The Contracts Outline

I. DAMAGES FOR BREACH

Example of Three Kinds of Damages
A agrees to sell land to B for 5000. B gives 4000 down. A fails to deliver. Market price of land
drops to 2000. What damages does A owe to B?
1. Expectation (profits + expenses): -3000 + 4000 = +1000
2. Expectation (§ 347: loss in value – cost avoided): 2000 – 1000 = +1000
(loss in value is the value of the land B should have if A delivers = 2000)
3. Reliance (§ 349: expenditures – loss if contract performed): 4000 – 3000 = +1000.
4. Restitution (§ 347: just refund): +4000.

1. Expectation Interest:
“The benefit of the bargain.”. Court attempts to put promisee in position he would have been had promise
been performed
-Should be upper limit of possible damages, but in losing contracts reliance can be brpader
-uses subjective value because K voluntary
-not what a reasonable person would have expected, but the victim
i. Expectation measures are preferred because it causes people to breach only
when it makes at least one party better off and no one worse off, i.e. encourages
only efficient breaches

Ex post expectancy v ex ante expectancy

Ex ante (expectancy) – market damages (reflect value of the option)
Ex post (lost profits) – reflect value of completed exchange

3 Ways to Calculate
1. Market price - K price
2. Lost profits – any expenses saved from the breach
3. Expenses + expected profits

expectation =
§347: measure of loss in value to him of the other party's performance caused by its failure or deficiency
damages in general + any other loss, incidental or consequential, caused by the breach
(default) p. 78 - any cost or other loss that he has avoided by not having to perform

Hawkins v. McGee p. 63 – hairy hand skin grafting, promise of a 100% perfect hand p. 69
promised
I: Can oral guarantee of 100% success in operation hold a doctor liable when operation
fails? i.e. when a special contract is made?
original
b R: Yes, utterance of words are done with the intention that they would be taken at face
value by patient inducing them to consent to operation. D went beyond offering a medical
a
opinion when offering a “perfect” hand
current
Expectation damages = value of perfect hand (a+b) – value of current hand + incidental cons.

Tongish v. Thomas p. 86 D, a farmer, made a K with P to sell his sunflower seeds. P had a K to deliver the
seeds to Bambino Bean & Seed for the price it paid to D plus 55 cents handling charge, P’s only profit.
The sunflower seed price went up dramatically and D refused to deliver the seeds to P and instead sold to
Thomas. UCC 2-713 applies, which states that damages for bad-faith breach of contract should be the
difference between market price and contract price plus any incidental or consequental damages.

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Sales of Goods: UCC applies same damage rule to purchase and sale of marketable goods
(see JO Hooker & Sons v Roberts Cabinet – cant include overhead in your expectation damages;
UCC didn’t apply here because breach was about services, not goods)

Hypo #1: Seller agrees to deliver $1/unit merchandise to Buyer

S breaches K
Under §2-712: B may “cover” by making purchase of substitute goods
Damages from S = cost of cover – K price
If B gets subst. for $1.50/unit  S owes B $.50/unit

Hypo #2: B breaches  S may resell goods to other buyers in a commercially reasonable manner
§2-706: S may claim damages equal to difference in K price and resale price

2. Reliance Interest
Restatement 349. Expenses incurred in performing or preparing to perform an action in reliance on a
promise. Court attempts to put promisee in position he would have been had promise not been made.

J.O. Hooker Case (pg 78) –When Hooker (D), a general contractor for renovation of public housing
residences, terminated Roberts’ (P) subcontract due to a dispute over the disposal of old cabinets, P
successfully sued for breach of contract.
Issue 1: Whether Article II of Uniform Commercial Code Applies. USC doesn’t apply to services so it
would apply to cabinet but not to installation. ssue 2: $1400 in damages for storage of cabinets in his
facility. (he pays rent, but says it took up 1/10 of the space wants 1/10 of the rent).
HOLDING: A party is entitled to recover damages for expenses in storing goods that it would not
otherwise have incurred absent other party’s breach. In this case P didn’t have to rent additional space so no
storage damages. Can’t recover for overhead However manager’s time spent on project is recoverable.

3. Restitution Interest
Promisee delivers something or does something in the course of a transaction. Promisor does not pay.
Court attempts to put promisor in position he would have been had promise not been made by depriving
them of the benefit they received.

§371, p. 256: Measure of Restitution Interest – If a sum of money is awarded to protect a party’s restitution
interest, it may as justice requires to be measured by either
- the reasonable value to the other party of what he has received in terms of what it would
have cost him to obtain it from a person in the claimant’s position, or
- the extent to which the other party’s property has been increased in value or his other
interests advanced.

§ 373, p. 256: Restitution when other party is in breach – injured party has no right to restitution if he has
performed all his duties under the contract and no performance by the other party remains due other than
payment of a definite sum of money for that performance.

§ 374, p. 265: Restitution in favor of party in breach – in justifiable breaches, party in breach is entitled to
restitution for any benefit in excess of the loss that he has cause by his own breach. Party is NOT entitled to
restitution if the value of the performance as liquidated damages is reasonable in the light of the anticipated
or actual loss cause by breach and the difficulties of proof.

§1-106: damages = expectation damages, not consequential, special, or penal damages p. 91

A. Restitution for a Losing K

Bush v. Canfield D breaches but with market price drop it actually helps P p.250
I. Should P get entire down payment back even though they would have lost money if the

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 contract were completed?
H: Yes. D is in breach and it is not for him to say that P would have lost $ in contract. D
should not receive a benefit for breaching.

B. Restitution for the Party in Breach

Britton v. Turner P breaches after working for 9.5 months, D withholds entire wages p. 256
I: Is P entitled to recover for services rendered
H: Yes. The amount that P can recover is the benefit and advantage D took from the labor, in
other words the amount of value he receives after deducting the amount of damages. Not
requiring D to pay would amount to unjust enrichment.

Vines v. Orchard Hills Homebuyer breaches in good faith then tries to recover down payment p. 260
I. Is P entitled to restitution even though down payment was contractually considered
§ 374, liquidated damages?
p. 265: H: A party whose breach is not willful can bring a claim to recover $ paid that unjustly enrich
the seller. The breaching party must satisfy his burden of proof that the other party has
acquired a net gain in order for a claim for unjust enrichment to be sustained. Here, if buyer
can prove homes price at time of breach covers the down payment they can get it back. The
liquidated damages clause would in that case be void as a penalty.

C. Restitution and “Quasi Contract”

-Law recognizes, when acting in an official capacity, ought to be compensated
-policy: patient could sue for negligence, etc  he ought to be able to recover for professional services

Cotnam v. Wisdom, Surgeons attempt to be compensated for accident victim on street p. 298
I: Is there an implied contract when surgeons fetched to the scene of an accident seek to help
the accident victim who later dies from injuries? Can P’s take into account victim’s financial
condition?
R1: implied contract : an insane person, idiot, or a person completely devoid of senses at the
time and reason by sudden stroke of an accident or disease may be held liable for necessaries
furnished to him in good faith while in that unfortunate and helpless condition.
R2: Because surgical operation is conceived to be performed with due skill and care, the price
to be paid does not depend on the result
R3; financial condition of patient cannot be considered where there is no contract and
recovery is sustained on an implied contract unless trade custom proves otherwise…except in
situations of emergencies when implied contracts require only “reasonable compensation”.

Martin v. Little, Brown and Co. P writes to publisher informing them of copyright infringement p. 269
I: Was there an implied contract that the publisher would pay for this information?
H: No. Volunteers have no right to restitution and his offer was not conditioned upon payment
of any kind. In order to recover for unjust enrichment, it must be shown by the facts that a
person wrongly secured or passively received a benefit that it would be unconscionable to
retain.

4. Limitations on damages

-Default rules that may be contracted around

a. Remoteness or Foreseeability of Harm

-Chen says rule increases breaches bc limits damages

§351: Unforeseeability and other limitations on damages

- not foreseeable by party in breach no damages

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 - foreseeable if:
i. loss follows in ordinary cause of events (consider separation in time
and space between breach and consequences, customs of the trade, etc)
ii. party in breach knows of special circumstances
- exceptions to forseeability damages:
i. excluding loss of profits, paying only reliance damages
ii. if giving damages exults in overcompensation
- damages can be curtailed by excluding recovery for lost profits, by allowing
recovery only for loss incurred in reliance, or otherwise if it concludes that in the circumstances
justice so requires in order to avoid disproportionate compensation

a test of foreseeability is to determine whether D would have agreed to the contract price had
he known of the extent of his liability

Hadley v. Baxendale, N‘l failed to deliver on time shaft that runs mill p. 93
I: is D liable for loss of profits?
H: no, damages limited to what was contemplated at the time of contract. Courier prob
thought they had extra shaft
R: must be foreseeable. For special situations, damages can be awarded only if P informs
D of the special situation or if the damages were reasonable foreseeable. Note that this
encourages information sharing when deviating from a default rule.

Hector Martinez v. South. Pac. Trans., delay and damage of dragline transp p. 104
I: Due to delay and damage of P’s machinery, should D be liable for P’s loss profits
without and conveyance of “special circumstances” notice?
R: Yes, as long as it’s foreseeable and not remote to a reasonable person. The harm is
foreseeable bc the delayed item has a use value in itself. Damages measured as rental
value of machine.

Morrow v. First National Bank Bank doesn’t inform guy of safety deposit box p. 109
I: Is bank laible for theft of coins?
R: No, under tacit agreement test D must have had knowledge that breach will entail
special damages and at least tacitly assume responsibility for those damages

a. Certainty of Harm
§ 352, Uncertainty of loss – limitation on damages
damages not recoverable for loss beyond an amount that evidence permits to be established
with reasonable certainty

If expectation damages (lost profits) are too speculative, can get reliance damages instead

Chicago Coliseum Club v. Dempsey, boxing match contract breach by boxer p. 112
I: What damages to provide when expected profits cannot be determined?
R: Only reliance and restitution expenses that flow from and are the result of the breach

Anglia Television v. Reed, actor breaches contract to appear on television film p. 1

I: Since D cannot determine lost profits due to breach can they claim “wasted
expenditures”, i.e. reliance damages before contract signed?
R: Yes, P can collect damages even prior to contract provided that it was a foreseeable
loss due to breach

Mistletoe Express c. Locke Locke collects reliance damages in losing contract p. 128
I: Can Locke collect in a losing contract?
R: In this case yes. BOP is on the breaching party to prove that the loss would have
exceeded the reliance damages. Without such proof P will collect reliance damages.

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 b. Avoidability of Harm
§350, p. 153: Avoidability limitations on damages
damages not rewarded for loss that injured party could have avoided without undue risk,
burden or humiliation except when injured party has made reasonable but unsuccessful efforts
to avoid loss

• Mitigation forces people to behave in non-wasteful ways

• Buyer’s duty to mitigate is embodied in the duty to cover; i.e. he must attempt to purchase
substitute goods from another supplier – no attempt to recover limits damages to recover only the
difference between the market price at the time when the buyer learned of the breach and the
contract price
• Seller’s duty to mitigate is much less than the buyer’s. If a buyer repudiates before delivery or
rejects delivery, seller has a choice of remedies:
o Resell and recover difference between resale price and contract price
o Not resell and recover the difference between market price at the time and place for
tender and the unpaid contract price
o Recover lost profits that do not require mitigation
• Chen: consequential damages can be more subjective
• if K is for special services instead of fungible merchandise, duty to mitigate is limited
o standard is subjective

Rockingham County v. Luten Bridge, breach of buyer on construction of bridge p.131

I: Should D be liable for damages sustained by P post notification of breach?
R: No, it is P’s duty to do nothing to increase the damages flowing from breach
Damages = expenses incurred prior to breach + expectancy interest (profit expected)

Shirley Maclaine v. 20th century Fox Studio cancels film tries to replace with another p. 142
I: Did Maclaine have a duty ot cover by taking other role?
R: No. Employee has duty to mitigate, but with work that is comparable or substantially
similar. Employee must use rable efforts to find similar work.

