CONTRACTS

Fall 2016Nachbar
Introduction
What Promises Should the Law Enforce? The Doctrine of Consideration
1. Promises, Form, and Reliance ..................................................................................................................................................... 3
a. Simple Promises ......................................................................................................................................................... 4
b. The Element of Form .................................................................................................................................................. 4
c. The Element of Reliance............................................................................................................................................. 5
2. The Bargain Principle and Its Limits ........................................................................................................................................... 8
a. Illusory Promise Rule 77 .......................................................................................................................................... 8
b. Implied Promises ..................................................................................................................................................... 10
c. Legal Duty Rule 73 ................................................................................................................................................. 10
3. Past Consideration ..................................................................................................................................................................... 12
Damages
4. An Introduction to Contract Damages ....................................................................................................................................... 13
5. The Expectation Measure .......................................................................................................................................................... 14
a. Breach by the Person Who Has Contracted to Perform Services .............................................................................. 14
b. Breach by the Person Who Has Contracted to Have Services Performed ................................................................. 16
c. Damages for Breach of a Contract for the Sale of Goods (UCC) .............................................................................. 17
i. Breach by the Seller ................................................................................................................................. 17
ii. Breach by the Buyer ................................................................................................................................. 18
6. Limitation on Expectations ........................................................................................................................................................ 20
a. Mitigation ................................................................................................................................................................. 20
b. Foreseeability............................................................................................................................................................ 21
c. Damages for Mental Distress .................................................................................................................................... 24
d. Certainty and Undue Speculation.............................................................................................................................. 25
e. Lost Volume Sellers.................................................................................................................................................. 26
7. Other Legal Remedies ............................................................................................................................................................... 27
a. Reliance Damages .................................................................................................................................................... 27
b. Restitution................................................................................................................................................................. 30
c. Liquidated Damages ................................................................................................................................................. 32
8. Equitable Remedies ................................................................................................................................................................... 36
a. Specific Performance ................................................................................................................................................ 36
i. Specific Performance Through Negative Enforcement..................................................................................... 39
Assent
9. Mutual Assent: The Meeting of the Minds ................................................................................................................................ 43
a. A Subjective or an Objective Theory of Assent? ...................................................................................................... 43
10. Offer and Revocation ................................................................................................................................................................ 47
a. What Constitutes an Offer ........................................................................................................................................ 47
b. Ending Offerees Power to Accept: Lapse, Rejection, Counteroffer ......................................................................... 47
c. Termination of the Offerees Power of Acceptance: Revocation .............................................................................. 48
11. Acceptances............................................................................................................................................................................... 52
a. The Mirror-Image Rule ............................................................................................................................................. 52
b. The Battle of the Forms; UCC 2-207 ........................................................................................................................ 52
c. The Mailbox Rule ..................................................................................................................................................... 54
d. Acceptance by Silence or Conduct (Implied Contracts)............................................................................................ 55
12. Parol Evidence and Interpretation of Written Contracts ............................................................................................................ 57
a. The Parol Evidence Rule .......................................................................................................................................... 57
b. The Interpretation of Written Contracts .................................................................................................................... 60
Problems in Formation
13. Asymmetric Bargaining............................................................................................................................................................. 62
a. Standardized Forms .................................................................................................................................................. 62
b. Shrink-wrap .............................................................................................................................................................. 63
c. Arbitration ................................................................................................................................................................ 64
d. Unconscionability ..................................................................................................................................................... 64
14. Employment: Handbooks and the At-Will Default .................................................................................................................... 67
15. Modification .............................................................................................................................................................................. 69
a. Duress ....................................................................................................................................................................... 69
b. Mechanics of Modification; Waiver ......................................................................................................................... 70
16. Impossibility .............................................................................................................................................................................. 72
17. Mistake ...................................................................................................................................................................................... 74
a. Mutual Mistakes ....................................................................................................................................................... 74
b. Unilateral Mistakes ................................................................................................................................................... 75
c. The Effect of Unexpected Circumstances ................................................................................................................. 76
Problems of Performance
18. The Obligation to Perform in Good Faith .................................................................................................................................. 77
a. Output Contracts ....................................................................................................................................................... 77
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INTRODUCTION
Four Basic Areas of Contract Law
Consideration
Damages
Assent
Problems in Formation and Performance

Effective Legal Argument

Understand that any issue can be argued from both sides
Elements of an argument:
1 The law is on my side
2 And its a good thing, too (arguments of justification)
a. Important as both sides will show how the law is on their side, but
arguments of justification show why its sensible to hold in your favor

Three Types of Arguments of Justification

1. Fairness
a. Appeal to cultural mores, equitable principles, etc.
2. Consequentialist
a. Effect that one rule or another will have on society
3. Role of the courts
a. Is this the type of issue on which the courts should rule?
i. What impact will ruling one way or another have on the courts role in
society, and is that effect appropriate?

I. What Promises Should the Law Enforce? The

Doctrine of Consideration (RS 71-90)
Three alternative answers for why the law should enforce certain agreements

Considerationthe law should enforce bargains but not otherwise

o What we mean by consideration is bargain
o As long as its a bargain, its considerationdoesnt matter if theres not
equivalency in value
o By definition, a gift is not a bargain
o Justice is NOT relevant

Formif an agreement is in the form its enforceable, otherwise not

o If theres a seal, promise is enforceable, otherwise not; no longer applies today
o Justice is NOT relevant

Relianceif one party has relied on the promise in some reasonable way its
enforceable, otherwise not
o No bargain or particular form is required
o Justice IS relevant
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1. Promises, Form, and Reliance

Requirement of a bargain
Formation of a contract requires a bargain in which there is:
o A manifestation of mutual assent to the exchange, and
o A consideration

The concept of consideration: Requirement of exchange; Types of exchange (RS 71)

To constitute consideration, a performance or return promise must be bargained for, that
is, sought by the promisor in exchange for his promise and given by the promisee in
exchange for that promise (bargain theory of consideration)
o Consideration induces the making of the promise, and promise induces the
furnishing of the consideration
The performance may consist of:
o An act other than a promise (performance)
o A forbearance
o The creation, modification, or destruction of a legal relation
Typically, to qualify as consideration, the performance or promise must constitute some
legal detriment to the promisee; otherwise, it will be simply nominal or illusory
Classic contract law: basic fault line in consideration ran at the boundary between bargain
promises and gratuitous promises, since gratuitous promises were per se unenforceable

Adequacy of consideration; mutuality of obligation

If the requirement of consideration is met (i.e. bargained for), theres no requirement of:
o A gain or benefit to the promisor or loss or disadvantage to the promisee,
o Equivalency in values exchanged (though gross differences in value may indicate
the consideration was not in fact bargained-for, but was instead a sham)
o Mutuality of obligation

Mutuality of obligation: suggests there should be some degree of balance in obligations; to have
consideration, it was said, both parties must be bound or neither will be.
Some exceptions include contracts made by minors or the mentally incompetent; both
categories of which can avoid liability on their promises; voidable
Issue: whether the general principles of consideration are such that one in concerned less
with preserving the plainness of legal doctrine than with examining the purposes that
doctrine must serve
The fact that a rule of law renders a promise voidable or unenforceable (no signature
from one party) does not prevent it from being consideration; even if a promise is found
barred by Statute of Frauds, that promise can still be used as evidence of consideration

Consideration as a Motive OR Inducing Cause ( 81)

(1) The fact that what is bargained for does not of itself induce the making of a promise does
not prevent it from being consideration for the promise.
(2) The fact that a promise does not of itself induce a performance or return promise does not
prevent the performance or return promise from being consideration for the promise.
Comment:
a. "Bargained for." Promisor must manifest an intention to induce performance or return promise
and be induced by it, and promisee must manifest an intention to induce the making of the
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promise and be induced by it. In most bargains, consideration is the object of promisor's desire
and that desire is a material motive or cause inducing the making of the promise; reciprocal
desire of promisee for making of the promise similarly induces the furnishing of consideration.

1.1 Simple Promises

A simple promise is one made for affective reasons (love, friendship), that is:
o Not cast in a form to which contract law gives significance, and
o Has not been demonstrably relied upon
Simple promises are generally unenforceable, except in certain situations (reliance,
executory, etc.)
Executor (pending) gift contracts are unenforceable; executed gift contracts (enforceable)

Dougherty v. Salt, N.Y. Ct. of Appls., 1919

Aunt gave boy $3k promissory note. Aunt died; estate refused to pay, boy sued
Court held that the note was purely voluntary and thus an unenforceable promise of an
executory gift. The boy was not a creditor, nor was the aunt paying a debt. Rather, she
was conferring a bounty; no consideration on the part of the boy
Gift promises are generally unenforceable if they lack consideration

Argument: Gift Promises Should Not Be Enforceable

Fairness: reach of promise doesnt damage promisee, who promises nothing back; made
at emotionally charged moments, doesnt reflect true will of promisor; situations change
Consequentialist: who wants a world where every promise made is enforced? Promisor
needs ability to change mind. People will be reluctant to make promises (less gifting)
Role of Courts: overload court if forced to enforce every promise made; also, evidentiary
problems of proving whether such a promise was made at all

Argument: Gift Promises Should Be Enforceable

Fairness: unfair to promisor who cannot make legally binding promise; goes against free
will. Its aunt Tillies wish to give Charlie the money. Charlie was counting on it
Consequentialist: people should be able to rely on promises, regardless of consideration,
etc.; would cut down on empty promises, etc.
Role of Courts: courts shouldnt determine that a promisor did not get something
(recognition, etc.) in return for a promise. (Aunt didnt know the proper form to use;
requiring people have access to this legal knowledge increases the complexity of
otherwise normal issues, and requires a larger role for lawyers)

1.2 The Element of Form

A promise can be enforceable if in proper form (will, trust, seal)
Reasons for relying on form to determine enforceability:
o Evidentiary (correct form provides proof that a promise was made);
o Cautionary: (complying cautions people that promise is legally enforceable);
o Channeling (helps court determine what promises should be enforced);
o Deterrence (helps prevent rash contracts/inadequate consideration)
Nominal consideration is usually not binding (i.e. form over substance of a bargain)
o However, courts dont usually look into the adequacy of consideration
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o A transaction has nominal consideration when the promisor doesnt view what he
receives as the price of the bargain.
RST requires bargain in fact rather than in form in order to be enforceable

Fischer v. Union Trust Co.

Fischers dad gave her the deed to his home, which included two mortgages. Fischer
gave father $1. Bank foreclosed on the home after the father died; sued estate
Held. Consideration was insufficient to compel performance (i.e. executory contract)
Daughters love for father was past consideration, and deemed irrelevant
If the $1 been almost anything non-monetary, it likely would have been consideration
Gifting the home was legal; there was intent and delivery. But, future mortgage
payments were never delivered, so payments on the mortgage constitute are executory
Under the terms of a gift, father can only give what he had, he could not 'give' part
of house that bank owned.
There must be something flowing in the other direction in exchange for the promise
and it has to be at least part of the reason the party makes the promise

Argument: Nominal Consideration Should Not Be Enforceable (Substance over Form):

Bargain must be a bargain in fact rather than just in form justice, etc.
Must be patently inadequate to be nominal does not effect the vast majority of contracts

Argument Nominal Consideration Should Be Enforceable (Form over Substance):

Would make consideration doctrine easier to apply
Nominal consideration is an effective replacement for the abandoned device of the seal
Not the role of the courts to determine the adequacy of consideration

1.3 The Element of Reliance

The reliance principle (Promissory Estoppel) (RS 90)
A promise the promisor should reasonably expect to induce action or forbearance (reliance) on
the part of the promisee and which does induce some action or forbearance is binding
(enforceable) if injustice can be avoided only by enforcement of such promise
Promise binding if promisee relied on promise, and promisor can reasonably expect
promisee to rely; reasonableness of reliance is important
o 1. Requires there be a detriment; injustice.
o 2. Protects reasonable reliance
Promisees reliance is treated either as consideration or as a substitute for consideration
Relief, however, may be limited to the extent of reliance, rather than terms of promise

Kirksey v. Kirksey, AL Sup.Ct., 1845

says to , If you come down and see me Ill give you some of my land. abandons
her land and travels 60 miles to live with . After two years brother-in-law tells to leave
Holding: No consideration and therefore no enforcement. The loss and inconvenience
sustained in moving to s property was insufficient consideration to support a promise to
furnish with house to raise her family.
Dissent: 60-mile trip was consideration.
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o Is driving 60 miles adequate consideration?
o There is reliance in this case, but is there reasonable reliance?
Today, RS 90 may hold for because she relied on brother-in-laws promise
Tramp case: man tells tramp if she goes to a store on the corner, she can buy coat on his
account. Is walking consideration for the coat, or does it just make performance possible?
o Same issue facing Kirksey; promise or bargained for exchange?
o Ambiguity in s statement leads to the ambiguity of what was really promised.
Kirksey could have come out either way.
A big problem in these types of cases is understanding what is driving the indeterminacy:
o Lack of consideration or a general misunderstanding of what the terms are?

Feinberg v. Pfeiffer Co., MO Ct. of Appeals, 1959

promised a pension after she retired; retired. stopped paying after 7 years
Holding: relied on s pension promise in choosing to retire when she did, so promise
was enforceable justice requires to continue paying s pension
o Promise not enforceable if one looks to bargain theory, as theres no consideration
Problem: would this allow employers to repudiate pension promises not relied on?

Hayes v. Plantation Steel Co., Fed. District Ct. of RI, 1982 (p.34)
announced retirement from . A week before retires, promises to take care of
After retired made several years of payments to , but then stopped
Holding: announced his retirement before promised to pay pension benefits, so s
pension promise did not induce to quit his job. did not rely on promise before retiring

Seavey v. Drake (Hamer not established at this time)

gave tract of land in parol agreement; occupied and built upon land. Contracts for
sale of land, or that wont be complete in under a year, must be in writing. The Statute of
Frauds prevented it from being executed after s death, sued for specific performance.
Law. Equity protects a gift of land equally with a parol agreement to sell it, if the promise
is accompanied by possession, and made valuable improvements, induced by the
promise. made a promise and is denied (estopped) from not enforcing that promise
Reliance as a substitute for consideration; inducement is not the same as reliance.
Seavey uses reliance in equity to require specific performance of a land contract to cure a
Stature of Frauds problem. The court doesnt think about the consequences of enlisting
reliance as a justification for enforcing such a promise. Does expanding the ways of
establishing a legally enforceable promise (besides consideration), create a better result?

Ricketts v. Scothorn (Hamer not established at this time)

quit working after her grandfather promised to pay her $2k/year.
Law. Promissory estoppel bars a party from asserting lack of consideration where
reliance was induced by the party asserting there was no requisite consideration.
Held. No bargain (no consideration); grandfather wasnt asking for anything in return;
but relied on the promise of money (she quit her job) so estopped from denying.
Grandfather said, you dont have to work anymore, NOT you cant work anymore.
This may show no consideration because of the way the grandfather phrased statement to
granddaughter. Also, the fact that she went back to work and grandfather didnt protest
looks like he didnt bargain for her not to work.
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There was evidence that the grandfather told that none of his grandchildren worked,
and so she shouldnt have to either. Does this change how you feel about the case? Does
the fact that the deal was between family members change what we think of the promise?

Allegheny College v. National Chautauqua Count Bank (Hamer not established at this time)
promised to give $5k to college when she died; pays $k a year later on account, and
reneges on her promise during her life. 30 days after her death, the college sues for $4k.
Held. Agreement to name fund after is sufficient consideration; the taking of $1k was
tied to getting the other $4k (unusual). When accepted $1k there was an assumption of
a duty to maintain memorial in s name. Duty to perpetuate name of founder in
memorial acts as consideration resulting in bilateral contract, implied in fact by s
conduct. No grounds for promissory estoppel; this is a consideration case. Court needs an
obligation that is given to supports the promise, and cant find that obligation at the time
the promise is made, so instead, the court finds it later on, when the promisor paid 1k.
Reliance is providing evidence of an underlying promise; this is why expectation
damages are awarded in promissory estoppel. The fact that the court gives expectation
damages in a promissory estoppel case shows the work the court is doing to enforce. So,
if the court does not want to give out expectation damages, then think about reliance.
Dissent. No offer existed because it was a gift. But, if we strain to view the transaction as
an offer, it is an offer for a unilateral, not bilateral contract. However, acts havent been
performed; no acceptance in her lifetime and so an offer that is revocable dies with maker
Old rule: intentional inducement of reliance.
New rule: RST 90: reasonable to rely or forebear, and which does induce actual
forbearance; binding if injustice can only be avoided by enforcement
Charitable subscriptions are binding without proof that the promise induced action or
forbearance; gift subscriptions are basically enforceable, absent reliance

Siegel v. Spear & Co (Hamer not established at this time)

D agrees to store and insure furniture for P. D did not insure; furniture destroyed in a fire
Rule: A party is not obligated to perform a gratuitous promise unless performance has
begun. Once started, performing party held to full execution of all that has been promised
Held. giving D the furniture was consideration for the agreement to insure; P relied on
Ds promise that he would insure; otherwise, P might have purchased his own insurance
can repudiate when it's still possible for to still act (i.e., obtain insurance on his own)
Spears was engaged in a gratuitous promise (i.e. a promise made without consideration),
but contract still enforceable under promissory estoppel once P brought D his furniture.

Argument for Reliance:

Fairness prevents injustice a person shouldnt be injured for justifiably relying on
anothers promise, which was then broken
Consequentialist it will make people think twice about making / breaching promises

Argument against Reliance:

Hard to tell what injured party would have done if hadnt been promise hard to quantify
Promisees duty to ensure promise enforceable (bargain theory, etc.) before relying on it
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2. The Bargain Principle and its Limits

The Bargain Principle
Courts generally do not inquire into the adequacy of consideration
o To do otherwise would violate free market principle that value is in fact
determined by what one is willing to pay for it
o Whats important is that the parties got what they bargained for

Hamer v. Sidway, NY Ct. of Appeals, 1891

promised $5k if refrains from drinking, smoking, etc. When nephew turned 21,
wrote letter promising to pay $5k at later date. s estate: a gift promise unenforceable
Rule: Waiver of legal right by request is sufficient consideration for a promise. For
something to be consideration, it is enough that that thing induced the promisor to make
the promise (i.e., a bargains a bargain)
Under the bargain test for consideration, s forbearance was arguably both a benefit to
and a detriment to . benefited by having his nephew refrain from certain conduct and
suffered a detriment by denying himself pleasures to which he had a legal right.
Case shows that bargained-for exchanges can be used to identify an enforceable promise
Davies v. Martel Laboratory Service, 1989
worked for as an at-will employee. promised to give a better, permanent job and
increase s salary if could get an MBA. One year later, fired without cause
Consideration a party offers can be beneficial and still count as consideration so long it
involves doing/not doing something the party otherwise has a legal right to do/not do.

Conditional Promises
Scott v. Moragues Lumber Co., AL Sup. Ct., 1918
promised if he bought a boat, he would rent to . bought boat; didnt charter to
Holding: Once bought the boat (which he was not bound to do), he had to charter it to
o Not an illusory promise as gave up his ability to charter boat to someone else
Acceptance on part of one party of a conditional promise by another converts promise
into a binding contract; other party must perform obligation when condition is met

2.1 Illusory Promise Rule (RS 77)

A real promise in exchange for an illusory promise is not an enforceable bargain because it lacks
consideration (even if its bargained-for)
To be valid, a promise must constrict the scope of potential choice it must foreclose the
actors future possibilities in order to be a promise at all.
If a promisor makes a commitment that does not shrink boundaries of choice (RS 77) or
if alternate performances are not sufficient as consideration, person has made an illusory
promise and theres no mutuality
Illusory promise test: must limit others future actions
If courts want to enforce a contract, they will find the consideration; if not, they will find
an illusory promise. Reasons why illusory promises are unenforceable include not
wanting people to make unfair deals, or take advantage of others weak bargaining power
Bilateral vs. Unilateral contracts
Bilateral contract: exchange of a promise for a promise
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Unilateral contract: exchange of a promise for an act (outside the principle of mutuality)
o Any bargained-for act or forbearance will constitute adequate consideration for a
unilateral contract
The only limit on the use of unilateral contract theory is the courts willingness to find the
alleged implied promise
Davis v. Jacoby
D promised that if P took care of he and his wife, P would inherit Ds estate; P wired D
that they would come. D committed suicide before they arrived. D left everything to his
nephews. P continued to care for his wife until her death; P sued for specific performance
Issue: Was the offer validly accepted such that a contract was formed? Was it an offer for
a unilateral contract (promise for performance) or for a bilateral contract?
Because offer to contract was ambiguous as to whether it was an offer to enter a bilateral
or unilateral contract, a presumption existed that it was bilateral; s letter was the
acceptance that formed a valid contact; consideration was moving to CA. It would make
no sense to treat it as a unilateral promise; even if man dies, P still must care for Ds wife
o But, D didnt make an offer to contract if P drove to CA; D contracted for care
Might argue that D was not in position to make an offer as he might be under undue
influence or incompetent (near end of his life, committed suicide)
You could argue this was a promissory estoppel case because there was reliance
If you look at this as being a bilateral contract, you have the same problem as Allied.
Omni Group, Inc. v. Seattle-First Natl Bank (1982)
If architect report was satisfactory, D would give P his acceptance within 15 days,
otherwise, if no notice is given, the transaction was null and void. P decided to forgo the
study and D refused the sale, arguing the waiver of a satisfactory report made promise
illusory. P argues the clause only created a condition subsequent that P could waive.
Held. A party cannot create an unenforceable contract by waiving the condition which
renders his promise illusory. A promise given for a promise is sufficient consideration
and does not necessarily render the contract illusory or affect its validity.
Court maintains the stance that mutuality of obligation is necessary to enforce a contract.
If one party is free to perform/withdraw from agreement at own unrestricted desire, then
contract is illusory. Here, waiver of report not deemed an unrestricted way out for P
In order for the promise to NOT be illusory, there must be some kind of restraint on them
Cardozo wants to move away from consideration; he wants to look at deal as a whole.
Against Cardozo: we dont want judges to do whatever they want. You cant identify
restraints on Cardozo in Woods the same was as you can in Omni.
Because Omnis promise to buy was contingent on both (1) obtaining and (2) approving
the engineers and architects reports, D thought P waiving the report, it made the
contract illusory because one of the conditions could not be satisfied. But, Omni needed
to show that it was both contingencies together that provided some degree of constraint,
or else they were illusory and not consideration. The court found consideration for
sellers promise to sell was really Omnis promise to buy?
Condition put there for s benefit, so shouldnt be free to waive it?
Miami Coca-Cola Bottling v. Orange Crush Co.
contracted to allow to manufacture soda indefinitely, but terms allowed to cancel at
any time and for any reason
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Holding: Contract unenforceable for lack of mutuality, since the could back out at any
time (i.e., was not bound in any way)
To be enforceable, a promise must limit the promisors freedom of choice in the future;
performance of a promise cannot be optional
Note* often parties make illusory promises because they are so eager to obtain possible
work, etc. that they gladly trade an absolute promise for an optional one

Lindner v. Mid-Continent Petroleum Corp., p. 97, Arkansas, 1952

Lease with Mid-Continent allowed Mid-Continent to cancel at will with ten days notice
Holding: Contract enforceable; 10 day notice at least bound Mid-Continent to something
Mutuality does not mean that obligations of both parties must be exactly coextensive

2.2 Implied Promises

Wood v. Lucy, Lady Duff-Gordon, NY Ct. of Appeals, 1917
hired to place s designs and endorsements, in return for half the profits. Lucy
wanted out of contract, claimed Wood did not bind himself to actually sell s goods
Issue. Whether the contract lacks mutuality because it does not expressly bind or require
to actually place endorsements or market s designs.
Held. Wood made an implied promise to use reasonable efforts to sell Woods products,
and this implied promise (good faith effort) constitutes consideration
Holding allows for great deal of judicial interpretation of contracts; substance over form
Cardozo looks to exclusive privilege given to as an assumption of the duty to place and
market designs. Without s implied efforts to assume those duties, neither party could
make money; mutuality with respect to promises made to each other can be implied
Cardozo: very specific idea about what agency looks like; it wouldnt make sense for to
enter into contract unless an obligation on is implied (only makes sense to look at
agreement as though they thought it was binding)
Nachbar: its conceivable that what the agent would take on isnt the obligation to go out
and find work, but the obligation to deal with work when it comes in; agency can be all
different things, depending on the business

