria that the expectation measure makes the promisee indifferent between
performance and damages; and that at the time of the decision, the promisor knows the value
that the promisee places on the promisors performance. Both incorrect. Damages do not
work that way and seller will not know the value buyer places on the goods.
Efficiency The encouragement of breach in the Overbidder Paradigm would decreased
rather than promote efficiency. Efficiency argument is that greater profit is desirable.
However, commodities always flow to greater value uses. Third party would either get the
commodity through performance of a contract or through purchases commodity from
promisee.
Critiques of the Theory of Efficient Breach
Remaking Contracts: Contracting parties may walk away during negotiations or demand
additional payment or other safeguards. This leads to inefficient bargaining.
Reducing the Rewards for Planning: Market price is inexact, making efficient breach
imprecise.

Weakening the Contract System: Efficient breach is based on a static and short-run
approach to the issue of breach, only addressing an individual contract. A dynamic and longterm approach address efficient of the contracting system as a whole.
Parties Duties in Case of Breach
Mitigation
A party aggrieved by a breach must use reasonable efforts to mitigate damages. In the
specific case of breach of an employment contract, courts will not generally require an
employee that has been discharged to take onerous or difficult measures to secure new
employment, such as taking a far inferior position or relocating.
Rockingham County v. Luten Bridge Co.:
-

Luten contracted to build bridge for Rockingham. Defendant changed its mind and
gave notice of cancellation to Plaintiff before actual construction began. Plaintiff went
ahead and built the bridge anyway, even though there was no road leading to it.
Plaintiff sued to recover contract price and won.
Party may not recover full contract price if they continue performance after
notice of breach. Once a party breaches a contract, the non-breaching party has
a duty not to increase its damages

S.J. Groves & Sons Co. v. Warner Co.:


-

Where both the P and D have had equal opportunity to reduce damages by same
act and its equally reasonable to expect the D to minimize damages, D is in no
position to contend that the P failed to mitigate.
Commercially reasonable to expect non-breaching party to go out and mitigate
damages

Shirley MacLaine Parker v. 20th Century-Fox Film Corp.:


-

Parker contracted to play female lead in Defendants movie. Defendant decided not to
produce movie and offered her a role in another movie. Plaintiff refused to accept role
and sued for $ due under contract
Damages: Measure of recovery by wrongfully discharged employee is the amt of
salary agreed upon for the period of service, less the amt. that employer
affirmatively proves the employee has earned or with reasonable effort might
have earned from other employment. However, the employee need not accept
employment of a different or inferior kind in order to mitigate damages.

(1)Except as stated in Subsection (2), damages are not recoverable for loss that the injured
party could have avoided without undue risk, burden or humiliation.
(2)The injured party is not precluded from recovery by the rule stated in Subsection (1) to the
extent that he has made reasonable but unsuccessful efforts to avoid loss. [Restatement 350]
(1) An aggrieved seller under the preceding section may
(a) identify to the contract conforming goodsnot already identified if at the time he learned of
the breach they are in his possession or control;
(b) treat as the subject of resale goods which have demonstrably been intended for the
particular contract even though those goods are unfinished.

(2) Where the goods are unfinished an aggrieved seller may in the exercise of reasonable
commercial judgment for the purposes of avoiding loss and of effective realization either
complete the manufacture and wholly identify the goods to the contractor cease manufacture
and resell for scrap or salvage value or proceed in any other reasonable manner. [UCC 2704]
Reason for this rule is that theres room for negotiation. If the deliverer knows of the
importance, he can charge more or choose not to take the job. [UCC 2-715]
Cover
Where a seller fails to deliver goods or repudiates, or where the seller's nonconforming tender
results in the buyer' rightful rejection or justifiable revocation of acceptance of goods, the
buyer may "cover" by making a reasonable substitute purchase, in good faith and without
unreasonable delay. The buyer may recover the difference between the cost of cover and the
contract price, along with incidental or consequential damages, less expenses saved. [UCC
2-712] As long as the cover was made in good faith, the price need not have been the lowest
available and the goods need not be identical to those stated in the contract.

