CONTRACTS

_________________________________________________________________________

Breach (claim in assumpsit)

• No remedy – even if there is a breach it would be against public policy, Shaheen v Knight
(p11)

• Types of remedies:
o Expectation Damages: Put plaintiff in position he would have been if contract had
been performed.
o Reliance Damages: Put plaintiff in position he was in before contract.
o Restitution Damages: Put defendant in position he was in before contract (avoiding
unjust enrichment).
o Liquidated Damages: A damage amount agreed to in the original contract (a
reasonable estimate of damages).
o Punitive Damages: Punish defendant – not in contracts unless also tort
o Injunctions - stop contract after breach
o Specific Performance – for unique property or service – order to “complete” contract
 Ex: land (hard to replicate in most circumstances), painting, etc
 Services (non-employment, non-generic, etc) – very qualified
• Goods vs Services
o In a mixed transaction, whether or not the contract should be interpreted under the
UCC or [common law] should depend on the nature of the contract and also whether
the dispute in question primary concerns goods furnished or services rendered
Hooker v Roberts

Hooker v. Roberts (choose

UCC v. common law)

UCC: 2-712 (p92), 2-706 Restatement 347

(p157), 2-708(2) (p158)

o UCC for Sale of Goods. UCC §2-712, 2-708(2) and 2-706

 General rule - expectations
 Exception for the lost volume seller, may be able to claim entire profit without
mitigating, since could have sold anyway
 Failure of buyer to effect cover does not bar from other remedy
o Services
 General rule court will use expectations damages Hawkins McGee p78 or
restatement $347
 General rule plaintiff has a choice which damages to use

1
  General rule Sullivan v O’Connor [see Prof Tiller spreadsheet], restitution
may be better in non-commercial settings (eg failed nose jobs)

Limitations on damages
 Foreseeability
o Special circumstances that are unknown at the time of contracting then breaching
party cannot be held liable for anything other than would generally be allowed
Hadley v Baxendale p93. Expectation damages can be general or consequential.
Expectation Damages - types:
General or Consequential

General: standard as natural Consequential: issue of foreseeability

and probable - contemplated at time of contracting

 General damages: arising naturally and obviously from breach of contract

 Consequential damages: must show that at the contract formation, losses
would be foreseeable by a reasonable person => see examples from class
• For commercial goods, according to UCC 2-719 Consequential
damages may be limited or excluded in the contract unless the
limitation or exclusion is unconscionable. Fedex shipping contract
o Limitation of consequential damages for injury to the person in
the case of consumer goods is prima facie unconscionable but
limitation of damages where the loss is commercial is not.”
 Certainty of harm
o Difficulty in estimating expectations damages, court may go with reliance damages.
Chicago Coliseum v Dempsey, p112
 Avoidability of harm (mitigation), Rockingham County v. Luten Bridge Co.
o General rule p 134, “the rule is only a particular application of the general rule that a
plaintiff cannot hold a defendant liable for damages which need not to have been
incurred.
 Employment contracts Shirley Maclaine Parker, p146.
o Regarding mitigation of damages in employment contracts - "employer must show
that other employment was comparable, or substantially similar;" employee's
rejection of or "failure to seek other employment of a different or inferior kind"
cannot be used to mitigate damages; only work "in the same field and of the same
quality need to be considered"
 Penalty clauses
o Liquidated damages vs penalty clauses. Kemble v Farren p 163 Penalty clauses are
not recoverable. A liquidating damages clause may be viewed by the court as a
penalty unless it meets the test
1. Reasonableness: large amount too easy to trigger by minor breaches; the more
uncertain the more likely the court will allow liquidated damages to stand, in this
case damages were relatively certain and therefore it was a penalty.

2
 2. At the time of contract formation the clause needs to be reasonable. Also after the
breach retrospectively the clause must be reasonable. – it cannot be “grossly
disproportionate”
3. In employment contracts Wassenaar v Towne Hotel p 165: Courts do not require
employees to reduce the amount recovered under a liquidated damages provision
by other earnings.
4. Lake River v Carborundum p 173
• Restatement of Contracts $355 Punitive Damages
o Punitive damages are not recoverable for a breach of contract unless the conduct
constituting the breach is a tort for which punitive damages are recoverable.

Specific performance p193

Contract for land – specific performance historically common for land – b/c “unique;” not as
common now b/c of housing developments / similarities

1. Contract for goods

• Ordinarily, specific performance will not be decreed if the subject matter of the contract
sought to be enforced is goods see UCC $2-716 Exceptions:
1. no adequate remedy at law [no financial remedy is appropriate];
2. peculiar, sentimental or unique value; Cumbest vs Harris p 203. [note:
replevin doesn’t work in this case because the creditor is currently the legal
owner. Replevin doesn’t apply when the plaintiff is the owner. The defendant
had not paid the money back so he didn’t have title]
• At law remedy: money damage
• Equitable remedy: includes injunction or specific performance
3. due to scarcity, goods not readily obtainable.
• Scholl v Hatzell p206, ct said not replevin had to amend complaint to
breach of contract – could cover with a different vehicle
• Sedmak v Charlie’s Chevrolet p208, could get specific performance
because vehicle was a special order
2. Contract for personal services
Injunctive relief will be granted to restrain violation by an employee of negative covenants in
a personal service contract if the employee is a person of exceptional and unique knowledge.
– because can’t usually use “specific performance” b/c of fear of courts enforcing indentured
servitude
• Dallas Cowboys Football Club v Harris p 232
 Personal service contracts for people of exceptional skills may allow contracting
party to prevent them from performing those services for another party.
 Lower court was too narrow in ascertaining unique skills as though he was the
best in the league - that is not required, he has skills that are special and should
have been given further consideration as unique
 Idea of tolling

Restatement 374: Restitution in Favor of the Party in Breach

(1) … if a party justifiably refuses to perform on the ground that his remaining duties of
performance have been discharged by the other party’s breach, the party in breach is entitled

3
 to restitution for any benefit that he has conferred by way of part performance or reliance in
excess of the loss that he has caused by his own breach.
(2) To the extent that, under the manifested assent of the parties, a party’s performance is to be
retained in the case of breach, that party is not entitled to restitution if the value of the
performance as liquidated damages is reasonable in light of the anticipated or actual loss
caused by the breach and the difficulties of proof of loss.

Restitution and Quasi-Contracts – Implied in Law (vs. Implied in Fact)

Section 374
What is an implied in law [or quasi-contract] contract – remedy is restitutional damages, to avoid
unjust enrichment
 One party is not there to signal consent
Cotnam v Wisdom p265: Implied in fact (quasi-contract) - estate has to pay standard
of care for doctor’s services
What is an implied in fact contract – remedy is expectation damages
 Actions that both parties appear to consent to, eg building a fence and the neighbor
Martin v Little, Brown and Co p269: Plagarism case, plaintiff tried to claim it was
an implied in fact or in law contract.
Not implied in fact – student kept volunteering
Not quasi/implied in law – the publisher did not unjustly enrich itself

Components of a Contract

 Offer
 Acceptance
 Consideration

Mutual Assent – spans both offer and acceptance

Reaching an agreement – “meeting of the minds” – required for contract formation

Formation of a contract requires two basic elements (1.) the mutual assent of the parties and (2.)
assent is of a legal form.

Restatement §19: Conduct as Manifestation of Assent (p304)

1. Manifestation of assent by written or spoken words or act or failure to act
2. Requires intent to act with knowledge or reason to know the other party will infer assent
from the act
3. Conduct may create assent even though no actual assent; voidable excuses include fraud,
duress, mistake or other invalidating causes

Ex: §19 (1) – fence being built, seeing it being built and not objecting = assent

The objective theory of assent – “reasonable person” standard (fits in §19(2))

4
Embry v Hargadine, Mckittrick p 290 – objective “reasonable man” standard; reasonable to have
thought words to mean assent – expressed intention through words / actions
Lucy v Zehmer p 296 – property sale in a restaurant on a receipt – deal valid - difference between
outward versus secret behavior – “reasonable man” standard

OFFERS
R.2d §24 – offer as “manifestation of willingness to enter into a bargain…where offeree’s assent is
invited and will form the bargain”

Offers vs. Invitations to Bargain – distinct ideas

Nebraska Seed v Harsh – advert / mailer as an invitation to bargain, not an offer; did not have
expressed language and fixed terms (lack of specificity of timing and amount required)

UCC §2-204: Formation in General (p317)

 Some specific terms may be undetermined but may still warrant a contract; §2-204(3) – does
not fail if parties intended to make contract and reasonable way for remedy
1. More liberal in finding agreement vs. common law (more particular)

Leonard v PepsiCo p308 – Ad as offer?