2.3 Legal-Duty Rule 73

Performance of a legal duty owed to a promisor which is neither doubtful nor the subject of
honest dispute is not consideration; however, 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
Legal-duty rule: Performance of a legal duty is not consideration. If theres a legal duty
to do something, and you want to modify it, you must provide new consideration
o Like illusory promise, legal-duty rule is an exception to idea that bargain = contract
o This rules acts as a CL rule restricting modification without additional consideration
Rule assumes parties specify all legal duties and terms at the beginning of the contract,
which is almost impossible, and it practically ignores the fact that modifications are
extremely prevalent in contracts; legal enforceability becomes confusing for both parties
o More difficult to determine whether the consideration was bargained-for.
o Unlike the legal duty rule, 2-209 says no additional consideration is necessary to
modify an existing contract. 2-209 essentially reverses the C/L rule; it doesnt
address problems with the modification rule. Instead, it just eliminates the rule
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Levine v. Blumenthal
D leased building for two years, $2,100/ first year and $2,400/ second year. After first
year, D orally told P he can only pay $175; owner accepts and then sues to recover
Law. A preexisting duty cant count as consideration for purposes of contract formation.
Court found that there was no consideration for the oral agreement, which was a new
contract essentially, and therefore it was not enforceable. Court adopts legal duty rule.
UCC, however, is willing to allow contract modifications without consideration when
theres no net gain for the party that has the renegotiation
A creditors mere fear that the debtor will fall into bankruptcy is not sufficient
consideration. Any consideration to perform new undertaking is satisfactory
consideration. The fact the agreement has been executed by the payment and acceptance
of the reduced rent, does not mean the substituted performance stands.
Proving both parties rescinded and that a new contract was formed is a powerful tool that
courts dont have a good rule for currently. Difficult to apply price modification waiver

Denny v. Reppert, KY Ct. of Appeals, 1968 (p.110) squib

Bank offered $1500 for arrest and conviction of bank robbers. Several people tried to
claim rewardbank employees, state policeman, etc. Holding: Reward given to sheriff of
neighboring county; only one without a legal duty to apprehend the robbers

Example: Ships sailing around the world; two sailors jump ship. Captain promises to split
abandoning sailors wages among the rest of the sailors if theyll do the work the abandoning
sailors were supposed to do. Enforceable?
o Yes: Each sailor has specific duties; in covering they take on new ones
o No: Sailors duty is to bring ship home safely; doing extra work is part of duty

Arguments for not enforcing legal-duty promises

Vulnerability of promisor to threats (hold-up job)
Potential for unequal protection under the law (monetary tips for police officers)
No additional consideration because already obligated to do what is being offered

General Notes
Consideration is a rule usually determined ex ante (based on forecasts, not actual results),
which reduces costs, but also makes the determination inaccurate. Promissory estoppel is
more of a standard; features a lot more power to the judge/jury to decide ex post (based
on actual results, not forecasts) and reduces the decision costs.
Promisor and Promisee: and can be both the promisor and promisee in a contract.
3 different ways to view the same transaction:
1. There is a promise for which there was consideration: contract
2. Someone acted in reliance on something said: promissory estoppel
3. Party benefitted by something another did, should pay quantum meruit
Consideration results in a lot of cases where promises that should not be legally
enforceable are legally enforceable, and vice versa
o Problem: if you think contract law is about giving legal meaning to peoples
promises, then assent is the fundamental part of contract law.
Gratuitous promise: a promise that is made without consideration and is usually
unenforceable. A gratuitous promise may be enforceable under promissory estoppel.
 12

3. Past Consideration (Benefits Previously Received)

Promise for Benefit Received (RS 86)
A promise made in recognition of a benefit previously received by the promisor is binding to the
extent necessary to prevent injustice
The promise is not binding, though, if promisee conferred benefit as a gift, if promisor
has not been unjustly enriched, or to extent that its value is disproportionate of the benefit
o Promise to pay for emergency services rendered also not binding
Situations in which promises to pay for past benefits are enforceable:
o Promise to pay discharged debt
o Promise to pay despite the fact that the statute of limitations has passed
o Promise to pay a debt incurred while a minor
These three promises were deemed enforceable under two principles:
o Moral obligation serves as consideration
o New promise deprives promisor of the legal defense and actualizes the right
Mills v. Wyman, MA Sup. Judicial Ct., 1825
s son became ill. took the son in and cared for him at great personal expense until son
died. promised to pay expenses incurred while s son was recovering, but reneged
Holding: Although had a moral obligation to repay , this alone is insufficient
consideration to hold the promise enforceable. Under RS 86, result maybe different
Rule. A moral obligation alone is insufficient consideration to enforce a promise
Moral obligation is sufficient consideration for an express promise only in cases where a
good or valuable consideration existed in the past. Must be some pre-existing legal
obligation to make the promise enforceable
Is there a question of tacit agreement, where kid would have promised to pay if asked?
o Even if the kid remained alive and got better, and then as he was leaving the
premises promised to pay, the promise would still not be enforceable.
o Tacit agreement: what is agreed to implicitly at time of formation
Doesnt really work today; law is more hung up on disclosures than intent
Webb v. McGowin, AL Ct. of Appeals, 1935
fell with a pine to prevent it from injuring ; severely injured. promised to support
for the rest of s life. died 9 years later & s executors stopped payment; sues
Held: Promise enforceable; received a material benefit from s saving his life
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 (modern position, like RS 86 )
Generally, past consideration could not be consideration. Here the court makes an
exception to the general rule for a type of moral obligation. However, the moral
obligation does not fit into the requirement of bargained-for exchange.
As opposed to Mills, there was intent to pay in Webb; suggests that Webb would also
have intended to pay at time of his accident. essentially conferred benefit to himself.
Why does Webb win and Mills lose? Nachbar says cases are in considerable tension
o Benefit conferred in Mills is not conferred on promisor but on promisors son?
Easier to detect contours of transaction because the benefit goes to defendant
o Maybe court is drawing a distinction- child has separate legal identity. Easier to
detect contours of transaction because the benefit goes to D; Straightforward rule
Mills + Webb represent extremes on both sided regarding how consideration works
 13

II. Damages
4. An Introduction to Contract Damages
Purposes of Remedies Judicial remedies under the rules stated in this Restatement serve to
protect one or more of the following interests of a promisee:
Expectation interest: Interest in having the benefit of his bargain by being put in as good
a position as he would have been in had the contract been performed, Cost + [Profit]
o Damages not based on injured partys hopes at formation, but rather on actual
value contract would have had to him had it been performed
o Expectation interest is therefore based on the circumstances at the time of
performance and not those at the time of the making of the contract
o Remedy used to effectuate the deal; usually most compensatory of 3 types
o Expectation damages create efficient incentives for performance, since it forces
potential breaching party to take other parties interests into account when
deciding whether to breach. Protecting expectation interest is good for society.
Reliance interest: Interest in being reimbursed for loss caused by reliance on contract by
being put in as good a position as if contract had not been made Cost + [No Profit]
Restitution interest: Interest in having restored any benefit conferred on the other party
o The prevention of unjust enrichment
Example: goes to an antique store at closing time on a Friday and agrees to pay $100 for a
mirror, which he will come back to pick up (and pay for) on Monday
Situation 1: calls Monday morning and says he doesnt want it anymore
Expectation damages: Uncompensated expectation of profit even though no real injury
Situation 2: crates mirror for shipment over weekend, calls Monday to cancel the deal
Reliance damages: Expenses and time spent to crate mirror in reliance on contract
Situation 3: takes mirror with him and promises to pay on Monday. Uses the mirror at
fancy dinner party and then returns it on Monday claiming he doesnt want to purchase it
Restitution damages: benefited without payment, should be compensated
Why expectation damages are preferred over reliance damages
o Easier to measure contract price than forgone speculative/opportunity price
o Incentive to breach only exists if good for both parties; includes cost to each other
Hawkins v. McGee, NH Sup. Ct., 1929
Doctor promised perfect hand, short recovery; resulted in disfigured hand, long recovery
Pain necessarily incident in surgery was part of contribution which was willing to make
in his joint undertaking with to produce a good hand. It was a legal detriment suffered
by him for contract. It represented a price which was willing to pay for a good hand.
Held. Difference between value of hairy hand and what was promised (perfect hand)
Can make the damage awards large or small. Main Point is that varying outcomes can
result from each of the measures; not a single formula
Expectation: Big: Loses gainful employment for life (hand model?), misery, pain (BUT,
how do you separate out pain and suffering from operation and pain and suffering that
resulted from botching of operation?) Small: Hand was already abnormal and can
shave/wax hand or wear a glove (A little hair on his hand? Big deal!)
Reliance: Big: Valued old hand more, and pain is relevant. Nothing can be done for
victim now, so to put him in position he would have been in had the contract never been
made would take a lot of money. Small: Out of pocket expenses and pain
Restitution: Big: Doctor got valuable experience and fee. Small: Disgorge the fee
 14

5. The Expectation Measure

5.1 Breach by the Person Who Contracted to Perform Services
Determining Damages: Cost of completion vs. Diminution of Value
Damages measured either by (1) diminution in value or (2) reasonable cost of completion
Cost of completion generally favored unless:
o (1) Cost is disproportionate to benefit, and
o (2) Breached contract provision is incidental
Good faith is not taken into account since intention is not to punish for breach
Why choose diminution of value over cost of completion?
o Maybe youre worried s going to go to Vegas rather than using the money to
get/do what they were originally promised (i.e., windfall)
Groves v. John Wunder
entered into contract with to remove sand/gravel from s premises & leave property
at uniform grade. paid $105k but willfully failed to leave property at uniform grade.
Cost of bringing land into compliance with contract would be $60k. However, if had
fully performed by leaving land at uniform grade, it would only be worth $12,160.
Holding: is liable to for cost of leaving the property at uniform grade.
Dissent: Willfulness of breach should not affect damages. Calculation of damages should
be diminished value of property after breach. Awarding 60k for specific performance
put , whose property is valued at 12k, in a far better position than originally
2 things may have happened, which could explain why did not leave property at
uniform grade: (1) Cost of grading land was more than originally thought or (2)
depression drove down real estate value, and paid less as a result.
In theory, should have priced cost of leaving land at uniform grade into contract price.
Nachbar seems to disagree with Groves; he thinks it misapplies expectation damages.
With expectation damages, we should not be concerned about cost to complete or what
was paid, we should be concerned about the value of what was expected (flat land). If
value of what was expected was about more than purely economic value of flat land, then
expectation damages is different. We still wouldnt care about the $60k, however;
expectation value would simply be different from $12k

Peevyhouse v. Garland Coal & Mining Co., OK SC, 1962

agreed to remedial measures when done mining in backyard. However, refused; cost
of repair ($29K) would only increase property value by $300; value of property was $5K
Holding: Court said normally cost of completion would be standard of damages, however
appropriate damages in this case were instead diminution of value of land b/c:
o Contract provision was incidental to the main purpose of the contract
o Cost to perform grossly disproportionate to benefit conferred economic waster
Court sides with contractors; relative economic benefit was proper. Owners dont care
about value and want to be put in position with a nice backyard (i.e., physical position)
could have contracted more effectively to ensure remedial work wasnt considered
incidental relative to primary objective (economic recovery of coal from land)
Arguments in favor of courts holding: Consequentialist: No coal mining companies
would mine land if theyre going to have $29k to fix $300 in damages
 15
Arguments against courts holding: Consequentialist: No ones going to let coal
companies mine their land if mining companies can just get out of a remedial provision
o admitted that insisted on inclusion of remedial provision in order to contract
Court made a distinction between Groves; they did not think building and construction
contract analogy used in Groves was strictly applicable here; primary purpose of lease
was not construction nor grading, but merely economic recovery and marketing of coal
Dissent. Cost of promised performance should have been awarded, as in Groves; majority
essentially took benefit contract bestowed upon , and transferred it to
Nachbar: engage in qualitative analysis to decide which measure of expectation damages
is appropriate. Were parties hoping for an economic or physical position? Is expectation
to live on land enough to entitle to cost to complete? Maybe, especially after Landis
We have a hindsight bias; we see what parties did with the money. With Groves, we
assume from the fact that they never graded land that they were more concerned about
economic benefits of flat land rather than having flat land. Judges dont have this luxury,
so lawyers must make arguments to try and define parties expectations at formation

Louise Caroline Nursing Home, Inc., v. Dix Construction Co., MA Sup. Jud. Ct., 1972
Builder breached contract to build nursing home, sued for expectation damages.
claimed expectations damages should be measured by the fair market value of the
completed building rather than the cost of completing the building
Holding: Court denied this because obtaining another builder to complete the building
would not cost nursing home any more than the original contract price
o To give the full market value would be to put them in a better position than had
the contract been performed. is entitled to be made whole and no more.
Here, market value is more than cost of completion (opposite of Peevyhouse)

Jacobs & Young v. Kent

Contractor agreed to install specific pipe but installed different brand of similar quality
Held: Breach was incidental; cost disproportionate to benefit, so correct measure is
diminution of value, not cost to cost of completion with correct piping

Damages for Breach in Construction Cases

RS 348 (Alternatives to loss in value of performance)
(1) If a breach delays use of property and loss in value to injured party is not proved with
reasonable certainty, he may recover based on rental value or interest value of property
(2) If a breach results in defective or unfinished construction and loss in value to injured
party is not proved with sufficient certainty, injured party may recover damages based on:
o The diminution of the market price caused by the breach, or
o The reasonable cost of performance or of remedying defects if that cost is not
clearly disproportionate to the probable loss of value to him
Landis v. William Fannin
hired to build custom home. agreed to construct home in accordance with plans
attached to contract. complained a particular stain was not properly blended; numerous
attempts to solve problem over 2 years failed and sued.
Issue: Damages based on cost to replace mismatched siding or diminution of value, 8.5k?
Baseline rule was applied: damages are cost to complete as specified from contract and as
agreed to effectuate terms of contract unless cost to complete is unreasonable.
 16
Does value economic benefit (diminution in value) or wood grain?
A part of the remedy decision should consider the general want to avoid economic waste
In most cases, cost to complete is the same as diminution in value; market price to
complete an improvement to a piece of property will be tied to value of that improvement
These cases get difficult when cost to complete is more than diminution in value
o This is the case in here; cost to re- house to contract specifications greatly exceeds
cost to make house market-ready by just staining siding to a generic solid color
o These cases will turn on the reasonableness portion of the above-stated rule.
Court doesnt give much guidance as to what reasonableness means.
Privity of contract; party who is subcontracting work out is still legally responsible.
Eastern Steamship Lines, Inc. v. US, 1953
Govt contracted to use ship; said it would restore ship to pre-government-use condition.
Govt refused; cost to restore ship would be $4M, after which its value would be $2M
Held: Govt must pay cost of ship after restoration, not cost of restoration, b/c: Economic
waste concerns; unlikely would spend $4M to fix ship since its return would be $2M

5.1.1 Breach by Person Who Contracted to Have Services Performed

Leingang v. City of Mandan Weed Board
P was awarded a landscaping contract with city. P sued for damages because D had
assigned land designated in Ps contract to another party. P stated damages should be
1,933, less maintenance costs avoided. City argued P was only entitled to net profits lost,
and overhead costs should be deducted from contract price of lost work.
Holding. Lower court erred in calculating net profit margin be deducting Ps general
costs of business without determining if costs remained constant despite cities breach
P is to be awarded for detriment caused by breach. Where contract is for services and
breach prevents performance of that service, the value of contract consists of 2 items:
o (1) partys reasonable expenditures towards performance, including costs paid,
materials wasted, and time and service spend on the contract, and
o (2) anticipated profits
Rule: Profit + [actual price to deliver - direct costs] = damages.
As opposed to Luten, must calculate variable costs (not just simply full contract price),
less cost of labor/materials, as these costs vary thru year with Ps business activities
Kearsarge Computer, Inc. v. Acme Staple Co.
D entered contract with P for data-processing services. Half way thru, D ended contract
on grounds that Ps performance was unsatisfactory. P sued for remainder of contract
Held. Breach didnt produce substantial savings for P; work force/overhead expenses
existed with or without Ds contract. Ps business is deemed expandable, thus it can have
concurrent business with other clients, regardless of whether P is contracted with D
Contract was neither purely for services or purely for sale of goods; it involves combo of
personal skills and labor, materials, equipment and time. In these respects, a contract for
data processing services is similar to a construction contract.
Here, as opposed to Luten, P owns a multiple-activity firm, with fixed costs, which cant
be properly deducted from damages as they are incurred with or without Ds business
o Nachbar recommends considering whether business actually saved a cost or
not, as opposed to thinking of a business as a multi-activity firm.
Indirect costs are never profit, its just whether you save those costs or not.
 17

5.2 Damages for Breach of a Contract for the Sale of Goods (UCC)
Determining Whether Were Under the UCC
UCC applies to all transactions in goods (service contracts are not covered by UCC)
Goods are all things movable (combo of goods and services may be covered)
IMPORTANT: If the UCC applies, its error not to discuss it

Examples
Peevyhouse not a UCC case; coal is to be severed by buyer, not the seller;
Mobil home sale covered under UCC; thing attached to but separable from realty
Anesthesiologist providing anesthesia: Cases go both ways (good or service?)
Is information a good? Are ideas goods?

Acme Mills v. Johnson (1911)

agreed to deliver 2k bushels of wheat at $1.03. breached, but denied was damaged.
alleges he threshed when wheat was worth $.975/ bushel, but sold for $1.16/bushel.
argues owes the difference between price sold to Liberty and contract price
Held: No damages; contract price was higher than market price at date wheat was to be
delivered; saved money by s breach; efficient breach. is entitled to damages against
for a failure to comply; measure of damages is difference between contract price &
market price at place & time of delivery, but whether was damaged is determined by
market value at fixed delivery time. has right to breach for a better deal; risks lawsuit
If market value was higher at fixed delivery, and D breached, P entitled to profit. If
market value was lower at fixed delivery, and P breached, D would be entitled to a profit.
Futures contract insulated from price fluctuations by selling crops early.
Acme Mills establishes the default rule that a party must cover at time of breach. should
have sold to Liberty for higher price, then repurchased at lower market price to sell to
What was each party trying to do? You can look at the contract two different ways:
1. Contract for wheat; really wanted the wheat.
2. Contract for risk; insulates against price fluctuations (insurance). [Mills majority]
a. It doesnt matter who gets the specific wheat as long as P gets someones
wheat, P is still protected by D for any price fluctuations.
Efficient Breach
Expectation damages forces breaching party to internalize harm of breach and assess if
breach is efficient from that standpoint (and better for society); if breach is worth it, do it!
Opposition: Efficient breach undermines confidence in bargains and security for promise.
No one is indifferent to breach (people usually want performance, not breach), so
breaching party should pay profits from breach to other party
5.2.1 Breach by the Seller
Laurin v. Decarolis Constr. Co., Inc (1977
purchased lot from . removed gravel from lot before the closing contract. Lower
court awarded the fair market value of gravel removed, including cost of removal
Holding: Proper measure of damages was fair market value of gravel removed, less the
cost of s labor in severing the gravel and loading it onto the trucks.
 18
made no claim to recover the cost of restoring the premises to the bargained-for
condition, nor did seek net proceeds of wrongful sales of gravel made by . s only
entitled to the value of what P expected to receive when contract was formed
Missouri Furnace Co. v. Cochran (1891)
Installment contract for a year for sale of coke. Fixed price at $1.21. Seller rescinded
contract; made contract with another seller for remainder of year for $4 ton, which was
market rate for a forward contract at the time, but was lower than spot market price.
Court doesnt allow difference; P can recover damages from breach, but not difference in
new contract as its a separate, independent contract (probably wrong decision)
When contracts for the sale of chattels is broken by the vendor failing to deliver, the
measure of damages is the difference between the contract price and market value of the
article at the time it should be delivered. Because theres no such thing as negative
damages, P will only be paid for days where spot price exceeds price stipulated originally
Theres too much price risk for to enter $4/ton; shouldnt enter a speculative contract
and insist pay difference of the new contract at height of coke market. $1.20/ton
original deal had price risk baked in (selling coke and insurance), and in turn, received
assurance that someone was buying his product. bargained for a forward contact with
for a fixed coke price; it was this benefit that lost by s breach (under-compensatory?)
Rule can be over-compensatory because second contract is not aggregated over time.
Jackson argued spot price (as opposed to a fixed contract price for the year), would be
over-compensatory for non-breaching party, had there been performance.
Does non-breaching party have a duty to cover? Court says no; with a futures contract,
spot price is more reasonable; P entitled to price of coke at pre-specified delivery dates.
Duty to cover consists of going out and buying coke for each specific delivery date, NOT
entering another forward contract, which has insurance built into the price (additional
value); the legal remedy of expectation damages already gave P this insurance.
Egerer v. CSR West, LLC, WA Ct. of Appeals, 2003
contracted with to fill gravel at $.50/yard with material thats cheaper than pit run
breached. After 6 months, found replacement material at $8.25/yard. Substitute
material was pit run. couldnt afford it. waits 2 years to find cheaper price; $6.29/yard
Holding: In assessing s damages, court uses $8.25/yard figure (hypothetical cover),
even though it was for a material of higher quality and cost than the material originally
contracted for, b/c pit run is a reasonable substitute for the contracted-for material.
Where a seller fails to deliver a product contracted for and buyer doesnt cover, in
assessing damages court may look to price of reasonable substitute at a time reasonably
close to time of breach as evidence of prevailing price, despite quality differences
between product contracted for and substitute
o Rule grants courts major leeway in measuring prevailing price b/c it says it may
use market price for goods different in quality from ones buyer contracted for

5.2.2 Breach by the Buyer

UCC Rules for Breach by Buyer
Where buyer breaches and breach is of the whole contract, seller can choose remedy:
Withhold delivery of the goods
Resell the goods and recover damages
 19
Recover damages for non-acceptance (2-708) or in some cases the price (2-709)
Cancel

2-706 (Resale): If made in good faith and in a commercially reasonable manner, seller may
recover difference between resale price and contract price together with any incidental damages,
less expenses saved in consequence of buyers breach

applies when the buyer doesnt resell the goods:

2-708 (Damages for non-acceptance): Measure of damages for non-acceptance or repudiation
by the buyer = [unpaid contract price] [market price at time and place of tender] + [incidental
damages] [expenses saved in consequence of buyers breach]
If the above measure of damages is insufficient to put the seller in as good of a position
had contract been fully performed, however (usually relevant with lost volume sellers),
then measure of damages is profit (including reasonable overhead) which seller would
have obtained from full performance, together with incidental damages
NOTE: These are the rules for (1) commodities markets/markets where things fluctuate and (2)
lost volume sellers. Paraphrased:
1) If there is a breach in a market where prices fluctuate (like a commodities market), the
damages will be [(contract price) (market price)] (adjusting accordingly for incidentals,
additional costs incurred OR costs saved, and things owed to the buyer)
2) If there is a breach in a lost volume seller market, measure of damages will essentially be
the profit that the seller would have expected to make on the sale: [(retail cost)
(wholesale cost)] (adjusting accordingly for incidentals, additional costs incurred OR
costs saved, and things owed to the buyer)

2-709 (Action for the price):

1) When the buyer fails to pay the price as it becomes due, the seller may recover (together
with incidental damages) the price:
a) of goods accepted or of conforming goods lost or damaged within a commercially
reasonable time after risk of their loss has passed to the buyer; and
b) of goods identified to the contract if the seller is unable after reasonable effort to
resell them at a reasonable price or the circumstances reasonably indicate that such
effort will be unavailing.
2) Where the seller sues for the price he must hold for the buyer any goods which have been
identified to the contract and are still in his control except that if resale becomes possible
he may resell them at any time prior to the collection of the judgment. The net proceeds
of any such resale must be credited to the buyer and payment of the judgment entitles him
to any goods not resold.
3) After the buyer has wrongfully rejected or revoked acceptance of goods, has failed to
make a payment due, or repudiated, a seller who is held not entitled to the price under
this shall nevertheless be awarded damages for non-acceptance under the preceding
NOTE: Nachbar says this is the best for the seller and what the seller will always wants because
you just get the price you contracted for. Lists two ways you can get it: (1) if you give the buyer
the goods and he doesnt pay you OR (2) if the buyer breaches before you give him the goods
and you try to resell but after reasonable effort to resell at a reasonable price youre unsuccessful

So, seller has three remedies in case of breach by buyer: (1) contract [resale(cover)], (2)
contract [market], or (3) lost profits
 20