THE EXPECTATION MEASURE


Expectation damages compensate the injured party for the benefit he would have received
had the contract not been breached, minus any amount he would have spent in performance
of the contract. Such damages must be proven with certainty, and may be measured by the
contract price, loss in value, or lost profits.
Forseeability
Expectation damages which may be general or consequential must be foreseeable.
General damages are the natural and probable consequence of a breach and are deemed to
have been within the contemplation of the breaching party. A party seeking general damages
need not offer further proof that the damages were foreseeable. Consequential (or special)
damages arise from the special facts and circumstances of the case and are not deemed to be
within the contemplation of the breaching party unless he was made aware of such specific
facts and circumstances. A party seeking consequential damages must demonstrate that the
damages were foreseeable at the time the contract was formed.
Certainty
Kenford Co. v. Erie:
-

Plaintiff contracted to build and operate a domed stadium for defendant county. The
parties agreed to start construction within 12 months and to negotiate a 40-year lease
for operation by plaintiffs. There was a clause for default that did not include lost
profits. The facility was never built. Plaintiff sued for damages and the jury awarded
lost profits for the length of the contract.
A non-breaching party isnt entitled to lost profits where such damages are never
contemplated at the time of contracting.
Loss of future profits is permitted as damages for breach of contract if:
o Such damages have been caused by the breach (causation);

o The lost profits are capable of proof with reasonable certainty (proof);
and
o The lost profits were fairly within the contemplation of the parties when
the contract was made. (contemplation)
The plaintiffs provided detailed proof of their lost profits, but the initial contract
provided for a remedy for breach, but did not include lost profits. Nothing indicated
that the parties contemplated defendant being liable for lost profits for the length of
the contract.
Breach of Service Contract

Cost of Completion
Formula: Total price of project minus payments made minus completion costs
Louise Caroline Nursing Home, Inc. v. Dix Construction Co.:
-

P contracted to have a nursing home built by the D. Reliance Insurance Co. provided
a bond guaranteeing performance by D. D did not complete job. P sued for damages.
Cost to complete the home was within remaining balance of the contract price so P
suffered no losses
Cost of completion is correct measure of damages when a builder defaults before
completing construction as required by contract. Not policy of law to award
damages that would put P in better position than if D had carried out contract: P
entitled to be made whole and no more.
Diminished Value

Diminished Value Rule: Where the contract provision breached was merely incidental to
main purpose in view, and where the economic benefit which would result to lessor by full
performance of the work is grossly disproportionate to cost of performance, damages which
lessor may recover are limited to the diminution in value resulting to premises because of
nonperformance
Formula: Value of premises before the contract minus value of the premises at
completion of contract
Things to look for in these cases:
1. Was it done in good faith?
2. Was it a principle objective or incidental benefit you were deprived of?
Peevyhouse v. Garland Coal & Mining Co.:
-

Plaintiffs leased their farm for 5 years to Defendants for mining purposes. Lease
provided that Defendant would restore land at end of lease, but didnt because cost to
do so greatly exceeded value it would have added to land ($29,000 v. $300)
Court ruled for defendant. Damages: In a construction contract where the defect can
be repaired without undue expense, the cost to complete the uncompleted work is the

proper measure of damages (since it will give P benefit of bargain). But where defect
cannot be repaired without an expenditure disproportionate to the objective to
be attained (putting plaintiff where he would have been had the contract been
performed), the diminished value rule is followed.
Breach by Client
When the person who contracts for services breaches:
-

Before performance starts: Contractor may recover prospective profits


During performance: Contractor may recover prospective profits plus expenses for
part performance
After performance: Contractor may recover full contract price.