Clark v Marsiglia: K to have paintings restored cancelled halfway; restorer completed project after received
notice  cant claim for damages for work performed after receiving order to stop (avoidable consequences
rule of damages)

Buyer’s Breach / Seller’s Remedies

UCC §2-706, p. 157: Seller’s Resale

damages = resale price – contract price + incidental damages – expenses saved in breach

all aspects of resale should be reasonable

Lost Volume Doctrine

- when seller has unlimited supply of like goods (fungible, fixed price units), he is entitled to the
profits from breach of K, even if he resells the actual good that buyer in breach was supposed to
buy, b/c “contract minus resale” measure in UCC §2-706 and “contract price minus market price”
measure in UCC §2-708 may not adequately put seller in expectation position
o UCC §2-708 – when standard remedies are inadequate, seller’s damages are his lost
profits
 if seller cant resell to mitigate, buyer must reimburse seller the whole K price
(cost of good + profit on the boat)

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 o RST § 350 – remember to apply lost-volume idea only when an injured party can take on
as many new jobs as people request and, therefore, when any new jobs are not substitute
jobs
- doesn’t apply to personal service (like an actress) or unique goods

Neri v. Retail Marine, breach of buyer due to legit reason in purchase of boat p.155
I: Should P be awarded loss profits and incidental damages from a breach by a buyer
even if it eventually sold said boat to another?
R: Yes, since P is a boat dealer it is assumed that breach by buyer prevented the sale of
two boats instead of one, D may be entitled to restitution damages

§2-708,p.158: Seller’s damages for non-acceptance or repudiation

damages = market price @ breach + place for tender – unpaid contract price + incidental damages –
expenses saved in breach

or

damages = profit of seller @ full performance + incidental damages + costs incurred – proceeds for resale

§2-710 incidental damages: i.e. commercially reasonable charges, expenses or commissions incurred in
stopping delivery, in transportation, care and custody of goods after buyer’s breach, in connection with
return, resale of goods or otherwise resulting from the breach

§2-718, p. 169: Liquidation or limitation of damages; Deposits

-Liquidated damages must be rable in light of anticipated or actual harm caused by breach, siddiculties
of proof of loss, and onconvenience or nonfeasibility of obtaining adequate remedy.
- a term fixing unreasonably large liquidation damages is void as a penallty
- buyer’s entitled to restitution damages, stipulations on p. 170

5. Contracting around the Default Rules of Damages

a. Liquidated Damages
Allowed if: actual damages would have been extremely difficult to ascertain, and the amount of liquidated
damages is reasonable at the time of contracting of the likely damages from the breach

Policy
Arguments for:
1. Willingness to agree can make promise seem more credible
2. Contractors should take penalty clauses into account when considering costs down the road
3. Refusal to enforce is at best paternalistic
Arguments against:
By raising cost of breaching: increased risk to other creditors, increase risk of bankruptcy and amplify
business cycle (b/c make efficient breach less plausible)

§ 2-719,p. 172: (Making liquidation damages clauses the exclusive means of recovery) Contractual
modification or Limitation of remedy Default Rules – parties can contract around by inserting expressed
clauses to the contrary unless clause is unconscionable

a. warranty clause: limits liability by providing the

exclusive remedy for a breach excluding damages for other foreseeable losses
b. liquidated damages: can expand or limit damages,

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 expressed explicitly in contract only if they are reasonable and do not exceed the loss
foreseeable by a breach, §356, p.172, applies only when actual damages cannot be
ascertained and must be proportional to actual damages

§355, p.172 No punitive Damages

§356, p.172 NO Liquidate ddamages that are unreasonable are punitive, and thus unenforceable.

Reasonableness Test for whether liquidated damages clause is appropriate: (look at factors and policies of
the time)
1. Did parties intend to provide for damages for a penalty?
2. Is injury caused by breach one that is difficult or incapable of accurate estimation @ time of
contract?
a. difficult of producing evidence of
damage
b. difficult in determining what
damages will be caused
c. difficult indetermining damages
contemplated
d. absence of standardized measure
e. difficulty in forecasting all
damages
3. Are the stipulated damages a reasonable forecast of the harm caused by the breach?
a. time of contracting
b. time of breach

Kemble v. Farren, actor’s breach in contract for failure to perform p. 163

I: Can court grant damages other than what is stipulated in contract?
R: Yes, clause would have been reasonable if actual damages cannot be ascertained, but,
in this case, actual damages are easily calculated and are less than the liquidated damages
clause.

Lake River Corp. v. Carborundum Co. Posner comments on liquidation clauses

R1: penalty clause may discourage efficient and inefficient breaches of contract
R2: Parties will only include penalty clause if gains > costs of penalty clause and other
costs, so maybe they should be allowed

Arbitration clauses – diamond market hypo

- Good: saves litigation costs; faster; more flexible; secret; doesn’t involve lawyers; judges familiar
with subject matter
- Bad: not transparent; no precedential value; hard to deal with novel issues; still might end up in
court to enforce it; potentially inconsistent; no class actions

I. OTHER REMEDIES
1. Specific Performance
Awarded when money damages are not adequate, i.e. sentimental value, “priceless” items, land, special,
unique items, items with “subjective” value, hard to value items, agreements not to compete, transfer
controlling block of shares.

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 §2-716, p233: Buyer’s Right to Specific Performance or Replevin
- SP when goods are unique or in other proper circumstances (no adequate
compensation available)
- SP may include terms and conditions regarding payment of price, damages, or
other relief court deems just (damages too speculative and uncertain to be calculable)
- SP if, after reasonable effort, claimant cannot effect cover or circumstances
reasonably indicate that such effort will be unavailing or if the goods have been shipped under
reservation and satisfaction of the security interest in them has been made or tendered. (non-
recoverable)

SP is not allowed if:

- adequate damage compensation is available
- indefinite contract terms, i.e. indefinite time
- difficulty in enforcement and supervision

When there has been a breach, you want the good itself
- look to see whether it costs more for breachor to replace good than breachee
- if cost to cover for breachor less, SP efficient

a. Contracts for Land

Land is presumed to be unique, so in land sale contracts the presumption shifts in favor of specific
performance

Loveless v. Diehl, specific performance on option to purchase land improved upon p. 198
I: should SP be upheld in sale of land promised to one party and sold to third?
R: yes, land is special , damages are clear and D’s would be unjustly enriched otherwise,
P had invested improvements in land.
PP: if no SP, people would not want to enter purchasing deals

b. Contracts for Goods

no presumption as with land; victim must establish good’s peculiarity (unique, not readily obtainable, no
sufficient remedy at law)

Chen policy question: should we allow parties to contract for SP?

 SP takes on form of liquidated damage
 Against efficient breach theory – if parties can contract for SP, it would be
impossible to breach even when extremely burdensome and irrational

Cumbest v. Harris, specialized stereo equipment as collateral in loan, sentimental item p. 203
I: does personal property of unique or sentimental value allow for specific performance?
R: SP will not be enforced if the subject matter of the contract sought to be enforced is personality.
Exceptions:
- no adequate remedy at law/damages hard to determine
- where the specific articles or property are of peculiar, sentimental or unique
value
- where due to scarcity, the chattel in not readily obtainable
H: SP, because stereo is unique

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Scholl v. Hartzell, conflict over sale of a 1962 Corvette, SP or no SP on car? P. 206
I: should P receive SP on a car he put a small down payment on to D?
R: Replevin lies wherever one person claims personal property in the possession of
another, provided the claimant has the exclusive and immediate right to possession of the
goods in question, SP when item is unique or in “other proper circumstances”
R: inability to cover is an exception to non-SP rule, but does not apply here
H: car not unique and P can likely cover

Sedmak v. Charlie’s Chevrolet, oral contract for limited edition customized car breached P. 208
I: Should SP be granted in the case of a purchase from a dealer of a limited edition car
customized for the P’s who had put a down payment on car?
R: Yes, since car is limited edition, it is unique and hard to obtain

c. Contracts for Personal Services

The case of Mary Clark, a woman of color, servant by indenture P. 212
I: whether P’s service, although involuntary in fact, shall not be considered voluntary by
operation of law, being performed under an indenture voluntarily executed? SP?
R: State of servitude produced by direct or permissive coercion will not be considered
voluntary either in fact or in law, therefore, no SP.

Negative Injunctions – if employee irreplaceable, ct may grant negative injunction if not in conflict with
§367
- important part is scope of neg injunction requested, the unique skill or special knowledge of
employee, and whether there was understanding of exclusive employment
- example: non-competition clauses
o limited in scope of geography and time
o use special scrutiny for SP
o Can be implied

Lumley v. Wagner, contracted singer breaches in attempt to sing at competitor’s theater P. 216
I: Can injunction be awarded preventing D from performing elsewhere if SP can not be
awarded forcing D to perform at P’s theater against her will?
R: Since court can not order specific performance, will attempt to bind parties to contract
by preventing her from doing something she bound herself not to do – injunction allowed
due to negative stipulation specifically written into contract. - 1852

Ford v. Jerman, contracted singer breaches in attempt to sing at competitor’s theater P. 222
I: Can injunction be awarded preventing D from performing elsewhere if SP can not be awarded?
R1: No SP, harsh to compel obedience by imprisonment
R2: No, injunction would be more injurious to D and less beneficial to P than SP, cannot
be enforced even with a negative stipulation implanted in contract (overrules Lumley) –
1865
**R3: NO SP for personal services in the case of those whose business is to amuse as
well as entrust and whose labors are worth nothing if given grudgingly, without the spirit
that should parade and give life to art.

Duff v. Russell Singer refuses to perform contract and instead performs for a rival casino P. 224
I: Can injunction be awarded preventing D from performing elsewhere if SP can not be awarded?
R: Yes, even though there was not an explicit negative stipulation in the contract, the court looks
to the substance of the contract and sees that she agreed to perform 7 days a week. Therefore, she

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 could nohave performed elsewhere vithout violating contract. Injunction sustained

Specific Performance compared to Damages

- Damages could undercompensate
o Dempsey doesn’t get speculative profits
- Unforeseeable consequential damages
- Damages hard to calculate
o Market price might be hard to determine
- Costs of searching for replacement goods (search costs)
- Breachee might be really pissed off—but still doesn’t get compensated for it by damages
- Damages don’t account for subjective value to breachee
- Requiring specific performance essentially removes any cap on damages (holdup power of
breachee)
o Makes transactions less efficient b/c no one will be able to account for potential damages
in pricing decisions
o Penalty damages would (in theory) be a way around this, but courts don’t like ‘em
- Chen says that contracts law sets an “insurance policy” that tells the buyer what they will get in a
breach

II. MUTUAL ASSENT

1. The Objective Theory of Assent
Contract Law has adopted the objective theory of assent, but this approach contains a subjective element as
well.

§17, p304: requirement of a bargain

formation of a bargain requires manifestation of mutual assent.

what you must have for a contract:

1 - bargain
2 - manifestation of mutual assent
3 - exchange
4 - consideration

things to consider in determining the manifestation of intent:

1 - the words used
2 - surrounding circumstances
3 - to whom the words are conveyed
4 - definiteness of terms
5 - whether a written contract is intended

§18: manifestation of mutual assent

manifestation of mutual assent means that each party either makes a promise or renders a
performance

§19, p.304: Conduct as manifestation of assent

(1) manifestation of assent may be made wholly or partly by written or spoken words or by other
acts or by failure to act.
(2) Conduct is not effective as manifestation unless he intends to engage in the conduct and
knows or has reason to know that other party may infer assent from his conduct
(3) Conduct of party may manifest assent even though he does not in fact assent. In such cases a

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 resulting contract may be voidable because of fraud, duress, mistake, or other invalidating
cause.