6. Limitations on Expectation Damages

Mitigation, Foreseeability and Certainty are notions to limit damagesbut it actually prevents
from being put in as good a position as he would have been in had contract been performed.
These limits define expectation damages. Code also doesnt put in as good a position b/c it
doeent account for interest, attorneys fees, or end product to boost reputation
6.1 Mitigation
Duty to avoid unnecessary damages in consequence of breach; limit economic waste
The mitigation rule is not about what you have to do; rather, its about what damages you
get (if you dont mitigate, you dont get the damages)
Duties to mitigate according to different situations:
o Bridge building: Duty to stop; no duty to search for other bridge. No cover.
o Sale of Goods (UCC): No duty to cover/resell; can simply collect market damages
o Employee: Duty to search. If job found, amount earned is deducted from damages
Rockingham County v. Luten Bridge Co., 4th Cir., 1929
County repudiated bridge contract; bridge-building company continued worked after
being given notice of the repudiation. Luten sued for full contract price of bridge
Holding: Bridge company failed duty to mitigate; not entitled to costs after repudiation.
Luten awarded [expenses incurred before breach] + [expected profits] but not expenses
incurred after the breach when the company continued to build the bridge. After an
absolute repudiation or refusal to perform by one party to a contract, the other party
cannot continue to perform and recover damages based on full performance.
Its more advantageous for to take profit and spend time doing something else; better
for to spend less money on something no longer worth any value to . Mitigation
would reduce economic waste and not put in any worse position
o Not entirely true since now has no bridge to show off; less work for employees
Luten rule: In construction contract breaches, damages = profits + incurred costs
o Puts duty on the non-breaching party to mitigate damages (stop building)
Uncertainty from calculating profits in the middle of a contract is a risk for
non-breaching party because often profit can be difficult to predict
o Encourages settlement: definite rule means both parties know how litigation ends
o Keeps parties from holding up breaching party (i.e. forcing party to provide full
cost to perform due to political backlash), instead of regular expectation damages
Problem: In Acme Mills, the exact moment of breach was a point of contention. Its not
clear that the county breached the moment they voted to pull funding from the bridge
project; unclear repudiation is risky: if youre wrong, you might be the one to breach
Who takes the risk on unclear repudiation? Non-breaching party
o If repudiation is clear, then non-breaching party is in better position
Hadley and Luten Bridge gives incentives to disclose info; shifts burden to the other party
74. Settlement of Claims
(1) Forbearance to assert or the surrender of a claim or defense which proves to be invalid is not
consideration unless
a. Claim or defense is in fact doubtful because of uncertainty as to the facts or law
(unclear repudiation?), or
b. The forbearing or surrendering party believes that the claim or defense may be fairy
determined to be valid.
 21
(2) Execution of a written instrument surrendering a claim or defense by one who is under no
duty to execute it is consideration if execution of written instrument is bargain for even
though he is not asserting a claim or defense and believes no valid claim or defense exists
Madsen v. Murrey & Sons Co., UT, 1987
After repudiation by buyer, table manufacture chops up its tables, sells them as firewood
Holding: Table manufacturer (seller in this case) had a duty to mitigate its damages to
buyer and failed to do so; dismantling the pool tables and using them as firewood, rather
than attempting to sell them at a full or discount price, was not commercially reasonable
Bank One, Texas N.A. v. Taylor, 5th Cir., 1992
froze s assets, which prevented from continuing in old-drilling venture. claimed
could have continued participation by selling her own assets, including jewelry & cash.
Holding: Injured party is not required to make unreasonable personal outlays of money
or to sacrifice a substantial right of his own
o An injured party is required to incur only slight expense & reasonable effort

6.2 Foreseeability
Can only get damages if damages from breach were foreseeable at time of contracting
Limits damages parties can recover; introduces a tension between consequential damages
and expectation idea of putting aggrieved party in as good a position as if contract upheld
The foreseeability doctrine is about lowering the cost of breach (-centered doctrine)
Argument for foreseeability doctrine: No one would agree to contract if they knew that
had to pay all consequential damages
Argument against foreseeability doctrine: Why would ever enter contracts if, when
breached, isnt responsible for damages?
Unforeseeability as a Limitation on Damages (RS 351)
(1) Damages are not recoverable for loses that a party in breach did not have reason to
foresee as a probable result of the breach when the contract was made
(2) A loss may be foreseeable as a probable result of breach if it follows from the breach:
o (a) In the ordinary course of events, or
o (b) As a result of special circumstances that party in breach had reason to know of
You have to tell people about the special circumstances (specially
communicate), and if you dont, theyre not liable
(3) A court may limit damages for foreseeable loss by excluding recovery for loss of
profits, by allowing recovery only for loss incurred in reliance, or otherwise if it
concludes justice so requires in order to avoid disproportionate compensation.
Comment:
a. Requirement of foreseeability. The mere circumstance that some loss was foreseeable, or even
that some loss of the same general kind was foreseeable, will not suffice if the loss that actually
occurred was not foreseeable. It is enough, however, that the loss was foreseeable as a probable
result of breach. Furthermore, the party in breach need not have made a "tacit agreement" to be
liable for the loss. Nor must he have had the loss in mind when making the contract, for the test
is an objective one based on what he had reason to foresee. Although recovery precluded by the
limitation of foreseeability is usually based on the expectation interest and takes the form of lost
profits, the limitation may also preclude recovery based on the reliance interest
Buyer/Sellers Incidental & Consequential Damages: Consequential damages resulting from
sellers breach include any loss (1) resulting from general or particular requirements and needs
 22
of which the seller at time of contracting had reason to know, and (2) which could not reasonably
be prevented by cover. Sellers consequential damages in case of breach by buyer are his lost
profits. Sometimes if both parties have contributed to breach, damages are divided among parties
Hadley v. Baxendale, England, 1854
contracted to have broken shaft sent out to be fixed and quickly returned, which
admits. Delivery delayed by neglect, causing mill to remain closed for several extra days.
sued for lost profits resulting from keeping mill closed. Contract didnt discuss breach
Held: Damages from mill shut-down resulting from breach is not fair or reasonably
foreseeable to , nor known by both parties as a special circumstance under 351(2)
If knew was repudiating, has a duty to mitigate damages.
Fairness Argument:
o would argue: not fair to pay such high damages for something they could not
have known would happen
o would argue: not fair to bear brunt of the loss caused by s breach
may argue: loss resulted from s want of new, instead of repaired shaft
Consequentialist Argument: Both sides would argue that a ruling contrary to their liking
might make people less likely to enter into contracts
: Cost of breach too high
: Cant depend on the other side to fulfill their full duty
Disclosure rule: charge party with more info to come forward with that info
Globe Refining Co v. Landa Cotton Oil Co (1903)
Contract for sale of oil. sent tankers from far away, but breached contract.
cancelled contract on Sept 2, but didnt notify until Sept 14th. claims had he known of
breach, he could have been supplying himself elsewhere ($2k damage) and lost use of its
tanks for 30 days ($700 damage estimate)
Held. owed difference between contract price of oil and price at time of breach.
Damages not affected by loss of use of tankers; could have sent tankers from anywhere;
assumed risk of selling tankers from far away. These are expenses was willing to incur
for performance. Otherwise, would pay twice for the same thing. didnt assume
additional liability at formation. The consequences, and who is answerable for such
consequences, must be contemplated at formation. A mere fact of knowledge of such
consequences is not enough; knowledge must be brought home to the party sought to be
charged, under such circumstances that he must know that the person he contracts with
reasonably believes he accepts the contract with special conditions attached to it (so that
the party can add the additional cost of the risk into the contract)
Holmes: What is fundamental justification for holding liability for damages for breach?
o Consent; we cant hold for harm they didnt agree to take; tacit agreement.
Holmes (tacit agreement) test: what did the parties agree to AND what would they have
agreed to had the issue come up? Test is about figuring out what was consented to.
Normative justification: cant hold liable for risk/harm they didnt consent to.
Economic justification: more accurate pricing; when a party consents to take on risk, they
have the chance to shift risk to price. Must give both parties an opportunity to
charge/receive compensation or take on additional risk
Victoria Laundry (Windsor) Ltd. V. Newman Indus. Ltd., England, 1949
purchased large boiler from to expand its laundry business. Boiler was delayed for
many months, causing to lose lucrative contracts it would have had with boiler
 23
Holding: entitled to lost profits: knew of intended use and that wanted boiler
ASAP; thus had reasonably possessed imputed knowledge of foreseeable damages to
MindGames, Inc. v. Western Publishing Co.
had license contract with for a board game. breached in the middle of the contract
Holding: asked for way too much in lost profits and there was no provable data from
past business to base anticipated profits for s recovery. s problem is one of undue
speculation in estimating damages; success in board game is uncertain. had no track
record when he created game. should have mitigated damages by cutting deal when
breached; fact didnt is evidence of dry market
Freund v. Washington Square Press, Inc.
granted exclusive rights to publish book. Contract called for $2k advance + royalties.
agreed to publish hardbound edition if didnt terminate agreement within 60 days of
manuscript. paid advanced, but merged with another company & ceased publishing
hardbacks. Never terminated agreement, & refused to publish book in any form
Held. Cost of publication NOT appropriate measure of damages as that would put in far
better position than if contract was performed. Allow to recover nominal damages as
royalties would have realized were not ascertained with adequate certainty; damages
should be reduced for the cost of publication. RST presented a problem with describing
reasonably certain. RST does help-ish. Speculative damages
Rule v. standard distinction in Posner is extremely important
Fera v. Village Plaza, Inc
signed lease to open a shop in s shopping center. s space was given to another
tenant, and s offer of alternative spot was refused because it was unsuitable.
Held. is entitled to damages. If theres some injury, it doesnt preclude recovery
because lost profits are speculative and hard to prove; it doesnt mean you just assume
damages are 0. Problem is not with profits, but requirement that damages be proved with
certainty, that a lay a basis for reasonable estimate of extent of harm, measured in $.
New Business Rule: Prohibits (in most cases) recovery of lost profits resulting from a
breach of contract that has prevented P from establishing a proposed new business on
grounds that profits in such cases are too speculative. Modern trend is away from this
rule, and towards whether P has gathered a sufficiency of proof
o Hard to predict lost profits, but should find a method of estimation that will be
lower than actual damages (which are too hard to prove) and more than 0.
Lamkins v. International Harvester Co. (1944) Dawson
bought a tractor and wanted lights on it. It wasnt delivered with lights and didnt get
lights for a year. was unable to work on a certain tract at night; sued for his lost profits.
Law: In order for to be liable for the crop loss, there must be evidence that he tacitly
agreed to risk liability for a crop loss of the size sustained. Court: neither made a
contract to assume such liability, nor, was there evidence of any tacit agreement to do so
Koufos v. C. Czarnikow, Ltd. [The Heron II], 1969
chartered s vessel to carry their load of sugar, intended to sell the sugar once the boat
arrived. s vessel arrived 9 days late; in the space of those 9 days, the price of sugar in
had fallen. s profits were less than they would have been had s boat arrived on time
 24
Holding: might have known would sell the sugar once it arrived and might have
supposed it was possible that the price of sugar would fluctuate during those 9 days of
delay, but he had no knowledge of s actual intentions and had no reason to suppose it
probable that during the relevant period the price of sugar would fall. Thus, the result was
not a foreseeable consequence of the delay at the time of contract, and is not
responsible for s profit lost because of the 9 day delay

6.3 Damages for Mental Distress

Damages for mental distress may be recovered only if
o (1) the contracts primary purpose is to secure some personal interest
o (2) damages cant adequately be determined by looking to market standard or
contract terms
Damages from emotional distress are often intangible and thus difficult to quantify
because of enormous differences between peoples ability to withstand emotional distress
Contracts whose breaches are likely to result in serious emotional disturbance include
carriers and innkeepers with passengers and guests, carriage and proper disposition of
dead bodies, delivery of messages
Contracts not likely to result in mental distress damages include employment
o Consequentialist argument for not awarding mental distress damages in a
wrongful firing suit: Most wrongful firings result in mental distress (so awarding
damages would be too expensive)
Punitive damages are not recoverable for a breach of contract unless the conduct
constituting the breach is also a tort for which punitive damages are recoverable
Hancock v. Northcutt
P sought damages arising from emotional distress from a breach of construction contract.
Held. Contracts pertaining to ones dwelling are not among those contracts which, if
breached, are likely to result in serious emotional disturbance. To rule otherwise would
make the financial risks of construction agreements difficult to predict and could increase
the already prohibitively high cost of housing in CA, effect insurance for builders, and
diminish affordable housing.
If its difficult to calculate emotional distress, then why/how do we do it in some cases?
What matters is if the breaching party can calculate/foresee damages?
Valentine v. General American Credit, Inc., MI SC, 1984
wrongfully discharged from her job (which she was supposed to hold for a full term),
sues for mental distress (loss of peace of mind resulting from loss of job security)
Held: may not recover mental distress damages. Primary purpose of an employment
contract is economic, not the securing of personal interests (which was secondary). s
monetary loss for wrongful termination of employment can be estimated with reasonable
certainty according to the terms of contract and market value of s service. Court was
concerned that recognizing psychological suffering would increase damages and change
incentives system, as almost every breach results in pecuniary loss and pecuniary loss
invariably results in some form of mental distress.
Economic justification: Courts underlying concern was to keep labor market fluid; court
also fears potential for punitive damages
Damages were foreseeable within the rule of Hadley, but
 25
o (1) Hadley, literally applied, leaves virtually every case of breach of contract with
an opportunity to recover damages for mental distress, and
o (2) theres a lot of cases where the law doesnt allow a full recovery.
Absent the foreseeability of loss to determine the applicability of the exception, courts
consider whether the contract has elements of personality and whether damages from
breach are capable of adequate compensation by reference to terms in the contact
The obligation which gave rise to this action is based on the agreement of parties at the
form of the contract; it included no contractual provision for job security.
Jarvis v. Swan Tours, Ltd., WLR, 1972
contracted with for a package holiday in Switzerland. The holiday was a flop; food
was terrible; was left all alone for the second week
Mental distress damages allowed in contract for a vacation, or any other contract to
provide entertainment and enjoyment. Vexation and being disappointed in a particular are
relevant considerations the court should use in assessing damages for breach in this case
Deitsch v. Music Co.
entitled to recover mental distress damages for distress, inconvenience, and diminution
of value of wedding reception caused when hired band failed to show up at wedding

6.4 Certainty and Undue Speculation

RS 33 (Certainty):
A manifestation of intention cannot be accepted so as to form a contract unless the terms
of the contact are reasonably certain
Terms of a contract are reasonably certain if they provide a basis for determining the
existence of a breach and for giving an appropriate remedy
The fact that one or more terms of contract is left uncertain may show that manifestation
of intention is not intended to be understood as an offer or acceptance
UCC Rules on Certainty: UCC allows a contract to be formed with very open terms
Problems of determining what is reasonable
The terms reasonable parties in that position would have wanted, or what actual parties would
have agreed to, had they bargained on the issue. UCC seems to take second position, but the
former position is better because it is so difficult to determine what terms specific parties would
have agreed to based on their relative bargaining power, degree of risk aversion, etc.
Basic Rule: You can only get damages that you can prove with reasonable certainty
o If you cant prove damages with reasonable certainty, your damages might be 0
Uncertainty as Limitation on Damages (RS 352)
Damages are not recoverable for loss beyond an amount that the evidence permits to be
established with reasonable certainty
Note* This maybe the conceptual underpinning to not allowing expectation damages if
you cant assess profits: if you cant assess loss with reasonable certainty, no damages
Ashland Management Inc v. Janien, NY, 1993
contracted with to create investment model to succeed current model, breached
Holding: entitled to damages for lost profits b/c parties had carefully studied
professional judgments of what they believed were realistic projections of s softwares
future use (so projection of future profits in this case was not based on undue speculation)
 26
Requirement that damages be reasonably certain doesnt require absolute certainty; rather
damages should be measurable based on reliable factors and without undue speculation
6.5 Lost Volume Sellers
UCC determines appropriate measure of damages for lost volume sellers based on the difficulty
of finding a substitute for the particular good:
2-709: default rule: works only if goods are identified and cannot be resold for whatever
reason. If goods cannot be resold, you can recover lost profit, otherwise party must cover
2-708(1) and (2): UCC suggests there is a hierarchy between them but those remedies
address completely different situations.
o 2-708(1): designed for markets where prices fluctuate; biggest loss to seller is loss
in shift to market price. Entitled to [Incidental damages] [direct costs saved].
o 2-708(2): designed for merchants who sell standard goods; prices dont fluctuate
much (probably). Theres a risk that a buyer isnt going to perform, seller is stuck
with goods. (Solves problem of buyer saying seller could resell so only damages
are cost of resale; seller says someone would have bought car from me anyway)
UCC profit: difference between wholesale price and resale price (most of that is cost of
sale difference eaten up by cost of retail seller; profit is difference between wholesale
price and retail (not because of price fluctuation but because of cost incurred in reselling)
o Where prices fluctuate: profit is buy low sell high; dif. btw price bought & sold
Neri v. Retail Marine Corp., NY Ct. of Appeals, 1972
contracted to purchase new boat for $13K and then repudiated when he got sick.
resold boat 3 months later for the original cost.
Held: Second sale is not a resale but rather a lost volume sale. Without breach, seller
would have made two sales, not just one. Thus, [market price] [contract price]
insufficient to put seller in as good a position as he would have been in had contract been
performed as it doesnt account for lost profit from first sale. Under 2-708, damages for
breach of first sale should be [lost profit] + [incidental damages].
Court should apply UCC 2-708 (entitled to lost profits and incidental costs) instead of 2-
718(2) [default liquid damages rule, which gives a right of restitution 20% or $500.
o 2-718 is over-compensatory if buyer is out no damages from breach (as buyer
covered), but seller still pays $500 to buyer despite buyer suffering no loss
o Breach of deprives to 2 sales; measure of damages should be profit from 1 car
Dissent: Court cites economic law of diminishing returns or increasing marginal costs.
must prove they (1) had capacity to produce 2 boats, & (2) that it would have been
profitable to have produced & sold both boats.
Exam: **Be ready to say if party is a loss volume seller & relate it back to UCC 2-708
Loss volume sellers problem is the most difficult issue facing expectation damages
Difference in buying/selling Van Gogh v. something that can be readily produced:
o Van Gogh: If D breaches, and P covers = no damages
o Something readily produced: Owe profits for two items after breach.
Lazenby Garages Ltd. V. Wright, English Ct. App.,1976
Lost-volume sales dont apply to used cars because not all used cars are the same, even
of the same model and year. New car dealers are lost-volume sellers as a new car can be
replaced with one thats exactly the same; a used car, on the other hand, cannot be
replaced with one exactly the same, because no two used cars are exactly the same.
 27

7. Other Legal Remedies

Relationship between Expectation, Reliance, and Restitution Damages
(1) Reliance damages cannot be greater than expectation damages (expectation damages
as cap on reliance damages)
o People enter contracts that they expect to be profitable
o Courts may lower reliance damages if can show contract would be unprofitable
(2) Restitution can exceed expectation if the contract has not been completed
o E.g., buyer gives seller $lk/ton of bricks, seller breaches. Price then drops to
$700/ton. Seller must still give buyer $1k, not $700 (expectation value); otherwise
it would lead to the sellers unjust enrichment ($300).
Idea is that a party should not profit from breach
(3) Restitution damages cannot exceed expectation damages if contract is complete
o This sometimes leads to perverse results, as when the person who finishes a
contract gets less than person who doesnt (Algernon Blaircrane rental).
o Restitution focuses on what the breaching party got, as opposed to expectation,
which focuses on the non-breaching party.
(4) An aggrieved party can sometimes get restitution and expectation damages; if one
party pays a down payment and other party breaches, first party may get down payment
back (restitution) and be put in position as had contract been performed (expectation)
7.1 Reliance Damages in a Bargain Context
Courts usually apply reliance measure when profits are difficult to determine/uncertain
Contracts for commodities, where prices fluctuate, will be determinable in liquid market
Contracts for services: profit is difference between actual costs and contract price.
Factoring in lost profits in reliance measure of damages
o Armstrong Rubber (not a good case for applying reliance because if loss was a
certain loss, you should be using expectancy)
Hand rule: If can prove what loss wouldve been, you should be using
expectancy damages, not reliance
Idea is to put injured party in as good a position he would have been in if the contract had
never been made
RS 90, comment d: Relief may be limited to restitution damages or to specific relief
measured by the extent of the promisees reliance rather than by the terms of promise
Can make reliance damages large or small (often depends on size of opportunity costs)
Security Stove & Mfg. Co. v. American Rys. Express Co., KS Ct. of Appeals, 1932
breached by not shipping furnace to convention where had exhibit
Holding: Court awards reliance damages (costs/expenses associated with setting up the
exhibit) even though these expenses would have been incurred even had not breached
In instances of special circumstances, the method for estimating damages should be that
which is (1) most definite and certain; (2) best achieves fundamental purpose of payment
Expectation damages are uncertain (and would likely be $0); however, we can assume
would have made money from demonstration, so by giving reliance damages the court
is actually giving less ( breaks even rather than profits)
Chicago Coliseum Club v. Dempsey
entered into contract to appear in fight and not appear in any other fight prior to.
breached, after stating he was training for another match when Clubs insurers called
 28
commenced an action to enjoin from engaging in other boxing matches, and seeking
monetary damages. Court finds a valid contract between parties, that had expended
large sums of money carrying out its obligations under agreement, and enjoined from
participating in other boxing matches or contracts
Law. Proper measure of damages for a breach in a performance contract includes the
time period between the signing of the contract and time of breach. To recover, expenses
must be incurred in furtherance of the general scheme
Held. itself admitted that it could not predict the amount of profit it would have made
when it requested injunctive relief. Lost profits were too speculative to be recoverable.
Any expenses assumed by prior to entering the contract could not be charged to .
Expenses incurred by in procuring the decree were not recoverable, as it had already
been informed that intended to proceed no further; took such steps at own risk
Court recognizes four different stages of damages to think about:
o Lost profits: Deny this because its too hard to determine.
Should have used reliance cost as lower bound.
o Expenditure that occurred prior to the signing of the agreement before and
Dempseys contract: prior to signing, these were at Ps risk. Once signed,
the risk paid off, so Dempsey should be responsible for these damages.
o Expenditure incurred after signing agreement before the breach: recoverable
o Expenditure incurred after the breach: Not recoverable, shouldnt mitigated.
Reliance: Benefit to greater than the harm [cost + NO PROFIT] done to
Dempsey lacks compelling evidence that would have lost money.
Theory of contract law sways outcome: Is it about consent or the taking on of obligations
Dempsey may not want to sign future contracts because of corresponding liability for
pre-contractual reliance, which could increase his price for future contracts
o Solution: write in contract that not responsible for pre-contractual reliance
Pre-contractual reliance based on foreseeability: Did know before he contracted that
they promise Wills money? Very important as it speaks to whether could foresee
damages. If he could, he maybe responsible; no longer reliance
o Unreasonable to charge someone with pre-contractual reliance as it wouldnt be in
their contemplation. In cases where it is, you want to argue reliance (Hadley)
L. Albert & Son, v. Armstrong Rubber Co., 2nd Cir, 1949
had contract with to recondition rubber. In anticipation of the contract, built a
foundation. repudiated; claimed defense that would have lost money on s venture
Rule: In cases where will have lost money if contract is performed, promisee may
recover outlays in preparation for performance, subject to the privilege of the promisor to
reduce it by whatever he can show promisee would have lost, if contract was performed
This is reliance. Why not seek expectation? Expectation damages would have been at a
loss. allowed choice of remedy; by choosing reliance, ends up even.
Rare case where reliance is greater than expectation: victim gets to choose the remedy.
But then breaching party has a privilege with burden of proof to offset award.
Problems with reliance
Under-deters breach in some cases, and if applied generally, it encourages breach, where
net harm to society could be great. If all Dempsey has to do is pay reliance damages, he
may choose not to fight in instances where society would otherwise want him to.
Is justification of applying reliance measure worth the harm to society?
 29
Mt. Pleasant Stable Co v. Steinberg
Performance contract; profit per unit load of $1. bought Cleist horses (bought for $625,
sold for $485) specifically for use in s trucking.
Lost profits easy to figure out: number of loads left multiplied by profit per unit; Court
doesnt allow recovery for loss on horses because if contract was completed, could only
recover for contract price.
Wrong result as horses are a depreciable asset. If a depreciable asset is used in a contract,
you must consider the change in market value and recovery for the change in the asset as
a result of the breach if the price has decreased more than normal depreciation. Recovery
for Asset = Amount Realized Adjusted Basis, where AB is the original cost-
depreciation and amount realized is the gain or loss from the original basis of the item.
E.g., here, say adjusted basis is $500. Recovery would be $15 ($500 - $485 sell price)
Rule: The rule that one must use reasonable effort to obtain other employment and
thereby mitigate damages has no application to a situation where could simultaneously
perform as many contracts as it could sign. Breaching party is not liable for all damages
an innocent party suffers, only those reasonably foreseeable
was entitled to recover damages measured by difference between contract price & what
it would have cost to have performed the contract, or, as found by the auditor, a profit of
$1 on each team from time contract was broken until its expiration according to its terms.
Expectation damages force internalization of cost of breaking promise; although
inefficient expenses occur as a result of breaking promises; still less than reliance-based.
Problem with expectation damages: inherent difficulty in judge/jury estimating damages,
because a true expectation damages remedy requires identifying the amount of money
that would have been made P was indifferent to whether the promise had been kept.
Hoffman v. Red Owl Stores, Inc., WI SC, 1965
relied upon promises from to let him open a grocery store (e.g., sold bakery).
increased required payment beyond what had orally agreed to, ending negotiations
Holding: Even though no breach of contract (because no contract was formed), can
recover reliance damages; liability before contract. Injustice would result if was not
allowed some relief because of s failure to honor original agreement. Reliance on a
statement that doesnt result in an offer can result in quasi-contract liability
Law. While promissory estoppel is the appropriate remedy in reliance cases, an injured
party will only be awarded damages to the extent they have been displaced. Where
damages are awarded in promissory estoppel instead of specifically enforcing the
promise, they should be only such as in the courts opinion to prevent injustice
The court found that s acquisition of the Wautoma grocery store and his work there was
something he had done as more or less an experiment and that should not be liable for
damages resulting in the loss of that operation.
IMPORTANT: Reliance is used here NOT as a substitute for consideration (as in RS
90), but to find assent (to find liability before contract)
Nachbar: this case should be upsetting, but Red Owl is still good law. Hes uncomfortable
with intent in contracts; its inconsistent with objective theory of formation
Here, theres no profit, but possible loss profit from market conditions/grocery store
Drennan (both parties are sophisticated, either with respect to the law or in the context of
their deal) puts a lot of pressure on Baird. Hoffman usually isnt applied where other
party is sophisticated (this was the problem w/ Drennancounterparty is sophisticated)
 30
Bottom line: This case involves the imposition of liability during pre-contractual
negotiations, based on reliance enforcement
Alternative view: was a sucker & should have gotten a contract before relying so much
7.2 The Restitution Measure (Quantum Meruit, etc.)
Restitution Interest
Substantively, refers to the recapture of a benefit/value conferred on by
o Usually refers to price paid, but can also be market value.
Remedially, refers to recoveries measured by s unjust enrichment
o An action for restitution of benefit conferred is often measured by s costs
Quantum meruit: reasonable value of work, labor and services; refers to both the doctrine
and the form of complaint (claim against unjust enrichment)
o a reasonable sum of money to be paid for services rendered or work done when
the amount due is not stipulated in a legally enforceable contract.
Implied in fact promise: A real promise, but implicit rather than express
Implied in law promise (quasi-contract): Promise created by the courts where its in the
interests of justice that pay , even though there was no legal contract
o I.e., Law reads a promise into a situation where theres in fact no promise
o Two requirements for court to read implied-in-law promise:
has received a benefit
Retention of that benefit is inequitable (e.g., paid money by mistake)