Aiello Construction, Inc. v. Nationwide Tractor Trailer Training and Placement Corp.: pg.
90 notes
-

P contracted to perform fill and grading work on Ds property. Agreement was tat D
was to pay 5 monthly installments of $6,600 for a total of $33,000. P completed most
of work and then let ground settle before applying the final layer of gravel. D had
only made on payment and some partial payments totaling $10,500. P did not
complete the job. P received as damages for his actual costs to perform ($21,500),
plus the profit he wouldve made on the entire contract ($3,000), less the $10,500 D
had already paid.
Contractor who justifiably ceases performance due to owners breach is entitled
to recover lost profits.
Damages: Under 346(2), a builder may recover the entire contract price, less
installments already paid and the cost of completion that the builder can reasonably
save by not completing the work, or the amount of his expenditure in part
performance of the contract
Builder has right to his expenditures and profits because payment of full price
wouldve reimbursed those expenditures in full and given him his profit in addition
Formulas:

Without subtracting out the costs saved for


not completing
- Cost + profits paid
- $21,500 + $3,000 - $10,500 =
$14,000

Subtracting out the costs saved for not


completing
- Contract price paid cost saved
- $33,000 - $10,500 - $8,500 = $14,000

Breach of Goods Contract


UCC cover contracts for sale of goods use the specific language in these cases.
-

Houses are not included, but mobile homes are


Contracts btwn individuals for the sale of goods are also included (not only
merchants)
Breach by Seller

Buyers remedies:
-

Specific Relief
o Buyer awarded actual goods
Damages
o Failure to deliver or buyer properly rejects goods/rightfully rejects acceptance
( 2-712 & 713)
o Buyer accepted goods, cannot/doesnt want to rightfully revoke acceptance,
but goods are defective ( 2-714)

UCC 2-711 Buyers Remedies in General


-

Where the seller fails to make delivery or repudiates OR the buyer rightfully rejects or
justifiably revokes acceptance, then w/ respect to any goods involved, and with
respect to the whole if the breach goes to the whole contract ( 2-612), the buyer may
cancel and whether or not he has done so may, in addition to recovering so much
of the price as has been paid
o cover and have damages under the nxt section as to all the goods affected
whether or not they have been identified to the contract; or
o recover damages for non-deliver as provided in this Article ( 2-713);
Where the seller fails to deliver or repudiates the buyer may also
o If the goods have been identified recover them as provided in this Article ( 2502); or
o In a proper case obtain specific performance or replevy the goods as provided
in the Article ( 2-716);
On rightful rejection or justifiable revocation of acceptance a buyer has a security
interest in goods in his possession or control for any payments made on their price
and any expenses reasonably incurred in their inspection, receipt, transportation, care
and custody and may hold such goods and resell them in like manner as an aggrieved
seller ( 2-706).

2-711 Buyers Remedies in General


2-712 Cover
-

can go out into market and purchase same goods from someone else and get
difference in price
get replacement goods

2-713 Buyers Damages for Non-delivery


-

measure of damages for nondelivery or repudiation by the seller is difference between


market price and the contract price at the place of tender at the time buyer learned of
breach
can decide that they dont really want goods anyway, or because they didnt get
delivered on time, dont want anymore, but market price for goods has gone up
can get difference between market price and contract price for goods

2-714 Goods are defective in some way


-

can get recovery for difference between value of goods as promised and value you
ended up with
basically difference in value for goods that were delivered

Egerer v. CSR West, LLC (2003):


- Plaintiff owned parcel of land he wished to develop. Contracted Wilder to haul the
material. Egerer contacted CSR to supply additional fill for $.50 per cubic yard, which
they did for two nights, then supplied fill to State. Egerer could not get replacement
fill. Later contracted for fill at $6.39 per cubic yard.
- Court granted Egerer difference between the prices.
- Under 2-713, because Egerer could not cover, Egerer granted difference.
HWH Cattle Company, Inc. v. Schroeder (1985):
-

HWH purchased cattle on commission for feedlots. HWH entered contract with
Schroeder to purchase 2000 steers at .67 cents per pound. HWH was contracted by
Western Trio to sell 2000 steers at .6735 cents per pound.
: Since HWH did not have cover, must provide damages under UCC 2-711. HWHs
call about additional cattle were not cover because only 120 cattle which were related
to separate order. HWH contention of damages under 2-713 because cattle were not
sold at market price and would lead to windfall.
Breach by Buyer