Embry v. Hargadine, McKittrick Dry Goods, re-employment after termination of contract p. 290
I: Does what was said between employee and employer as interpreted by P constitute a
contract for reemployment on the previous terms irrespective of the intention or purpose of D
employer?
H: Yes. objective standard applied: what D’s intentions were were totally irrelevant in
deciding if a contract is formed  if what he says would have been taken by a reasonable
person to be a contract as P so understood it, it constituted a valid contract.

Texaco v. Pennzoil, Texaco attempts to interrupt business dealings of Pennzoil & Getty p. 295
F: Pennzoil wanted to do a deal with Getty Oil, and thought it had a deal done. Getty’s
Board voted 15-1 for it, memorandum signed by almost all parties, binding letter signed by
Chairman of Getty, press release announced tentative deal, etc. Then Texaco came in and
stole the deal
I: should manifestations of intent be considered only between parties and not to third parties?
R1: objective manifestations of intent of parties and expressed by words and deeds that
determine whether that parties have actually entered into a contract.
R2: conduct not effective as manifestation unless he knows other party may infer assent from
conduct.

Lucy v. Zehmer, drunken sale of land on back of restaurant check p 296

F: P and D were old acquaintances and out drinking one night. P offered to buy D’s farm, D
said P couldn’t raise the money for it, P said he could. D wrote out a contract for sale, signed
it, and got his wife to sign it too. P offered an immediate down payment, whereupon D said
he was only joking. D secretly told wife it was a joke
I: is a written contract enforceable even if D was drunk, joking, and had no intention to
actually sell?
H: yes, his actions as objectively observed indicated he was serious. We look to the outward
expression of acts and words – terms discussed for a long time, joke was not expressed to P
R: look to the outward expressions only, prefer objective to subjective manifestation because
subjective manifestation would result in an increase in broken contracts – increases chance of
“exit strategy”, i.e. fraud.

2. Offer
requirements for a valid offer:
1 - manifestation of present contractual intent
2 - certainty and definiteness of terms
3 - communication to the offeree

General Rules
• Offer to receive offers is not a contract (Nebraska Seed)
• Advertisements usually do not constitute an offer; more like an invitation to enter into negotiations
o But, can be an offer if it is clear, definite, explicit and leaves nothing open for negotiation
(fur example- first come first served).
• If a party leaves a way out of the offer, it is a manifestation NOT to be bound

§22, p 316: mode of assent: offer and acceptance

(1) manifestation of mutual assent is usually in form of offer followed byacceptance.
(2) but, there may be a manifestation of mutual assent even if neither offer nor acceptance can be
identified and even if the moment of formations cannot be determined (eg., in complex
negotiations).

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§ 25, p. 331: Options contract – promise which meets the requirements for the formation of a contract and
limits the promisor’s power to revoke an offer.

§24: offer defined

offer is manifestation of willingness to enter into a bargain, so made as to justify another person in
understanding that his assent to that bargain is invited and will conclude it.

§26, p.316: 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.

§29 p. 316: To Whom an Offer is Adressed

(1) Manifested intention of the offeror determines in whom is created a power of acceptance
(2) Offer can create power of acceptance in individual, a limited group, or in anyone or everyone
who makes a specified promise or renders a performance.

§33, p.316: Certainty

(1) Manifestation of intent cannot be accepted as to form a contract unless the terms of the
contract are reasonably certain
(2) Reasonably certain if they provide a basis for determining the existence of a breach and for
giving an appropriate remedy
(3) The fact that terms are left open or uncertain may show that manifestation of intent is not
intended to be an offer or an acceptance

§35 p. 333: Offeree’s power of acceptance

(1)Offer gives the offeree a continuing power to complete the manifestation of mutual assent by
acceptance of the offer unless
(2) offer has been terminated under §36 (revocation infra)

§2-204, p. 317: Formation in General

(2) An contract may be recognized even though the moment of its making is undetermined
(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 reasonably certain basis for giving and
appropriate remedy.

§2-206, p. 317: Offer and acceptance in formation of contract

(1) unless otherwise unambiguously indicated
a. an offer to make a contract should be construed as inviting acceptance in any manner
by any medium reasonable
b. order or offer to buy goods for prompt/current shipment invites acceptance by
prompt promise to ship or prompt/current shipment. Nonconforming goods do not
constitute an acceptance if the seller seasonably notifies the buyer that shipment is
offered as an accommodation to buyer
(2) where the beginning of a requested performance is a reasonable mode of acceptance an
offeror who is not notified of acceptance within a reasonable time may treat the offer as
having lapsed before acceptance.

§2-305, p. 318: Open Price Term- avoid by setting price based on an external standard or specifically
contract what would happen if agreement cannot be made in terms of price
§2-308, p.318: Absence of specified place for delivery
(a) assumed to be seller’s place of business
§2-309, p.318: Absence of specific time provisions, notice of termination
(a) default is reasonable time

12
§2-310, p. 319: Open time for payment or running of time
(a) default is the time and place at which buyer receives goods

B. Preliminary Negotiations
§26, p.316: 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.

Nebraska Seed Co. v. Harsh, Proposed seed sale given by letter P. 305
I: Does a letter inviting a purchase of D’s seeds constitute an offer or just an advertisement?
R1: §26, not an offer –. letter was an invitation requesting bids.
R2: §33 - language in letter is general, it is an invitation to make an offer, does not fix a time
for delivery, did not fix a definite and certain amount. Factors to consider – trade customs, #
of persons communication was addressed to, completeness of terms in “supposed” offer

Leonard v. PepsiCo, product points for fighter jet advertisement P. 308

I: Did a television commercial by D constitute an offer when it showed a fighter jet as a
reward for collecting Pepsi product points at a value much less than its true worth?
R1: advertisements are generally viewed to be mere requests to consider and examine and
negotiate – here would be no enforceable contract until defendant accepted the Order Form
and cashed the check – exceptions to advertisement rule only in cases of clear, definite, and
explicit advertisements – ex. Lefkowitz and fur coat. Present case isn’t explicit – reserves
details to separate writing.
R2: objective standard – no reasonable person would have concluded that the commercial
actually offered consumers a fighting jet as a prize
H: P loses because – commercial is an advertisement not a unilateral offer, jestful nature of
commercial would not cause a reasonable person to take offer seriously, and there is no
writing between the parties sufficient to satisfy the Statute of Frauds.

C. Contemplation of Written Memorial

§27, p. 322:Existence of contract where written memorial is contemplated

Just because parties intend to prepare and a adopt a written memorial doesn’t mean a
manifestation of assent itself isn’t sufficient to form a contract unless circumstances show that the
agreements are preliminary negotiations.

Empro Mfring v. Ball-Co Mfring, Letter of intent to purchase assets sold to another party P. 319
I: Does a letter of intent bar D from selling assets to a third party based on a subjective
manifestation of intent?
R1: no, intent is an objective manifestation, determined solely from the language used when
no ambiguity in terms exist.
R2: Wording of letter indicates considerations were necessary before letter becomes a
contract, letter of intent just sets the stage of negotiation – preliminary negotiations §26

Pennzoil v. Texaco P. 366

. I: Did parties intend to be bound to the terms of the memorandum of agreement even if parties
contemplated a more formal document to memorialize the agreement later?
R1: § 27 applies unless either party communicates the intent not to be bound before a final
formal document is executed
R2: the emphasis in deciding when a binding contract exists is on intent rather than on

13
 form, based on an objective standard:

Attempt at Final Contract

R - determine manifest intent to be bound by
1 - is there an explicit “no agreement until signing” clause?
2 - is there acceptance of partial performance?
3 - is there literally nothing left to negotiate?
4 - what is the transactional/industry norm - does complexity require writing?

H: At the time, some terms were still open (timing of payments) and industry practices
supported Texaco (after all, in this $10 billion deal there was no final signature).
The Texas jury found for a hand-shake deal for Pennzoil.

D. Revoking an Offer
Requirements of an effective revocation:
1 - words or conduct must be clear
2 - must be communicated to offeree
3 - effective when received (minority rule is w\then dispatched)

In general: When does an offer become irrevocable?

1. when someone relies on a promise (promissory estoppel)
2. Firm Offer (UCC §2-205)
3. After acceptance (in bilateral K)
4. After partial performance (in unilateral K)
5. Option Contracts (distinguishable from firm offers b/c there is usually consideration by promisee
to keep offer open; nominal consideration is acceptable)

§36, p332: methods of termination of the power of acceptance

(1) an offeree’s power of acceptance may be terminated by
(1) rejection or counter-offer by offeree;
(2) lapse of time;
(3) revocation by the offerer;
(4) death or incapacity of the offeror or offeree.
(2) also by the nonoccurrence of any condition of acceptance under the terms of the offer

§37, p. 334: termination of power of acceptance under option contract

Notwithstanding §§38-49, the power of acceptance under option contract is not terminated by
rejection or counter-offer, by revocation, or by death or incapacity of the offeror, unless the
requirements are met for the discharge of a contractual duty.
enter into the proposed contract and the offeree acquires reliable information to that effect.

§42, p334: revocation by communication from offeror received by offeree

an offeree's power of acceptance is terminated when the offeree receives from the offeror a
manifestation of an intention not to enter into the proposed contract.

§43, p334: indirect communication of revocation

power of acceptance is terminated when the offeror takes definitive action inconsistent with
an intention to enter into the proposed contract and the offeree acquires reliable information to
that effect

§2-205, p.333: firm offers

an offer by a merchant to buy or sell goods in a signed writing which by its terms gives assurance

14
 that it will be held open is not revocable, for lack of consideration, during the time stated or if
no time is stated for a reasonable time, but in no event may such period exceed three months.

Dickinson v. Dodds, Options contract for sale of property sold to third party P. 325
I: Should SP be given to an options contract whereby the D gave P till 9am the following day
to determine whether he wanted to purchase the property and then D sold property to third
party within that time which P knew about before deciding to accept offer?
Lower Ct: According to §42, revocation by D must be conveyed to P explicitly
R1: no need for express or actual withdrawal from offer, can be inferred from D’s intent to
sell to third party
R2: no meeting of the minds at time P chose to accept offer (D already intend to sell to
another), therefore no contract
R3: Promise to hold till 9am is a promise without consideration, therefore it’s not binding

3. Offer of an Option Contract

Contract to keep an offer open for a specific period (until a certain date); UCC limits to 3 months
- RST requires consideration (§25); UCC does not
- Default rule of K law: not an option contract, unless contract makes clear that it is an option K
R § 37 the power of acceptance under an option contract is not terminated by rejection or counteroffer, by
revocation, or by death or incapacity of the offer, unless the requirements are met for the discharge of a
contractual duty.

R § 87(a) An offer is an option contract if it is in writing and singed by offeror, recites a purported
consideration for the making of the offer, and proposes an exchange of fair terms w/in a reasonable time; an
offer that should expect to induce and does induce substantial action by offeree b4 acceptance is binding
option contract to extent necessary to avoid injustice
Nominal consideration sufficient for a short time period!

R § 45 Option contract is created by part performance or tender where the offer invites acceptance by
performance and the offeree begins the invited performance ; offeror’s duty of performance is created when
offeree tenders complete performance

- lost dog hypo: if you go to look for the lost dog, may be able to count as creation of an option contract –
-obligated to keep it open for a certain amount of time; looking for dog counts as “paying”
something in return for keeping offer open

Chen thoughts: think of an option K as paying for the chance to play the market for a few days
(widgets)
Expectation damages are the difference between K price and market price
Same, really, as if seller covered himself by going out to market and buying new widgets

Why would the UCC take a different position from option contracts?
Makes business dealing more efficient in order to accommodate high volumes, encourages
reliance on price (option K more like a firm offer), moves market along more quickly (if you needed
consideration for every offer, would be slow); its between merchants who can make multiple offers with
assumption that they have inventory to accomodate

4. Acceptance
Offer may only be accepted by a person in whom the offeror intended to create a power of acceptance
Determination of intent of offeror is based only on the objective theory.