Difference between unjust enrichment and quantum meruit claims:

o Damages for unjust enrichment claim are measured by benefit conferred upon
Unjust enrichment is its own cause of action
o Damages in quantum meruit claim (implied-in-fact contract to pay reasonable cost
for services rendered) are measured by reasonable value of s services

Determining Restitution Damages

RS 371 (Measure of restitution interest): Restitution damages can be measured by:
(1) The reasonable value to of what he received (i.e., what it would have cost him to
obtain it from someone else in s position), or
(2) The extent to which the other partys property has been increased in value or his other
interests advanced
NOTE: The party against whom restitution is sought may not reduce his liability by
subtracting his expenditures from the amount of benefit he has received from other party
If you have completed performance, you must sue under contract instead of restitution
Restitution becomes a guess of (1) cost and (2) portion of profit earned to date

Osteen v. Johnson, CO Ct. of Appeals, 1970

only partially performed its promise to promote s daughters music
Holding: Court awards restitution damages, but notes that did partially perform
contract so should be allowed compensation for the reasonable value of his services
In receiving restitution, must return value of services received as part-performance

Quantum Meruit
A suit in quantum meruit is a suit of injustices, not a suit on the contracts terms
 31
Quantum meruit: Seeks recovery for the reasonable value of work, labor, and services
performed at s request
One who is wrongfully discharged & prevented from further performance of his contract
may elect to treat the contract as rescinded and may sue upon a quantum meruit as if the
special contract of employment had never been made and recover the reasonable value of
the services performed even though such reasonable value exceeds the contract price
o A that has only partly performed is granted restitution for services rendered
even if that restitution (i.e., the value of the services rendered) is an amount more
than the contract price for full performance

Justification for restitution

Court allows restitution because they are looking for a more certain amount to apply
Cases of partial performances are really hard to evaluate with respect to what the likely
profit would be, especially if small percentage of the contract was completed
In reliance, the problem is uncertainty of a specific portion of damages; here, uncertainty
comes from how much of the contract a party performed; calculation includes profits/cost
Cant award damages for items P didnt actually give D; dont know how much D should
pay as D hasnt given P the thing in question; difficult to attribute Ps work to D (i.e.
maybe P was using stones for D, and some for other clients; maybe it was quarry day)
Dont know D accepted the thing; requiring D to receive item gives them opportunity not
to accept (i.e. dont know if D thinks stones are okay)

US v. Algernon Blair, Inc., 4th Cir., 1973

After partial performance, ceased to perform after contractor refused to pay for crane
rental; contractor breached. However, had finished working, would have lost money
Held. can recover for his services rendered to , minus what has already paid, even
though would have lost money had contract been performed. is entitled to recover
restitution damages. Otherwise would have received benefits without paying for it, and
would have incurred expenses without compensation. Quantum meruit recovery is
undiminished by any loss which would have been incurred by complete performance;
can recover the reasonable value of s performance
While the contract may be evidence of reasonable value of the services, it does not
measure the value of the performance or limit recovery. Rather, the standard for
measuring the reasonable value of the services rendered is the amount for which such
services could have been purchased from one in s position at the time and place
services were rendered.
Argument for restitution: shouldnt be allowed to recover if expected a loss
Someone might choose restitution if theres uncertainty in the contracts future.
o Restitution resolves uncertainty by adding certainty to the expected recovery.
This is a material breach case, and features the concept of undue enrichment

Boone v. Coe
D owned farm; made verbal contract with P to rent farm; told he would have a house
ready on farm for them. P travelled for 55 days; D refused to let occupy house and farm
This case falls under the statute of frauds because it is an oral contract for the sale or
lease of real estate for a longer term than one year on which had not yet received any
benefit (so no unjust enrichment); P cant recover under contract
 32
P sustained a loss, but D received no benefit, so no obligation to pay was implied
Unjust enrichment seems to be much more concerned about the promisor & what the
promisor gets, as opposed to reliance, which focuses almost entirely on the promisee
Objective: avoid equating the Quantum Meruit/unjust enrichment actions w/ K action
Just because one party was harmed doesnt mean the other party benefitted
Note* Statute of frauds includes a provision that a contract for the sale of something for
$500 or more is not enforceable without writing

Kearns v. Andrew (implied contracts)

P tried to sell land to D. D became dissatisfied; agreed to purchase if P made alterations.
P did; D refused to purchase. Alterations made home less saleable; P sold for less
Allowed to recover expenses to make property idiosyncratic to buyer
Scope of remedy is reasonable value of services performednot actual benefit conferred
on promisor as a result of performance.

US v. Cal State Electric, 9th Cir., 1991

If breacher conferred a benefit on an innocent party rather than a detriment, breacher may
recover b/c otherwise it would unjustly enrich innocent party & unduly punish breacher
In no case, however, may a breaching party recover more than the contract price (i.e.
breaching party cannot force innocent party to pay more than the contract price)

Expectation Damages as Cap on Reliance Damages, but Not on Restitution Damages

Expectation damages as cap on reliance damages:
o If can prove amount would have lost through performance, can have cost
subtracted from s reliance damages i.e. expenses incurred in reliance of contract
Expectation damages not cap on restitution damages:
o As in Algernon, a who has entered a losing contract in which he has conferred a
benefit on (breaching party) can recover the market value of the benefit even if
it exceeds the contract price. In other words, the expectation measure does not set
a cap on restitution damages in a suit in unjust enrichment against a breaching
promisor. Thus, in case of a losing contract the promisee may be better off suing
for restitution damages than for expectation damages

Problems with losing contracts

If someone is in a losing contract a party will engage in partial performance, and we give
them market value of what they provided, thus, they end up getting some of the profit that
market value represents that they would not have gotten if they had actually performed.
Instances where there is losing contract, theres a catch 22.
o Armstrong: if losses that would have flowed from the finished contract are certain
enough, it probably will not be a good case for restitution

7.3 Liquidated Damages

Liquidated damages clause: Sets out the damages for contract breach ahead of time
General rule seems to be: enforceable only insofar as it comes close to what damages
would have been calculated at when contract was formed, and arent unconscionable later
o Court calls it liquidated damages clauses when valid; penalties when invalid
Courts thus limit freedom of parties to contract outside of the legal system
 33
o Why does the court know more than the appropriateness of certain damages
(liquidated damages as calculated as allocation of risk)? The court looks only at
legally recognized harms (narrow), whereas parties might have wanted to contract
for other kinds of harm
When forecasting damages, should parties forecast the legal loss (i.e., what the courts
will think your loss was) or actual loss (theres a lot of harm not covered by the legal
system)? If parties try to forecast legal loss, options are much narrower

Fairness arguments in support of judicial oversight of liquidated damages clauses:

We don't want to make better off after breach (if unreasonably high damages)
High liquidated damages are evidence parties underestimated chance of breach; had they
thought it out beforehand, they would not have agreed to these terms
To allow such high damages would be oppressive or point to coercion, duress, etc. (i.e.,
concern about uneven bargaining power)
Why we might like liquidated damages clauses:
o Efficient (dont have to go to court)
o Maybe the parties are in a better position to determine damages than a court is
Paradox: If you estimate something thats difficult to prove and come close to actual
damages, then its probably not difficult to prove (is a penalty). On the other hand, if your
estimate ends up being way off-base, then its probably not reasonable (is a penalty).
Either way the liquidated damages clause is a penalty.
Validity of Liquidated Damages and Penalties (RS 356)
Damages for breach by either party may be liquidated in the agreement but only at an
amount that is reasonable in light of (1) the anticipated or actual loss caused by the
breach and (2) the difficulties of proof of loss.
A term fixing unreasonably large liquidated damages is unenforceable on grounds of
public policy as a penalty
A term in a bond providing for an amount of money as a penalty for non-occurrence of
the condition of the bond is unenforceable on grounds of public policy to the extent that
the amount exceeds the loss caused by such non-occurrence.
NOTE: Like our discussion of Muldoon in class. Penal bonds are unenforceable, so in order for
liquidated damages to be distinguished from penal bonds you must tie the liquidated damages to
anticipated or actual losses.
UCC 2-718(1) (Liquidation or limitation of damages)
Damages for breach by either party may be liquidated in agreement but only at an amount
which is reasonable in light of (1) anticipated or actual harm caused by breach, (2) the
difficulties of proof of loss, and (3) the inconvenience or non-feasibility of otherwise
obtaining an adequate remedy
o Actual damages in the clause must be reasonable
o It must be hard to determine what the actual remedy is
A term fixing unreasonably large liquidated damages is void as a penalty
Where the seller justifiably withholds delivery of goods because of buyer's breach, the
buyer is entitled to restitution of any amount by which the sum of his payments exceeds
o the amount to which the seller is entitled by virtue of terms liquidating the seller's
damages in accordance with subsection (1), or
 34
o in the absence of such terms, twenty per cent of the value of the total performance
for which the buyer is obligated under the contract or $500, whichever is smaller.
The buyer's right to restitution under subsection (2) is subject to offset to the extent that
the seller establishes
o a right to recover damages under the provisions of this Article other than
subsection (1), and
o the amount or value of any benefits received by the buyer directly or indirectly by
reason of the contract.
Where a seller has received payment in goods, their reasonable value or the proceeds of
their resale shall be treated as payments for the purposes of subsection (2); but if the
seller has notice of the buyer's breach before reselling goods received in part
performance, his resale is subject to the conditions laid down in this Article on resale by
an aggrieved seller (Section 2-706).

NOTE: This provision is important for different parts of the class so its helpful to split it up in
your head! Nachbar actually lists them separately on the syllabus.
2-718(1): This is like the UCC version of RST 356 and they have almost identical
language: You need to tie liquidated damages to anticipated or actual harms.
The rest of 2-718: If a buyer breaches but has not been given the goods (seller has
withheld because of the breach) and the buyer has paid in excess of the amount in the
liquidated damages clause, buyer is entitled to the excess in restitution. If there are no
terms listing liquidated damages, the amount that his restitution will be measured against
(the amount he is exceeding as if it were just liquidated damages) will be 20% of the total
value of the contract OR $500, whichever is smaller.
Similarly to damages in the other UCC provisions, the amount that a buyer can seek in
restitution is offset by what is owed to the seller (in this case, sellers right to recover
under other parts of the UCC) as well as savings hes reaped. Think of this like the
adjusting accordingly for incidentals, additional costs incurred OR costs saved, and
things owed to the buyer provisions for UCC damages. You have a basic right to certain
recovery and then its offset by what youre owed to the other party or your savings
Muldoon v. Lynch
P and D entered contract in which P was to complete a monument for dead husband with
a specific marble; would forfeit $10 a day late beyond the stated time for completion.
Marble was delayed for two years due to transportation problems.
Liquidated damages clause was invalid as it looked like a penalty, not damages, and so
its on D to prove actual damages. D failed to prove she actually suffered any damages
measurable by money. Damages should be purely compensatory, & commensurate with
injury, not more or less
If you have a contract with idiosyncratic preferences, you want to put risk of delay on
person with those preferences. Avoidable risks goes to party with best position to avoid
it. May want contractor to be able to indemnify whoever he buys marble from for delay
Important to put why you need damages clause in contracthere, was getting older, so
important to have it finished sooner than later. Not straight line depreciation of value.

Yockey v. Horn
 35
Business partners enter settlement agreement with a clause that parties would not
voluntarily participate in lawsuit against the other, otherwise, liquidated damages at $50k.
One party did testify against the other; non-breacher suffered reputational damage
Court upheld liquidated damage clause as it was hard to measure damages; no idea to
what extent voluntary testimony hurt. Variance in estimates high, but looking at nature of
business (reputational effects), $50k looks reasonable

Hutchison v. Tompkins, FL, 1972

Buyer agreed to buy property from seller, put down a $10k deposit. Contract had
provision that if buyer failed to perform, seller could retain $10k. Buyer failed to perform
Holding: Liquidated damages clause allowed because damages were not ascertainable at
time contract drawn. Validity of liquidated damages clause depends on whether damages
were readily ascertainable at the time of contract, not whether theyre readily
ascertainable at the time of breach

Problems with comparing liquidated damages amount with anticipated or actual damages
a. Comparing with anticipated damages: actual damages from what was anticipated may be
over or under compensatory.
b. Comparing with actual damages: even harder for parties to reduce cost of contracting
from using liquidated damages; must litigate actual damages in every case anyway
c. Rule: liquidated damages must be reasonable in terms of actual and anticipated damages
a. Why must we consider both actual and anticipated damages?
Anticipated damages; concerned with intent. What are parties thinking and
trying to do? If parties intend to put in punitive function, must defeat intention
Actual damages; general reasonableness. Whats the best way to prove
anticipated damages? Actual damages.
d. Modern Rule: we use either anticipated or actual. Courts like liquidated damages;
judges are lazy and this reduces the work for courts; if you can show any connection to
reality, either anticipated or actual, good to go.
 36

8. Equitable Remedies
Equitable relief: remedy aimed at compelling a party to do (or not do) something, rather than
compensating by money for an injury already inflicted; primary purpose of injunctive relief is to
preserve status quo. Two types of equitable relief orders:
1. Temporary restraining orders
May be issued without any notice to D, or opportunity to be heard, if Ps need is
sufficiently compelling to warrant restraint for brief period; usually no more than 20 days
2. Temporary injunctions (also called preliminary/interlocutory injunctions) [will not be tested
on this concept, but Prof. still says to know the elements]
Usually awarded before a temp. retraining order terminates, and after a notice to the D
and a hearing. P must show a reasonable likelihood of success on the merits.
The basic idea is to preserve the suit for an effective decision after a full trial.
The benefits to the P must outweigh the injury that D might face.
8.1 Specific Performance
General Rule: Specific performance will not be ordered unless other damages are
inadequate, usually because the goods involved are unique
o Generally, damages are the rule and specific performance is the exception
Lowers the cost of breach
Unique is shorthand for (1) hard to determine things value (2) impossible to cover
Specific performance is about changing the price of damages, since it forces negotiation
between the parties and the price settled on is likely higher than damages determined by
court (negotiation is different when one party has a decree entitling them to performance)
Courts will never order specific performance is in a personal service contract
o can, however, get an injunction preventing someone from doing something
Tension between perfect tender rule and the substantial performance rule
Perfect tender rule refers to the legal right for a buyer of goods to insist upon "perfect
tender" by the seller. In a contract for the sale of goods, if goods fail to conform exactly
to the contract description (whether as to quality, quantity or manner of delivery) the
buyer may reject the goods. The buyer doesnt have an unfettered ability to reject tender
o This rule has been retained by the UCC, ordinarily superseding over claims of
substantial performance, albeit with several exceptions restoring the rule of
substantial performance that apply in most commercial cases.
o Pros for perfect tender rule: Simplifies the rules of breach
Substantial Performance. Relevant when a contractor's performance is in some way
deficient, yet is so nearly equivalent that it would be unreasonable for the owner to deny
the agreed upon payment. If a contractor successfully demonstrates substantial
performance, the owner remains obligated to fulfill payment, less any damages suffered
as a result of the deficiencies in workmanship by the contractor.
o Most courts have adopted substantial performance. But substantial performance
must be interpreted since it is not self-evident how much work it constitutes
o Pragmatic approach since perfect tender shifts all the risk to the seller, while the
buyer can get out on trivialities (allows to refuse if price is falling, etc.)
o Strong incentive to get substantial performance and sue on contract rather than
restitution, as contract breacher only gets value of services not tied to contract price
o If substantial performance: gets [contract price ] [diminution of value]
 37
o If not SP, then restitution: gets [benefits provided] [cost of completion]
Substantial Performance in Unilateral Contracts
Traditionally, such unilateral contracts were deemed to be effective once specified performance
was tendered, and could be revoked at any time prior to completion of the performance. This
result was deemed unacceptable by many jurists, and so they applied the doctrine of substantial
performance to the situation, effectively deeming someone who had begun the performance to
have established an option contract to hold the unilateral contract open.
Material Breach vs. Substantial Performance
Substantial performance: Concerns the question of when a party who has breached a
contract can nevertheless bring suit under the contract for the work they have completed
Material breach: Concerns a different question: when can a party who has not breached a
contract (i) invoke the sanction of terminating the contract for the other partys breach,
and (ii) bring suit for damages for total breach
Three kinds of breach:
o Immaterial: breach in minor issues; doesnt excuse party from performance
o Material: excused from performance
o Total: form of material breach; party that breaches doesnt do anything at all.
Jacob & Youngs v. Kent, NY Ct. of Appeals, 1921
Builder unknowingly used wrong kind of pipe in home, though same quality and price
Holding: substantially performed; entitled to damages for diminution of value, which
is trivial. In a case of imperfect performance, a party is entitled to the money which
would allow him to complete the performance, unless the cost of completion is grossly
and unfairly out of proportion to the good to be attained

K&G Construction Co. v. Harris, MD, 1960

Subcontractor materially breached contract when it knocked down house wall and didnt
fix it. Contractor refused to make progress payment, so sub refused to continue working.
Holding: Material breach (knocking down of wall) gave contractor right to stop payment,
so contractor was not in default. Subs ensuing failure to continue work after contractor
stopped payment is an unjust repudiation that allows contractor to bring action for breach

If there is a repudiation (whether anticipatory, accompanied by non-performance or following

non-performance), there is no need to cure it since there is no longer a duty; repudiation is
considered a total material breach
A repudiation is a statement by the obligor to the obligee that the obligor will commit a
breach that would be a material breach or a voluntary affirmative act rendering the
obligor unable to perform without breach
A party may repudiate by words or act (both of which require interpretation)
A repudiation can be retracted if the other party has not yet relied on it
Central issue: With breach by nonperformance were trying to figure out if its been a
material breach; with repudiation were trying to figure if theres been a repudiation.

Anticipatory Repudiation
When either party repudiates contract with respect to a performance not yet due the loss
of which will substantially impair the value of contract to the other, aggrieved party may:
o For a commercially reasonable time await performance by repudiating party, or
 38
o Resort to any remedy for breach even though he has notified the repudiating party
that he would await the latters performance and has urged retraction; and
o In either case suspend his own performance or proceed in accordance with the
provisions of this Article on the sellers right to identify goods to the contract
notwithstanding breach or to salvage unfinished goods

Hochester v. De La Tour, England, 1853

wrote to to notify that he no longer needed s courier services and refused
compensation. sued prior to the date when performance on the contract was due
Holding: Court allowed suit for anticipatory repudiation
Reasoning: After repudiated, should be free to consider himself absolved; not
uselessly preparing (to a maintain suit) but rather finding other work to mitigate damages
Williston: This holding makes no sense because promised performance hasnt come
around yet (how can you sue for breach of something that was supposed to happen, when
the time when the thing was supposed to happen hasnt yet occurred? The other party
didnt make a promise not to repudiate; he only promised to go on the trip)
Corbin: The parties had created an implied promise not to create a situation
undermining or defeating others expectations (i.e., implied promise not to prevent
completion of the contract)

Adequacy of Damages
RS 360 (Factors affecting adequacy of damages): In determining whether the remedy
in damages would be adequate, the following circumstances are significant:
o The difficulty of proving damages with reasonable certainty
Examples where damages may not be able to prove with reasonable
certainty: loss of heirlooms, art with strong sentimental attachment, etc.
o The difficulty of procuring a suitable substitute performance by means of money
awarded as damages, and
o The likelihood that an award of damages could not be collected
o NOTE: these are factors that held determine adequacy of a remedy at law;
remember: inadequacy of a remedy at law is why we have specific performance

London Bucket Co. v. Stewart, KY, 1951

breached contract to install a heating system for a large motel
Holding: Court refused to order specific performance, stating contracts for building
construction will not be specifically enforced because ordinarily damages are an adequate
remedy and, in part, because of the incapacity of the court to superintend performance

Edge Group WAICCS LLC v. Sapir Group GROUP LLC

P sought specific performance on contract with D for sale of interest in LLC.
Transaction would have involved $20M payment by D to P in exchange for a 50%
interest. Before closing, D repudiated due to speculative nature of project planned
D argued that measuring damages from breach is not inherently imprecise at to justify
specific performance. D also argues specific performance should be denied because:
(1) Ps need to mitigate its damages and
o Court found mitigation was not required to justify spec. performance, and that
P did make attempts to mitigate by reducing sales price to D
(2) the fact that D doesnt have the funds to pay the $19M owed.
 39
o Court found that even though specific performance may be precluded by
impossibility of performance at time of breach (or anytime court relief is
sought), Ds prior deposition conflicted with this assertion
Court: Ds contention that a legal remedy is available is based on flawed appraisal value
for parcel, which was not the value of an interest in WAICCS2. The property had
restrictions that P was bound by, P could not easily sell property
o D initially argued that P was entitled to difference between the $20M purchase
price and the value of Ps interest in the property at the time of breach.
o Appraisal was made during recession/commercial real estate collapse.
Holding: P entitled to specific performance because of inability to calculate damages
The real estate was deemed inherently unique, and the court points to a number of
decisions granting specific performance of real estate sale contracts.
Uncertainty in placing monetary value on property determines if a contract will be
redressed by specific performance: when relevant info is unreliable, theres a huge risk
that an award of money damages will either exceed or fall short of promisees actual loss
Substituting helps figure out value of the object by comparing it to the substitute; a
substitute would allow D to claim a legal remedy; P can if a substitute is available
8.1.1 Specific Performance Through Negative Enforcement
Specific Performance and Uniqueness of Location
Walgreen Co. v. Sara Creek Property Co., 7th Cir, 1992
operated a drug store in a mall on a 30-year lease, stipulating that the mall couldnt
open another drug store. lost largest tenant in mall; informed it intended to replace
largest tenant with a drug store. sued for breach; sough injunction to prevent drug store
Holding: Court grants injunction because there is an inadequate remedy at law;
determining s damages for breach would be costly and highly uncertain. In contrast, the
only substantial cost of injunction is that it may set off negotiations between parties
(because injunction sought is an enforcement of a negative exclusivity clause)
Benefits of injunctive relief: Shifts burden of determining costs of s conduct from court
to parties (parties would enter negotiations to dissolve injunction), and prices are more
accurately determined by the market than by government
Negatives of injunctive relief: Many injunctions are costly b/c they require continuing
court supervision, and injunctions may impose costs on third parties.
o Also, in case of a bilateral monopoly, parties have incentive to push towards the
limits (maybe to develop relationship as a hard bargainer), even to the point of
causing negotiation to break down
Bilateral monopoly: Both and have different powers and may want
to pay out of the injunction in order to avoid the injunction.
Benefits of damages: Avoids costs of continuing court supervision and third-party effects
and also avoids costs and potential problems w/bilateral monopoly effects
Negatives of damages: Less accuracy in determination of value, costs of parties
preparing & presenting evidence to court & time of court in evaluating evidence
Its not physical uniqueness that matters, its economic uniqueness that matters.
Nachbar thinks court was wrong: you dont apply specific performance whenever cost
and benefits of specific performance as a remedy are such that, as a matter of
administrable costs from courts perspective, costs are lower than damages.
Problems with applying specific performance:
 40
o Bilateral monopolies: any range of prices may be okay; whether parties find the
appropriate range may be a barrier to bargaining
o Inability of parties to determine value of something; indeterminacy makes it hard
to resolve dispute
o Hard for Pharmor to value how much more it is for them to be there, as opposed
to another strip mall
o Once interests are set very clearly, parties can negotiate around it
o Maybe we should think of specific performance broadly, as it allows parties to
negotiate a conclusion
o Money damages assumes we know which party will breach, and that courts award
damages. Who will have better info? Parties.