2. In general, no…ads do not constitute offers unless ad is “clear, definite, and explicit –
nothing left open for negotiation (Lefkowitz).”
a. Same with catalogs – not offers, only invitations to bargain unless specific on all
terms (timing, amount, who can accept)
3. Still “reasonable person” standard – how would interpret ad

Texaco v Pennzoil p323 – Written contract is contemplated – make an offer?

 R.2d §27 – yes, contract through manifestations of intent even if also intend to put to writing;
circumstances may indicate preliminary agreements
 Pennzoil and Getty intended to bind through outward / express actions to each other and to
public (PR release and other communications, payment arrangement) – legally and factually
significant evidence

Revoking an Offer

Dickinson v Dodds p328 – offer revocation allowed before acceptance initiated

 offer for land purchase with open offer; if revocation occurs prior to acceptance, the offer is
termed; open offers expire after “reasonable” time
 action to initiate acceptance had not begun when offer revoked (through sale to other party);
may have different outcome if option to keep offer open had had consideration

R2d:
 §25 – option contract is promise that limits power to revoke
 §35 – contract not created by acceptance after power to accept terminated

5
  §36 – methods to terminate offer:
• Rejection or counter-offer by offeree
• Lapse of time
• Revocation by offeror
• Death or incapacity by either party

UCC §2-205: firm offers = option to hold open a transaction is not revocable until time lapses or
3 months pass (i.e., no consideration needed for an option)

ACCEPTANCE

Mirror Image Rule – acceptance needs to “look” like an offer; if not, then it’s a counteroffer

Ardente v. Horan – sale of property with additional terms added on acceptance; not acceptance
 an acceptance with conditions or limitations is counteroffer and requires acceptance of new
terms before contract exists

R2d §61 – acceptance which changes / adds terms: does not invalidate contract unless need
assent to changes (e.g., adding furniture vs. adding a date for execution)

Mailbox Rule – acceptance is effective upon dispatch

 Exception = options contract; acceptance is upon receipt
 Burden on offerer for mailbox rule; burden on offeree with options contracts

Acceptance by Performance / Unilateral Contracts

Offer invites acceptance by performance only
 Biggest issues: problems of notification, revocation and reliance in form of partial
performance

Bilateral vs. Unilateral Contracts

 Bilateral – both-way promises
 Unilateral – one side promise, other side action (different means of acceptance)

R2d §54 – acceptance by performance; necessity of notification

1. Unilateral contracts – no notification is needed
2. No contract if offeror has no adequate means of learning of performance with reasonable
promptness and certainty unless
a) Offeree does due diligence to notify of acceptance
b) Offerer learns of performance within reasonable time
c) Offer indicates notification of acceptance is not required

White v Corlies & Tifft p 358 – suit for office build-out in NYC;
 interpret the contract as unilateral or bilateral; court ruled irrelevant – not bilateral b/c no
response; not unilateral because no performance relevant to job offer; no contract

6
R 2d:
 §30 - offer made can be accepted through either promise or performance
 §32 – if uncertain, acceptance type by offeree

3 Forms of Acceptance:
 Strict bilateral
 Strict unilateral
 Offeree has “control” over contract establishment, but must complete within reasonable
timeframe; ex: running across Brooklyn Bridge for $100; offeror cannot revoke once
performance initiated (but offeree can stop performing)
 Up to offeree (treated as bilateral)

Peterson v Pattberg, 1928, p 362 - plaintiff sued for breach of contract regarding bond and
mortgage sale while defendant had issued outstanding offer to plaintiff for reduction if paid-in-
full within timeframe given
 Defendant's offer was withdrawn before its acceptance had been tendered; the act requested
to be performed for assent was the completed act of payment, a thing incapable of
performance unless assented to by the person to be paid; offer of the defendant was
withdrawn before it became binding - no contract
 Williston on Contracts – offeror can revoke any time before performance (very hard-lined)
 Dissent: if promisor is himself the cause of the failure for performance, then cannot take
advantage of the failure (now common opinion)

R2d:
 §45: Acceptance of an offer is allowed by performance, without promissory acceptance,
options contract is then created at start of the performance
 Option contract – contingent on completion of performance
 §62: when offer allows choice between promise and performance, the beginning of
performance makes the contract (even if performance not completed) – works as promise to
complete performance – e.g., more like bilateral agreement

Hobbs v. Massahoit, 1893, p368 – shipped eel skins, as per prior behavior; defendant denied
receipt, and stated contract didn’t exist
 Contract implied in fact, not expressed – silence does NOT constitute acceptance, unless…
o R2d §69:
 Benefit taken (i.e., accepted)
 Given offeror reason to understand assent by silence
 Historical relationship / expectations for behavior

CONSIDERATION

Bargain Theory of Consideration – summary from R2d

 §1 and 2 – contract is an enforceable promise

7
 §17 – a promise must be supported by consideration (with some exceptions)
 §71 – promise is supported by consideration if it is bargained for, i.e., if it is sought by the
promisor in exchange for his promise and given by the promise in exchange for that promise

Adam Smith – historical view, from 1800’s – self-love as basis for consent – the bargain serves
as reason for consideration

Types of Enforceable Contracts and Promises:

 Promise + Bargained-for Consideration
 Non-bargained for Promises
o Promise + Reliance (Promissory Estoppel)
o Promise + Moral Obligation from the Past (ex: I promise to give you $1K for saving my
life)
 Quasi-contract – legal fiction
o Contract implied in law – law “reasons” into a contract based on unjust enrichment
otherwise (ex: MD performs surgery on unconscious patient, should be paid – like
Cotnam v. Wisdom)
o Not based on promise, but unjust enrichment

R2d §71 – formation of contract

 Requires bargain where mutual assent and consideration occur
o Consideration = performance or return promise must be bargained for
o Promise for a promise (even exchange)

***TEST: Bilateral Promise Consideration – requires:

 Mutuality of obligation
 Legal detriment – promising something you do NOT have to do
 Reciprocal inducement – inducing each other’s actions – reason each party is acting is b/c of
other party’s actions

Vs.

Unilateral Promise – requires acceptance by completion of performance

 Once performance has begun, offeror is bound, but offeree is not

Johnson v. Otterbein U, 1885, p620 – sued for breach by promise to pay re: university’s
indebtedness
 Issue: is a promise to give gift a promise and therefore contract?
o Appellate said no: no contract because there is no additional legal detriment to the
university because they already have an obligation to pay their debt

Gifts: promise for gift – not enforceable because there is no consideration under bargain theory
(although there may be under promissory estoppel)

8
 Hamer v. Sidway, 1891, p622 – promise from uncle to abstain from vices until age 21 in
exchange for $5K
 Issue: does this promise from a unilateral contract – if you act, I will give you $
o Defense argued no consideration because promisor was not benefited and there is no
detriment to plaintiff because he formed ‘good habits’
o Appellate court said no to defense because the plaintiff took on legal detriment
 Only need a legal detriment to promisee, not to prove benefit to promisor

Hypo: Bilateral Contract

A says to B: “If you promise to paint my building, I promise to pay you $100,000.” B says “I
agree.”  Contract formed when B agrees.
- Legal Detriment: Yes – doing something parties would not have otherwise done
o – paying $100,000 and painting the building
- Mutuality of Obligation: Yes – both are committing themselves to undertake a detriment
- Reciprocal Inducements (essentially a transfer of benefits) - Yes
o B painting house b/c wants $100,000
o A willing to pay b/c he wants building painted

BUT – if B says to A “I’ve got extra workers, so we’ll go ahead and paint your building.”
A then says to B: “You’re so nice, I’ll pay you $100,000 when you’re done painting the building.”
o No Contract (no legal detriment and no reciprocal inducement
 A paying because B is “so nice”
 B painting b/c he had extra workers, not for $$

Hypo: Unilateral Contract

A says to B: “I promise to pay $200,000 to the first person who brings dinosaur DNA to me.” B
says “I agree to be the first person to do it.”  Contract not formed when B agrees.

B locates dinosaur DNA the next month and delivers it to A (and is the first person to do so). 
Contract formed when B delivers DNA to A. NOTE: Can’t have breach until contract is formed.