15
 Generally an acceptance is only valid if the offeree knows of the offer at the time of his alleged
acceptance.
If method no established, offeree can accept in a manner reasonable in the circumstances
In some circumstances, prior business deadlines, silence can constitute an acceptance.

An effective acceptance requires three things

1. Manifestation of assent by the offeree
-a commitment
-not a mere receipt of the offer or a promise to look it over
-that is unconditional (§59)
-“I accept, subject to…” = counter-offer (not allowed)
-and unequivocal = on the same terms of the offer (mirror image rule) [§58]
-an acceptance that is unequivocal but requests some change or addition, is still good
under §61 unless the acceptance is made to depend on those changes
2. The acceptance must be made in the manner invited or required by the offer [§50]
 unless otherwise indicated, an offer invites acceptance by any medium
reasonable
3. The acceptance must occur while the offer is still open, ie if the offer has already been revoked, the
acceptance is not effective to create K

A. Mirror Image Rule

Any qualification of or departure from the terms set out in an offer invalidates the offer and is
considered a counteroffer. At that moment, the original offer is considered destroyed, so if the original
offerer rejects the counteroffer they are not bound to enter into a contract under the original terms they
offered.

§61 p. 338: Acceptance Which Requests Change of Terms

An acceptance which requests a change or addition to the terms of the offer is not thereby
invalidated unless the acceptance is made to depend on an assent to the changed or added terms.

Ardente v. Horan P agrees to buy house but in acceptance tries to alter terms to include furniture p. 336
I: Must an acceptance be unequivocal to be effective
H: Yes, An acceptance may not impose additional conditions on the offer, nor may it add
limitations. An acceptance which is equivocal or upon condition or with a limitation, is a
counteroffer and requires acceptance by the original offeror before a contractual relationship
exists.
H2: However, an acceptance may be valid despite conditional language if the acceptance is clearly
independent of the condition.

B. Mailbox Rule
Acceptance is effective upon dispatch
- can protect all offerees this way – the opposite would only help some offerors
- offerors are free to contract around this default rule to protect themselves if they insist
that acceptance is only effective upon receipt
- there is still a K even if the acceptance is lost in the mail
- offeree may not revoke her acceptance once mailed w/o breaking the K
- Rejections and counteroffers are valid only upon reciept

§63, p. 341: acceptance is operative as soon as it’s out of the offeree’s possession except options
contracts which are not operative
Pointuntil received by offeror
where contract
becomes effective , §63a
revocation
sent
acceptance

sent received
received

Offeree Offeree Offeror Offereor notifies

Offeror
signs sends receives offeree of receipt of statutory common
makes offer
contract acceptance acceptance contract law

Offeror can revoke offer

16
anytime before offeree
revokes
§§ 36, 42, 43
 §64, p.341: Acceptance by telephone or teletype
Same principles as if the parties were together in person

§65, p.341: Reasonableness of medium of acceptance

Unless circumstances indicate otherwise, a medium of acceptance is reasonable if it is the one
used by the offeror or one customary in similar transactions at the time and place the offer is
received.

§66, p.342: Acceptance must be Properly Dispatched

An acceptance sent by mail or otherwise by distance is not operative when dispatched unless
properly addressed and other precautions are taken as are ordinarily observed to insure safe
transmission of similar messages

Chen thoughts: a few days between when acceptance mailed and when seller gets it; b/c made
binding when sent, doesn’t allow buyer to play market for a few days (binds both parties)

C. Acceptance by Performance or Unilateral Contracts

Two types of contracts – bilateral and unilateral
Bilateral
- a contract in which acceptance must be given in the form of a promise
- if you are exchanging a promise, there has to be notification
Unilateral
- a contract in which acceptance must be given in the form of a performance
- no notification necessary §54 (Carbolic)
- the beginning of performance by the offeree CREATES AN OPTION under §45 – the
offeror cannot revoke, and the offeree is entitled to either finish or discontinue
performance

§30, p.362: form of acceptance invited

(1) an offer may invite or require acceptance to be made by an affirmative answer in words, or by
performing or refraining from performing a specified act...(unilateral contract).;
(3) unless otherwise indicated by language or circumstances, an offer invites acceptance in any
manner and by any medium that is reasonable in the circumstances

§32, p362: where there is doubt as to acceptance

in cases of doubt, offeree may accept by performing what the offer requests or by promising to
perform, as the offeree chooses.

§54, p.356: acceptance by performance, necessity of notification to offeror

(1) when offer invites acceptance by performance, notice is not necessary unless the offer requests
such a notification;
(2) when offer does not explicitly invite acceptance by performance and offeree knows offeror has
no adequate means of learning of the performance/acceptance, offeror is released from
obligation unless:
(a) offeree exercise reasonable diligence to notify offeror; or

17
 (b) offeror learns of the performance/acceptance in a reasonable time; or
(c) offer indicates that notification of acceptance is not required.
(note that w/unilateral promise - no duty to notify)

§45, p367: option contract created through part-performance or tender (i.e., unilateral promise)
(1) where an offer invites acceptance through performance only, an option contract is created
when the offeree begins performance;
(2) in such a case the offeror's duty of performance is conditional on completion of the offeree's
performance. (this is actually good for offeree bc it allows them to stop working without
being held liable for breach)

§62, p367: Effect of Performance where offer invites performance or promise

(1) When offer invites offeree to accept by promise or performance, beginning the performance is
an acceptance
(2) This acceptance operates as a promise to complete performance

UCC §2-206 makes clear that an offer, usually a purchase order, can be accepted by any reasonable
“medium” including the commencement of performance

Carlill v. Carbolic Smoke Ball, advertisement offering reward in use of product p.343
I: Was an advertisement offering a reward to no one in particular who, during use of product,
§54 developed influenza a unilateral contract subject to be bound by performance on part of
participant without prior acceptance?
R: Yes, this was not mere “puff” based on fact that money was actually set aside for this
reward by D. Advertisement was a unilateral offer in which acceptance takes the form of
performance. Analogous to lost dog reward.

Leonard v. PepsiCo, product points for fighter jet advertisement p. 356

I: Did a television commercial by D constitute an offer when it showed a fighter jet as a
reward for collecting Pepsi product points at a value much less than its true worth?
R1: advertisements are generally viewed to be mere requests to consider and examine and
negotiate – here would be no enforceable contract until defendant accepted the Order Form
and cashed the check – exceptions to advertisement rule only in cases of clear, definite, and
explicit advertisements – ex. Lefkowitz and fur coat. Present case isn’t explicit – reserves
details to separate writing.
R2: objective standard – no reasonable person would have concluded that the commercial
actually offered consumers a fighting jet as a prize
H: P loses because – commercial is an advertisement not a unilateral offer, jestful nature of
commercial would not cause a reasonable person to take offer seriously, and there is no
writing between the parties sufficient to satisfy the Statute of Frauds. At most this was an
advertisement to receive offers.

White v. Corlies & Tifft, Contract for building offices, silence deemed no acceptance P.358
F: D contracted P to build a suite of offices for him. D changed specifications which were
assented to by P. D sent note to P which was not replied to and D then retracted contract. P,
upon receipt of first note had begun performing on contract.
I: Upon receipt of note from D, did P have a duty to give notice of assent to D before
commencing work? i.e. was there a binding contract between parties as based on wording of
note?
H: Yes, note was a proposition and must have been accepted by P before either party was
bound by contract.
R: if manifestation is not put in a proper way to be in the usual course of events in a
reasonable amount of time there is no binding contract. Mental determination not indicated by
speech or put in course of indication by act to the other party is not an acceptance which will

18
 bind the parties.

Petterson v Pattberg P tries to pay back mortgage, D won’t accept bc already sold it p. 362
I: Whether, as the Pl in approaching the Df intending to perform, and before actual
§45, performance is tendered, the offer can be withdrawn?
§62 H: If the offeror can say “I revoke,” before the offeree accepts, however brief the period
between the two acts, there is no escape from the conclusion that the offer is terminated.
P was on notice that D was negotiating with other parties.

D. Acceptance by Silence

§69, p.368: acceptance by silence or exercise of dominion

(1) where offeree fails to reply to an offer, his silence and inaction operate as an acceptance only
where:
(a) he has taken a benefit or offered service with reasonable opportunity to reject it with
reason to know that compensation was expected;
(b) offeror relates that acceptance by silence is ok, and the offeree in remaining silent intents
to accept;
(c) because of previous dealings or otherwise, it is reasonable that the offeree should notify
the offeror if he does not intend to accept.

Hobbs v. Massasoit Whip, eel skins retained by D w/o acknow. assumed as acceptance p.368
I: whether P reasonably presumed acceptance based on silence on the part of D in receipt of
eel skins
R1: Similar eel skins were frequently sent to D in this manner, duty on D to act upon receipt
of eel skins and silence on its part coupled with retention of skins for an unreasonable time
gave P good reason to assume D accepted goods.
R2: D did not have a duty to notify of acceptance but D had duty to negate acceptance by
notifying P.

III. DISCERNING THE AGREEMENT

1. Interpreting Meaning of Terms

E. Ambiguous and Vague Terms

Vague: whether and what extent words are meant to apply beyond agreed core meaning
Ambiguous: Entirely different meanings

Ambiguious Terms Standard of Reasonablenes: Judge must consider what interpretation is reasonable,
using common sense, plain and ordinary meaning doctrine, and consider all of the circumstances, including
the parties’ purpose
- contract when:
o there is an ambiguity, and one party knows or has reason to know of the
ambiguity and the other does not, it will bear the meaning that the party without
fault intended it to have RST §201
o when there is an ambiguity, and each party gives the same meaning to it, there is
a contract
- NO contract when:

19
 o There is an ambiguity, and each party gives a different meaning to it, and neither
knows or has reason to know of the other party’s meaning

Chen Problems: might end up with a K no one intended; hard to determine what people were thinking when
made contract, can end up with specific performance (policy question)

5 Types of evidence to consider when interpreting contract terms:

1. Words of the contract
2. Course of negotiations
3. Course of performance
UCC § 2-208: “Where the contract for sale involved repeated occasions for performance by
either party… any course of performance accepted to acquiesced in without objection shall be
relevant to determine the meaning of the agreement.”
4. Course of dealing
UCC § 1-205: “A course of dealing is a sequence of pervious conduct between the parties to a
particular transaction which is fairly to be regarded as establishing a common basis of
understanding for interpreting their expressions and other conduct.”
5. Usage of trade.
§ 1-205: “A usage of trade is any practice or method for dealing having such regularity of
observance in a place, vocation or trade as to justify an expectation that it will be observed with
respect to the transaction in question.”

§201, p. 409: Whose meaning prevails?

(1) if same meaning attached, interpreted with that meaning
(2) if different meanings attached, interpreted in accordance with the meaning attached by one of
them if at the time the agreement was made…
a. that party did not know of any different meaning attached by other, and other knew
meaning attached by first, or
b. that party had no reason to know any different meaning attached by other, and other
had reason to know the meaning attached by first,
c. Except as stated in this section, neither party is bound by the meaning attached by
the other, even though the result may be a failure of mutual assent.
(3) Unless stated above, neither party is bound by the meaning attached by the other

§202, p. 409: Rules in aid of interpretation

(1) words interpreted in light of circumstances, intention of parties is given much weight
(2) writing interpreted as a whole
(3) unless different intention manifested
a. language interpreted with general meaning
b. technical terms given technical meaning when interpreted in technical field
(4) when agreement calls for repeated performance with opportunity for objection, any course of
performance/negotiations accepted without objection will be given great weight in
interpretation
(5) wherever reasonable, manifestation of intention are interpreted as consistent with each other
and with any relevant course of performance, course of dealing, or usage of trade. (Weinberg
v. Edelstein, p.468, definition of a dress determined by trade usage and background research
done by court.)