Curtis Brothers
Court considering whether to grant specific performance in harvest of tomatoes.
Holding. Court awards specific performance. Why? Commodities not unique, usually.
Always look at the circumstances; not much of a spot market for tomatoes: it is the time
of year when everyone is buying tomatoes so everyone is locked in forward contracts.
Money difference between contract price and spot market price doesnt actually do
much to compensate the canning plant (hard time covering; cant bring tomatoes in on
time). Canning plant operates on assumption there will be tomatoes (large fixed costs)
Negative enforcement winds up being a way to try to push someone into positive enforcement
(affirmative enforcement)
However, court can make it happen alternatively by declining injunction and
ordering high damages. Then D has a choice and can negotiate with P about
whether D will pay, negotiate, or perform. Parties can always settle after ruling
Lumley: Court wont order to perform; does keep her from singing elsewhere
Dempsey: Court wont order to perform; keeps him from fighting anyone else

Van Wagner Advertising Corp. v. S&M Enterprises, NY, 1986

leased space on exterior wall of s building to erect a billboard. breached and
sought injunctive relief because the space in the contract was unique as to location
Holding: Court refuses to order specific performance. Point at which breach of a contract
will be redressable by specific performance must lie not in any inherent physical
uniqueness of property but instead in uncertainty of its value. The fact that the subject of
a contract may be unique as to location does not by itself entitle to specific performance
Difficulty in establishing damages for contract breach involving real property arise, not
because property is not interchangeable with money, but because its very difficult for
courts to obtain, at a reasonable cost, enough info about substitutes to permit the
calculation of an award of damages without imposing an unacceptably high risk of under-
compensation of the aggrieved party

Lumley v. Wagner
D, opera singer, engaged in contract with an exclusivity clause; D made another
engagement for larger sum and abandoned agreement with P.
Cant force D to sing; and damages are hard to estimate. However, the court read the
contract as the exclusive right to sing and enjoined from singing at second opera house.
Holding: An injunction can be granted to enforce a negative covenant of a contract.
 41
Court states the injunction provides two purposes:
o To compel D to not sing at competing theaters, which she agreed in contract, and
o To protect D from vindictive damages a jury may have awarded if she
performed elsewhere while she was still under contract.
Contract contains a positive covenant (requirement that singer sing for the theatre) and a
negative covenant (the implied requirement that she wouldn't sing in a different theatre).
Courts should not necessarily enforce positive covenants like these since we don't want to
force employees to work for employers they don't want to work for; public policy issue.
However, courts can enforce negative covenants (to push singer pack to employer) if the
commodity in question in the contract is sufficiently rare or has a specific talent.
Forcing to pay for breach would not adequately compensate for losing major talent
and having her defect to another theatre; damages also difficult to estimate
Third party who employed her separately in this case are free riding on first guys
advertising. Period of exclusivity is crucial for preventing this type of freeriding.
Negative covenant: a requirement in a contract that one party will NOT do something.
This is a case of specific performance through a negative enforcement.

Manchester Dairy System v. Hayward

P entered into contract in which he had to sell to Assn all dairy products produced on
farm. Assn pay monthly base price and distributed balance of years net earnings among
members. Clause in contract stated it would be difficult to assess damages, so there
would be $5 per cow in liquidated damages, and in the event of a breach, Assn would be
entitled to an injunction to prevent breach, or decree for specific performance.
We want specific performance or injunction in this case because of business model of
associationif you cant get injunction/specific performance, theres a worry about other
members defaulting, which is a huge externality and causes the other association
members to bear a higher costtragedy of the commons situation.
In sale of perishable goods, an injunction is tantamount to specific performance because
if you cant sell to anyone else, might as well sell to P, otherwise stuff just rots.

Laclede Gas Co. v. Amoco Oil Co., 8th Cir., 1975

Oil company breached on a contract to meet housing developments propane needs
Holding: Court ordered specific performance because theres a public interest in
providing propane to retail customers, substitutes are unavailable, and the amount of
court supervision required would be far from onerous
While a court may refuse to grant specific performance where such a decree would
require continuing court supervision, this is a discretionary rule frequently ignored when
the public interest is involved

Arguments For/Against Specific Performance

For specific performance:
o Fairness: Specific performance is the best way to put in the position he would
have been in had contract been performed (damages are an imperfect substitute,
as seen in Peevyhouse)
Against specific performance:
o Courts dont like to force people to do things; its a bad policy and hard to enforce
 42
o Consequentialist: Specific performance prolongs litigation; if someone breaches,
they often have a good reason and are willing to pay damages. By forcing them to
do something they dont want to do, the court raises the cost of breach, giving
too much power in subsequent negotiations

Problems of Supervision
City Stores Co. v. Ammerman
told that would have an opportunity to lease space in s building if two
conditions were met; met conditions; reneged and sued for specific performance
Law. If legal remedies arent practicable/adequate, specific performance may be an
adequate remedy, even if contract has left terms open for future negotiation
Held. Judgment for ; when a legal remedy is inadequate/impracticable and material
terms are definite, open terms will not render specific performance an inadequate remedy
Relief ordering building construction should not be withheld unless the difficulties of
supervision by the court outweigh the importance of enforcement to the plaintiff.
Because was promised a lease with terms at least equal to that of other major tenants,
the material terms could easily be ascertained by examining other tenants leases.
However, remedy at law is still not adequate; wont compensate for advantage of new
shopping center
Forcing to give a lease wouldnt be especially detrimental or result in a hardship to

Grayson-Robinson Stores v. Iris Contr. Corp.

Facts: contracted with to build a store on s property. was unable to get financing
and asked for an increase in rent. refused; case went to arbitration. Arbitrators
ordered to proceed. By statute, NY courts had authority to enforce decision of arbitrator
Issue: Should the courts enforce specific performance as ordered by the arbitrator?
Rule: A NY statute dictates that the courts will enforce arbitration agreements without
considering their merits; ordered to build the building.
Normally, taking on responsibility to enforce an order thats arguably impossible would
be rejected on public policy grounds. Here, a statute seems to trump the common law rule
 43

III. Assent
9. Mutual Assent: The Meeting of the Minds
9.1 A Subjective or an Objective Theory of Assent?
Subjective intention: What the parties really meant (state of mind)
Intent is often unreliable; nearly impossible to base contracts on subjective intent
If what matters is subjective intent: contract law is about assent, autonomy, and realizing
autonomy through bargain
If parties subjectively attach the same meaning to an expression, that meaning prevails
even if it is unreasonable. Reasonableness becomes relevant only where theres not a
mutually held subjective meaning
If parties subjectively attach different meanings to an expression, neither knows the other
attaches a different meaning, and both meanings are equally reasonable, neither prevails;
Peerless
If parties subjectively attach different meanings to an expression, neither party knows that
the other attaches a different meaning, and both meanings are not equally reasonable, the
more reasonable meanings prevails
If the parties, A and B, attach different meanings, M and N, to an expression, and A
knows that B attaches meaning N while B does not know that A attaches meaning M,
meaning N prevails even if it is less reasonable
o Fault analysis: B may have been at fault in attaching meaning N to the expression,
but A is more at fault (blameworthy) for allowing B to proceed on the basis of an
interpretation A knew B held, if B didnt know A held a different interpretation
Objective intention: What parties actually wrote in contract
Words are often unreliable; often using objective words of a party led to interpreting
contracts to mean something parties obviously did not intend
Strict objectivist: contract law is about communication. Someones perception of your
expression is what matters.
Threshold question: Whether ambiguity is of objective terms, not subjective intent
Objective wins every time. Subjectivity will only be evidence of objective intent

Determining Meanings in Case of a Misunderstanding

No mutual assent [no contract] if parties attach different meanings to their manifestations and
neither knows or has reason to know meaning attached by other, or both parties know or have
reason to know meaning attached by other; [if equally innocent or equally guilty no contract]
Hawkins v. McGee
guaranteed 100% perfect hand in 3 or 4 days. Is this a contract?
o : 100% was the final inducement to operate.
o : 100% is just a figure of speech, just for reassurance (theres no way to
achieve perfection).
o : 3-4 days sounds like an explicit promise; affects s decision to have surgery
o : should have known time is relatively uncertain
Held. Time isnt a contract, but 100% perfect is. Understanding of parties (reason to
know) is crucial to determine. Whether theres a contract is never a neutral position!
Lucy v. Zehmer, VA SC, 1954
Drunk guy agrees to sell land to man for $50K, but thought agreement was a joke
 44
Held: Contract; s outward intention manifested real agreement: he got wife to cosign,
made reasonable price for offer (better than previous offers), rewrote first draft, etc.
A person cannot set up that he was merely jesting when his conduct and words would
warrant a reasonable person in believing that he intended a real agreement
BUT, Keller v. Holderman, MI, 1863
Check was made out in jest to buy $15 watch for $300. Held: If a whole transaction is a
frolic made in jest by both parties (buyer never intended to buy/seller never intended to
sell), court should conclude (1) no COA existed as (2) no contract was ever made

New York Trust Co. v. Island Oil & Transport Corp. (1929)
created several Mexican subsidiaries, for which owned all the stock. mortgaged
stock in subsidiaries, but in order to fix the books, had one of their subsidiaries sell a
large quantity of nonexistent oil to ; then owed subsidiary a lot of money. went
bankrupt; subsidiaries were sold to pay their debts. took over one of the subsidiaries;
demanded pay money owed. argued contract between and subsidiary was a scam,
not enforceable. Law: contracts only enforceable if legitimate. If a contract is part of a
scam, then its non-enforceable, even if it meets all the requirements of a contract

Raffles v. Wichelhaus, England, 1864

sold cotton to on a ship called the Peerless. Two ships were called the Peerless.
meant Oct. and meant Dec ship. refused accept cotton when it arrived, sued
Held. Ship transporting cotton is immaterial. Since parties didnt state an intention when
contracting as to the ship that had the cotton, a written contract (good on its face), is not
disturbed by parol evidence. Ambiguous immaterial terms dont render a contract void
Rule: Contract unenforceable/nonexistent when a latent ambiguity relating to a
material term in the contract prevents a meeting of the minds at the time of formation
Dissent. Since theres 2 ships called Peerless, contract contains a latent ambiguity. Parol
evidence may be introduced to prove parties meant different ships; contract nonbinding

Allied Steel & Conveyers, Inc. v. Ford Motor Co. (1960)

employee performing installation on s premises was injured by negligence of .
executed a purchase order with that contained an indemnity making liable for s
negligence in connection with s work. Work commenced and injury occurred months
before indemnity provision was acknowledged
Law. If form of acceptance is worded in suggestive language, offeree may accept in other
reasonable way, such as commencement of performance, and be bound by offers terms
Held. s amendment gave a suggested mode of acceptance which didnt preclude s
acceptance by another method. accepted when undertook performance of the work
called for by the amendment with the consent and acquiescence of .
o However, Allied just showing up is not extremely persuasive evidence of a
contract. Its not unusual that a party starts performing without a contract.
Nachbar: If Raffles is right, Allied is wrong; Allied is right, but reasoning not convincing
created ambiguity and had control over acceptance. Why not punish for ambiguity?

Frigaliment Importing Co. v. B.N.S. Intern. Sales Corp., US DC SDNY, 1960

contracted for chicken from . wanted frying chicken; delivered stewing chicken
Held. Chicken includes stewing; contract referred to DOA regulations/trade usage
 45
s subjective intent as to the meaning of chicken coincides with a reasonable
interpretation in light of the circumstances; fully performed. In a dispute over the
meaning of a contract word, s subjective intent is sufficient to escape liability so long
as its subjective intent corresponds with a reasonable interpretation of the disputed word

Embry v. Hargadine, McKittrick Dry Goods Co., MO, 1907

went to talk to about renewing employment contract. said: Youre all right, dont
let that worry you. understood as accepting re-employment. fired months later
Held. If a party, irrespective of his true intentions,
(1) conducts himself in such a way that a reasonable person would believe he was
assenting to the terms proposed by the other party, and
(2) other party, upon such reasonable belief enters a contract with him enforceable
Spoken words giving way to a contract are more important than inner intent. So even if
didnt intend to renew the contract, if a reasonable person could believe the contract was
renewed based on s statement to , it constituted valid assent to re-employment
With respect to the issue of mutual assent the court suggests subjectivity is important.
o It could be that objective intent (expressed intent) is evidence of subjective intent
(implied intent), which would contracts are about assent.
When making a contract, parties need to agree to their relative liabilities.
Contracts creates mechanisms to put this in place (i.e. mutual assent.). If
contract law is about assent, what kind of questions should we be asking?
o A strict objectivist is more concerned with communication, as opposed to intent.
o Knowing which theory is more important leads to your intuition of contracts law
Think of Embry as a formation case, specifically in terms of offer and acceptance.
Formation cases: what people say (and context) is especially important
Mechanisms to put mutual assent in place**
o 1. Offer: proposal to enter into a contract. Offer must contain
(1) A proposal to make a legally binding agreement and
(2) Terms of the agreement/contract
o 2. Acceptance: an offer seeks acceptance. If acceptance is accepted, the contract
forms mutual assent. Acceptance indicates agreement to enter a contract.
3 Categories of Contract Terms
(1) Term parties probably had in mind but did not trouble to express
(2) Terms parties would probably have expressed if it had been brought to their attention
(3) Terms implied by Court because of the Courts view of fairness or policy or rules of law

Supplying an Omitted Term

When the parties to a contract have not agreed to a term essential to a determination of
their rights and duties, the court supplies a term that is reasonable in the circumstances
The court should supply terms in accordance with community standards of fairness and
public policy; courts not limited by what parties had in mind
Hurst v. W.J. Lake & Co., OR, 1932
Sale of horse meat scrape at minimum 50% protein. Delivered between 49.5-50%
Held for seller; common trade usage means min. 50% protein is no less than 49.5%
Its safe to assume that, absent evidence to contrary, that when tradesmen employ trade
terms they attach to them their trade significance. If they meant to strip them of their
trade significance, it would be reasonable to believe they would state so in agreement
 46
Spaulding v. Morse, MA Sup. Jud. Ct., 1947
agreed to pay stipend to son until be entered college. Son entered military. Mom sued
Held: not required to perform provision for education of son while hes in the military.
only intended to pay son if/when he went to college at formation of contract
If an instrument as a whole indicates a particular result was fixedly desired, though not
expressed by formal words, that defect may be supplied by implication and underlying
intention may be effectuated, provided it is sufficiently declared by the entire instrument
Lawson v. Martin Timber Co., LA, 1959
Contract stated that would get another year to cut timber if there was high water
Held: Court ruled against clear words of contract; looked at context to determine parties
meant got another year if there was high water and it prevented timber removal
Flower City Painting Contractors v. Gumina, 2nd Cir., 1979
Contractor hired new painting company to paint a building. Painters only painted interior
walls. Contractor refused to pay, saying contract included all rooms in the building
Trade usage for construction industry in NY was that painting contracts be awarded on
basis that all rooms in the building were covered; painting company claimed ignorance
Held: No contract formed; this was the painting companys first contract; the company
had no reason to know of trade usage, and didnt adopt it. Thus, the material term in
question could mean or represent two different things; no meeting of minds; no contract
Each party held a different and reasonable view of the undertaking: Flowers on basis of
literal reading of units, and Gumina because of supposition concerning trade practice
Given the ambiguity created by multiple contract documents, 2 different understandings
of the subject matter embraced by the contract are both possible and plausible, but
custom isnt enough to establish a contracts meaning. A party is bound if he either
knows or has reason to know of its existence and nature. An experience professional
may have a duty/responsibility to inform neophyte if you know they are a neophyte.
Its not about whether the professional knows, but if the professional has a reasonable
expectation that the ambiguity may lead to multiple interpretations
If no consideration, Quantum meruit applies if party proves it acted reasonably
*As in Raffles, no party acted so unreasonably as to justify construing the ambiguity
against it. If one party can be assigned greater blame for the misunderstanding, that party
should be found liable for the confusion; ambiguity dispute should be resolved by a jury
Usage of trade, Course of dealing, and Course of performance
Usage of trade. Usage with such regularity of observance in a place, vocation, or trade as
to justify an expectation that it will be observed with respect to a particular agreement.
Unless otherwise agreed, usage of trade in which parties are engaged or one which they
know or have reason to know gives meaning to parties agreement; not required that
usage of trade be consistent with the meaning the agreement would have apart from usage
Course of dealing is a sequence of previous conduct between the parties to an agreement
which is fairly to be regarded as establishing a common basis of understanding for
interpreting their expressions and other conduct. Unless otherwise agreed, a course of
dealing between parties gives meaning to or supplements or qualifies their agreement
Course of performance: An agreement is supplemented/qualified by reasonable usage
with respect to agreements of same type if parties know/have reason to know of usage
and neither knows/has reason to know other party has intentions inconsistent with usage
 47

10. Offer and Revocation

A contract must have both consideration and requirements of offer and acceptance to be valid
The power to terminate acceptance exists between offer and acceptance stages
Classically, the offeror is the master of the bargain, but if elements of reliance are
present, it provides protection to the offeree as well
If we call something an offer, it makes the offeror very vulnerable to an acceptance and
thus a contract, so we want to make sure there are not too many things classified as offers

10.1 What Constitutes an Offer

An offer is the manifestation of willingness to enter a bargain, so as to justify another
person in understanding that his assent to that bargain is invited and will conclude it
Test is whether a reasonable person (offeree) thinks he can accept and conclude dealings
Preliminary Negotiations
A manifestation of willingness to enter into a bargain is not an offer if the person to
whom it is addressed knows or has reason to know that the person making it does not
intend to conclude a bargain until he has made a further manifestation of assent
o Ads of goods by display, sign, newspaper, radio, or TV arent ordinarily intended
or understood as offers to sell. Must ordinarily be some language of commitment
or some invitation to take action without further communication to count as offer
o Price quote is commonly understood as inviting an offer rather than making one
Moulton v. Kershaw
D sent letter stating we are authorized to offer a certain type of salt and price, shall be
pleased to receive your order. P replied, you may ship me 2000 barrels of salt, as
offered in letter. D notified P of withdrawal of letter the day after Ps reply is received
This was a business ad, not an offer. The language cannot fairly be construed into an
offer, did not sell or specify the amounts it had to sell available.
Epstein would treat this as an offer with a bunch of implied conditions; only offering to
sell whats on hand on a first come, first serve basis.
The general rule is that ads are not offers; based on policy considerations BUT,
Lefkowitz v. Great Minneapolis Surplus Store, MN SC, 1975
Where an advertisement offer is clear, definite, and explicit, and leaves nothing open for
negotiation, it constitutes an offer, acceptance of which will complete the contract and
create obligation in the offeror to perform according to the terms of the published offer
While an advertiser has a right any time before acceptance to modify offer, theres no
right after acceptance to impose new/arbitrary conditions not contained in published offer

10.2 Ending Offerees Power to Accept: Lapse, Rejection, Counter

Methods of Terminating the Offerees Power of Acceptance (RS 36)
Rejection or counter offer by offeree
o An inquiry into the possibility of different terms or a comment upon the terms of
the offer, is ordinarily not a counter-offer
Lapse of time
Revocation by offeror
o Can be indirect: Even if offeror takes definite actions inconsistent with an intent
to enter the proposed contract and offeree acquires reliable info to that effect
 48
Death or incapacity of either party (this rule is harsh towards offerees)
Non-occurrence of any condition of acceptance under the terms of the offer

Purported acceptance which adds conditions

A reply to an offer which purports to accept it but is conditioned on offerors assent to
terms additional to or different from those offered is a counter-offer BUT, a definite
expression of acceptance is operative despite statement of additional or different terms if
acceptance isnt made to depend on assent to additional/different terms (only a proposal)
CONTRAST UCC 2-207: In sale of goods, an acceptance with conditions is still an
acceptance and sometimes the conditions become part of the actual agreement
10.3 Termination of the Offerees Power of Acceptance: Revocation
Option Contract Created by Part Performance or Tender (RS 45)
(1) Where an offer invites an offeree to accept by rendering a performance and does not
invite a promissory acceptance (not bilateral), an option contract is created when the
offeree tenders or begins the invited performance or tenders at beginning of it
(2) The offeror's duty of performance under any option contract so created is conditional
on completion or tender of the invited performance in accordance with terms of the offer
Comment:
f. Preparations for performance. What is begun or tendered must be part of the actual
performance invited in order to preclude revocation under this Section. Beginning preparations,
though they may be essential to carrying out the contract or to accepting the offer, is not enough.
Preparations to perform may, however, constitute justifiable reliance sufficient to make the
offeror's promise binding under 87(2). In many cases what is invited depends on what is a
reasonable mode of acceptance.
Illustration:
A makes a written promise to pay $5k to B, a hospital, "to aid B in its humanitarian work."
Relying upon this and other like promises, B proceeds in its humanitarian work, expending large
sums of money and incurring large liabilities. Performance by B began; A's offer is irrevocable
If an offeror invites acceptance [only] by performance, an option contract is created when
offeree begins performance, at which point an implied promise is established that the
offer is irrevocable by offeror even though offeree is not bound to complete the contract
Beginning prep for performance is not enough to preclude revocation; some degree of
actual performance is required, though prep can constitute reliance that creates a contract
Option contract: Irrevocable offer the offeror promises not to revoke for a period of time
Protects offeree by prohibiting revocation once the offeree begins performance. Designed
to protect offeree in justifiable reliance on offeror's promise; rule yields to a
manifestation of intention which makes reliance unjustified

Petterson v. Pattberg (1928)