Kirksey v. Kirksey, 1845, p629 – brother-in-law promised to brother’s widow – live on open
land, raise family
 Issue: was there sufficient consideration and legal detriment to widow, or was this only a
gift?
o Trial court said = bargain
o Appellate / Supreme = reversed, only a gift
 Question of bargain (move, distance traveled, etc) as creating detriment or gift?
• Brother-in-law wants to give but is not trying to induce widow to give up
property; not trying to create legal detriment; therefore conditional gift
(i.e., she had to give up land to accept but it wasn’t an attempted
inducement for legal detriment)

Hypo: Conditional gift vs. bargain

9
 1. Alfred giving Brett pc and printer at 2pm Friday; not given to Brett – like
Kirksey, merely conditional gift
2. Alfref giving Carla pc and printer after she waters his plants while he’s out
of town – like Hamer, trying to enduce detriment, therefore there is bargained-for
consideration

Moore v. Elmer, 1901, p638 – psychic and client – she predicted his death; he said, if I die, I
promise to pay you
 Issue: is there a bargained-for consideration to make contract?
o No – past consideration (i.e., payment) does not make for future consideration; already
paid for services, therefore the money promise is just a gift
 Hypo: what if was only going to pay if psychic was right? Then no compensation
and payment = consideration

Contract Modification – Pre-Existing Duty Rule

Pre-existing duty rule: performance or promise to perform pre-existing duty does NOT
make consideration; new consideration is required
 Hypo: fixing pc – changes price just before exams, agrees to pay more but then doesn’t pay
the extra amount – this is ok b/c pre-existing duty rule applies; no new consideration
 Hypo: prepping taxes - $1500K cost, settled to pay $1000 – this is NOT ok because there is
no new consideration for the reduced price
o Debtor can claim something wrong with original contract and can settle for reduced debt
in exchange for (i.e., consideration of) waiving legal claim – waives uncertainty in future
 Hypo: $25K for landscaping by 9/1; change to $30K to complete by 8/1; this is ok as a
contract modification because new consideration because of changed date

Stilk v. Myrick, 1809, p656 – sailors sued for extra pay because on desertion, captain
offered to pay more – and not a hold-up situation
 Issue: is this an acceptable contract modification?
o No – because no new consideration; pre-existing rule applies

Alaska Packers Assn. v. Domenico, 1908, p658 – salmon fishers from San Fran to Alaska,
sued for increase to $100 pay – “hold-up” scenario
 Issue: is this an acceptable contract modification?
o Plaintiff: fishers claimed breach from defective nets and therefore that was consideration for
changes to wages – releasing right to sue for breach of contract
o Court said NO – both sides incented for working nets and good fishing; no new consideration
 Hypo: How court fishers get modification? Add a term, it doesn’t even have to match
the value given (ex, sing each night to entertain captain)

Angel v. Murray, 1974, handout – sued for expanse in # of houses to pick-up garbage
 Issue: is there new consideration?
o Trial court – no modification, no more pay

10
 o Appellate / Supreme – reversed; doesn’t use pre-existing rule because obvious change in
terms for the # of homes being covered by contract – rule really to avoid “hold-up” scenario
 No hold-up scenario, actually fair to pay them more
 Voluntary increase
 Modification occurred prior to performance
 UCC 2-209: used as reference in court – abandons pre-existing rule; “need no
consideration for modifications to be binding” (again, very liberal – trying to
enforce contracts) – test of “good faith”

EXCEPTIONS TO CONSIDERATION FOR BINDING MODIFICATION:

R2d §89 – modification of contract – does the Angel case fit this rule? – TEST of
modification for exceptions to consideration - binding if:
1. Voluntariness
2. Modification prior to performance
3. Unexpected change in circumstances / unforeseen circumstances
4. Modification fair and equitable

Dyer v. National By-products, 1986, p676 – loss of foot at work, given “oral contract” to
forego WC claim for lifetime employment, then plaintiff was laid off
 Issue: is there adequate consideration?
o Trial – no consideration
o Appellate / Supreme – uphold agreement
 Court uses combo of subjective test (are parties acting in good faith) and objective
test (“reasonable person”) to determine consideration
 Uncertainty is bargained away – it was an invalid WC claim by law, but no party
knew this; courts prefer parties to choose to reach agreement / settle out of court
(policy implication)
Hypo: man as presumed father – can negotiate uncertainty (his consideration) away through
support settlement – may be held as valid even though later facts prove he is NOT the father

PROMISSORY ESTOPPEL – alternative to Bargain Theory of Consideration – legal

fiction
Theory underlying promissory estoppel is compensation for detrimental reliance

Test for Promissory estoppel (from Hoffman):

 Promisor should reasonably expect to induce action from promise?
 Did the promise induce such action?
 Can injustice be avoided only by enforcement of the promise?

Ricketts v. Scothorn, 1898, p723 – grandfather promised to pay granddaughter so she could
resign from working, but he passed before paying her
 Issue: is there a contract?

11
 o Bargain theory? NO – because there is inducement but there is no “mutuality of obligation” –
she wasn’t bound to quit her job
o Promissory Estoppel? YES because he intended for her to quit working, and at the time of
the promise, it is reasonable to think that the promise will be relied upon
 Promise? Yes
 Reasonable expectation of inducement to retirement with promise? Yes
 Pension promise enforceable because it induced reliance? Yes

Equitable Estoppel – usually envoked regarding fraud, or misrepresentation of facts

R2d §90 – promissory estoppel / reliance theory

 Promisor reasonably expects to induce action and does induce such action – then the promise is
binding if injustice is avoided only through the enforcement of said promise
o Reliance theory, but in commercial transactions now often resolved through expectation
damages

Feinberg v. Pfeiffer Co., 1959, p736 – promise of pension of $200 / month for life after 40
years of service
 Issue: is this promise binding?
o Bargain theory? NO – no new obligation to receive benefit; no mutuality of obligation – past
consideration is not a valid consideration
o Promissory estoppel? YES – she relied on promise, and gave up her job in exchange of this
reliance; unjust to not consider promise binding
 Her cancer was not part of the reasoning or her reliance; however if was known
before the promise, that’s even more of an argument for reliance

Drennan v. Star Paving, 1958, p745 – subcontractor made bid to GC for paving; lowed bid
was chosen, and then paver attempted to revoke; GC found another subcontract to mitigate
the damages, but still damages – expectation damages were awarded
 Issue: binding?
o Bargain theory? No – no consideration
o Promissory Estoppel?
 Promise? Yes
 Reliance? Yes
 Reasonable to think subcontractor would induce reliance via promise? Yes – created
option contract through reliance to keep bid open
 Is enforcement needed to prevent injustice? Yes

R2d §87 – Option Contract - consideration paid for the right to accept an offer at a later
time creates an “option contract”
 Offer expected reasonably to induce action by offeree before acceptance, and induces said
action, is binding as option contract and enforceable under promissory estoppel to keep option
open
o Becomes a contract under bargain theory once promise is returned

12
 Goodman v. Dicker, 1948, p751 – franchise for selling radios, promise with reliance to
detriment
 Issue: is there promise?
o Courts say yes – defense is terminable at will contract, but then the odds of getting radios to
sell if no promise are 0; versus with promise, there are odds to rely on that there will be
radios to sell – therefore reliance
 No promissory estoppel because of the “terminable at will” issue, so court focuses on
reliance, in light of misrepresentation or fraud (aka equitable estoppel)
 If enforced as a contract, then there’s the issue of illusory promise (which the courts
will not enforce)

Hoffman v. Red Owl, 1965, p752 – WI grocery store franchise, Hoffman sells businesses
and moves on agreement that $18K will be enough to start franchise – Red Owl then changes
the amount and terms
 Issue: is there a promise?
o Courts apply promissory estoppel…YES to all:
 Was there a promise?
 Was it likely to create reliance?
 Did it create reliance?
 Was the reliance reasonable?
o Courts have a lot of discretion with damages under PE – moving more toward expectation
damages now, but this case settled through reliance damages
 Damages heavily discussed – because not a breach of contract issue, no loss of profits
calculated – again, damages only as that necessary to avoid injustice
 Re: grocery store sale: actual loss measured as difference between sales price and fair
market value
o Promissory estoppel <> breach of contract because of the element of “discretion”
 “to avoid injustice”…involves a policy decision by the court

R2d §90 – promissory estoppel – promise which is reasonable to expect to induce action on
part of promissee or third party and which induces such action is binding if enforcement is
required to avoid injustice

Pre-contractual Negotiations:
Letter of Intent – drafted to be non-binding and not enforceable as a contract; BUT if
obligation to negotiate is written in as to be done in good faith, then one party’s breach is
actionable
 “Good faith” prevents party from renouncing deal, abandoning negotiations, or insert terms not
conforming to the letter
 Courts are very divided on this issue

Office Max v. Sapp, 2001, from notes – landlord agreed to not offer lease to Office Max
competitor but did so anyway after letter of intent with “non shop” clause
 Issue: should this be binding as breach?