UCC 2-703 Sellers Remedies in General


-

Where the buyer wrongfully rejects or revokes acceptance of goods or fails to make a
payment due on or before delivery or repudiates w/ respect to part or whole, then w/
respect to any goods directly affected and, if the breach is of the whole contract, then
also w/ respect to the whole undelivered balance, the aggrieved seller may
o Withhold delivery of such goods;
o Stop delivery by any bailee as hereafter provided ( 2-705);
o Proceed under the nxt section respecting goods still unidentified to the
contract;
o Resell and recover damages as hereafter provided ( 2-706);
o Recover damages for non-acceptance ( 2-708) or in a proper case the
price ( 2-709);
o Cancel.

UCC 2-706 Sellers Resale


UCC 2-708 Sellers Damages for Non-acceptance
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(2) Recognizes that damages under (1) might be inadequate to compensate seller
might need to give profits that it wouldve lost on another sale to make seller whole:
o Lost volume seller: seller in Neri wouldve sold 2 boats instead of just 1

o To take advantage of this have to:


Show that whoever bought boat, wouldve bought another boat
from marine operation if they hadnt bought Neris boat
Entitled to incidental damages as long as not unnecessary

UCC 2-718 Deposits


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Refunds of deposits specifically


Just because you retain a deposit, doesnt mean you forfeit your right to get damages
under 2-706 or 2-708.
Lost Profits
Things to look at when determining profit damages:
1.) Arise naturally
2.) Reasonably contemplated, probable result at time contract was made
Under expectation rule, all lost profits would be included in damages
Neri v. Retail Marine Corp.:
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P contracted to purchase a boat from D and made a deposit for $4,250 to assure
immediate delivery. At time of delivery, P entered hospital and was unable to pay for
boat. P sought a refund; D refused. D sold boat to another customer 4 months later. P
sued to recover the refund and D counterclaimed for damages in same amt. Court
awarded only $500 to D and ordered repayment of the remaining balance under UCC
2-718.
A retail dealer may recover lost profit even when he resells the goods after the
original buyers repudiation of the contract.
UCC 2-706: you get the diff btwn the contract price and the resale price
UCC 2-708: you get the diff btwn the contract price and the market price
In this case, both are 0. UCC 2-718(2) deals with deposits seller can keep 20% or
$500. Why? Incidental expenses.

Teradyne, Inc. v. Teledyne Industries, Inc.:


-

Universally agreed that in a case where after the buyers default a seller resells
the goods, the proceeds of the resale are not to be credited to the buyer if the
seller is a lost volume seller

THE RELIANCE AND RESTITUTION


MEASURES
Reliance damages compensate the injured party for expenses or loss incurred in reasonable
reliance on the contract that was breached. Reliance damages are only awarded when
expectation damages cannot be proven, and may not exceed the anticipated benefit of the
bargain.
Restitution compensates a party for the benefit conferred on the other party as a result of
partial performance or reliance, and is aimed at preventing unjust enrichment. Restitution

damages may be measured by the reasonable value of the benefit received in terms of what it
would have cost to obtain such benefit from another source or the extent to which the value
of the party's property has been increased or his other interests advanced.
Restitution may be available in cases of breach, where a contract is unenforceable or voidable
or where a duty is excused or discharged.
Restitution by Injured Party
A party injured by breach is entitled to restitution for any benefit he conferred on the
breaching party by way of partial performance or reliance. Restitution is not available if the
injured party has performed all his duties and the breaching party owns no performance other
than payment for the injured partys performance [Restatement 373]
Restitution by Breaching Party
Where the aggrieved party justifiably suspends his performance on the ground that other
party's breach discharged his remaining duties, the breaching party is entitled to restitution
for any benefit he conferred by way of part performance or reliance in excess of the loss that
he caused the aggrieved party by his breach. [Restatement 374(1)]
If a deliberate breach of contract results in profit to the defaulting promisor and the available
damage remedy affords inadequate protect to the promisees contractual entitlement, the
promisee has a claim to restitution of the profit realized by the promises as a result of the
breach. Restitution by the rule of this section is an alternative to a remedy in damages.
A case in which damages afford inadequate protection to the promisees contractual
entitlement is ordinarily one in which damages will not permit the promisee to acquire a full
equivalent to the promised performance in a substitute transaction
Judicial remedies under the rules stated in this Restatement serve to protect one or more of
the following interests of a promisee: (a) his expectation interest, which is his interest in
being reimbursed for loss caused by reliance on the contract by being put in as good a
position as he wouldve been in had the contract been performed, (b) his reliance interest,
which is his interest in being reimbursed for loss caused by reliance on the contract by being
put in as good a position as he wouldve been in had the contract not been made, or (c) his
restitution interest, which is his interest in having restored to him any benefit that hes
conferred on the other party. [Restatement 344 Purposes of Remedies]
Security Stove & Mfg. Co. v. American Rys. Express Co. (1932)
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Plaintiff chartered defendant for transportation of a package, to arrive by a certain