D offered to give P a discount on his mortgage if paid off by certain date; when P tried to
pay, D refused and said mortgage had been sold to a third party; P needed to pay in full
Law. Unilateral contract may be revoked any time prior to performance of invited action
Held. Court determined s letter constituted an offer to enter a unilateral contract and
that revoked offer to enter into a unilateral contract prior to s acceptance. When
performance and rejection take place simultaneously; court decides who wins.
Modern view is that you cant pull an offer once tender is being offered. This case does
not reflect the current law; RS 45 probably changes the outcome
 49
These contracts have the implied term that once you start, you have the option to finish,
but you must finish to get whatever the bargain was for (cant get half recovery for half
performance). Acceptance and performance are simultaneously.
Court held that acceptance could only be found after full performance (money tendered)
Dissent. made s performance impossible. did everything he could to perform.
shouldnt benefit from a failure of a condition when its solely s actions that caused
condition to fail. s letter could be construed as requesting exactly what did

Brackenberry v. Hodgkins
Mom tells child, You can have my place if you take care of me the rest of my life.
Classical rule: Mom can revoke until the moment of her death (scary for offeree)
Modern rule: If offer is clearly for a unilateral contract, RS 45 governs and offeree may
cease performance without breaching (and mom cant revoke even if child is mean).
However, if there is doubt as to whether offer is for a unilateral or a bilateral contract (if
offeree can accept by promise or by performance), then its possible that if offeree ceases
performance, she breaches

Ragosta v. Wilder, VT SC, 1991

told he would sell The Fork Shop if he came to bank with $88K before Nov. 1st
began securing financing, called back and said he was no longer selling; had
incurred $7500 in loan closing costs at this point
Held: No acceptance, no contract. Preparation to perform isnt the same as performance

87 Option Contract [When usual consideration lacks, provides for nominal consideration]
An offer is binding as an option contract if it
is in writing and signed by the offeror, recites a purported consideration for the making of
the offer, and proposes an exchange on fair terms within a reasonable time; or
is made irrevocable by statute.
Option Contract Created Through Reliance (RS 87(2))
An offer which the offeror should reasonably expect to induce action or forbearance of a
substantial character on the part of the offeree before acceptance and which does induce such
action or forbearance is binding as an option contract to the extent necessary to avoid injustice
Eisenberg: In comparing 87(2) with 45, it appears that the framers of RS believed that
where offeree has actually begun to perform pursuant to an offer for a unilateral contract,
hes automatically entitled to expectation damages, while in other cases of reliance on an
offer (preparation), the offeree may appropriately be limited to reliance damages

James Baird Co. v. Gimbel Bros.

mistakenly calculated the wrong price for its bid, which the general contractor () used
in its bid. felt there was a contract; didnt recognize existence of contract
Law. A general contractor cannot enforce a bid made by a subcontractor as a bilateral
contract when the general contractor is under no obligation to use the subcontractors bid
if awarded job and the general contractor did not accept the subcontractors bid before it
was revoked. A general contractor is also unable to enforce the subcontractors bid based
on promissory estoppel when there is no consideration
Held: because the letter stated looking forward to your acceptance, suggests there had
to be a return letter on acceptance; held for .
 50
Court reasons that this is not an option contract because enforcing subcontractors bid as
an option contract would require subcontractor to keep offer open, but general contractor
would not be required to purchase from subcontractor. Another reason this is probably
not an option contract is for lack of consideration
Why this decision is wrong: in mass produced, highly competitive multi-party
arrangements, we have to assume everyone is agreeing to play by standard rules to make
the system work
Acceptance by Use Doctrine: general rule of subcontracting that if you use a subs bid
and get the main contract, youre bound to use that bid and must send notice to sub [of
acceptance] the same or next day after you learn you got the general contract. This rule
prevents opportunism at the post-acceptance stage by bid shopping.
o If you use the acceptance by use doctrine, no need for promissory estoppel
because its a bilateral contract.
Not clear that Baird survives broader view of RST 90. The key is to understand what the
difference here is with respect to how RST 87(2) is different from RST 90.
o If you make someone a proposal, you know (1) both parties are bound if accepted
and (2) parties not currently bound yet.
o Reliance on an offer (RST 87), rather than reliance on a promise (RST 90), is the
difference between RST 87 + 90
Promise must be revocable prior to acceptance, as theres no consideration

Drennan v. Star Paving Co., CA SC, 1958

General contractor () uses subcontractors bid () in making its own bid, and wins.
When tells it won the bid, wants to revoke, saying it mistakenly bid too low;
relied on s bid to calculate is own bid, which is now bound to.
Issue. Can enforce s bid as a contract and/or based on promissory estoppel?
Held. cannot revoke bid. s reliance made s bid an option contract, so not revocable;
bound to promise not to revoke even though is not bound to
o can enforce s bid based on promissory estoppel, but not as a contract. cant
enforce s bid as a bilateral contract or an option contract; no consideration
Law: A general contractor may enforce a subcontractors bid where reasonable
detrimental reliance makes the offer (bid) binding under promissory estoppel.
One partys reliance on anothers offer may, under RS 90, make that offer irrevocable if
the offeror knew or should have known the offer would induce the offeree to take real
and substantial action in reliance on the offer
did not bargain for the use of s bid, however, it was reasonable for to rely on s
bid in creating the bid submitted; court says theres no consideration in this case
s submission of a bid was motivated by furthering its own business and s business
would only be furthered if were awarded the job. In other words, submitted the bid to
because wanted to use the bid in compiling a bid for the job. should not expect
was wrong in calculating its bid; caused mistake and should be stuck with resulting loss
Court notes that had s mistake been so obvious as to be known to , s reliance would
not have been reasonable and bid would not be enforceable under promissory estoppel.
Court also rejects s contention that failed to mitigate damages. reasonably
mitigated damages by seeking other bids for paving work and accepting the lowest bid
Baird court would probably decide this case differently. Baird and Drennan see problem
differently: Drennan sees a factual problem, while Baird doesnt really consider reliance
 51
if youre in the middle of trying to perform what you think is a contract. Baird could be a
huge issue with respect to promissory estoppel.
Use RST 45 to make an offer, and RST 90 to get around a lack of consideration
Problem w/ Drennan: two sophisticated parties creates discomfort in courts application
What is reliance actually doing in Drennan? [This is the big Q when taking the exam].
o Does it supply consideration to keep the offer open?
o Is it a substitute for mutual assent?

Dynalectric Co., Inc. v. Clark and Sullivan Constructors Inc..

interested in serving as general contractor, sought bids from subcontractors, including
. submitted a bid to and repeatedly assured of the accuracy of its bid.
incorporated s bid into its bid and was awarded the general contract; notified .
Subsequently, repudiated its obligations to and refused to negotiate with .
contracted with three replacement subcontractors to complete the electrical work for the
project. then sued in district court under promissory estoppel. was awarded the
difference between s bid and amount paid the three replacement contractors to
complete the electrical work for the project
Held. Justice required using expectation measure of damages; damages district court
awarded were foreseeable & reasonably certain. NVs doctrine of promissory estoppel (as
articulated in RST 90) says the appropriate measure of damages for such claims should
consider the measure of damages that justice requires and that comports with the RSTs
general requirements that damages be foreseeable and reasonably certain.
Court considered whether district court used appropriate measure of damages when it
awarded C&S promissory estoppel damages representing the difference between s bid
and the amount the three replacement contractors charged C&S to complete the same
work. Citing numerous cases in which promissory estoppel claims arose from a
subcontractors repudiation of its obligations to a general contractor, the Court held that
the presumptive measure of damages for a general contractor that reasonably relies upon
a subcontractors unfulfilled promise is expectation damages, and that the district court
award was foreseeable and reasonably certain
District courts may award expectation, reliance, or restitution damages for promissory
estoppel claims. The determination of the appropriate measure of damages turns on
considerations of what justice requires and the foreseeability and certainty of the
particular damages award sought. The presumptive measure of damages for a general
contractor that reasonably relies upon a subcontractors unfulfilled promise is the
difference between the nonperforming subcontractors original bid and the cost of the
replacement subcontractors performance (expectation damages)

Long Island Trust Co. v. International Inst. for Packaging Educ., Ltd. (1976)
When failed to repay the recently renewed loan, sued four of the five guarantors and
. The guarantors tried to introduce parol evidence of a contemporaneous oral agreement
that endorsement of all guarantors was required for renewal of the loan. Only 4 endorsed
Issue: May a party use parol evidence to attempt to prove the existence of an oral
condition that would bar the enforcement of the written agreement if not performed?
Rule: An oral condition precedent may be proved by parol evidence if it in no way
contradicts the express terms of the written agreement.
 52

11. Acceptances
Where an offer invites the offeree to choose between acceptance by promise and acceptance by
performance, the beginning of the invited performance is an acceptance by performance and
operates as a promise to render complete performance (RS 90)
Contrast with RS 45, which governs clearly unilateral contract: offeree who begins
performance not bound to complete it

11.1 The Mirror-Image Rule

Livingstone v. Evans (1925)
Ds agent wrote to P & offered to sell land. P wired Ds agent & said hed take it at lower
price. Ds agent wired back & said he couldnt lower price. Meanwhile, D sold land to
someone else. P wired to accept offer, but to no avail. P sued for specific performance.
Issue. Did an offer followed by a counteroffer, Ds agents reply, and the subsequent
acceptance by constitute a binding contract?
Rule. Counteroffers acts as rejection of the original offer, but the rejection may renew the
original offer. If Ds agent hadnt sent a message about not lowering the price, theres no
question no contract was formed, as counteroffer was a rejection of the original
offer. However, court found (narrowly) that Ds agents message was not a rejection of a
counteroffer, but a renewal of the original offer. As far as P knew, the offer was still open
when he accepted at original price; a binding contract was formed
Baseline rule: counteroffer is a rejection of offer. That offer cant be resuscitated, except
by the offeror; but its considered a new offer.
Mirror image rule: if your acceptance alters the terms of an offer, its a rejection of the
original offer, and a new offer, followed by acceptance must follow for contract to form.
o Problem with rule: makes it impossible to vary terms without having to establish a
new offer each time (i.e. new negotiation is formed, and all other past promises
are off the table unless a new offer is established with those promises).
2-207 is a way of addressing this; UCC and CL dont actually look too different.

11.2 UCC 2-207; The Battle of the Forms

Chief innovation of 2-207 was the abandonment of the very principle of a formal rule of
offer and acceptance in the common lawnow you can form a contract and then figure
out the terms later. In place of a formal rule, the court substitutes a general standard under
which the court is supposed to look at the general gist of the parties communication to
determine if they have formed a contract. The court can overlook any express terms in
communication if they do not fairly reflect the agreement
** Disaggregate questions in 2-207 to break down (1) if theres a contract under section,
then break down the terms in section (2). Make sure ALL 4 conditions are satisfied:
1. Must be between merchants,
2. Offer doesnt expressly limit acceptance to the terms of the contract,
3. The terms are immaterial**, and
4. Theres no notice of objection given before, or reasonably after
2-207. Additional Terms in Acceptance or Confirmation
(1) A definite and seasonable expression of acceptance or a written confirmation which is sent
within a reasonable time operates as an acceptance even though it states terms additional to or
 53
different from those offered or agreed upon, unless acceptance is expressly made conditional on
assent to the additional or different terms.
(2) The additional terms are to be construed as proposals for addition to the contract. Between
merchants such terms become part of the contract unless:
(a) the offer expressly limits acceptance to the terms of the offer;
(b) they materially alter it; or
(c) notification of objection to them has already been given or is given within a
reasonable time after notice of them is received.
(3) Conduct by both parties which recognizes the existence of a contract is sufficient to establish
a contract for sale although the writings of parties do not otherwise establish a contract. In such
cases, terms of the particular contract consist of those terms on which writings of the parties
agree, together with any supplementary terms incorporated under any other provisions of this Act
**Examples of typical clauses which would normally "materially alter" the contract and so
result in surprise or hardship if incorporated without express awareness by the other party are:
1. a clause negating such standard warranties as that of merchantability or fitness for a
particular purpose in circumstances in which either warranty normally attaches;
2. a clause requiring a guaranty of 90% or 100% deliveries in a case such as a contract
by cannery, where the usage of the trade allows greater quantity leeways;
3. a clause reserving to the seller the power to cancel upon the buyer's failure to meet
any invoice when due;
4. clause requiring that complaints be made in a time materially shorter than customary
**Examples of clauses which involve no element of unreasonable surprise and which
therefore are to be incorporated in the contract unless notice of objection is seasonably given are:
1. a clause setting forth and perhaps enlarging slightly upon the seller's exemption due
to supervening causes beyond his control, similar to those covered by the provision of
this Article on merchant's excuse by failure of presupposed conditions or a clause
fixing in advance any reasonable formula of proration under such circumstances;
2. a clause fixing a reasonable time for complaints within customary limits, or in the
case of a purchase for sub-sale, providing for inspection by the sub-purchaser;
3. a clause providing for interest on overdue invoices or fixing the seller's standard
credit terms where they are within the range of trade practice and do not limit any
credit bargained for;
4. clause limiting the right of rejection for defects which fall within customary trade
tolerances for acceptance "with adjustment" or otherwise limiting remedy in a
reasonable way
Brower. v. Gateway 2000, Inc. (1998)
A copy of Gateways terms and warranties were included in shipment, which stated the
buyer agreed to the terms and to an arbitration agreement if the buyer kept the computer
beyond 30 days after date of delivery.
The consumer had "the ability to make the purchase elsewhere and the express option to
return the goods, the consumer is not in a "take it or leave it" position; if any term is
unacceptable, buyer can reject Gateways agreement by returning the merchandise."
Law. It is generally necessary to prove both procedural & substantive unconscionability
when arguing a provision of an agreement is unconscionable. However, substantive
unconscionability alone is enough in a case where the consumer is "barred from resorting
to the courts by the arbitration clause in the first instance, the designation of a financially
prohibitive forum effectively bars consumers from this forum as well, and consumers are
 54
thus left with no forum at all in which to resolve a dispute."
s argued that arbitration clause was invalid under UCC 2-207 because:
o Arbitration forum was in Chicago; headquarters of arbitral body (ICC) in France
o Arbitral bodys rules were difficult to locate
o Costs were prohibitive: fees of $4k, $2k non-refundable, if claim < $50k
o Travel expenses would be incongruent to the amount sought.
o If lost, must pay s legal fees, which was more than most of s products
Issue. Does the arbitration clause violate UCC 2-207, and was it unconscionable?
Held. Pursuant to [Hill] and [ProCD], the arbitration clause doesnt violate 2-207.
Based on [Hill], the contract was formed when the consumer decided to retain the
merchandise beyond the 30-day period specified. Hill recognized the realities of
conducting business and observed that payment preceding the revelation of full terms was
particularly common in some industries. ProCD observed 2-207 didnt apply, noting the
section is generally invoked where multiple agreements have been exchanged between
parties in a "battle of the forms;" here a single form was used
Furthermore, unconscionability usually requires a contract be both procedurally and
substantively unconscionable when made (i.e. some showing of an absence of meaningful
choice on the part of one of the parties together with contract terms which are
unreasonably favorable to one party). The court concludes the transaction was not
procedurally unconscionable. With respect to substantive unconscionability, the site of
the arbitration being inconvenient isnt enough to rise to unconscionable, but the "high
cost factor that is necessarily entailed in arbitrating before the ICC is unreasonable and
serves to deter individual consumers from invoking the process. Since the consumer is
"barred from resorting to the courts by the arbitration clause in the first instance, the
designation of a financially prohibitive forum effectively barred P from this forum too
Substantive unconscionability puts considerable pressure on procedural unconscionability
as the driving consideration for the court.
o Consider Brower and the UCC in this context
Procedural and Substantive Unconscionability
Procedural unconscionability: this element is assessed by examining the contract
formation process to determine if "in fact one party lacked any meaningful choice in
entering into the contract, taking into consideration such factors as the setting of the
transaction, the experience and education of the party claiming unconscionability,
whether the contract contained "fine print," whether the seller used "high-pressured
tactics" and any disparity in the parties" bargaining power."
Substantive unconscionability: The substantive portion of the analysis requires "an
examination of the substance of the Agreement to determine whether the terms
unreasonably favor one party.
*Be prepared to parse out various arguments made in the various unconscionability cases
o A lot of outcomes are overdetermined.
o Figure out the sources of various arguments in order to connect them back to
either procedural or substantive unconscionability, and then determine:
Whether the interests motivating the court are legitimate?
Whether this is the role of the court?
11.3 The Mailbox Rule
Acceptance Effective Upon Dispatch (RS 63) [Mailbox Rule]
Unless the offer provides otherwise,
 55
(a) an acceptance made in a manner and by a medium invited by an offer is operative and
completes the manifestation of mutual assent as soon as put out of the offeree's possession,
without regard to whether it ever reaches the offeror; but
(b) an acceptance under an option contract is not operative until received by the offeror
Acceptance becomes effective upon dispatch (when mailed; even if its never delivered)
and revocation becomes effective upon receipt
Contract can be worded to make acceptance effective only upon receipt
Key to understanding mailbox rule: it was designed to protect offerees reliance.
o Under rule, offeree is likely to start relying on the fact that the offer was accepted.
o However, in the context of mutual assent, it would make more sense to seek
acceptance by receipt, as opposed to acceptance by mailing.
The mailbox rule is diminished by instantaneous communication.
Dates are obviously very important when applying the mailbox rule.
Comment: Revocation of acceptance after acceptance is dispatched is generally not
operative. Rather, it will amount to an offer to rescind the contract, or to a repudiation
Adams v. Lindsell (Handout)
D sent a letter to P offering to sell them fleeces, after receipt of Ps acceptance in mail.
Ds letter was misdirected and didnt reach until later. P accepted Ds offer, and mailed it
back in a timely manner; D had sold wool to another person by the time Ps letter arrived
Law. Mailbox rule is born; stands for proposition that an offer is accepted upon dispatch
Held. D, in their offer, notified P of the terms; D would await acceptance in the course of
post. Thus, D was bound by terms of their offer until it was accepted or until terms of the
offer expired. Ps accepted by mail, thus manifested valid asset. Offer accepted Friday
Points to Ponder
Sending a rejection and an acceptance (reject 1st and accept later); whichever arrives first
controls, since other side might rely on receiving the rejection
o Point is to protect offeror from offerees mistake. Rules overlap, however (can
retract rejection but not acceptance).
11.4 Acceptance by Silence or Conduct
In this section, note the interesting relationship between implicit promises and concepts
of reliance, such as promissory estoppel.
o Mutual assent problem between parties.
o When you avail yourself to a benefit, there is some assumption of a promise.
Cases of acceptance by silence, or conduct, can be looked at in many different ways.
Consider what exactly is doing the work for the court:
o Is the court concerned with problems of consideration?
o Is the court concerned with whether there was acceptance?
o Is the court ignoring whether someone did or did not accept, and just looking at
whether a party availed themselves of a benefit, for which it would be an injustice
to not find a contract
Finding of contract out of fairness, as opposed to assent, often happens in
cases of promissory estoppel and unjust enrichment
When Silence Operates as Acceptance (RS 69)
Where an offeree fails to reply to an offer, silence or inaction operates as acceptance if:
 56
o Offeree takes benefit of the offered services with reasonable opportunity to reject
them and reason to know that they were offered with expectation of compensation
o Offeror has stated or given offeree reason to understand that assent may be
manifested by silence or inaction and offeree in remaining silent and inactive
intends to accept the offer
o Because of previous dealings or otherwise it is reasonable that offeree should
notify the offeror if he does not intend to accept
An offeree is bound in accordance with the offered terms if he acts inconsistently with
the offerors ownership of the property (unless offered terms manifestly unreasonable)
But if the act is wrongful as against the offeror, it is an acceptance only if ratified by him
Kukuska v. Home Mutual Insurance Co., WI, 1931
applied for hail insurance; required to pay in advance, so limited ability to shop around.
Insurance company did not reject until morning of a huge storm, destroyed farmers crops
Held: had a duty to inform of acceptance within a reasonable time of application so
could protect himself. Not rejecting within a reasonable time was a silent acceptance
Austin v. Burge, MO, 1911
had newspaper subscription that expired; directed that subscription be stopped, but
newspaper co. nevertheless kept sending papers and kept reading them until he moved
Holding: accepted and used the newspaper, with no pretense by the newspaper that it
was a gratuity. In receiving this benefit, an obligation arose on s part to pay for it,
notwithstanding his direction to to stop sending their product
Hobbs v. Massosoit Whip Co., MA, 1893
had shipped eel skins without specific orders on several occasions, and had paid.
retained latest shipment for months, then got rid of them and refused to pay
Holding: Past dealings of the parties had created a kind of standing offer for the eel
skins. Thus, sending the skins imposed a duty on to act on them. Silence on s part,
coupled with retention of goods for a long time, amounted to an acceptance
Law. Conduct which imports acceptance or assent is acceptance or assent, in the view of
the law, whatever may have been the actual state of mind of the party; extremely fact
specific; must consider all facts when defining what parties contracted for and when
Compare Seaview (P recovers for 8 yrs. of HOA) to see how court is making its decision
What is important about Hobbs is not the outcome, but rather, at exactly what moment a
contract was formed and both parties became bound (i.e. when there was mutual assent):
o Was it when the eel skins arrived? Nachbar doesnt think so.
o Was it after eel skins arrived, and recipient of eel skins didnt object? Probably
Implied-in-Law vs. Implied-in-Fact Contracts
Implied-in-fact contract: A true contract, which differs from a run-of-the-mill contract
only in the fact that parties assent, while real, is implicit rather than explicit
o E.g., buying an apple on the run
o Damages are what parties intended (compensatory damages)
Implied-in-law contract: Not a contract at all, but rather a label given to certain kinds of
conduct that gives rise to liability for unjust enrichment
o Nothing the parties say or do implies a contract exists, and nothing the parties say
or do warrants our inferring a contract exists. Rather, the court simply says theres
a contract to avoid unjust enrichment; Quasi-contract. (No need for assent)
o Damages for implied-in-law contracts are restitution of the benefit received
 57

12. Parol Evidence + Interpretation of Written Contracts

12.1 The Parol Evidence Rule
General rule: Later written agreements nullify all prior written and oral agreements
Does not apply if theres no written agreement
Not a rule of evidence, but rather a substantive rule about the terms of a contract (i.e.,
issue is, whats the real deal?). The idea with the parol evidence rule is that we want to
exclude agreements/ evidence that might be likely to mislead the jury
Inquiry for the court comes down to whether or not the court will allow additional
information that explains the terms of a contract.
o Contract law prefers written terms over oral terms, especially when written terms
exist, which express the agreement between the parties.
RST/Willistons view: Look only at the writing (Four corners rule): If the writing
appears to be complete, it is deemed a total integration, representing intent of the parties.
o Simplifies role of courts
o BUT, conversation can give context to written words, and what if written contract
doesnt reflect true agreement of parties; maybe real deal is the conversation
Corbins view: Court should focus on true intent of parties, which can be gleaned both
from the agreement and from relevant evidence of intent outside of the writing itself.
Both views are worried about fraud.
o Williston: parties might fraudulently claim promises that were never made.
o Corbin: a party might make a fraudulent oral promise to the other to induce a
written agreement

There is a struggle with how the courts approach the parol evidence rule
Approaches to parol evidence:
o UCC approach: Nachbar says it wont be tested.
o RST approach:
Partially integrated agreement
o Parol evidence may be included
Completely integrated agreement
o No parol evidence is included
Another way to rationalize this rule is to distinguish between:
o Evidence that is going to be admitted for the purpose of determining whether or not
(in RST terms) an agreement is integrated [decided by the judge], and
o Evidence about the terms, or additional promises, that one party wants to include in
an agreement (assuming the agreement is not integrated) [decided by a jury].