13
 o Court said NO – there was no contract because it lacked essential terms and there was no
independent consideration for the “non shop” lease – Office Max should have paid for
consideration to not shop the lease around
 Could have created promissory estoppel if there had been reasonable reliance

AMBIGUOUS AND VAGUE TERMS

 Under realm of bargained for contracts – “discerning the agreement”
 Courts use an objective approach with a subjective twist

Raffles v. Wichelhaus, 1864, p396 – case for cotton delivery from Bombay via “Peerless” –
sued for breach – delivery refused because of 2 ships with different arrival dates named
Peerless
 Issue: is there a contract to breach given terms? Question of term “Peerless”
o Court held NO – no contract because there had been no meeting of the minds for mutual
assent – the parties were NOT assenting to the same thing (parol evidence offered as option
to resolve what was meant, but not presented)
 Opinions offered in book from Gilmore and Simpson (p398)

R2d §201 -
 §201(1) – if parties attach same meaning to term, then it is applied

 §201(2) – whose meaning prevails: (objective test NOT applied in Raffles)

1. Mutual meaning
2. Party which doesn’t know of different meaning but other party does (subjective)
3. No reason to know different meaning, but other party has reason to know (objective)
 “Reasonable person” test - Usage of trade, etc.

 §201(3) – neither party is bound by the other’s meaning, then no contract because no mutual
assent

Oswald v. Allen, 1969, p407 – Swiss coin collection agreement for sale – ambiguity around
verbiage to indicate what “Swiss coins” meant (there were 2 collections, but 1 general
categorization – this is the ambiguous term)
 Issue: is there a contract given the ambiguous term?
o Courts said NO – under §201(3) – when any of the terms is ambiguous and neither party
knows what the other intended, then there is no contract (references Raffles)

UCC – Hierarchy of Evidence – used to determine what an ambiguous term means

1. Express Terms
2. Course of performance (actions taken)
3. Course of dealing (sequence of previous conduct between parties)
4. Usage of Trade (general dealings within the trade)

14
Weinberg v. Edelstein, 1952, p411 – plaintiff sued other tenant (not landlord) because he is a 3rd
party beneficiary of the other tenant’s contract – terms of contract forbid
 Issue: how to interpret the vague term “dress” in determining breach
o Court used “usage of trade” standards; the practice and customs of trade in general impact
interpretation of “vague” terms – ruled no breach, once term clarified
o Plaintiff seeking damages of an injunction – denied
o R2d §201-2(b) – one should “reasonably” know of standard within the industry

MUTUALITY OF OBLIGATION / ILLUSORY PROMISES / DEFINITENESS

Mutuality of Obligation – one is freed from obligation because the other party has a “free way out”
– invalidates contract
 General rule = both parties are bound or neither is bound

Miami Coca Cola v. Orange Crush – licensing agreement, Orange Crush cancels licensing
agreement
 Issue: is there mutuality of obligation to enforce contract?
o Court says NO contract – there was no mutuality of obligation because Coke could cancel at
any time – one-way agreement
o Raises issue of “illusory promises” – usually in such cases party who made the actual
promise wants out, claims contract is unenforceable because of an illusory promise, versus
the party who has not exited yet (i.e., Coca cola) – the latter wants the promise enforced and
the party to perform

NY Iron Works v. US Radiator, 1903, p429 – supplier contract with question of amount demanded
of supplier by buyer, who claims breach
 Issue: is there mutuality of obligation?
o Court says YES – although the buyer could take nothing or could take a lot, this is an
exclusive agreement – which is make in response to say exclusivity creates “legal
detriment” and is not an illusory promise
o Because of lack of definiteness (buyer could demand much more than supplier is able), how
to be fair? Unfair if buyer is just speculating or acting in bad faith
 Duty of good faith
• General rule of “duty of good faith” to resolve lack of definiteness in contracts
– implied in “requirements” contracts

Requirements contract – both agree to buy / sell all the buyer needs
Output contract – both agree to buy / sell all seller can produce

Illusory Promises – 2 rules to get around to make binding contract (i.e., no “free way out”):
 Mutuality of obligation – solved by exclusivity
 Indefiniteness – solved through duty of good faith

15
Eastern Air v. Gulf Oil – 1975, p431 – requirement contract, on decades-old relationship to provide
jet fuel; new contract was recently made, and after execution, Gulf Oil demanded more money
 Issue: is this an illusory promise?
o Court says NO – contract is binding; Gulf said illusory promise - no consideration because
they were subject to Eastern’s whim or demands; could be question of “hold-up contract” if
oil prices had changed dramatically and then could make different argument
o But Eastern was not speculating, and there was no evidence of “bad faith”
 There was an element of definiteness and non-abuse through duty of good faith
 Also mutuality of obligation because contract had exclusivity

UCC §2-306(1) – duty of good faith

 Requirements or output contracts – definiteness is satisfied by “duty of good faith”
o Quantities within reason of estimates or past comparable output – cannot require
unreasonably disproportionate volume on either side

Wood v. Lucy, Lady Duff Gordon, 1917, p434 – promised exclusive right to use name for ½ of all
profits – implied duty to “use best efforts”
 Issue: is this an illusory promise?
o Court says NO – binding contract because many obligations exist on plaintiff and although
Lucy argued he had a “free way out”, mutuality exists because he was incented to sell her
name to make money – implied obligation (courts answer for getting around mutuality of
obligation problem)

UCC §2-306(2) – exclusive agreements imposes both sides to use “best efforts”

Conditions in mutuality of obligation - when one party has the ability to control a condition, there
may be an issue of mutuality:
 If discretionary, then “free way out” – no consideration and no contract
 If limit on discretion, then mutuality

Hypo: Kurt selling Nancy stocks:

 At $100 / share – OK; mutuality exists because seller limits options
 At peak – NO; illusory promise because seller has too much power
o Key factor: how much power promisor retains over condition – too much, then it’s a
“free way out” and no consideration or contract

Choosing between alternatives in mutuality of obligation – when one party is given choice, even
if that choice would usually not be mutuality or consideration, if other party chooses it then it
constitutes consideration
Hypo: Karen promises employer Tim she will do any of the following for $1K more:
 10+ hours of work a week
 Give up 1 week of vacation
 Do same job (no additional consideration)

16
If Karen chooses #3, then no contract because no new consideration – she already has a pre-existing
duty to perform; BUT if Tim chooses #3 or he agrees to any option and she chooses #3, then there is
consideration

Hill v. PeopleSoft, 2004, in notes – employee signed agreement to arbitrate, but then sued
 Issue: is this agreement illusory?
o Company argued employee violated agreement, employee argued that agreement was
“illusory” because no real promise or consideration
o Court said NO contract, illusory promise because no consideration
 Generally, agreement to arbitrate that is subject to unilateral modification or
revocation is illusory and unenforceable

Form Contracts
Forum Selection Clauses – clause in contract that selects forum for litigation

Carnival Cruise v. Shute, 1991, p445 – forum selection clause for bringing suit only in FL
 Issue: is this clause valid?
o Trial court said NO – not freely bargained for and hard to have “day in court” – plaintiff’s
arguments
o Supreme court reversed – fits concept of “reasonableness”
 Forum selection clauses can be ok – forum choice was not unreasonable within
context; policy reasons / judicially efficient and plaintiff admitted knowledge of
clause
 Dissent: Stevens – prevailing rule in common law – not to enforce a clause if it is not
freely bargained for, create additional expense for one side, or deny one side a
remedy
Reasonableness – test in contracts of “adhesion”
 Ex: fridge sold at inflated interest rates to welfare mom – extreme ex of unreasonableness

Compagno v. Commodore Cruise, 1992, p452 – US House of Reps tried to change verbiage
through statute in USC – applied to admiralty law only, but wasn’t passed – NOT state common law

Caspi v. Microsoft, 199, p453 – forum selection clause for all suits to be brought in WA state
 Issue: is forum selection clause valid?
o Court said OK – clause was presented as same appearance with all other terms; was printable
and accessible after installation
 Why would these clauses be bad? against what could be concerns of local influence

R2d §211 – standardized agreements – used to fit particular types of transactions – help create
efficiency en masse - RULE:
1. Manifest assent to a writing that is typical of those types of agreements (e.g., terms on the
Carnival ticket or Microsoft agreement) – then adopt writing as integrated agreement
2. Treating similar writings alike
3. No assent if had knowledge of particular term in question, then term NOT included in agreement