1-205 p. 410 Course of Dealing and Usage of Trade

(1)Course of dealing is a sequence of previous conduct which is regarded as establishing a

20
 common basis of understanding for intepretation
(2) Usage of trade is a practice or method of dealinghaving such regularity in a place, vocation, or
trade as to justify an expectation it will be observed
(3) Usage of trade and Course of dealing give particular meaning to and supplement or qualify
terms of an agreement
(4)Express terms override usage of trade or course of dealing when they cannot be reasonably both
used

1-208 Course of Performance or Practical Construction

(1) If contract for sale involves repeated occasions for performance by either party with the
knowledge of the nature of performance and opportunity for objection, any course of performance
accepted without objection shall be relevant to determine the meaning of the agreement
(2)express terms control course of performance, course of performance controls both course of
dealing and usage of trade

Interpreting Assent:
Do parties subjectively attach the same meaning to terms in the contract?
(consider words in contract, course of negotiations, performance, past dealings)

NO(there is a misunderstanding YES  there is an agreement and term is enforced §201(1)

1. Does one party know/ have reason to know that other party (x) has
attached a partic. meaning to term?

NO YES if x is clueless, there is an agreement

subject to the meaning of the term as
believed by party x
3. Can objective meaning of term be determined? (consider course of performance, course of
deal, usage of trade §202, §1-205, §2-208

NO YES  there is an agreement subject to the objective meaning

of the party whose objective meaning matches its subjective
meaning
no agreement, only seemed
to be mutual assent

Raffles v. Wichelhaus, mistaken identity of Peerless boat used in delivery of goods P. 396
F: D purchased goods from P to be shipped from a boat called Peerless from Bombay.
Apparently two boats were named Peerless leaving from Bombay and each party thought of
different boats in the making of contract. Since goods came later than D expected, D refused
to purchase goods
I: Is it material to contract that each party identified a different ship named Peerless that was
to deliver the goods?
R: Because there was conflict as to which boat was meant in contract, court deemed there was
no mutual assent, no “meeting of the minds”(subjective test) and ambiguity effects a material
term of the contract because under conditions of wildly fluctuating prices arrival date is
important (objective test) and therefore, no contract.
MUTUAL MISTAKE AS TO CONTRACT SUBSTANCE VOIDS CONTRACT

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Oswald v. Allen, Swiss coin collection, mistake of what was for sale P. 07
F: P thought two collections for price, D thought one collection for price
I: Was there a valid contract even though both parties had different views of what was being
sold?
R1: when terms used in agreement are ambiguous and parties understand it in different ways,
there cannot be a contract unless one party had reason to be aware of other’s understanding.
R2: Although mental assent of parties is usually not a requisite to formation of contract this
cause is an exception because there is “no sensible basis for choosing between conflicting
understandings”. (Applies Raffles)

Vague term Cases

Weinberg v. Edelstein p. 411 - Π sues to enforce restriction against selling “dresses”- covenant to restrict
sale of “dresses” was enforceable but term was too vague to prevent Δ from being able to sell matching
skirt and shirt sets. injunction denied; see UCC §2-208

Frigaliment Importing Co. v. BNS p. 415– meaning of chicken – ct rules that Π’s definition of chicken
was one used in contract and that contract was enforceable meaning Δ had to pay for chicken received
although he claimed it was the wrong type of chicken – Π submitted info on trade usage such as FDA
recognition and testimony from people in the industry
- Party who seeks to interpret the terms of the agreement in a sense narrower than their everyday use bears
the burden of persuasion to so show (Frig. failed to meet its burden of proof on the meaning of “chicken”)

2. Filling Gaps in the Terms

A. Agreements to Agree
2 types of contracts
1) parties have left a gap in their K suggesting that the K is really just an agreement to agree later and left it
as a way of leaving an out so either party could get out
2) distinguish this from cases where parties left a gap but, regardless, fully intend to be bound

Should the courts fill in all the gaps?

- brings down the costs of K – every line in a K costs money to negotiate and every line
runs the risk of scuttling the deal
- some of these fees are bourn by the public, through the courts
- go from ex ante to ex post if have courts find terms!

First question: did the parties intend to be bound?

- no: then court has no business reading in a contract where there is none
- yes : maybe the court has the business, maybe not, but at least we are in the ballpark of
something the parties wanted

§34, p.427: Certainty and choice of terms, effect of performance or reliance

(1) May be rably certain even if there is stipulation for selection of terms in course of performance
(2) part performance may remove uncertainty and establish an enforceable contract (bargain has been
formed)
(3) reliance on agreement may make a contractual remedy appropriate even though uncertainty is not
removed.

§204 p. 428 Supplying an omitted essential term

When the parties to a bargain sufficiently defined to be a contract have omitted an essential term, a
reasonable term in the circumstances will be supplied by the court

22
§2-204: formation in general
(1) a contract may be made in any manner sufficient to show agreement;
(2) a contract may be found even though the moment of making is undetermined;
(3) even though one or more terms are left open, a contract does not fail for indefiniteness if the
parties have intended to make a contract and there is a reasonably certain basis for giving an
appropriate remedy;

UCC gives more freedom in gap filling by the court than Restatement
- as long as there is intent to be bound, courts can fill in all sorts of things

Sun Printing & Publishing v. Remington Paper & Power, Contract for sale of paper P.422
F: P agreed to buy paper supply from D, future price of paper and length of time which price
should apply were to be agreed upon by parties at a later date. Max on price set by external
standard. Time gap was left unfulfilled.
I: Is there a legal contract binding parties when a term left open in the contract cannot be
agreed upon by the parties?
R1: no, the time element is essential to the formation of the contract, inability to agree upon
this element causes the failure of the contract and neither party is bound.
H: there is no basis to determine what time element should be, therefore no contract.
R2: to avoid in the future, set price based on an external standard or specifically contract
actions to take when no agreement can be reached by parties

Texaco v. Pennzoil, P. 428

I: can a contract be binding even if the terms intended to be included into an agreement are
too vague and incomplete?
R1: terms in contract must be sufficiently complete so that parties in good faith can find in the
agreement words that will fairly define their respective duties and liabilities.
R2: parties’ intent not conclusively discernible from their writings alone, extrinsic evidence of
relevant events is considered
H: there was a breach

B. Illusory Promises/Output Contracts

This issue is whether the promise of one of the parties is “illusory” b/c it leaves complete discretion to
perform or not in the hands of the purported promisor. Court will fill this gap by supplying an obligation to
exercise this discretion in “good faith” with reasonable efforts

UCC 2-306 p. 444 In an output or requirements contract

(1) Buyer means requirements as may occur in good faith, except no quantity unreasonably
disproportionate to any stated estimate or in the absence of estimate to any normal or otherwise
comparable prior output or requirements may be tendered or demanded.”;
(2) agreements for exclusive dealings require the use of best efforts to supply goods (seller) and to use
best efforts to promote their sale (buyer).

Is the seller obligated to supply what the buyer demands?

1) Is demand by good faith?

YES NO  no obligation

2) Was there an established estimate in contract?

YES NO  3b) Is buyer’s demand disproportionate to past
requirements? YES NO

23
 3a) Was buyer’s demand disproportionate?
YES NO maybe obligated
obligated
depending on
no obligation obligated circumstances

NY Central Iron Works v. US Radiator, extensive need of radiators not provided by D P.429
F: Contract between D and P where D was to supply P with entire radiator needs, quantity
was an open term of contract. P sought an increased amount of radiation than previous orders
and D refused to fulfill orders.
I: Was there a mutual mistake in framing contract since the intention was to limit the quantity
of goods to be delivered to an amount such as had been ordered in previous years? Should
contract be reformed to reflect this intention?
R: No sign of bad faith or unfair dealings on part of P, therefore D breached contract. Built
into this type of contract is some amount of speculation, you can’t refuse to fulfill contract
just because you were on the losing end of that speculation.

Eastern Air Lines v. Gulf Oil Corp. , exclusive gas supply contract, issue on $ for renewal p.431
F: P and D dealt with one another for decades. In 1972 they signed a 5-year renewal at a set
price for all of the oil that Eastern would need in certain airports. The oil shock came and a
government price control resulted in the pricing mechanism of the contract being pegged to an
artificially controlled very low price.
I: did Eastern violate the contract even if it freighted? Was contract void for indefiniteness in
terms of mutuality of obligation and subjects Gulf to the whims of Eastern?
H: no, the freighting was standard business practice for years. The real issue is to look at the
intent of the parties and to see if there is good faith. At all times, Eastern acted with the good
faith of a merchant. Lack of mutuality and indefiniteness of contract resolved by court with
reference to objective evidence of volume of goods required to run business.

Wood v. Lucy, Lady Duff-Gordon, P hired to help in endorsements of Ds clothing P. 434

F: agent agreement made between a fashion designer and her agent. In exchange for exclusive
marketing rights, agent was to be paid a percentage of sales he scared up. He does noting, she
sells her own stuff, he sues. She claims illusory promise should make contract void.
I: Because P did not specifically promise anything, is a contract void?
R: no, “a promise may be lacking and yet the whole writing may be instinct with an obligation
imperfectly expressed” §2-306
H: Because D gave an exclusive privilege, which, acceptance by P constitutes assumption of
duties to increase profits (since P’s own profits are tied to his endeavor) – promise has value –
reasonable effort standard

3. Identifying the terms of the Agreement

General rule: Courts will enforce contracts as written

- however, traditionally review terms of contracts of adhesion with heightened scrutiny for
“reasonableness” because they are generally offered on a take-or-leave basis by one party
w/ stronger bargaining power to a party with a weaker power
- challenge our notions of assent (ie Carnoival)

§2-207, p467: additional terms in acceptance or confirmation

(1) acceptance creates a contract even if it varies in terms of the offer
unless acceptance is contingent on assent to the new terms
(2) In the case of contradictions between terms of offer and

24
 acceptance, offer terms govern unless the acceptance is expressly conditioned on assent to the
new terms.
(3) Different terms only become part of contract if they do not
materially change contract (p. 468), if they limit acceptance to the acceptance of the new
terms, or if notification of objection has already been given or is given within a
reasonable time. Terms that materially change the contract are deemed mere
suggestions for future negotiation.
(4) Conduct by both parties which recognizes the existence of a K is
sufficient to establish a K although the writings of parties do not otherwise establish a K.
Where there is a contradiction, the above rules govern.
§211, p.444: Standardized Agreements
(1) except as stated in (3), where a party to an agreement signs or otherwise manifests assent to a
writing and has reason to believe that like writings are regularly used to embody terms or
agreements of the same type, he adopts the writing as an integrated agreement with respect to
the terms included in the writing
(2) Such a writing is interpreted wherever reasonable as treating alike all those similarly situated,
without regard to their knowledge or understanding of the standard terms of the writing
(3) Where the other party has reason to believe that the party manifesting such an assent would
not do so if he knew of the writing contained in the particular term, the term is not part of the
agreement

- UCC approach makes things easier by allowing parties to agree on the core and letting the courts fill
in the details later if necessary
- Gives more power to the offeror

§2-316, p.469: Exclusion or Modification of Warranties

(1) Words and conduct creating and negating or limiting warranties shall be rably constructed as
consistent, but subject to parol evidence rules negation is inoperative to the extent that such
construction is unreasonable
(2) excluding or modifying implied warranties of merchantability must mention merchantability
and if in case of writing must be conspicuous
(3) excluding or modifying implied warranties of fitness must be in writing and conspicuous. To
exclude all implied warranties of fitness it is sufficient to state “There are no warranties which
extend beyond the description on the face hereof”
(4) unless stated otherwise, all implied warranties are excluded by expressions like “as is”, “with
all faults”waivers of inspection by buyer or actual inspection by buyer negates an implied
warranty course of dealings or course of performance or usage of trade