Integrated Agreements and Parol Evidence

RS 209 (Integrated agreements):
1. An integrated agreement is a writing or writings constituting a final expression of one or
more terms of an agreement.
a. A completely integrated agreement is an integrated agreement adopted by the
parties as a complete and exclusive statement of the terms of the agreement.
b. A partially integrated agreement is an integrated agreement other than a
completely integrated agreement.
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2. Whether there is an integrated agreement is to be determined by the court as a question
preliminary to determination of a question of interpretation or to application of P/E
3. Where parties reduce an agreement to a writing which in view of its completeness and
specificity reasonably appears to be a complete agreement, its taken to be an integrated
agreement unless established by other evidence that it didnt constitute a final expression

RS 213 (Effect of an integrated agreement on prior agreements (Parol Evidence Rule)

A binding (partially) integrated agreement discharges inconsistent prior agreements
A binding completely integrated agreement discharges agreements that are in its scope
An integrated agreement that is not binding or that is voidable and avoided does not
discharge a prior agreement. But an integrated agreement, even though not binding, may
be effective to render inoperative a term which would have been part of the agreement if
it had not been integrated.
Comment:
a. Parol evidence rule. It renders inoperative prior written agreements and prior oral agreements.
Where writings relating to the same matter are assented to as parts of one transaction, both form
part of the integrated agreement. Where an agreement is partly oral and partly written, the
writing is at most a partially integrated agreement.
b. Inconsistent terms. Whether a binding agreement is completely integrated or partially
integrated, it supersedes inconsistent terms of prior agreements. The court must make
preliminary determinations that there is an integrated agreement and that it is inconsistent with
the term in question. Those determinations are made in accordance with all relevant evidence,
and require interpretation both of the integrated agreement and of the prior agreement.
PE rule is not a rule of interpretation but rather defines the subject matter of
interpretation (i.e., what will and will not be interpreted)

RST 214. Evidence Of Prior Or Contemporaneous Agreements And Negotiations

Agreements and negotiations prior to or contemporaneous with the adoption of a writing are
admissible in evidence to establish
(a) that the writing is or is not an integrated agreement;
(b) that the integrated agreement, if any, is completely or partially integrated;
(c) the meaning of the writing, whether or not integrated;
(d) illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
(e) ground for granting or denying rescission, reformation, specific performance, or other remedy

RST 216. Consistent Additional Terms

(1) Evidence of a consistent additional term is admissible to supplement an integrated agreement
unless the court finds that the agreement was completely integrated.
(2) An agreement is not completely integrated if the writing omits a consistent additional agreed
term which is
(a) agreed to for separate consideration, or
(b) such a term as in the circumstances might naturally be omitted from the writing.
Comment:
b. Consistency. Terms of prior agreements are superseded to the extent that they are inconsistent
with an integrated agreement, and evidence of them is not admissible to contradict a term of the
integration. The determination whether an alleged additional term is consistent or inconsistent
with the integrated agreement requires interpretation of the writing in the light of all the
circumstances, including the evidence of the additional term. For this purpose, the meaning of
 59
the writing includes not only the terms explicitly stated but also those fairly implied as part of the
bargain of the parties in fact. It does not include a term supplied by a rule of law designed to fill
gaps where the parties have not agreed otherwise, unless it can be inferred that the parties
contracted with reference to the rule of law. Determinations are to be made by a judge, not jury
e. Written term excluding oral terms ("merger" clause). Written agreements often contain clauses
stating that there are no representations, promises or agreements between the parties except those
found in the writing. Such a clause may negate the apparent authority of an agent to vary orally
the written terms, and if agreed to is likely to conclude the issue whether the agreement is
completely integrated. Consistent additional terms may then be excluded even though their
omission would have been natural in the absence of such a clause. But such a clause does not
control the question whether the writing was assented to as an integrated agreement.

Mitchill v. Lath, NY Ct. of Appeals, 1928

claimed that had orally agreed to remove an icehouse before the purchase of a home
Holding: Parol evidence not admissible to determine if icehouse was part of the
agreement, because agreement to move the icehouse is something that one would expect
the parties would normally put in the contract (Willistonian); agreement was integrated
For a parol agreement to vary a written contract entered into at the same time, three
conditions must be met:
o Must, in form, be a collateral one
o Must not contradict the express or implied provisions of the written contract
o The agreement must be one that the parties would not ordinarily be expected to
put into the written agreement (i.e., it must not be so connected with the principal
transaction so as to be part and parcel of it)
This can be viewed either by looking at the text of writing, or by looking
outside the writing, specifically at the context of the deal.
Court: Third condition not satisfied. If wanted to make the promise, it would seem
most natural to be included in the written contract to sell land. Written contract showed a
complete and full agreement (complete integration); reciprocal obligations fully detailed
o Court is encouraging contracting parties to put their contracts in writing
Dissent: Looking only at the written contract is not sufficient; the court must examine
prior negotiations to determine integration. A written contract for conveyance of land
doesnt cover a field so broad as to include prior agreements to do other acts on other
property after conveyance was made (Corbin)
o Cant determine if the written agreement was a final expression until you figure
out what they intended it to cover by looking at circumstances outside the writing
General rule in applying both Mitchill and RST: The likelihood a court will exclude
extrinsic evidence about terms of deal and just look at the written contract depends on:
(1) How comprehensive the agreement is, and
(2) How closely related the collateral agreement is with the subject matter of the
written agreement, and
(3) How sophisticated each party is (i.e. by lawyering up, for instance),

Hatley v. Stafford, OR, 1978

signed a lease to rent a farm from , which included a provision that could buy out
lease at $70 per acre; contract didnt specify when could exercise buy-out option.
came onto s land and cut down wheat to build mobile home park. sued for trespass
Held: After applying the P/E rule, oral evidence of the buy-out term was allowed
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A term of the oral agreement must contradict an express provision of the written
agreement to be considered inconsistent with it. The oral agreement was not inconsistent
with the written agreement, as an express provision in the contract was not contradicted;
it wasnt even mentioned in writing.
Furthermore, the court found it reasonable to find the oral buy-out time limitation
agreement would naturally be made separately from the written contract.
o Court finds it important, but not dispositive, that contract appears on its face to be
on such poor terms to lessee in regard to value of wheat
Important to consider: How judge answered question of law about what evidence to let
in, followed by the question of fact regarding terms of the agreement.
They could have put in merger clause to try and solve this kind of dispute.
Parol evidence takeaway: collateral not supported by separate consideration.
Court should assume the writing was intended to be a complete integration, at least when
writings complete on its face, and should admit evidence of consistent additional terms
only if theres substantial evidence parties didnt intend writing to embody entire deal

Problem with PE rule

People are not careful when contracting, especially unsophisticated parties
If rule is applied strictly, you will enforce contracts that neither party intended to agree
o Objective standard of intent works either:
Because we think people think what theyre saying, and so we use what
they say as an indication of what they were actually thinking, or
Because we dont really care what they were thinking, we really care
about is what the counterparty would have thought they were thinking
based on what they said.

12.1 The Interpretation of Written Contracts

Courts must interpret all contracts to determine what they mean (interpretation always
lies outside the P/E rule)
o IMPORTANT: PE rule normally doesnt exclude evidence of the
circumstances under which a contract was made, only evidence of agreements
not embodied in the written contract
Plain Meaning approach: Look at words of the contract, and if theyre unambiguous then
youre done (i.e., extrinsic evidence is inadmissible to interpret, vary, or add to the terms
of an unambiguous integrated written instrument)
o Pro arguments:
Role of the courts: Its not the role of the courts to re-write a contract in
conflict with the plain meaning of the terms
Consequentialist: Without the plain meaning rule, any agreement would
be at risk of a party later having its true meaning obfuscated under guise of
examining extrinsic evidence
o Con arguments:
Whether the language of an agreement is clear or ambiguous may not be
apparent without reference to the context in which the agreement arose
Intent approach: Always examine extrinsic evidence and circumstances when
interpreting an agreement
o Con arguments:
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Casts a long shadow of uncertainty over all business deals; more litigation
Chips away at the foundations of our legal system, the basic principal that
language provides a meaningful constraint on public and private conduct

RS adopts the intent approach

RS 212: Interpretation of an I/A must be made in light of the circumstances
Any determination of meaning or ambiguity should only be made in the light of the
relevant evidence of the situation and relations of the parties, the subject matter of the
transaction, preliminary negotiations and statements made therein, usages of trade, and
the course of dealing between the parties
Illustration: Under the RS, if A and B agree orally that buy means sell and sell
means buy, if they then make a contract in accordance with that oral agreement, they
are then bound in accordance with that oral agreement

The parol evidence rule doesnt even come into play until it is first determined what the
true agreement of the parties is, i.e., what they meant by what they wrote down
Construing a contract of debatable meaning by resort to surrounding and antecedent
circumstances and negotiations to determine the meaning of the words used is never a
violation of the P/E rule

Pacific Gas v. G. W. Thomas Drayage & Rigging, CA SC, 1968

agreed to indemnify against all loss resulting from injury to property arising out of a
repair contract. During work, cover fell & injured exposed rotor of s turbine; sued
Issue: Can admit evidence that damage to property meant damage to 3rd party property?
Holding: Extrinsic evidence admissible because of the imprecision of language and
because the plain meaning may not reflect the intentions of the parties
o Rational interpretation requires at least a preliminary consideration of all
credible evidence offered to prove the intention of the parties
The test of admissibility of extrinsic evidence to explain the meaning of a written
instrument is not whether it appears to the court to be plain and unambiguous on its
face, but whether the offered evidence is relevant to prove a meaning to which the
language of the instrument is reasonably susceptible
The trend is for juries, not judges, to look at extrinsic evidence to interpret an agreement
Excluding parol evidence merely because the words do not appear ambiguous may lead
to an interpretation of a written contract that was never intended. Extrinsic evidence may
not add to, detract from, or vary the terms of a written contract, but it may be used to
interpret the terms of the contract. Here, since contract clause was reasonably susceptible
of the meaning attached to it, the evidence offered by is admissible.
PE rules purpose is to discourage irrelevant extrinsic info from decision making process
o Problem with rule: same problem that we face with other objective standard
normallycourts think their inquiry is to figure out the parties intent.
Two different ways to apply the parol evidence rule:
o Mitchell (3 element approach) and RST approach
General rule: High combo of (1) comprehensiveness, (2) proximity of collateral to
subject matter, & (3) sophistication of parties more likely court allows parol evidence
Court seems just as concerned with problems of subjective intent, as with objective intent
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IV. PROBLEMS IN FORMATION

13. Asymmetric Bargaining
Does the duty lie with the drafter, to tell the reader if the document is somehow inconsistent with
his assumptions, or does is lie with the reader, to make sure the contract hes signing is what he
thinks hes signing? The answer to this question comes down to whether were more concerned
about (1) potential abuse of power, or (2) peoples ability to rely on written contracts.
13.1 Standardized Forms
Standardized agreements are normally considered integrated agreements, but if one party knows
the second party wont agree to a specific term if he knew the writing contained it, that term is
not part of the agreement
Standardized terms are construed against the draftsman and subject to an overriding
obligation of good faith
Customers are not bound to unknown terms which are beyond range of reasonable
expectation; value is cutting transaction/time & promoting uniformity
A presenting partys reason to believe that adhering party would not assent to agreement
if he knew that writing contained a particular term may be inferred from fact that term is:
o (1) Bizarre or oppressive,
o (2) Eviscerates the non-standard terms explicitly agreed to, or
o (3) Eliminates the dominant purpose of the transaction
This inference is reinforced if the adhering party never had an opportunity to read the
term, or if it is illegible or otherwise hidden from view
Henningsen v. Bloomfield Motors, Inc.
P purchased car; while his wife was driving, steering wheel spun in her hands & crashed
into brick wall. Damage made it impossible to determine whether human error or
defective steering mechanism caused accident. Disclaimer in warranty purported to limit
liability for breach to replacement of defective parts. P testified he did not read warranty.
Law. A disclaimer/limitation of liability shall not be given effect if unfairly procured,
(i.e. the consumer was not made aware of it or it was not clear and explicit.)
Held. In the absence of fraud, one cannot seek relief from terms of a contract that he fails
to read before signing. However, due to gross inequality in bargaining positions occupied
by an automobile dealers and a consumer, a disclaimer of liability will not be enforced if
it is not brought to purchasers attention or is not clear and explicit.
Judgment for P; implies UCC warranty of merchantability. Attempted disclaimer of this
implied warranty is contrary to public good and adjudicates its invalidity.
Efficiency arguments for why standardized warranties are good: save on
negotiation/administrative cost, protect against variance in drivers.
People dont read form contracts because they know they wont understand the small
print, or because they know the court wont enforce specific terms.
Standardized goods and standardized terms kind of go hand-in-hand. When we have
complex goods we need terms that state how it will operate
The last few cases beg question of whether to apply 1 of 2 objective theories:
o From the perspective of a 3rd party who observes the parties formation (and 3rd
party is informed of the industry standard) [societal welfare argument]
o From the perspective of parties actually making the deal at time of formation.
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Nature of disclaimer might be doing some of the work with respect to whether we charge
Henningsen with having read it. Problem: outcome in Henningsen is overdetermined
Sometimes industries are so highly regulated that the terms in a form contract become
governed by regulations or customs within the industry.

Richardson v. Union Carbide Indus. Gases, Inc. (2002)

Buyer and seller both had conflicting indemnity clauses in their contracts. Neither side
objected to the language. Court adopts the knock-out rule.
approaches for dealing with conflicting clauses:
o Majority view: Knock-out rule: the conflicting terms knock each other out and,
if necessary, are replaced by suitable UCC gap-filler provisions.
o Minority view: offerors terms control because the offerees different terms
cannot be saved by 2-207(2), because that section applies only to additional terms.
o Least-adopted view: assimilates different to additional so terms of the offer
prevail over different terms in acceptance only if late found materially is different
Subject to or expressly made conditional would essentially change contract each time
boiler-plate language was introduced (i.e. no formation); no contract is formed UCC
default terms. Additional terms can be considered conflicting contract terms

Darner Motor Sales v. Universal Underwriters, AZ, 1984

Insurance policy was handed to Darner as a book, which he did not read, instead relying
on statements of insurance salesman on what the coverage was
Holding: Court looks at parties reasonable expectations that induced making of promise,
reforms contract to that which Darner thought he was buying
PE rule does not apply to enforce an illusory bargain set forth in a standardized
contract when the bargain (1) was never really made and (2) would, if applied, defeat
the true agreement which was supposedly contained in the contract
Court uses promissory estoppel and good faith duty to adopt a rule that boiler plate
terms contrary to the expressed agreement or purpose of transaction are not given effect
o Court thus allows reformation of insurance contract when there is a mistake on
the part of one party and fraud or inequitable conduct on the part of the other
Llewellyn: Fine print which has not been read has no business undercutting the meaning
of dickered terms, which constitute the dominant and only real expression of agreement
In a contract from with boilerplate clauses there are actually two contracts:
o (1) The dickered terms, and
o (2) An agreement that the (unread) boilerplate (a) does not alter or impair the fair
meaning of dickered terms when read alone and (b) is not in its terms
unreasonable or unfair
Court should effectuate only the true intention of the parties
13.2 Shrink-wrap
ProCD, Inc. v. Zeidenberg
ProCD had compiled info from telephone directories into computer database. sold CDs
at a lower price for personal usage, higher for trade use. Shrink-wrap contract on box
limits use of application programs and listings to noncommercial purposes for lower
priced CD. bought consumer package and used it for commercial purposes.
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Court: shrink-wrap contracts are enforceable unless their terms are objectionable on the
grounds applicable to contracts in general. Everyone knows about these terms; consumer
can return item if you dont like the terms, otherwise buyer accepts those terms (2-206).
Never quite sure in these situations who offeror/offeree is and when contract is completed

Hill v. Gateway 2000, Inc. (1997)

Hill (P) purchased a computer from Gateway (D) over the phone. Included in the box
with computer was a list of terms. Terms included provision requiring disputes be
resolved exclusively through final & binding arbitration. P could return computer.
Law. Additional terms included in a box shipped by seller DO become part of contract
between the parties, even if the purchaser is unaware of the additional terms and the
purchasers acceptance of the terms is by not returning the item purchased.
Held. P accepted terms of contract when P chose not to return the computer.
Those who accept terms without reading assume the risk of unfavorable terms
13.3 Arbitration
Rent-A-Center v. Jackson (2010)
Jackson filed a complaint in NV federal district court alleging race discrimination and
retaliation. Employer moved to dismiss the proceedings and compel arbitration.
Held. Under Federal Arbitration Act, where an agreement to arbitrate includes a
provision that the arbitrator will determine the enforceability of the agreement, if a party
challenges specifically the enforceability of that particular provision, the court considers
the challenge, but if a party challenges the enforceability of the agreement as a whole, the
challenge is for the arbitrator.
Court reasoned that D challenged the enforceability of the agreement as a whole, and
thus, the determination is left to the arbitrator not the district court; strong federal
preference for arbitration
13.4 Unconscionability
2-302. Unconscionable contract or Clause (UCC)
(1) If the court as a matter of law finds any clause of the contract to have been unconscionable at
the time it was made the court may refuse to enforce the contract, or it may enforce the
remainder of the contract without the unconscionable clause, or it may so limit the application of
any unconscionable clause as to avoid any unconscionable result.
(2) When it is claimed or appears to the court that any clause thereof may be unconscionable the
parties shall be afforded a reasonable opportunity to present evidence as to its commercial
setting, purpose and effect to aid the court in making the determination.
The Doctrine of Unconscionability (RST)
If a contract, or its term, is unconscionable at the time the contract is made, a court may
refuse to enforce the contract, may refuse to enforce the unconscionable term, or may
limit the application of any unconscionable term so as to avoid any unconscionable result
o Gross inequality of contract terms or bargaining power does not by itself indicate
unconscionability, but when both are present, along with other factors, they may
confirm those other indications of unconscionability
Substantive vs. procedural unconscionability
o Procedural unconscionability:
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Concerned with unfair surprise; fine print, mistakes or ignorance of
important facts, or facts that mean bargaining didnt proceed as it should
o Substantive unconscionability (overly harsh terms):
Involves an unjust or one-sided contract (imbalance of obligations)
Sometimes seems sufficient in and of itself to void a term of a contract
Helps confirm or provide evidence of procedural unconscionability
Williams v. Walker-Thomas Furniture Co., US Ct. of Appeals for DC, 1965
Lease-to-own furniture store has security clause in contract such that if buyer defaults on
any payment, store can repossess both the defaulted-on item and any other item buyer
purchase at store that was unpaid. Store repossessed everything had ever bought from
them after she defaulted on one item
Holding: Contract was unconscionable because had little education or bargaining power
and so ended up with an unreasonable contract with little knowledge of the terms
In this case there was absence of meaningful choice, which is determined by the equality
of bargaining power and a reasonable understanding of contractual terms that each party
has when entering the contract.
In Brower and 2-302, substantive unconscionability seems to put a lot of pressure on
procedural unconscionability; may be able to infer procedural unconscionability
Problematic approach for determining whether to apply specific performance.
*Most importantly, be able to parse out the different issues that come out in
unconscionable contracts (i.e. social welfare justifications, asymmetric bargaining power,
etc.). Be able to identify the different sources of arguments that are motivating the courts
then determine if theyre (1) legitimate and (2) if contract law should step in.
*Problematic contracts and heavily one-sided contracts (i.e. unconscionable) are distinct
Williams probably not decided the same way today. Why?
Probably b/c of internet; people have more opportunities for contracting
Problematic transaction: Social justice concern; asymmetrical information
Williams explores the outer-limits of unconscionability
Batsakis v. Demotsis, TX Ct. of Civil Appeals, 1949
lent $25 in drachmae during WWII; promised to repay $2,000
Holding: awarded $2,000; there was a bargain. Mere inadequacy of consideration does
not void a contract. Without evidence of fraud, duress, or misrepresentation, the Court is
unwilling to void the contract merely because there may be insufficient consideration.
Not duress because there is no threat and my terms or no deal not considered a threat
Court looks at this transaction as the sale of drachmae, not exchange of currency.
Three arguments of consideration in this case:
o 1. Want of consideration: yesits looks like a business deal. [doesnt apply]
o 2. Failure of consideration: if he doesnt deliver drachmae, then there is failure of
consideration. [doesnt apply]
o 3. Inadequate consideration: if theres consideration, court wont inquire into
adequacy; inadequate consideration is not really a thing.
Duress is not much of a thing either. At formation, higher degree of duress might
actually be in favor of consideration (i.e. valid consent); justifies risk
o Degree duress is increased is parallel to chance of money actually being returned
o A party being in a bad situation wont make contract unenforceable
Modification rule: modifications of contract must be supported by new consideration
 66
Nature of duress: If adequacy of remedy is the problem, does the fact that counterparty is
judgement-proof (i.e. cant afford a judgement against them) count as duress?

Woollums v. Horsley (1892)

, who was elderly and infirmed and lived upon his mountain farm of 200 acres, entered
into a contract with , a savy businessman, to sell Ps farm for far less than its worth. No
payment was made because the quantity of land was unknown and refused to survey
it. refused to convey the land, and brought a suit for specific performance.
Law. K ought not be carried into specific performance unless just & fair in all respects
Held. The contract was not equitable or reasonable, or grounded upon sufficient
consideration, and no interest had arisen in any third party; The contract was for 40 cents
and acre when the land was worth $15 an acre. Thus, no specific performance allowed
s agent received $80 as his pay for securing the contract, which was all was to get
under the contract for all he sold; equity will not help out such a harsh bargain.

Maxwell v. Fidelity Financial Services, Inc., AZ Sup. Ct., 1995

installs water heater doesnt need, cant afford; installed incorrectly; declared hazard
loans money to pay for the heater, with s house as collateral. Total cost of loan
(included a few things in addition to the heater) was nearly half the value of s house
Holding: Contract was unconscionable: $15k for a water heater is a grossly excessive
price when the home itself is worth only $40k; setting and purpose considerations
o Substantive unconscionability established in grossly excessive price
Unconscionability is determined in light of a contracts setting, purpose and effect.
Contract terms so one-sided as to oppress or unfairly surprise an innocent party, an
overall imbalance in the obligations, or a significant cost-price disparity are all evidence
unconscionability
Dissent. Its province of legislature, not Courts, to determine when contracts are
unenforceable from a public policy perspective. Low income clients purchase items on
credit out of necessity; not Courts role to determine when contracts should be annulled
Arguments for Doctrine of Unconscionability:
Morality as well as argument that certain people (poor, uneducated, those in trouble) have
unequal bargaining powerno meaningful choice, and hence contract not truly consensual
Prevent those with bargaining power from abusing advantage (protect rights weak, etc.)
Courts should protect the weak, and further, courts are able to draw line to limit
unconscionability (and duress) and still protect right to contract
Arguments against Doctrine of Unconscionability:
Intent of parties/freedom of contract should be determinative. Further, shouldnt treat
poor different because of unequal bargaining power, etc.same right to contract as others
Slippery slope until point where all contracts based on unequal bargaining power are
unenforceable; threat of unconscionability makes people less likely to contract with poor.
Why should the court judge the value of consideration after the fact?
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14. Employment: Handbooks and the At-Will Default

Both employers and employees have the right to terminate employment at-will.
Does this make sense from an economic perspective?
o Contingent on how you think labor markets work, and mobility.
You dont want to displace labor.
Consider the reliance interest of employees
Consider the reliance interest of employers
Does this make sense from a contract law perspective?
Pine River: How do you implement the at-will system?
o Behavior is rationalized in contract law so that each new day is considered a new
unilateral contract.
It does allow for modification of employment relationship from day-to-day.
o Doesnt really fit the model of other general contract law inquiries.
Pine River State Bank v. Mettille, MN, 1983
hired at-will; claimed discharge violated contract as modified in new handbook
Holding: New handbook provisions enforced without need for new consideration.
Handbook in effect an offer of changed conditions of original contract
o Court found consideration in services continued to be performed, added loyalty,
etc. Court also found (silent) acceptance in fact employee didnt quit in protest
o Interesting since unlikely to find silent acceptance if handbook took away benefits

Sheets v. Teddys Frosted Foods, Inc.