17
Mirror Image / Last Shot Rule – determines which terms govern if performance starts and mirror
image not yet met – idea of “last shot” – common law historical rule as last set of terms exchanged
before performance begins determine which set of terms define the contract

Meaning of Additional Terms – UCC §2-207 – changed “last shot” rule

 Acceptance is per terms from offer unless acceptance is expressly made conditioned on assent to
additional terms
 §2-207(2) – specific to between merchants – additional terms are part of the contract unless:
o Offer limits acceptance to terms of offer only
o Additional terms materially alter contract
o Notification of objection is given
 §2-207(3) – actions of parties consistent with a contract will constitute a contract; terms are then
determined as that which is in the writings

Step-Saver Data v. Wyse Technoloy, 1991, p457 – plaintiff was value added retailer for IBM /
multi-user system hardware and software packages with IBM as mainframe; Wyse supplied
terminals and TSL supplied OS; TSL software came with "box top license" for limited warranty -
issue arose re: box-top license to serve as "final and complete expression of the terms of their
agreement"
 Issue: Is forum selection clause valid?
o Trial for breach of warranty against Wyse
o Appellate reverses - §2-204(3): "even though one or more terms are left open a contract for
sale does not fail for indefiniteness if the parties have intended to make a contract and there
is a reasonably certain basis for giving an appropriate remedy" – contract was sufficiently
definite without additional writing
 Conditional acceptance test under UCC §2-207 - box-top license was not counteroffer
functioning as conditional acceptance under §2-207(1); neither integration clause of
"consent by opening" nor refund term are sufficient

Union Carbide v. Oscar Meyer – sales price competition for supplier of plastic casings over sales
tax; Union provided lower option and then wanted to recoup for back taxes from Oscar Meyer
 Issue: is term part of contract? Is contract still valid? (regarding coverage for taxes in invoice
language)
o Court said YES contract but term NOT included – the additional term as Union interprets it
creates “material alteration” (under UCC §2-207) – eliminates Oscar Meyer’s ability to
choose another supplier

Added and Inconsistent Terms – can provide extrinsic evidence to support added or inconsistent
terms agreed upon prior to or simultaneously with written contract
Ex: buying a home, which is contracted in writing, at which time orally agree to Lexus also – creates
issue – allow extrinsic / Parol evidence?

Parol Evidence Rule – oral evidence to elucidate term meanings in question in additional to written
contract

Thompson v. Libbey, 1885, p488 – case for warranty of quality of logs purchase

18
 Issue: is parol evidence allowed? (to demonstrate whether warranty clause was in contract)
o Trial court said yes – additional evidence was allowed at trial, found for defendant
o Supreme court reversed – pre-UCC rule: forbid additional by parol when writing is silent on
the topic in question, or to vary from what is written – parol evidence NOT allowed

Brown v. Oliver, 1927, p489 – purchase of land with hotel – debate over whether hotel furniture
was part of contract
 Issue: is parol evidence allowed? (to demonstrate inclusion of furniture in agreement)
o Court said YES, to allow evidence for jury to determine integration of terms for furniture and
jury found it was included in contract
 Complete as to the sale of the land
 But not fully integrated  because only integrated with respect to land
o Rule: when partial integration, whether subject was included depends on intent of parties;
intent seen through conduct and language of the parties, and the surrounding circumstances
(when writing is not enough); determine if element was dealt with in writings
 Court hears extrinsic evidence to decide whether writing is complete
 Then, when decision is made, this determines what evidence goes to the jury.

Two approaches to Parol Evidence:

 Traditional, by Williston (and in Thompson)
o written agreement only
 Modern approach, by Wigmore and Corbin (and in Brown)
o written agreement and extrinsic evidence – determine if document was fully integrated: if
yes, then no extrinsic evidence, otherwise allowed

R2d §209 - Integrated Agreement

 An integrated agreement is a writing constituting a final expression of terms
 Integrated agreement – determined by court preliminary to determining anything through parol
evidence

R2d §210 – Completely vs. Partially Integrated Agreements

1. completely integrated = adopted as complete and exclusive expression of terms
2. partially integrated = not complete

R2d §213 – Parol Evidence Rule

 When integrated agreement, not allowed to offer jury extrinsic evidence that contradicts
integrated agreement
 When completely integrated, can’t offer evidence that contradicts or supplements
 RULE: Extent to which you use parol evidence to determine whether the contract is complete
o IF you conclude contract is not complete, then you admit evidence for jury to decide
whether those terms are part of the whole deal.
Ex: home sale with HVAC system – of course it would be integrated regarding the HVAC term
(versus the Lexus included in the home sale – not standard course of dealings)
Purpose: rule to avoid danger from undermining written contracts with fraudulent terms

19
R2d §214 – Evidence of Prior / Contemporaneous Agreements – admissible evidence to establish
if:
 writing is or is not an integrated agreement;
 integrated agreement, if any, is completely or partially integrated;
 the meaning of the writing, whether or not integrated;
 illegality, fraud, duress, mistake, lack of consideration, or other invalidating cause;
 ground for granting or denying recission, reformation, specific performance, or other
remedy

R2d §216 – Consistent Additional Terms

 If agreement NOT completely integrated, then can offer evidence of consistent additional terms
 Writing is not completely integrated IF it omits a consistent additional term which in the
circumstances might naturally be omitted from the writing

Extrinsic Evidence – any other evidence to show additional terms that are not in the writing
• Prior written agreements
• Prior and simultaneous oral statements
• Course of dealing (negotiations)
• Course of performance
• Custom of trade or industry

Hypos –
1. Real estate ex for non-compete but then competes; Defense presents argument that agreement
included oral commitment to compete only under $10M
a. Agreement integrated regarding competition? YES
b. Added term relate to integrated agreement terms? YES
c. NO evidence allowed because contradicts original terms

2. Sale of land for $5M; plaintiff claims also agreement to plow land and sues for breach, wants
to present evidence
a. Agreement integrated regarding plowing? NO – because something that would
normally be omitted from written contract for sale of land
b. Consistent additional term? YES – does not contradict
c. YES evidence can be presented

3. Sale of house, disagreement if whether car was included

a. Agreement integrated regarding car? NO – wouldn’t normally be included
b. Consistent additional term? YES – would normally be excluded from home sale
c. YES evidence can be presented

4. 500 pcs purchased for $500K; plaintiff says discount offered during contracting for future
purchases and credited for upgrades
a. Agreement integrated re: discount? YES – and yes because had “merger clause” -
“this document constitutes a final written expression of all the terms of this agreement
and is a complete and exclusive statement of those terms.”
b. Consistent additional term? NO – may contradict

20
Integrated Agreement – Common Law interpretation
 Whether an agreement is completely or partially integrated is to be determined by the court as a
question preliminary to determination of a question of interpretation or to application of the
parol evidence rule
 If agreement is in writing and appears complete, then court presumes that it was intended to be
an integrated agreement, unless proven otherwise to the court by the party wishing to introduce
extrinsic evidence to the jury

UCC §2-202 – Parol / Extrinsic Evidence – terms in integrated agreement cannot be contradicted
but can explain or supplement:
 by course of dealing or usage of trade or by course of performance
 by evidence of consistent additional terms unless the court finds the writing to have been
intended also as a complete and exclusive statement of the terms of the agreement
 burden on party trying to exclude extrinsic evidence – must prove parties’ intention to
create completely integrated agreement
UCC – very liberal position to admitting extrinsic evidence; vs. common law – burden on party
wanting to admit it

Merger Clauses – integration clauses can be ignored if court finds parties’ intent contradicts it
o Intent seen in the conduct and language of the parties and the surrounding circumstances

PER Notes:
o PER only applies to precontractual/simultaneous negotiations. It does not bar evidence of
subsequent negotiations to show modification of contract. Even a completely integrated
agreement could be modified orally
o PER not limited to oral negotiations. Can include prior or simultaneous writings such as
letters, email, telegrams, memoranda, and preliminary drafts.
o If extrinsic evidence is offered to prove a separate contract, then it is allowed. PER is not
relevant, but look for separate consideration.
o Not to be confused with Statute of Frauds (certain contracts must be in writing to be
enforceable). Statute of Frauds is an issue when there is no writing; PER an issue when
there is a writing.
o PER is not applicable to oral evidence regarding “interpretation” of contract language.