A. Form Contracts
Carnival Cruise v. Shute, choice of venue clause on back of ticket p444
F: P (Shute) slipped while on a cruise on D. P lived/bought ticket in WA, injury was in int’l
waters off of Mexico. Ticket had clause of forum-selection requiring all suits to be brought in
Florida.
I: Is clause on venue selection on back of ticket enforceable?
H - not unconscionable even if P didn’t know until after buying the ticket. There are many
reasonable business interests for requiring litigation in D’s home state. Some of these may
lower costs, resulting potentially in lower prices for other Ps.
R: this clause is not the sort of thing that one bargains for, and therefore this is governed by
ordinary commercial considerations. The clause is reasonable and was made in good faith.
Clause is enforceable because it does not preclude recovery.
§211 Dissent: P does not see conditions of contract until after purchase of tickets

Capsi v Microsoft Network p.453– (click through agreement had forum selection clause) all the provisions
were identically presented in the contract to which Ps agreed online; to hold that the forum selection clause

25
 was not binding would be to render the K not binding

B. Which Terms were Agreed To?

Step-Saver Data Syst. v. Wyse Technology, computers purchase incompatible with system P.457
F: Is additional term in box top binding?
H: No, under UCC §2-207, an additional term detailed in the box top
license will not become incorporated into the parties agreement if it would materially
alter the agreement – here, it materially altered the agreement
2-207
C. Terms that Follow Later
rule: a buyer accepts under UCC §2-206 if, after opportunity to inspect the goods, he fails to make an
effective rejection

ProCD v Zeidenberg – (shrinkwrap license pops up on screen) if a buyer is presented with additional terms
and offered the opportunity to reject and return the goods and subsequently does not reject the goods, then
the buyer will have accepted those terms

IV. WRITTEN MANIFESTATIONS OF ASSENT

1. Parol Evidence Rule

If an agreement about an element is not included within the four corners of the written agreement, you
have to get around the parole evidence rule to enforce it.

Parole evidence rule: extrinsic evidence about a prior or contemporaneous agreement within the scope of
a fully integrated writing cannot be used to supplement the terms of its writing.
o Thompson v Libbey – traditional 4 corners rule; parol evidence inadmissible,
even to determine if K is integrated

Determining applicability of Parol evidence

1. Is the written agreement between parties intended to be final?
YES – PE inadmissible No – PE admissible

2. Is agreement is complete or exclusive?

YES – PE inadmissible NO – PE can be used that does not go against written
agreement

3. If parties intended to at least partially integrate/finalize the agreement – no contradictory PE

admissible

4. If parties fully integrated – no PE of any additional terms

§209, p.492: Integrated agreements

a final expression

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§213 = a written agreement that is found to be completely integrated (that represents a full and final
embodiment of the parties’ understanding) effectively discharges any prior agreement that falls within its
scope
-if the court deems the writing to be only partially integrated, however, extrinsic evidence will be
allowed in to supplement and explain the terms of the writing with consistent terms under RST
§213

§214 says when parole evidence is admissible (most important: to establish whether a contract is
integrated)
- First, court will look to extrinsic evidence to determine if the writing is fully integrated
o Thompson said cannot look to extrinsic evidence at all
o Brown is the modern majority rule; says that extrinsic evidence can be viewed
preliminarily to determine whether writing is integrated [§210]
 a writing that is an “estimate” or leaves a term open to approval will be
considered partially integrated
 if it is addressed, there is a presumption that the writing was meant to
represent the entire transaction and parol evidence is not admissible
-Prior agreements and negotiations are admissible to establish:
- (a) – (c) whether writing is integrated, completely or partially, and meaning of writing
- (d) illegality, fraud, duress, lack of consideration or other invalidating cause;
- (e) ground 4 rescission, reformation, specific performance, or other remedy

R § 216 If agreement partially integrated evidence of a consistent additional term is admissible to

supplement; agreement is not completely integrated if it 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.

§2-202 p. 493: final written expression: parol or extrinsic evidence

...[terms of contract] may not be contradicted by evidence of any prior agreement or of a
contemporaneous oral agreement but may be explained or supplemented:
(a) by course of dealing or usage of trade (§1-205) or by performance (§2-208), and
(b) 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 and agreement

Thompson v. Libbey, verbal warranty as to quality of purchased logs P. 488

I: can a verbal warranty be admissible as evidence when whole of contract is in writing?
R: No, PE not allowed because the written contract seems complete – fully integrated –
therefore any PE evidence that alters or adds to contract is inadmissible.

Brown v. Oliver, sale of hotel, fight over furniture P. 489

F: Parties discussed sale of hotel to include furniture but final contract did not include it.
I: Should furniture term be considered part of the agreement even though it was not written
into actual contract?
R: PE admissible based on Wigmore treatise:
1. was writing intended to cover all subjects or just some subjects? (depends wholly on
parties’ intent
2. intent of parties determined from conduct and language of parties and surrounding
circumstances
3. in deciding upon intent, see if particular element of the alleged extrinsic negotiation is
dealt with at all in writing

Pacific Gas – (botched turbine repair case) CA Rule – basically allows extrinsic evidence for anything if it
reasonably susceptible to a different meaning (very broad! Not really used anywhere else)

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Trident Center v CT Gen. Life Insurance – bound to follow Pacific Gas b/c of federal court following state;
parol evidence admissible to raise ambiguity in K that is unambiguous on its face and by the admission of
the parties

2. Reforming Written Mistakes

Three requirements:
1. The parties must have made an agreement.
2. The parties must have agreed to put the agreement in writing.
3. There must be a discrepancy between the agreement and the writing.

RST §155: When Mistake of Both Parties As To Written Expression Justified Reformation
When a writing fails to express the agreement because of a mistake of both parties as to the
contents or effects of the writing, the court may reform the writing to express the agreement
EXCEPT to the extent that rights of third parties (such as good faith purchasers for value) will be
unfairly affected

The Travelers Insurance Company v. Bailey p. 507-- insurance policy that was printed on a form that did
not accurately set forth the parties’ agreement may be reformed (no reliance)

3. Statute of Frauds

§110, p. 510: types of contracts which must be in writing:

1. contract of an executor’s duty to decedent (executor-administrator provision)

2. contract of one’s duty to another (suretyship provision)
3. contract in consideration of marriage
4. contract in sale of land (SP may be enforced if one party fully relied and changed its position
in regards to that reliance, and injustice cannot be avoided without SP)
5. contracts which are incapable of being fully performed within one year of contract date (when
one party completes performance, the other party must perform regardless of in writing or not;
relevant dates are then contract is made and when provisions of contract will be completed)
6. contracts under UCC:
a. sale of goods over $500
b. sale of securities
c. sale of personal property not otherwise covered, to extent of enforcement by way of
action or defense beyond $5000 in amount or value of remedy
d. UCC also requires writing signed by debtor for contract which provides for security
interest in personal property not in possession of secured party.

§129 Action in reliance; specific performance

Contract for the transfer of land may be specifically enforced even if in violation of statute of
frauds if party seeking enforcement, in rable reliance on K and on continuing assent of party
against whom enforcement is sought, has so changed his position that injustice can be avoided
only by specific enforcement

§139 p 519 Enforcement by virtue of action in reliance

(1)promise which promisor should rably expect to indice action or forbearance and which does so
is enforceable if injustice can be avoided only by enforcement of the promise.

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 (2) Consider: Avaliability of other remedies, ike cancellation and restitution; character of the
action; rableness of action; foreseeability of the action

Boone v. Coe, move from KY to TX on promise to work in exchange for housing/crops P.521
*Inconsistent with restatement 139?*
F: Family travels to TX from KY after promising to work on person’s land in exchange for %
of crops and land to live on. Other side decides to renege on offer.
I: Can P collect damages on expenses incurred and time lost on the faith of a contract that is
unenforceable under statute of frauds?
H: No breach because under SOF there was no contract. P conferred no benefit on owner, so
they are entitled to no recovery.
R: SOF applies because contract was to be performed more than one year from date of
agreement.
Note: had P’s done some work to improve land (e.g. Loveless v. Diehl), might have gotten SP
or cost of performance, failing reasonableness test may have resulted in diminution of value
of land with and without the fence. No unjust enrichement here for D.

V. PRINCIPLES OF ENFORCEABILITY
Party Based Principles
The Will Principle
• Idea that commitments are enforceable because the promisor has willed or freely chose to be
bound by his commitment
• Limitations- where there is evidence the subjective intent of the parties is contrary to the behavior,
the subjective intent should prevail
The Reliance Principle
• Contractual enforcement protects a promisee’s reliance on the promise, promissory est.
• We ought to be liable for our verbal behavior in the same way we are held liable for harmful
consequences of other types of acts (tort, crim)
• Limitations: “justifiable” or “reasonable” reliance
The Restitution Principle
• Prevent unjust enrichment of a promisor who seeks to go back on her word
• Limitations: must be unjust
Standards Based Principles
Efficiency
• Maximization of social wealth or welfare, benefits > costs
• Limitations: hard to know true values; if we had perfect knowledge wouldn’t need Ks at all
Substantive Fairness
• Is the substance of the transaction fair? Ex- unequal bargaining power
• Limitations: doesn’t tell us which conscionable contracts shouldn’t be enforced
Bargain Principle
• Predominant theory of consideration, each party’s promise is induced by the others. Each is
enriched, theoretically, by entering into a K

Marvin v. Marvin, live in love, implied contract? P. 605

I: What principles should govern distribution of property acquired in a non-marital relationship?
R1: Courts shall enforce express contracts between non-marital partners except if it’s founded on
sex

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 R2: Courts inquire into conduct to determine if there is an implied contract – there is when a man
and a woman live together and agree to pool their earnings and share equally in their joint
accumulation, equity will protect the interests of each in such property.
R3: Quantum meruit (not a contract at all, but a method to collect damages, applied when courts
believe not applying would result in unjust enrichment) – recoverable for the reasonable value
of household services rendered less the reasonable value of support received if he can show
that he rendered services with the expectation of monetary reward
H: looks at will and reliance principles, theory of quantum meruit, and implied contracts
Dissent: decision would result in cases inundating court, hard to collect damages

Morone v. Morone, cohabitation, implied contract? P.645

R: there is no implied contract
H: in living together you provide services without an expectation of payment – it is hard to
determine in retrospect which services were gratuitous and which were not

Posner v. Posner
R: An inadequate and disproportionate alimony agreement will not invalidate an antenuptual
Freedom to contract includes freedom to make a bad bargainagreement.