date. Package did not arrive. Plaintiff sued for breach.
Court awarded damages. The carrier had notice of peculiar circumstances under
which the shipment was made (satisfies the Baxendale standard) and that delay in
delivery would result in unusual losses by the shipper. Under these circumstances, the
injured party may recover expenses incurred in relying upon the contract, although
such expenses would have been incurred had the contract not been breached.

Osteen v. Johnson (1970)

Contract between parties to promote plaintiffs record for $2500. Defendant put
another artist as co-author of a song. Defendant sent out 340 copies of the record.
Record was advertised. Second record was not mailed out. Plaintiff brought suit for
breach of contract.
Court ruled that the defendant had not performed the agreement. The defendant did
advertise the first record but failed to advertise the second.

United States v. Algernon Blair, Inc (1973)


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Algernon Blair entered into a contract with the United States to construct a naval
hospital. Algernon then contracted with Coastal Steel to perform steel erection and
supply equipment. Coastal began its performance, utilizing its own cranes for
handling and placing steel. Algernon refused to pay for crane rental. Coastal therefore
terminated its performance after completing approximately 28% of the subcontract.
Algernon completed the job with another subcontractor. Plaintiff brought suit for
expenses.
Court ruled for Coastal. While Coastal may not have been made profits had it
completed the contract, upon breach a promisee may forgo suit based on contract and
only request performance damages. Recovery in quantum meruit is an equitable
alternative to actual damages (which may end up as zero or a loss) to prevent
unjust enrichment for the breaching party.

Allows a promisee in a losing contract that has been breached by the promisor to recover
restitutionary damages in excess of the contract price. The reliance measure is only used
where expectation damages are too uncertain to recover or where damages should be limited
to less than the full expectation in the interest of justice.
A contract-price cap is not the same as an expectation-damages-measure cap. If the market
value of the plaintiffs partial performance prior to the defendants breach is less than the
contract price, then a contract-price cap does not limit damages, while an expectation cap
does, if the defendant could prove the plaintiff would have incurred a loss had the plaintiff
completed performance.
Kutzin v. Pirnie (1991)
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Pirnie contracted for the sale of Kutzins house for $365,000. The contract did not
provide for liquidated damages or forfeiture of the deposit. Pirnies agreed to pay
$1,000 at signing and $35,000 within seven days. Pirnies reneged on the offer. Kutzin
refused to refund deposit and sued for performance. Later sold house six months later
for $352,500. Pirnie entitled to refund of $18,675. The breach of contract led to
damages of $17,325. To allow Kutzin to keep entire deposit would lead to unjust
enrichment.

In theory, restitutionary and reliance damages are distinguishable: restitutionary damages are
based on the market value of the performance rendered by the plaintiff; reliance damages are

based on costs incurred by the plaintiff. Traditionally, restitutionary damages for breach have
been viewed as benefit-based. Under Restatement, Third, Restitution and Unjust Enrichment,
restitutionary damages are the measure of the market value of the plaintiff uncompensated
contractual performance.