Hypo – oral conditions

 Purchase of building for $10M; defense wants to introduce evidence that oral agreement made
regarding being contingent on financing – can introduce evidence

R2d §217 – oral conditions - parties to written contract agree orally that performance is subject to
occurrence of stated condition, agreement is not integrated with respect to oral condition – extrinsic
evidence allowed
 Rule applies even if merger clause is present

Pacific Gas v. Thomas Dreyage, 1968, p494 – indemnity clause for damage to property

21
 Issue: how to interpret contract language in clause?
o Court finds either interpretation is possible; therefore it is up to a jury to determine through
extrinsic evidence what is meant by writing
 If term is objectively ambiguous AND
 Subjective meaning attached to the terms by the parties is different
 THEN judge allows jury to consider extrinsic evidence

Contract Interpretation
 Traditional (Williston) view – judge first determines term is ambiguous prima facie
 Modern (Corbin) view – court will consider extrinsic evidence to determine terms
that are susceptible to more than one meaning, even if prima facie clear

“Plain Meaning Rule” (R2d §212, UCC 2-202(2)) – extrinsic and parol evidence NOT allowed to
create ambiguity in already complete and unambiguous contract

R2d §201(2) – Whose Meaning Prevails

 When different meanings attached to agreement or term, interpreted by meaning attached
by one of them at time of agreement
o Meaning meant by party who didn’t know and / or had no reason to know what the
other party intended, but the other party knew what the first intended

R2d §206 – Interpretation against the Draftsman

 Whomever wrote the agreement’s meaning is NOT used – “gap-filling rules”

Contract Interpretation – Hierarchy of evidence/interpretation rules

• Words of the Contract
• Course of the negotiations
• Course of performance
• Course of dealings
• Usage of trade
• Gap-filling rules (i.e., rule against the draftsman)
• Standards of reasonableness & good faith

STATUTE OF FRAUDS – requires written agreements as only enforceable option; may be

electronic
• Promise to pay debt of another (Suretyship Promise – not within own interests)
• Required because looks like lacking consideration (because person promising to pay isn’t
getting anything out of it)
• Interests in Land
• Because too many opportunities for fraud in oral-only land contracts
• Performance that cannot be performed within one year
• Challenges accuracy of memory > 1 year ago
• Sale of goods priced at $500 or more (UCC)
• To cover large transactions

22
Requirements:
• In general, if SOF applies, writing must contain:
o Identity of parties
o Contract’s subject matter
o Recital of consideration
o Terms and conditions
o Signature of party against whom enforcement is sought

• For sale of goods for $500 or more (UCC), only requirements of writing are:
o Quantity
o Signature of party against whom enforcement is sought
• Letterhead, email address on email, initials – can be liberal

Suretyship – promise to answer for the debt of another; must be collateral promise – main purpose
not to benefit self
Ex:
 A and B negotiate for services; C says “if A cannot pay, I will” – suretyship, SOF applies
 A and B negotiate for services; C says “I will pay” – not suretyship, C is main promisor
to pay; looks like consideration, therefore don’t need SOF to say yes to oral contract
 A and B contract for B to construct heating for A’s football stadium; A promises supplier
C, “if B cannot pay, I will” – not suretyship, SOF does NOT apply – main purpose to
benefit A
 A and B are friends and A offers to help B start business, tells C “I will pay” –
suretyship, SOF applies

Land under SOF:

 Sale of property / land
o Exception: contract for building or purchase of land for purposes of joint sale and
division of profits
 Leases > 1 year
 Easements for > 1 year
 Mortgages

Performance > 1 year under SOF – a promise which by its terms cannot possibly be completed
within 1 year
Ex:
 11/1/06 – X and Y agreement for services from 1/1/07 – 12/31/07 – SOF applies
 1/1/07 – A and B agreement for installation, takes 3 months, must start by 9/1/07 – SOF
does NOT apply (because can be done within one year by terms of agreement)

UCC §2-201 - Sale of Goods – writing for >$500; requirements = quantity and signature
 Exceptions, §2-201(3) -
o Oral contract, followed by written confirmation with 10 day objection period – or
confirmation by silence

23
 o Specially manufactured goods (with substantial beginning)
 Shows performance begun and reliance – less chance of fraud
o Admissions made by party in court
o Partial payment or delivery
SOF Exceptions - way to get “out of” requirement to have contract in writing; BUT just because
you get an exception under SOF doesn’t mean contract exists – still has to go to court to determine if
contract exists

UCC §2-201(3)(a) – detrimental reliance

 Hypo: buyer orders 10K magnets with logo; buyer repudiates 3 days after acceptance, but
before performance begun – NO suit because no reliance
 What if seller had completed manufacturing? agreement is enforceable because
performance completed – shows reliance; does NOT mean you have a contract, it just
means you CANNOT use SOF
o NOTE: court hypo ruling is different than promissory estoppel: reliance-based
argument; this seems more evidence-based: BUT in exam argue BOTH because may
be both situations

UCC §2-201(2) – merchant exception

 SOF applies when transaction between 2 merchants written confirmation arrives to
confirm oral contract; only exception is notice of objection within 10 days of
confirmation

NOTES: SOF on decline in courts, because many exceptions and availability of alternative theories:
 Promissory estoppel
 Quasi-contract (unjust enrichment)

Boone v. Coe, 1913, p511 – lease for land in TX

 Issue: is contract that is unenforceable under SOF recoverable from reliance?
o Courts said no – defendant had legal right to not carry it out because a land contract is
required to be in writing – contract unenforceable under SOF

Riley v. Capital Airlines, 1960, p515 – 5 year jet fuel supplier – must be in writing under SOF
 Issue: does oral contract exist under SOF? Enforceable?
o Yes contract but no, not enforceable under SOF

R2d §139 – Enforcement by action in reliance – promise which can be reasonably expected to
induce action and does so, is enforceable notwithstanding the SOF if the only way to avoid injustice
is enforcing the promise
 Essentially promissory estoppel to get around SOF

PERFORMANCE, BREACH and EXCUSE

PROMISES in bilateral contracts

24
About breach and about performance – question if the actions are independent or dependent; who
needs to perform first? What makes substantial performance?

Independent vs. Dependent promises

 Ex: A and B promise and form a contract; A is to paint B’s house and perform first
o Independent – B owes a duty to A even if A breaches; if B does NOT perform, then
just as much in breach as B
 Historically, all independent promises
o Dependent – B’s duty to perform is conditioned on A’s performance
 Modern common law
• Ex: B can sue A and get expectation damages back if have to find
another house painter

Kingston v. Preston, 1773, p880 - Silk mercer contract for stock in trade in exchange for security;
apprentice sued for breach
 Issue: were promises dependent?
o Court first wrestling with concept that implied assumptions make promises
dependent
o Court held apprentice held in breach for not fulfilling first performance for dependent
promise to be received from mercer

Constructive condition = courts “make it up” – implied condition

 When contract has no instruction as to who performs first, courts supply missing term
 Implies both order of performance and dependency in the promise – common law “gap-
filling”

Morton v. Lamb, 1797, p882 – Concurrent transaction for corn in exchange for payment
 Issue: who performs first / dependent?
o Court held plaintiff in breach – did not confirm he was ready to pay for the corn, so
he can’t bring an action against it not being delivered by other party
 RULE: “if one party covenant to do one thing in consideration of the other
party’s doing another, each must be ready to perform his part of the contract at
the time he charges the other with non-performance”
 Still dependent promises; often sale of goods is “simultaneous exchange”

R2d §234 – order of performance in dependent promises

 If performances to be done simultaneously, then they are due simultaneously
 When performance of only one party requires a period of time, his performance is due
first unless language or circumstances indicate otherwise
Ex: paint house for $10K – if no clause for who goes first, then painter goes first because his
performance takes a “period of time” – other ex’s: haircut, construction, employment – same idea:
“period of time”

Hypo: A’s performance is implied condition of B’s duty:

25
  If A fails to perform, B need not perform AND can sue for breach (e.g., damages).
o Expectation damages with mitigation difference; ex: get someone else to paint house,
$2K more = damages
o No specific performance because B has already chosen his “remedy” by not
performing – neither party performs
 If A performs, but B does not, A can sue B for breach
o Ex: damages AND specific performance – because A has already performed, this is
the remedy for B not performing
 If A performs first but immaterially breaches (in other words, substantially performs), B
must perform BUT can sue for damages caused by the minor breach (or seek offset).

Ex: A supposed to paint house in exchange for after B plowing field – if B performs (even though he
doesn’t have to), then can get expectation damages for the cost of paying someone to paint the house
beyond the value of the plowed field, say damages at cost of $12K to pay another person to paint;
also can use specific performance as an option (if it meets specific performance requirements)

Doctrine of Substantial Performance

 How much must be done to constitute before breach?