In the Matter of Baby M, surrogacy contract, egg from surrogate P. 33

F: contract for the a surrogate parent to bear child.
I: are these contracts void?
R: yes, conflicts with:
1. law of state – violates rules of adoption and prohibits termination of parent rights by
contract
2. public policy – court does not what to encourage baby bartering, lacks counseling and
evaluation, use of money to purchase children, mother does not make an informed
decision
H: no remedy, contract is void

VI. CONSIDERATION
-
- Two basic aspects of consideration:
(1) Promisee must suffer a legal detriment, i.e. promises must give up something of
value, or circumscribe his liberty in some way;
(2) Promise must be bargained for, i.e. promise
motivated by the legal detriment suffered by the promisee
- Detriment for purposes of consideration means
giving up anything you have a legal right to do regardless of its moral or health implications
- Consideration can also be benefit to the promisor
that motivated the bargain (consideration need only be benefit or detriment, it need not be
both. Usually there is a detriment and it is arguable whether there is a benefit)
- Courts may be willing to find consideration in a
commercial setting than in an interpersonal setting. Court involvement is more necessary in
the context of commercial transactions because there is less trust

- Consideration has two chief functions:

(1) Evidentiary – existence of consideration
provides objective evidence that the parties intended to be legally bound by the
agreement they made
(2) Cautionary – requirement of consideration
also affords parties the opportunity to consider the full implications of their actions

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 before binding themselves because statements and promises made without the
support of consideration are not binding

RST §17 expresses the general understanding on this topic, by stating that, except where special rules
apply, the formation of contracts requires a bargain, to which the contracting parties give assent, and a
consideration, which can take the form of either a return promise or an actual performance

Unilateral K: involve the exchange of a promise for a performance

Bilateral K: involve exchange of promises
- no requirement that K must be in writing!
- RST §19 – confirms that a promise may be expressed in acts, that is, without words
- Commencement of a performance may be itself constitute a “return promise” that is
sufficient to create bilateral K

1. The Bargain Theory of Consideration

-For promises to be enforceable, detriment must have been bargained for

-Chief reason for this criteria is to distinguish between a bargain – reciprocal nature of thing
promised and a gratuitous promise – getting something for nothing  no consideration

-Gifts are generally unenforceable because the promise if not bargained for and the promisee suffers no
detriment
-Courts generally refuse to police promises to give gifts because of
1) Judicial administration, i.e. people make promises all the time that they break; and
2)Personal context gives you more trust and because trust is lacking in commercial arena
need more formal mechanisms

Under the Restatement, primary approach to enforceability:

1. A contract is enforceable if it is bargained for (§§ 1 and 2);
2. With some exceptions (§17(2)), to be enforceable a promise must be supported by a
consideration
(§17(1));
3. A promise is supported by consideration if it is bargained for (§71(1));
4. A promise is bargained for if “it is sought by the promisor in exchange for his promise and is
given by
the promisee in exchange for that promise.” (§71(2))

§71: p. requirement of exchange; types of exchange

(1) consideration must be bargained for;
(2) must take place in exchange context;
(3) may consist of:
(a) an act or
(b) forbearance, or;
(c) the creation, modification or destruction of a legal relation.

§ 24(b): p. 636 Proposal of Contingent Gift

- must be an element of exchange for a gift proposal to be an offer

A. Bargains v. Gratuitious Promises

Case 48: Hamer v. Sidway, uncle’s reward for nephew’s purging of vices
p 658

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 F: P received from his uncle a promise for $5,000 if he gave up smoking and drinking, which he
did. U wrote a promise to pay, but died before paying.
I: was there consideration even if U received nothing tangible?
R: forbearance of legal right to vice is consideration.
H: yes, “it is enough that something is promised, done, forborne, or suffered by the party to whom
the promise is made as consideration for the promise made to him.”
Detriment/Benefit need not be economic

B. Past Consideration

Moore v. Elmer, clairvoyant, promise to pay her mortgage if prediction is true P. 639
I: Can clairvoyant request D to pay for services rendered during reading session?
R: No, no consideration since there was no bargain before he sat down for reading, he only
promised to pay post reading. If there was a contract he didn’t receive any benefit from it
since service was rendered prior to making of contract. Past consideration not binding
except in certain situations §86

C. Moral Consideration
Usually moral consideration cannot be consideration under the bargain theory of consideration. One
exception is a gratuitious promise made after promisor receives material benefit from promisee. material
benefit + moral obligation = valid consideration. Webb v. McGowan

R § 86 Promise made in recognition of a benefit previously received by the promisor from the promisee
is binding to the extent necessary to prevent injustice; A promise is NOT binding under previous
statement if promisee conferred the benefit as a gift or other reasons the promisor has not been unjustly
enriched; or to the extent that its value is disproportionate to the benefit.

Mills v. Wyman, promise to pay for nurse's prior care of deceased son. p 640
F: P found and cared for D’s son, V, who returned from sea and fell ill. After 2 weeks V died. P
wrote to D and asked for expenses. D wrote back after only 4 days, promised to pay, later
reneged.
I: consideration?
R: No consideration, no benefits to D – no non-doctor Good Samaritan rule
H: no, D did not contract for the kindness and services of P, nor did he benefit from them. “It is
only when the party making the promise gains something, or he to whom it is made loses
something, that the law gives the promise validity....” nothing more than moral obligation

Webb v McGowan, sacrifice of self to save boss’s life p 649

F: P worked for D in a mill. P went over the edge with a huge pine block in order to stop the
block from crushing D. P sustained serious injuries. D promised to care for P for the rest of
P’s life. D died, his estate stopped paying.
I: consideration even if no bargain?
H: yes, the material benefit rule applies if there is both a moral obligation and a subsequent
promise to pay, even if there was no original duty or liability. No doubt that parties meant to
be bound. (minority rule applied)
R: No benefit promise + moral obligation + material benefit = valid consideration
Note: Under §71, P may have lost since act was not induced by D’s promise to pay

2. Contract Modification and the Preexisting Duty Rule

-A modification to an existing contract is only binding if there is consideration for the modification

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-If a party is legally obligated to perform a certain duty and seeks to modify contract to receive additional
compensation for same duty, the modification fails for lack of consideration
-the pre-existing duty rule applies when only ONE side gets more out of the renegotiation

-Preexisting duty rule does a poor job of accommodating the need for flexibility necessitated by unforeseen
circumstances - note that this rule generally no longer applies, even though it’s still in the R2d, would also
require the good-faith requirements of § 89

§89,p 670: modification of an executory contract

a promise modifying a duty under a contract not fully performed on either side is binding:
(a) if the modification is fair and equitable in view of the circumstances not anticipated by the
parties when the contract was made; or
(b) to the extent provided by statute; or
(c) to the extent that justice requires enforcement in view of material change of position in
reliance on the promise.
a circumstance can be considered unanticipated even though it was considered - provided that the
contract did not price it accordingly

§2-209, p.670: modification, rescission and waiver

(1) modification needs no consideration
(2) a signed document with a clause excluding modification or rescission except by signed writing
cannot be changed, but except as between merchants such a requirement on a form contract
must be signed by the other party
(3) requirements of Statute of .Frauds must be satisfied if the contract is within it
(4) although an attempt at modification or rescission does not satisfy (2) or (3), it can operate as a
waiver
(5) a party who has made a waiver....[not important]
unless modification was waived in the original contract; requires good faith and reasonable
commercial standards of fair dealing and usage of trade;

Stilk v. Myrick, due to desertion, captain promises to increase wages of existing crew P.656
F: captain entered an agreement with remaining crew to split the wages of the two deserters
amongst them if he could not procure two other people to help
I: Is captain’s agreement with crew enforceable? I.e. can crew members collect extra wages?
H: No, the cannot. There was no additional consideration in the alteration of the contract, the
crew members did the work they were expected to do in the first place and there was no
additional benefit to the D. Before Ps set sail they had undertaken to do all that they could
under all the emergencies of the voyage.
R: generally, a contract may not be altered or modified without additional consideration.

Alaska Packers Ass’n v. Domenico, US Ct.App. 9th Cir., 1902 TURNED DOWN p 658
F: Ps went as employees of D from San Fran to Alaska as crew/fishermen. When they got to
Alaska they had a labor strike for higher wages, no other available work force, supervisor
gave in to demands but subsequently refuses to pay increase.
I: does the replacement contract stand even if D’s rep stated he had no authority to contract
and even if D had no alternative but face losses and failure?
H: no, according to preexisting duty rule, P’s offered as consideration only what they had
already contracted to do. No new consideration in modification of contract.
R: for good faith, the validity of contract modification is going to come down to whether it is
a change necessitated by a change in circumstances or if it is one party exploiting another

Brian Construction v. Brighenti, excavation underestimate, recontracted P.666

F: subcontractor hired to excavate discovers excavation is more work than thought. SC and
GC recontract for increase pay, SC works for awhile and quits leaving GC to finish job at

33
 high cost.
I: Whether parties’ agreement constituted a legally enforceable contract obligating D to
remove unexpected rubble
R: Exception to preexisting duty rule – the subsequent agreement imposes upon the one
seeking greater compensation an additional obligation, therefore there is new consideration –
binding.
R: Then a contract must be performed under unforeseen burdensome conditions, and the
parties renegotiate a fair new contract, then the new contract has consideration. Separate
valid contract
H: since no assumption of risks and unforeseen circumstances, modified contract is valid.

3. Adequacy of Consideration
-Three types of problems with consideration
1. Want (or lack) of consideration – nothing whatsoever given in exchange for the promise
2. Failure of consideration – person did not get what they bargained for
3. Inadequate consideration – thing not worth as much as you thought, an inadequate consideration

-Nominal consideration is nsufficient (71) unless it is in an option contract (87)

-Courts do not judge on adequacy of consideration because it would
- be time-consuming
- be expensive
- introduce uncertainties into transactions
- be difficult to prove when subjective value attached to item
Courts will not examine adequacy but they will examine the sufficiency, i.e. nominal considerations
So long as promisee suffers some detriment or something is found to be bargained for, courts are not
concerned with the adequacy.

§79, p.674: adequacy of consideration (mutuality of obligation)

if the requirement of consideration is met there is no additional requirement of:
(1) a gain, advantage or benefit to the promisor or a loss, disadvantage, or detriment to the
promisee; or
(2) equivalence in values exchanged, or;
(3) "mutuality of obligation"

§364, p.675: Effect of unfairness

where specific performance would be unfair because the exchange is grossly inadequate, court
will deny SP. Permits court to refuse equitable relief on grounds of unfairness, even in situations
where they would not necessarily refuse to award damages

Newman & Snell's State Bank v. Hunter p.674

Deceased owed bank money, but there is no money in his estate. Widow agrees to put in own note
that she repay debt, if bank will cancel husband's note. ÷no consideration. Bank's promise to cancel
husband's note is not of sufficient value to constitute consideration, b/c bank's note had become
economically valueless & bank did not have legal ability to collect the debt. Widow is the only one
who values the note (sentimental value).

Schnell v. Nell, attempt to make gift enforceable with consideration of one cent p.
F: 3 considerations found:
1. love and affection for wife (not relevant, moral consideration)
2. wife made promise (not relevant, past consideration)
3. promise of Ps to pay one cent (not relevant, nominal consideration)
I: Will contract be enforced when there appears only to be nominal consideration in the

34
 bargain?
R: bargain deemed unconscionable, nominal consideration for gifts are not sufficient
R: Must ask question – Pretense of a bargain or a real bargain? Here, not real bargain.

VII. INTENTION TO BE LEGALLY BOUND

Functions of formalities such as the seal, nominal consideration, recital:
• Evidentiary – transaction took place
• Cautionary – before the ritual, promisor has time to think & reflect
• Channeling – population made aware that the use of a device will have a result – makes judicial
determination easier
• Clarification – have to work out details from oral agreement when put into writing

1. Formalities to Manifest Intent

F. The Seal

• Can be a substitute for consideration in some instances

• Erosion of the use of the seal – UCC now prohibits for sale of goods, most states reject it for all
Ks.

§95, p.692: Requirement for sealed contract or written contract or instrument

(1) In the absence of statute, promise is binding
without consideration if
a. Written and sealed; and
b. Document delivered; and
c. Identification of promisor and promisee
is clear in document

§2-203, p.692: Seals inoperative

The affixing of a seal to a writing evidencing a contract does not constitute the writing a sealed
instrument and the law with respect to sealed instruments does not apply to such a contract or offer

Aller v. Aller old law not valid in NJ monetary promise to daughter sealed p. 688
I: Whether an instrument under seal, without sufficient consideration, is enforceable
R: Seal is presumptive evidence of legally sufficient consideration; statute of consideration
applies only when there is consideration and no seal
H: Purpose of formality of a seal is to supercede need for consideration and represents a
precautionary function to show promise made with lots of thought

Wagner v. Lectrox, license sealed p. 691

I: whether there had been failure of consideration for the license granted the corporate
defendant by him under the agreement
R: Seal supercedes any need for consideration, parol evidence rule applied in oral assurances

G. Nominal Consideration
-Consideration need to be sufficient to be found to support a promise
-Nominal considerations are binding with respect to options contracts, § 87, p730, but are not recognized in
attempts to make gifts enforceable, §71, p729.