Worker in quality control finds good underweight compared to what the label specified,
which violated the Conn. Uniform FDCA. P told D in writing his concerns for the
defects. His recommendations were ignored and he was fired. Should this be an exception
to at-will contracts where the discharge contravenes a clear mandate of public policy?
The relevant state statute means P cannot be fired for alerting someone of the violations.
Held. An employee at-will may have an action for wrongful discharge if he was required,
as part of the job, to perform an illegal act and needed job for his living purposes
Dissent. By allowing Ps claim to proceed, the majority created a mechanism with which
employees can coerce their employers to retain them. Newly created COA was overly
broad and its nuisance value may hinder an employers ability to make retention
decisions regarding its employees. P could have anonymously communicated violations
to commissioner of consumer affairs without jeopardizing his employment. No evidence
P did so during or after his employment.
Courts should not interfere with managerial discretion, but must ensure that employees
are protected when their employer punishes them for their conduct as good citizens.
Employees must not be forced to weigh job security against protecting the public.
Does it matter that he didnt call the health authority? Would it be different if he did?
Whats the connection between his conduct and what is owed to him?
Baseline CL rule: Employment contracts are at-will unless you modify the terms
Should employers be able to fire for whatever reason?
o Economic perspective
o Contract law perspective; does allow for modification
o Public policy perspective: potentially a limitless concern
 68
Price v. Carmack Datsun
P fired when told D of his intention to file a claim under his works health insurance plan
Court held that P did not have a cause of action; suggests that exception to the at-will
doctrine only applies when the discharge violates a clearly mandated public policy
suggests that must have important public purpose, such as a public health risk.
Employment and the Duty to Mitigate (exception to the general rule)
Employee who is wrongfully discharged has duty to search for another job; if he takes
another job then earnings are subtracted from damages
o Employee need only look for and take comparable job (whats comparable?!)
o Not required to take inferior job, but if you do then it is taken out of your damages
Whats comparable?
o Important question: If you make very few things comparable, you raise the cost of
breach; if you make many things comparable, you lower the cost of breach
Rationale for the employee exception to general mitigation rule:
o Its in the publics interest to get people back to work rather than have them
inefficiently sitting around
o Whereas a contractor or landlord does not need incentives to go out and find a
new source of income, an employee does not necessarily have this incentive.
Courts therefore force employee to mitigate by taking a comparable job
(efficiency concerns)

Shirley MacLaine Parker v. Twentieth Century-Fox Film Corp., CA SC, 1970

Studio repudiated movie contract for guaranteed compensation with actress, offered her
new part instead. Western rather than musical, in Australia rather than LA, etc.
Holding: did not have to take different or inferior employment, so she can recover
wages; contract not deemed comparable
The general rule for damages in wrongful discharge cases is:
[The amount of salary agreed upon for the period of service] [Amount breaching
employer can show the employee (1) has earned or (2) might with reasonable effort
have earned from other employment] = Damages
Before projected or unsought earnings can be used to mitigate damages, however,
the employer must show that the other employment was comparable or
substantially similar to that of which the employee has been deprived
Duty is on the non-breaching party to prove she tried to find work.
Problem in this case was with valuing mitigation.
o Which terms matter? How much duty on non-breaching party to find work?
o Non-breaching party needs to act reasonable in doing what?
Mitigating damages or finding a new job?
Small distinctions in criteria for assessing comparability can drastically affect mitigation
Any way you cut it, was unlikely to be put in same position as if contract upheld
Dissent: whether second offer was substantially similar to first should be a jury question.

Mr. Eddie, Inc. v. Ginsberg, TX Civ. App., 1968

can recover for expenses incurred while seeking to mitigate losses/damages resulting
from s breach (i.e., expenses incurred while seeking in vain for other employment.
 69

15. Modification
15.1 Duress
A promise made under duress may be unenforceable even with consideration
Duress is a procedural not substantive standard the process that led to the deal
Alaska Packers Assn v. Domenico (1902)
Alaska contracts with workmen for $50. After arriving, workmen stopped working and
demanded $100. Realizing that he could find no one else at the time, Appellant agreed.
When men returned to SF, Appellant paid only $50.
Law. A party cant obtain added compensation for duties hes already agreed to perform.
Held. Appellant agreed to demands of the workmen out of necessity. New agreement was
based solely upon workmens assent to render exact services already under contract to
render; new agreement not supported by new consideration, so its unenforceable
A contract lacks consideration where one or more of the parties incur no new
responsibilities under the new agreement.
Is it lack of consideration or presence/absence of duress that does work in Alaska?
Alaska Packers as a legal duty case; issues with duress
o You reward the party who knows the system the best (with lawyers), which
probably is not the way we want contracts law to work.
Austin Instrument, Inc. v. Loral Corp. (1971)
entered into a subcontract agreement to purchase components from , which would be
used to produce radar sets for the Navy. After performing the first contract between the
parties, awarded another subcontract to , who responded by raising its prices and
threatening stoppage of delivery of its parts, if the price increase was not met.
was forced to pay price increase to receive new items; still brought suit for charges
due on second contract, which did not pay after delivery was complete. countered,
claiming s price increase amounted to duress, as it was forced to accept s terms
Law. Duress can be personal & economic; key is its effect on partys exercise of free will
Issue. This case considers whether duress can be economic in nature and if it can,
whether it is actionable as a vehicle to recover damages.
Held. Affirmed as to s claim & modified to allow recovery for . Court found
economic duress did exist, insofar as was forced to buy parts at Ps gauged price out of
necessity to meet its own contractual obligation.
Dissent. Questions concerning acts constituting economic duress are factual and
deference should be given to trial court, which found the facts did not support duress.
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, s knowledge of s desire to meet its own
contractual commitment put in a position of coercion.
A modification premised on a threat to breachseems like you can agree to terms (if its
not practical to sue in court first) and then back out once its time to pay.
o If adequacy of legal remedy is the problem, is the fact that is judgement proof
enough to get out of contract enforcement?
Chouinard v. Chouinard, F.2d, 1978
Mere hard bargaining positions (if lawful) and the press of financial circumstances not
caused by the party against whom contract is sought to be voided, is not deemed duress
To be duress, the threat must come from the party against whom the duress is alleged
 70
Post v. Jones, 60 US, 1856
Admiralty case: a whaling ship ran aground and was completely helpless. 3 ships rescued
the oil only after whaling ships captain agreed to sell them the oil at a very low price
Holding: Contract unenforceable: ship captain was completely helpless; had no choice
Arguments for/against Duress
See arguments for/against unconscionability.
15.2 Mechanics of Modification; Waiver
Difference between waiver and modification
Waiver: One party gives up a condition, not a material element, of a contract
o Can be rescinded while still executory if theres been no reliance
o Waiver is often defined as knowing relinquishment of legal right
o The rule that waiver needs no consideration is one escape from the legal-duty rule
Modification: Both parties agree to alter a material element of the contract (affects the
whole deal) Cannot be rescinded
Modification of a contract usually does not require consideration (and cant be rescinded)
A promise modifying a contractual duty not fully performed is binding:
o If it is fair/equitable in view of circumstances not anticipated by parties when
contract is made
o To extent provided by statute; or
o To extent that justice requires enforcement in view of material change in position
resulting from reliance on promise
Tension between fair & equitable modification and legal duty rule:
o Can read fair & equitable modification as limiting the legal duty rule, or as an
alternative to the legal duty rule. Obviously need to speak both languages.
Consider tension in Angel v. Murray.
Universal Builders, Inc. v. Moon Motor Lodge, Inc. (1968)
P contracted with D to build motel. Contract provided all changes must be in writing.
Berger (agent of D) requested P do extra work not in original contract. Berger orally told
P that D would pay for additional work. Berger knew the requirements of contract very
well and was frequently at construction site watching additional work being performed
D refused to pay due to the contractual requirement that all changes be in writing.
Holding: Modification was valid, despite modification provision; P relied on D.
Rule: Effectiveness of non-written modification, despite contract condition, depends on
whether enforcement of condition is or isnt barred by equitable considerations.
When a party materially changes its position in reliance on other partys waiver of a
contract condition, that modifications must be in writing, otherwise not enforced
Modifications & waivers can be difficult to distinguish problems when both applied
Angel v. Murray, RI Sup. Ct., 1974
Garbage collector signed 5-year contract with city to collect trash. Unexpected increase
in number of homes; collector asked for more money. City agreed to increase payment
and tendered increased payment. sued, claiming new contract unenforceable; garbage
man was only doing his legal duty. Modification binding because it was (1) voluntary, (2)
fair/equitable given unforeseen circumstances, and (3) preceded full performance
Problem with modification:
 71
o No one principle of modification generally accepted in contracts law
o Some people argue for the principle that because modifications take place all the time,
contracts should anticipate modifications in a lot of different ways.
o How do you incorporate that principle into contracts law? Legal duty rule
Example: Contractor agrees to build house and only paid if owners architect satisfied
Not an illusory promise but rather a conditional promise (bound if condition met)
Contractor builds house but architect not satisfied; owner agrees to pay anyway
Waiver of condition enforceable since not a material part of the contract
o Could also possibly argue unjust enrichment if owner refuses to pay
Clark v. West, NY Ct. of Appeals, 1908
Publisher agreed to give writer $2/page if he drank and $6/page if he abstained. Writer
drank, but publisher knew and did not object through the course of their dealings
Holding: This constituted a waiver of the drinking condition (writer got $6/page)
Drinking provision was merely a stipulation of contract; not consideration not a
contract for to write books so he can stay sober; rather, staying sober was incidental to
the writers performance; books were consideration, not abstention from alcohol
A party can waive a stipulation of the contract, but not the consideration itself

UCC 2-209 - Modification, Rescission and Waiver.

1. An agreement modifying a contract within this Article needs no consideration to be
binding.
2. A signed agreement which excludes modification or rescission except by a signed
writing cannot be otherwise modified or rescinded, but except as between merchants
such a requirement on a form supplied by the merchant must be separately signed by
the other party.
3. The requirements of the statute of frauds section of this Article ( Section 2-201) must
be satisfied if the contract as modified is within its provisions.
4. Although an attempt at modification or rescission does not satisfy the requirements of
subsection (2) or (3) it can operate as a waiver.
5. A party who has made a waiver affecting an executory portion of the contract may
retract the waiver by reasonable notification received by the other party that strict
performance will be required of any term waived, unless the retraction would be
unjust in view of a material change of position in reliance on the waiver.

Comments:
But such matters as a market shift which makes performance come to involve a loss
may provide such an objectively demonstrable reason for seeking a modification even
though there is no such unforeseen difficulty as would make out a legal excuse from
performance.
Subsection (4) is intended, despite the provisions of subsections (2) and (3), to
prevent contractual provisions excluding modification except by a signed writing
from limiting in other respects the legal effect of the parties' actual later conduct
 72

16. Impossibility
Two important (and related) questions to always ask about impossibility
1. How are we going to decide what parties said about a particular eventuality?
o Tacit agreement (Taylor v. Caldwell)
Tacit agreement might be a good way of thinking about this since there
was no discussion to begin with. Nachbar begrudgingly agrees
2. How do you allocate losses?
o One party is probably going to be faced with a greater loss.
o In a normative sense, we want to assign fault.
Not always easy to assign fault in these type of cases.
As long as the risk of loss rules are clear, the rules dont actually matter. Why? Insurance
o If parties know what the risk of loss is, they can insure against those risks.
Taylor v. Caldwell, England, 1863
Music hall that had agreed to rent to for a concert burned down before performances
Holding: Existence of the music hall was an implied condition in the contract. The parties
must have contemplated the continuing existence as foundation of their agreement
Both parties excused since in contract 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. Court re-envisions the negotiation process and comes up with
the condition they think parties would have come up with.
o We should be asking what the parties would have expected in the case of fire.
A lease changes the possessing power from one person to another.

[NOTE: Problem with these types of cases is that our knowledge of the tacit assumption at
work can be based only on intuition and introspection; we just know that the music hall
burning down violated a tacit assumption of the parties]

Tompkins v. Dudley
Guy builds schoolhouse; almost complete except for some cosmetic stuff, when building
burned down. Owner (P) had not yet taken possession of property. Action by P to recover
money it had paid to builder as building had progressed & damages for non-completion.
can recover damages for nonperformance. The builder takes the risk until the owner
goes into possession of the building.
Rule: Until you hand over the key, you bare the risk for the loss. This is a clear test.
This test really doesnt care how the risk was created; all that matters is that one party is
going to be found in possession of the property at the time of the injury.
To prevent situations like this, parties should get an insurance policy that covers whoever
bears the risks at a time, rather than having each party take out a separate policy.
o Another technique is to find the contract specifications given by the contractor
both faultydefective, at least inadequateand the responsibility of someone
other than the contractor.
Taylor case probably should have ruled in favor of P because D was in possession of the
property at the time of the fire. Possible outcomes: (1) contract is void because school
house burned down. (2) Contract is not void because school house burned down.
Important question: which party is being harmed?
 73
The contractor has the information as it relates to the possibility of damages occurring,
and is more aware of the cost to repair those damages.
o Nachbar: consider the fact that one party is allocating more risk than the other.
Are the contractors the correct party to pay for consequential damages?
o Contractors are in a better position to bare risk of some losses rather than others.
One reason why this is the case is because they can more easily price out
the liability, which might stem from particular risks of loss.
The builder is usually responsible for the consequential damages.
Tompkins court has a bright line rule: party in possession of property bares the risk of loss

Carroll v. Bowersock (1917)

Contractor (P) partially performed under a construction contract with D when Ds
warehouse was totally destroyed by a fire.
Law. The test of benefit received adopted by Court was that liability of owner in a
case like this should be measured by the amount of contract work done which, at the time
of the destruction of the structure, had become so far identified with it as that but for
the destruction it would have inured to him as contemplated by the contract.
P was entitled to recover for work done prior to fire, the benefit of which could already
passed to D; In order for P to recover, D must have benefited.
Test: whether or not the work inured to the party a benefit. Unclear test
Problems with the test that the court applies:
o This test is unclear: Who decides what and when a benefit is inured?
Imponderable question about what would happen if fire had not occurred?
o Carroll attempts to assign liability based on what parts of the new structure were
considered permanent; liability assignment can become a subjective process.
With impossibility, its important to consider how to decide what the parties would have
done if they would have thought of what is being now considered as an impossibility.
o Tacit agreement is one option, however, not usually the best option.
Rescinding the contract doesnt make the loss go away
Consider the distinction between Carroll and Tompkins: Structures v. improvements.
 74

17. Mistake
Remedy for mistake is rescission unless its a mistake in transcription reformation
Misfeasance (you do something wrong) v. Nonfeasance (you dont do anything)
Mechanical errors: Physical or intellectual blunders that result from transient errors in
the mechanics of an actors internal machinery

Arguments for Limited Use of the Mistake Doctrine

Fairness: Both sides are equally innocent, so one should err on the side of the contract.
Court shouldnt be babying people.
Consequentialist: We want people to protect themselves, assume responsibility, and
investigate before they enter into a contract. People are always making mistakes, so a
limited mistake doctrine leads to a more stable contract system.
Efficiency: The market and the making of contracts best allocate risks
Role of the courts: Courts should focus on the deal and not go deeper

Arguments for a Broad/Generous Law of Mistake

Efficiency: Only so much fact-finding you can do (i.e., you can always do more to
protect yourself, but this is unrealistic). If the law made you be too careful, inefficiency
would result as you would waste too many resources in due diligence
Consequentialist: Dont want to allow windfall for one party; unjust enrichment. And
people will contract more freely if theres less worry about being bound by mistakes.
Fairness: Doesnt reflect the parties true intentions, so courts should not enforce. Also,
helps avoid unjust enrichment owing to the other partys mistake

17.1 Mutual Mistakes

When a Mistake of Both Parties Makes a Contract Voidable
RS 152: Where a mistake of both parties at the time a contract was made as to a basic
assumption on which the contract was made, and has a material effect on the agreed exchange of
performances, contract is voidable by adversely affected party unless he bears risk of the mistake
In determining if mistake has a material effect on agreed exchange of performances,
account is taken of any relief by way of reformation, restitution, or otherwise
applies only where both parties are mistaken as to the same basic assumption. Their
mistakes need not be identical, though. If, however, theyre mistaken as to different
assumptions, RS 153 governs
When a party bears the risk of a mistake
A party bears the risk of a mistake when:
o The risk is allocated to him by agreement of the parties; or
o Hes aware at time contract is made that he has only limited knowledge w/ respect
to facts to which the mistake relates but treats his knowledge as sufficient; or
o The risk is allocated to him by the court on ground that it is reasonable to do so
Comment: distinguish between mistake and conscious ignorance

Sherwood v. Walker, MI SC, 1887

Parties contracted for sale of cow both thought barren; turns out cow not barren
Holding: The parties mistake went to the very nature of the cow (a barren cow is
substantially a different creature from a fertile cow), so seller can rescind.
 75
When parties to a contract agree upon an object, taking for granted that it will not change,
a change in the nature of the object could void the contract.
A contract made upon the mistake of a material factas to the substance of the thing
bargained for so that the thing actually delivered or received is different in substance
from the thing bargained for, and intended to be sold, there is no contract
If, however, the mistake is as only to the quality (and not the substance) of the thing
bargained for, the contract remains binding
Dissent: The buyer took a chance that the cow was not barren and should thus be
rewarded, not punished, by the fact that his risk paid off
Economic difference between the parties is what is doing the work.

Wood v. Boynton, WI, 1885

Poor lady found stone and sold to jeweler for $1, both thinking that it was near worthless.
Stone later turned out to be diamond worth $700. Holding: court refused to void the sale,
claiming that although both sides were ignorant, lady was responsible for failing to
further investigate the value. Lady cannot repudiate sale when it turns out that she made
bad bargain; court allocates risk to seller

17.2 Unilateral Mistakes

When Mistake of One Party Makes a Contract Voidable (RS 153)
Where a mistake of one party at the time a contract was made as to a basic assumption on which
he made the contract has a material effect on the agreed exchange of performance that is adverse
to him, the contract is voidable by him if he does not bear the risk of the mistake, and the
Effect of the mistake is such that enforcement of contract would be unconscionable, or
The other party had reason to know of the mistake or his fault caused the mistake
Note* Its harder to rescind with a unilateral mistake, as opposed to a mutual mistake.
Elsinore Union Elementary School Dist. v. Kastorff (1960)
Contractor (D) submitted a low bid to make certain editions to Ps school. Due to clerical
error made on bid worksheet, bid was $9,500 less than D could truly offer based on
subcontracting cost. D realized mistake and promptly rescinded offer following morning
Law. Rescission is allowed based on mistake of fact if
o (1) a mistake regarding a basic assumption upon which the contract was made
o (2) material to the contract,
o (3) mistake was not result of neglect of legal duty and
o (4) would be unconscionable to enforce.
Issue. Whether a contractor may rescind a mistaken bid based on a clerical error?
Held. The contractor could rescind the bid. The fact that D had ample time to check work
did not mean the mistake was a neglect of legal duty which would deny him the ability to
rescind the bid; D shouldnt be denied relief from an inequitable and unintended bargain.
The bid should include plumbing costs and if that charge was accidentally left out of the
bid, it was unintended by the bidder to the point that the bargain is lost. Further, it would
be unconscionable to make bidder pay the difference between the bid that eventually was
awarded the project upon his rescission. Court looked at intent & reasonable expectation
of parties that plumbing cost was included/
Cobaugh v. Klick-Lewis, Inc. (1989)
P was playing golf. He got to a hole and saw a sign that said if he hit a hole-in-one he
 76
would win a new car. He hit a hole-in-one and tried to claim his prize. , the car dealer,
said contest only applied to a charity golf tournament that happened 2 days before
Rule. Making the rules of a contest public constitutes an offer that the contest promoter is
bound to perform if someone acts upon the offer.
The court says that the contest was not a proposal of a gift. Because the prize required
some performance, the contest was an offer.
The court also says that the agreement is not unenforceable on the basis of lack of
consideration. The consideration that the dealership received in return for its offer was
publicity, and the golfer got a car in exchange for earning a hole-in-one.
Finally, the court says that the agreement is not void due to mutual mistake, because the
mistake was actually only unilateral on the part of the promisor.

Donovan v. RRL Corp., CA SC, 2001

Car dealership advertised car in a newspaper at a price far lower than it intended because
of a proofreading mistake by the newspaper. attempted to buy the car at the advertised
price, dealership refused to sell at that price
Holding: not required to sell car at advertised price because an error of price constitutes
a mistake regarding a basic assumption upon which contract was made, and dealers
mistake in this case made contract far less desirable to him and far more desirable to .
Where has no reason to know of and does not cause s unilateral mistake of fact,
must establish the following in order to rescind the contract:
o 1. made a mistake regarding a basic assumption upon which he made contract
o 2. Mistake has adverse material effect on agreed exchange of performance to
o 3. The does not bear the risk of the mistake
o 4. The effect of the mistake is such that enforcement would be unconscionable
Reasoning: Imposing liability on for s failure to proofread the advertising proof
would amount to strict liability for any typo in the price of an advertised car

17.3 The Effect of Unexpected Circumstances

Unexpected circumstances differ from mistake since theres no argument that the parties
did not actually assent. Instead, the argument is that changed circumstances should make
the contract unenforceable. Also, mistake goes only to the moment of contract;
unexpected circumstances goes on for the entire contract.
Mistake focuses on assent; changed circumstances focuses on performance
o In mistake, generally one person can get a windfall; in impracticability one can
get screwed (because of a disaster)
o UCC does not have a law of mistake, but it does have a law of changed
circumstances. UCC says that when it does not have a section addressing
something specifically, it merely adopts the common law rule.
o Mistake and impracticability are quite alike in practice, but judged as worlds apart
in the common law; impracticability is a much larger concept, including anything
that may supervene into the performance of the contractual duties; without such a
concept youd be bound to a contract no matter what
This issue is a big deal as the purpose of contract is to bind parties in face of an uncertain
future
 77

VI. Problems of Performance

18. The Obligation to Perform in Good Faith
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

Patterson v. Meyerhofer, NY Ct. of Appeals

and contracted that would buy houses at auction, which houses would then buy
from . reneged on contract and went to auction and bought the houses herself
Holding: entitled to compensation for the profit would have made
In the case of every contract there is an implied undertaking on the part of each party
that he will not intentionally and purposely do anything to prevent the other party from
carrying out the agreement on his part

18.1 Output Contracts

Requirements and Output Contracts
Requirements contract:
o (1) The seller promises to supply ALL of the buyers requirements of a defined
commodity at a stated price over a designated period of time and
o (2) The buyer promises to purchase ALL of his requirements of the commodity
during that time from the seller at the stated price
Outputs contract:
o (1) The buyer promises to buy ALL of a sellers output of a given commodity at a
stated price and
o (2) the seller promises to sell ALL of her output of the commodity during that
time to the buyer at a stated price
Good Faith and Output, Requirements, and Exclusive Dealings Contracts
UCC 2-306 (Output, requirements, and exclusive dealings): A lawful agreement by either
seller or buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise
agreed an obligation by seller to use best efforts to supply goods and by buyer to use best efforts
to promote their sale.
Output and requirements contracts do not lack mutuality of obligation
Requirement contracts are not unenforceable just because the quantity is not set.
o Interpret terms of contract to figure out whether terms are definite enough to
signify mutual assent (i.e. if parties actually understood what they were doing)
Output contracts require less commitment, more flexible than fixed quantity contracts
o Same obligation of good faith in requirements contracts (fixed quantity) as output
Party must try and keep operating, but dont have to operate if its going to
drive them out of business to do so.
UCC: preference for formation
o A contract governed by UCC is easy to form; and then custom provides
meaning to the terms
o Omni: if no obligation to act reasonably, then there is complete discretion on
the part of one party; no consideration for the promise made by the other party
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o Problem: if there isnt a reasonableness requirement, then the promise itself is
unenforceable. Not that there is a lack of consideration, but that the promise itself
is indefinite
Feld v. Henry S. Levy & Sons, Inc.
P made contract, where D agreed to sell and P to purchase all bread crumbs produced at
Ds factory for a certain period of time. Bread crumbs was an ancillary business for D. D
decided to stop making bread crumbs after it wasnt profitable; dismantled machinery. D
claimed contract didnt require D to manufacture bread crumbs, only to sell all the bread
crumbs he did make
Law. Under an output contract, good faith cessation of production of the subject of the
contract terminates any further obligations & excuses performance by the party
discontinuing production.
Evidence demonstrated that it was uneconomical for D to continue operating his oven,
however, no steps were taken to acquire another oven. The oven was destroyed and D
used the area as a computer room. D indicated to P, that D would resume bread crumb
production if the contract price of 6 cents per pound were changed to 7 cents.
D did not cease operations of bread baking; he determined that it was uneconomical to
continue production. Questions of fact exist as to whether D performed in good faith and
whether its cessation of production was in good faith. Ds cessation prior to cancellation
of the contract due to losses from producing the bread crumbs under the existing
circumstances would be justified in good faith if its losses from continuing would be
more than trivial. UCC: seller must make best effort, not clear what this means. Seller
expected to operate at commercially reasonable loss potentially.
Court held for P. Since bread crumbs were only a small part of Ds business, he wasnt
going to go bankrupt by taking a loss on it; there was a contractual right to cancellation,
but good faith required continued production until cancellation, even if there was no
profit for D.
UCC tries to solve the indefiniteness problem and illusory problem because theres
no fixed quantity term besides all. UCC does this with good faith and commercial
standards of fair dealing, by placing good faith in context of industry practices.
The fact that the promise was indefinite makes it potentially illusory because it didnt
supply consideration and its not enforceable.
2-306: if its indefinite/illusory its unenforceable
Court resolves this case similarly to Omni Grouparchitect case, where one party
waiving a provision of a contact did not make that contract illusory.