Jacob & Youngs v. Kent, 1921, p883 – home builders suing for final payment; defense filed as
breach since did not install “Reading” pipes as per contract; home builders did not know of change,
and no substantial difference in value
 Issue: who is breaching party? Did builder complete substantial performance?
o Dependent promises – builder has to go first, but no material breach – breach was minor
(question is one of degree)
o Damages is then equal to the “difference in value”
 Substantial performance completed (vs. perfect tender, which is impossible)
1. purpose to be served (utility v. art) – as good as promised
2. desire to be gratified – is there relationship for owner, no – then YES desire met
3. the excuse for deviation from the letter (good faith -- intention) – no ill intention
4. cruelty of the enforced adherence
o Hypo – if Reading pipes meant something, then maybe could make different argument

Hochster v. de la Tour, 1853, p892 – contract for tour guide, with repudiation before the date of
expected performance
 Issue: is repudiation before performance a breach? Can it be actioned?
o Court says yes – gives excuse for nonperformance and immediate cause of action for
damages
o Why? Because mitigation is better for both parties
Anticipatory Breach – must be a definite and final communication of the intention to forego
performance before the anticipated breach may be the subject of legal action
 R2d §251 – if doubt is created as to performance, then other party can “demand adequate
assurance” from the promisor; if no assurance, then can treat as repudiation and resort to the
usual affirmative or defensive remedies

26
Ex: Hochster v. de la Tour – definite and final intent to breach; or if say “I’m sick and may not be
well enough to go” – then has right to ask “adequate assurance”; if not confirmed, then can consider
this creation of doubt as repudiation

B & B Equipment Co. v. Bowen, 1979, p907 – Bowen was hired to replace Brayman as 3rd partner,
in exchange for his work as controller; part of deal was to buy out Brayman’s stock of 10K shares
 Issue: who was substantial breaching party?
o Bowen’s breach was for poor performance, which he argued was not material; court
disagreed – poor performance WAS a material breach because “major purpose of contract
was about performance of services by Bowen”

Factors of Materiality: test from B&B case

 Extent to which injured party will get substantial benefit
 Extent to which injured party can be adequately compensated by damages – restitution
damages only
 Extent to which partial performance has occurred
 Greater or less hardship on the party failing to perform
 Willful, negligent or innocent behavior
 Greater or less uncertainty that the remainder of the contract will be performed

Lane Enterprises v. Foster, 1998, p910 - Foster subcontracted with Lane to coat steel for ODOT
bridge; contaminants for phase 1, had to pay 3rd party for repairs; question of who breached first –
Foster asked for assurances from Lane for phase 2, Lane never responded
 Issue: who is breaching party?
o Court held Foster had reasonable basis to request adequate assurances for Phase 2
performance, and had right to seek cover when no response was received; even though Foster
breached in Phase I, was NOT material (withheld < 5% of payment)

Rights upon Breach - non-breaching party may:

 Affirmative Remedies
o Sue for money damages
o Request specific performance
 Defensive Remedies
o Refuse to perform duties under the contract
Risk: The risk with defensive remedies for the “nonbreaching” party is that if a court finds that the
other side had not materially breached, then the “nonbreaching” party may now be considered in
breach!

Inwood Tower v. Fireman’s Fund –breach issue with multiple contracts; Inwood didn’t pay on
first contract so FF didn’t perform on second contract
 Issue: does breach on one contract allow “anticipatory breach” on different contract?
o Court held: NO - nothing in the roof repair contract provided that it was contingent on the
masonry contract; and there was no evidence that it was standard construction practice to
complete masonry work before commencing roof work. Thus, no anticipatory breach.

27
CONTRACT DEFENSES
Misrepresentation

Vokes v. Arthur Murray, 1968, p991 – Vokes purchased $31K in dance lessons on basis of
becoming good dancer and making progress; sued for misrepresentation – wants contract voided and
restitution damages
 Issue: is there a valid defense?
o Can opinion be considered factual representation? When does it become fact-like? Rule: “a
statement of a party having…superior knowledge may be regarded as a statement of fact
although it would be considered as opinion of the parties were dealing on equal terms.”
o Question of undue influence

R2d §168 – reliance on assertion of opinion

If reasonable to do so, the recipient of a person’s opinion as to facts not otherwise known to the
recipient may properly interpret it as an assertion if:
o the facts known to that person are not incompatible with his opinion, or
o he knows facts sufficient to justify him in forming it.
Ex: Vokes v. Arthur Murray

R2d §169 – reliance on assertion not justified

Assertion on opinion only, cannot be relied upon unless recipient:
o stands in such a relation of trust and confidence to the person whose opinion is asserted that
the recipient is reasonable in relying on it, or
o reasonably believes that, as compared with himself, the person whose opinion is asserted has
special skill judgment or objectivity with respect to the subject matter, or
o is for some other special reason particularly susceptible to a misrepresentation

R2d §177 - Undue Influence

o Undue influence is unfair persuasion of a party who is under the domination of the person
exercising the persuasion or who by virtue of the relation between them is justified in
assuming that that person will not act in a manner inconsistent with his welfare
o If assent is induced by undue influence by the other party, the contract is voidable

Austin Instrument v. Loral Corp., 1971, p1004 - Loral subcontracts with Austin to produce gears
in large Navy contract
 Issue: is there economic duress as excuse for nonperformance?
o Court said YES – “hold-up” scenario – it was wrongful to increase price; circumstances had
not changed for “good faith” request to ask for more (supply / input cost increase, for ex)
o RULE: “a contract is voidable on the ground of duress when it is established that the party
making the claim was forced to agree to it by means of a wrongful threat precluding the
exercise of his free will…the existence of economic duress or business compulsion is
demonstrated by proof that “immediate possession of needful goods is threatened.”
o Dissent – held that request for a renegotiation of terms was not in bad faith

28
US v. Progressive, 1976, p1008 – purchase agreement, where Crane held offer open and ultimately
accepted purchase from Progressive, then changed price because of higher input costs – agreed to by
Progressive in writing via purchase order
 Issue: is there economic duress as excuse for nonperformance?
o Court flips good faith requirement onto party getting held-up because non-breaching party
has to say “I disagree – I don’t want to go along with this” – silence is not an indicator
o UCC – agreement modifying contract needs no consideration to be binding
o Forcing other party to verbally object allows for greater efficiency; allows party who wants
to object to notify of economic duress
 No complaint, therefore no duress
 Crane acted in good faith

Economic Duress
• A contract is voidable on the ground of duress when it is established that the party making
the claim was forced to agree to it by means of a wrongful threat precluding the exercise of
his free will – same as “hold-up” problem

R2d §175 – duress as excuse

 If party’s assent is induced by threat or has no reasonable alternative, then void
 If 3rd party induces then voidable unless contracting party acted in good faith without
reason to know of duress and relies materially on the agreement

Williams v. Walker Thomas Furniture, 1965, p1025 – furniture store sold many items on credit
policy, and retained a security interest in all items until all outstanding debt paid off and purchased
outright; specific Williams case for $515 stereo to welfare mother of 7
 Issue: is this policy unconscionable?
o Case of first impression - Court uses UCC but it doesn’t directly apply because after
lease over = transaction of goods; lower courts held they couldn’t undo these
contracts because no former unconscionability precedent, but suggested to Congress
to issue corrective legislation to avoid “such exploitative contracts”
o RULE: Unconscionability includes an “absence of meaningful choice together with
contract terms which are unreasonably favorable to the other party”
o Consider UCC §2-302 persuasive authority to hold “element of unconscionability is
present at the time a contract is made then the contract should not be enforced”
o Dissent: Court shouldn’t be making law – too much policy going on here (legislative
issue); shouldn’t be looking at plaintiff as “reasonable person”

R2d §208 - Unconscionable Contract or Term

 If term / contract unconscionable at the time the contract is made, a court may refuse to
enforce the contract, or may enforce the remainder of the contract without the
unconscionable term
o Rule: “a contract be unreasonable and unconscionable, but not void for fraud, …
damages only equitably entitled to…” (from Williams v. Walker-Thomas Furniture)

UCC §2-302 – unconscionable contract or clause

29
  Same guidelines to unconscionability as under R2d; Understand not just persons who
made contract but setting / circumstances factors influence court determination of
unconscionability or not

TEST: Unconscionability:
1. Oppression and surprise
2. Adhesion contract – creates small amount of procedural unconscionability