SPECIFIC PERFORMANCE
Specific performance is a remedy in the form of a court order that the breaching party render
performance of the contract. Specific performance is not available if expectation damages
are adequate to put the aggrieved party in as good a position as he would have been had the
contract been fully performed. Expectation damages are deemed to be an inadequate remedy:
where the subject matter is unique or in goods contracts, "where goods are unique or in other
proper circumstances," e.g., where the goods are in short supply. [UCC 2-716]
Discretionary Factors
Is the defendant capable of performing?
Would performance create an undue hardship?
Is the required performance clear and definite?
Should the court have to supervise?
Would it involve involuntary servitude?
Are there public policy concerns?
London Bucket Co v. Stewart:
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Contract to furnish and install heating system. Bucket breached and Stewart filed suit
for performance and $8,250. Later amended to performance.
Court order monetary damages. The general rule is that building construction
contracts will not be specifically enforced because ordinary damages are an
adequate remedy, and in part because of the inability of the court to superintend
the performance. The court held that there is nothing to suggest that the service or
material that P was to supply was of any unique value that could not be remedied by
damages alone.

Walgreens Co. v. Sara Creek Property Co.:


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Plaintiff had a thirty-year lease with Defendant landlord that expired in 2001. The
lease contained an exclusivity clause to prevent Defendant from leasing any part of
the mall containing Plaintiffs store to another pharmacy. Defendant attempted to
contract with another pharmacy. Plaintiff sued for the breach of contract
Court granted specific performance of the injunction. The district court made a
reasonable determination that a damages remedy for the remainder of the lease would
be highly speculative and costly to determine, and if the costs to Plaintiff were
higher than Defendants costs as the result of the injunction, then the market would
naturally resolve the problem.
Liquidated Damages

At the time the contract is formed, the parties may agree to a fixed sum of money or a set
formula for setting damages in the event of a breach. Stipulated damages will be enforced if
they reflect an honest effort to anticipate the harm caused by a breach. Stipulated damages
will be deemed invalid if they represent an attempt to punish the breaching party, such as in
the case of unreasonably large damages.
Under common law, the reasonableness of stipulated damages must reflect: the anticipated or
actual harm caused by the breach; and the difficulties of proof of loss.
In sales contracts, stipulated damages must be reasonable in light of: the anticipated or actual
harm caused by the breach; the difficulties of proof of loss; and the inconvenience or
nonfeasibility of otherwise obtaining an adequate remedy. [UCC 2-718]
Wassermans Inc. v. Middletown :
-

Defendants leased property to plaintiff with a cancellation clause that required


defendant to pay plaint 25% of plaintiffs average annual gross receipts, based on a
three-year average if defendant cancelled the lease. The defendant did cancel the
lease 16 years later. The average annual gross was over a million dollars, but the
average net profit was only around $1,000.
Liquidated damages clause cant be enforced if it awards the non-breaching party
nearly $300,000 when the partys actual loss is only around $1,000.
To quality as a liquidated damages clause, the clause must constitute a
reasonable forecast of the provable injury resulting from breach.
This ends up being a punitive damages clause and contract law does not award
punitive damages. If a contract is breached, the party should be put in the same
position, not a windfall. Punitive damages in private contract would give private
people judicial power.
Restatement 356 Liquidated Damages and Penalties
o Damages for breach by either party may be liquidated in the agreement but
only at an amount that is reasonable in the light of the anticipated or actual
loss caused by the breach and the difficulties of proof of loss. A term fixing
unreasonably large liquidated damages is unenforceable on grounds of public
policy as a penalty.

Incidental Damages
Incidental damages are available under several UCC provisions, for both buyers and sellers.
Incidental damages suffered by a seller due to a buyer's breach include any commercially
reasonable charges, expenses or commissions incurred by:
the stoppage of delivery
the transportation, care and custody of goods after the buyer's breach
the return or resale of the goods
actions otherwise resulting from the buyer's breach. [UCC 2-710]
Incidental damages suffered by a buyer as a result of a seller's breach include expenses
reasonably incurred in:
inspection, receipt, transportation and care and custody of goods rightfully rejected
any commercially reasonably changes, expenses, or commissions in connection with
effecting cover

any other reasonable expense incident to the delay or other seller's breach. [UCC 2715(1)]

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