Gatton v. T-Mobile, 2007, p1037 – Mobile phone contracts: mandatory arbitration clause, class
action waiver – plaintiffs want to litigate for termination fee and lock-up phones
 Issue: is there Unconscionability in contract?
o Court says yes, NO contract
o Unconscionability: requires procedural and substantive unconscionability; sliding-
scale rule applies (mix of level of each)
o Dissent - meaningful market alternatives and procedural unconscionability, therefore
no unconscionability

Procedural: oppression or surprise – no surprise, but oppression through appearance of adhesion-

like contract; “take-it-or-leave-it” type – forces you to give up procedural right
Contract of adhesion: “imposed and drafted by the party of superior bargaining strength and
relegates to the subscribing party only the opportunity to adhere to the contract or reject it”

Substantive: overly harsh or one-sided results – high degree of substantive unconscionability; class-
action waivers are “indisputably one-sided” because companies do not sue their customers for class
actions

EX: procedure of getting into the contract; substantive is what’s actually in the contract

MISTAKE OF FACT
 Mistakes coupled with other circumstances, may provide a defense - focus is on a
mistaken assumption about basic facts existing at the time of contract formation
o RULE: “if there is a difference or misapprehension as to the substance of the thing
bargained for … there is no contract”

Sherwood v. Walker, 1887, p1051 – replevin for a cow with a dispute over cow’s value – as
breeder or meat
 Issue: is there a mistake of fact to void contract?
o Mistake of substance vs. value – difference about substance is material mistake
(objective) vs. value (no remedy at law for value mistakes - subjective)
o Court allocates risk of transaction on buyer, because seller can undo transaction
 RULE: “if there is a difference or misapprehension as to the substance of the
thing bargained for … there is no contract”
o Dissent - Opinion that main bargain is for cow itself, regardless of cow’s “standing” –
no mutual mistake (because buyer thinks he can breed the cow)

30
  By this logic, seller bears risk because sold cow as “probably barren” –
because seller uncertain in their mind; should be baring some of the risk if
they’re wrong

R2d §152 – when bilateral mistake voids contract – contract is voidable by the adversely affected
party if mutual mistake (unless party bears risk under R2d §154)

R2d §153 – following from 152, contract is voidable if no risk born AND…
 Mistake is such that enforcement would be unconscionable
 Other party had reason to know of mistake

***R2d §154 – bearing risk of mistake – bears risk when… (NOT about foreseeability)
1. Risk is so allocated in agreement
2. Aware at time of contracting that has only limited knowledge with respect to the facts to
which the mistake relates but treats his limited knowledge as sufficient
3. Risk allocated by court on reasonable grounds given circumstances

Beachcomber Coins v. Boskett, in notes – plaintiff purchased fake coin; mutual mistake by both
parties, therefore can’t be held liable for misunderstanding of substance

UCC – mistake of fact; implied warranty of merchantability

 §2-104 – definition of merchant
 §2-314 – implied warranty / merchantability - i.e., they are what I said they are
o Denver coin violates warranty of merchantability
 §2-316 – exchange or modification of warranty – when buyer has examined the goods
or refused, warranty void
o Should there be reason during 15 – 45 minute examination of coin that buyer should
KNOW of default? If yes, then no warranty under UCC

Hypo: Cliff owns land in Texas, museum wants to explore caves for $50K and keep artifacts; Cliff
tells them no caves but agrees
 R2d 153 – Cliff had reason to know of mistake, but Cliff told them! Good faith… this
provision doesn’t weigh in much
 Cliff argument – paying for value of finding caves, not finding artifacts – mistake of
fact / value and not substance?

IMPOSSIBILITY, COMMERCIAL IMPRACTABILITY, FRUSTRATION OF PURPOSE

Impossibility
 Formerly held that no excuse for performance
 Modern form - has exceptions:
o Supervening Illegality - such that the party could not both comply with the law and perform
the contract

31
 o Supervening Death or Disability - if performance requires enough personal experience, skill,
ability, and judgment, to require the existence of a particular person and could not be
delegated to another
 Ex: Death or Disability - painting a painting vs. building buildings – anyone can do
latter, versus painting – death excuses
o Supervening Destruction (Taylor v. Caldwell) - if the existence of a particular thing is
necessary for a party’s performance, the party is excused if the destruction or deterioration of
the thing prevents performance

Taylor v. Caldwell, 1863, p1087 – lease for 4 concerts in music hall, which burned down before
shows
 Issue: is impossibility an excuse for contract performance?
o Court held YES - court implies that they contemplated the continued existence of the
Music Hall as a condition to performance
o Policy Concern – Too much excuse undermines the stability of contracts, reallocates
risks already insured against in an inefficient manner and invites courts to “make”
contracts that the parties could and should have made for themselves.
 i.e., should have built logic into the original contract – letting courts in too
much perhaps?
o RULE: “absence of an express or implied warranty that the thing shall exist, contract
is not to be construed as a positive contract and parties shall be excused if
performance becomes impossible from the perishing of the thing without default of
the contractor”

R2d – impracticability
 § 261 - after a contract is made, a party’s performance is made impracticable without his
fault by the occurrence of an event the non-occurrence of which was a basic assumption
on which the contract was made, his duty to render that performance is discharged
 §263 - existence of a specific thing is necessary for the performance of a duty, its failure
to come into existence, destruction, or such deterioration as makes performance
impracticable is an event the non-occurrence of which was a basic assumption on which
the contract was made

UCC §2-615 – impracticability - Delay in delivery or non-delivery in whole or in part by a seller

… is not a breach of his duty if performance as agreed has been made impracticable by the
occurrence of a contingency the nonoccurrence of which was a basic assumption on which the
contract was made
 Ex: if deposit given, contract voidable and deposit returned – restitution remedy (can’t
gain by excuse)
 TEST:
o Goods are fungible
o Consideration given at time of contract

Larsen v. Grabowski, 1996, from notes – lease for land to grow corn, to pay with 3355 bushels and
$3K; crop ruined

32
  Issue: is commercial impracticability an excuse?
o Court held NO - more like Taylor v. Caldwell – if owner could’ve found substitute
hall for performers, maybe then he shouldn’t be excused – substitute available for
corn on market to buy to fulfill duty of performance

Tractebel Energy Marketing v. Du Pont, 2003, in notes – emission credits agreement, which were
taken back by government before delivery to Tractebel
 Issue: is commercial impracticability an excuse?
o Court held NO - substitute available for credits on market – Tractebel doesn’t care
whose credits they are!
 Because government had already reduced credits – should be foreseeable /
part of consideration
 Again, excuse is NOT often given for “commercial impracticability”

Krell v. Henry, 1903, p1099 – rental of home for 2 days to view King Edward’s coronation, which
never occurred
 Issue: is frustration of purpose an excuse?
o Court held YES – extrinsic evidence of implied term was applied – term being the
existence of the coronation

Frustration of Purpose
 Extension of impossibility doctrine – “frustration of purpose” defense; unfortunate event
occurs which “could not be in the contemplation of the parties”
1. Foreseeability - even if “low risk” probably thought of and therefore probably valid -
NO frustration; versus excused because unlikely to even cross minds – “outside one’s
contemplation”
2. Foundation of contract – what was the essence of the contract for
3. Was performance prevented?

Ex: 3 taxis:
1. With sign to say “taxi to races” – frustration of purpose
2. Told him purpose for going, but doesn’t care – not explicit to purpose of contract
3. Give him address, absolutely NOT frustration – other party didn’t know or intend

Lloyd v. Murphy, 1944, p1105 – 5 year lease for lot to sell new cars, then government invoked
rules under wartime for limits on sales
 Issue: frustration of purse as excuse?
o Court held NO – risk foreseeable, and value of performance was not destroyed
o Note: Williston quote – “wholly outside the contemplation…”

Hypo: Trump building condos and commissioning boat on Navy Pier; focused on view of fireworks
and ferris wheel; contracts with builder for condos and boat, and sells unit to Retiree; then city cuts
budget for both items
o Trump – argues frustration of purpose

33
o Can Trump get out of either contract? (can use parol evidence to learn more facts) –
assume know purpose of contracts
 If Trump knew budget was under constraint, foreseeability factor
 Trump can still sell condos and use yacht outside of Navy Pier factors – still
purposes
 Roger Retiree – could have purchased many different condos, intended to buy this
ONE for the views; BUT no…foreseeabiity? Perhaps, need to argue you need
more facts; could argue fireworks are “added value” but not purpose, many other
uses for condo

34