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§87, p.697: option contract (i.e., bilateral promise)
an offer is binding as an option contract if it:
(1) is in writing and is signed; recites the purported consideration, and proposes an exchange
on fair terms within a reasonable time;
(2) an offer which the offeror should reasonably expect to induce action or forbearance of a
substantial character by the offeror before acceptance and which does induce such action
or forbearance is binding as an option contract tot he extent necessary to avoid injustice.

Schnell v. Nell, attempt to make gift enforceable with consideration of one cent p. 726
F: 3 considerations found:
1. love and affection for wife (not relevant, moral consideration)
2. wife made promise (not relevant, past consideration)
3. promise of Ps to pay one cent (not relevant, nominal consideration)
I: Will contract be enforced when there appears only to be nominal consideration in the
bargain?
R: bargain deemed unconscionable, nominal consideration for gifts are not sufficient
R: Must ask question – Pretense of a bargain or a real bargain? Here, not real bargain.

H. Recitals

• Majority view: A recital in a written agreement that a stated consideration was given may be
contradicted by parol evidence that no consideration was given or expected.
• Exception: Options K under §87(a). Immaterial whether consideration was actually given.

Smith v. Wheeler: π gave ∆ one year lease option to buy property, recited payment of $1, which was
never paid. This was valid consideration because the K was an option K even though the consideration
was never paid. He recital of the one dollar consideration gives rise to an implied promise to pay what
can be enforced by the other party
Note: This is the MINORITY view. Usually if no consideration given, you can use PE to so show.

VIII. PROMISSORY ESTOPPEL

an offensive action of asking for compensation for detrimental reliance on a promise even if there was
no consideration

NOT IN UCC

R § 90 Questions to ask in applying § 90:

(1) was there a promise?
(2) was reliance intended and foreseeable?
(3) was there actual reliance?
(4) is remedy necessary to prevent injustice?
In other words, a promise is binding if:
(a) there is an inducement by promisor reasonably expected to produce an action or reliance
(reasonably foreseeable to the promisor that promisee would rely on the promise); and
(b) action or reliance actually takes place (actual reliance in a reasonable way); and
(c) that action leads to some detriment on the part of the promisee; and
(d) injustice cannot be avoided without enforcement of the promise.
-Charitable subscriptions and marriage settlements are binding even if there is no proof of induced action or
forbearance

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Factors that help to determine reasonableness:
1 - credibility of promisor/promise
2 - that the reliance was definite, substantial, and in relation for the remedy sought
3 - formality with which the promise was made
4 - (negotiations context - are there extraneous factors that could kill the deal?)

Questions of damages is unclear with respect to PE – reliance or expectation?

Measure of damages –
-according to doctrine, court can only give reliance damages because PE is built around
notion of reliance
-restitution may be available if he has conferred something of value to D
-modern trend towards awarding expectation damages unless lost profits involved are too
speculative pr uncertain
-expectation damages more likely in cases where promisor acted in bad faith

1. Promissory Estoppel as a Substitute for Consideration

I. Family Promises
when there is detrimental reliance (promise to pay for son’s education so son quits his lucrative job.) son
will get damages suffered from losing the job but not the full cost of a college education. (reliance not
expectation)

Rickets(D) v. Scothorn (P), Grandfather gives $ so granddaughter doesn’t have to work p723
F: grandfather doesn’t want granddaughter P to work, promises her money. P quits job and
relies on money. He dies, estate D refuses to pay rest of note.
I: was the promise a gift for want of consideration?
H: not exactly, because U should have known (indeed he intended) that his promise would
induce P to act, which she did. Reasonable reliance on promise to her detriment and injustice
can only be avoided by enforcing promise. No consideration but promissory estoppel

J. Charitable Subscriptions

§ 90 (2) A charitable subscription…is binding under Subsection (1) without proof that the promise induced
action or forbearance.

Allegheny College v. Nat’l Chautauqua Cty Bank, endowment for fund in D’s name P. 731
F: D stipulated money to school for creation of endowment in her name. P advertises that D
gave money for use. D repudiates promise after making one payment and dies.
I: Whether a charitable subscription is enforceable
R: Not PE but actual consideration – D immortalized in endowment in exchange for $
Dissent: note was a gift, or a unilateral contract. P had not performed stipulations and D has
not yet been unjustly enriched so no contract.

K. Promises of a Pension

Feinberg v. Pfeiffer Co., retirement pension for life promised p 736

F: P worked for D for 37 years at which time D promised her a retirement annuity of
$200/month for life. D worked for 2 more years then retired. D paid for 7 years then had a
change in mgmt and cut payment down to $100, when P sued.

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 I: is D liable for the payments even if there is no consideration?
H: yes. D should have known that P would have relied on the promise and knew that in fact
she did (and did not seek other employment). Other elements met.

2. Promissory Estoppel as an Alternative to Breach of K

-In this case, there doesn’t even have to be a contract involved
-If someone reasonably relies on negotiations, statements, illusory promises, etc they might be able to get
remedy under promissory estoppel

-Goodman can be considered another way of reaching the tort remedy of misstatement of fact, while Red
Owl seems to be creating a remedy of negligent promissory misrepresentation, i.e. the court awards relief
when a promise is made to indice a promise to rely in a desired way in circumstances such that the
promisor knows (or should know) that the promise will appear to be more reliable than it is.

Goodman v. Dicker, Dealer franchise to sell radios P. 751

F: Ps thought they had a contract to see D’s radios. P incurred cost in preparation of selling
radios. D decided not to allow P to sell radios. P sues.
I: Can P be awarded reliance damages based on a promise by D that franchise would be
granted to P and goods supplied causing P to incur expenses in preparation for business?
H: yes, promissory estoppel invoked. Awards reliance damages and not expectation damages

Hoffman v. Red Owl Stores, Inc., Supermarket Franchise deal falls apart p. 752
F: P applied for a franchise from D, who said raise $18,000 and it’s yours. P sold his current
business, took a job that would train him, and put a down payment on the land. P was
repeatedly told by D that all looked good. D demanded more money than P could pay, then D
backed out.
I: was there an agreement actually made or relied upon?
H: yes, P meets the elements for promissory estoppel – finds sufficient promise and
detrimental reasonable reliance the result of which injustice can only be avoided by enforcing
the promise
R1: Contract theory not possible since there was no offer
R2: reliance damages and not expectation damages are rewarded. Expectation damages would
be hard to calculate and are only considered when promisor has acted in bad faith.

3. Establishing the Elements of Promissory Estoppel

A. Promise

Blatt v. USC, nonadmittance into law school legal society P. 775

F: P worked hard in an attempt to get into Legal Honor Society. Society rejects application. P
sues on premise of promissory estoppel in causing him to work extra hard believing he would
get into society.
I: Can P claim reliance on promise to his detriment under PE?
H: No, there was no promise of definite admission into society, just a promise for “eligibility”
for election into society. This promise was fulfilled..his application was reviewed and denied.
R: Fails PE because P faced no real detriment – not of a “definite and substantial character”

Spooner v. Reserve Life Insurance company retracts offer of bonus

F: D promised a “voluntary contribution” bonus and later retracts offer
I: Can P claim PE?
H: No. There is no real promise to be enforced. D imposed conditions on the bonus that made it
clear that it could be retracted

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Ypsilanti v. General Motors, tax abatement for keeping company in town P.779
F: GM mfr pulls out of town of Ypsilanti after given tax abatement by town before it was
expected to
I: Did GMs statements and conduct constitute a promise to maintain a plant in town if town
continued to offer it tax abatements?
LC: lower court believed that there was a promise if town gave tax abatement, GM would
maintain shop there, promise was relied on to their detriment by town and there would be
injustice to Ypsilanti for giving up $$ and having GM desert them.
HC: cannot invoke promissory estoppel because there was no promise. GMs statements were
mere sales “puff” and expressed hopes and expectations not promises. Also, since there is
proof of hesitancy on side of D, cannot say the reliance on alleged promise was reasonable.

IX. PERFORMANCE
• Once you determine that there was an enforceable K, you have to determine whether the promises
were kept
• Key is determining the parties’ intent

1. Conditions
• Non performer can justify her non performance if her obligations are conditioned upon the
occurrence of an event/contingency, and the event/contingency has failed to occur
o Ex- A agrees to buy house if she can get a loan < 10% interest. She can only get loan for
12%. Thus, A’s contractual obligation is excused
o Ex- developer can’t get a zoning permit.
• Most terms in a K are promises or conditions, or both

Three Types:
1. Express Conditions- language of K (w/o PE) articulates the intent to make performance contingent
on the event.
a. Generally applied strictly
2. Conditions implied in fact- no express language, but contextual evidence supports inference that
the parties intended a performance to be conditional
a. Watch out for PER, might prevent other info from being presented
b. G3reater flexibility in determining whether this was a condition to be enforced
3. Constructive Conditions: a condition may not be expressed or inferable, but it could be implied in
law.
a. Court will imply the condition if the circumstances and the nature of the K show the
condition should exist as a matter of public policy, or if the parties had addressed the
issue, they reasonably would have intended it to be part of K
b. Construed because no evidence that the parties actually contemplated these terms
c. Backward looking to what the parties intended
d. Ex- zoning. First you need the rezoning approved, then Buyer’s promise to pay and
Seller’s promise to convey the land are dependent on each other. If buyer doesn’t pay,
seller doesn’t have to convey the land

Failure of any condition could release the parties from performance of the K.

2. Good Faith Performance

• All K’s contain an implied covenant to perform in good faith

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 • Ex- Wood v. Lucy, Lady Duff Gordon. Implied K that Lucy wouldn’t endorse other merchants do

RST § 205 Duty of Good Faith and Fair Dealing: Every K imposes upon each party a duty of good faith
and fair dealing in its performance and its enforcement

UCC § 1-203 Obligation of Good Faith: Every K or duty imposes an obligation of good faith in its
performance or enforcement

3. Implied Warranties
L. Implied warranty of merchantability and Fitness for Part. Purpose
Scope of performance often defined by a warranty
- when parties are silent, contract law supplies some warranties by default
- UCC provides implied warranties of merchantability and fitness for a practical purpose

UCC 2-314. Implied Warranty of Merchantability

Goods must:
1. Pass without objection in the trade under the K description; and
2. In the case of fungible goods, are of fair and average quality within the description; and
3. Are fit for ordinary purposes for which such goods are used; and
4. Run, within the variations permitted by the agreement, or even kind, quality, and quantity within
each unit and among all units involved; and
5. Are adequately contained, packaged, and labeled as the agreement may require; and
6. Conform to the promises or affirmations of fact made on the container or label, if any.

UCC § 2-315. Implied Warranty of Fitness for a Particular Purpose

1. The seller must have reason to know the buyer’s particular purpose.
2. The seller must have reason to know that the buyer is relying on the seller’s skill or judgment to
furnish appropriate goods
3. The buyer must, in fact, rely upon the seller’s skill or judgment

UCC § 2-714: Damages for Breach of Warranty

Difference between goods as received and value they would have been if they were as the warranty stated,
unless circumstances show prox damages of a different amount. Incidental and consequential damages may
also be recovered.

§2-316, p.921: Exclusion or Modification of Warranties

(1) Negating warranties is inoperable to the extent that such constriction is unreasonable
(2) excluding or modifying implied warranties of merchantability must mention merchantability and if
in case of writing must be conspicuous
(3) excluding or modifying implied warranties of fitness must be in writing and conspicuous. To
exclude all implied warranties of fitness it is sufficient to state “There are no warranties which extend
beyond the description on the face hereof”
(4) unless stated otherwise, all implied warranties are excluded by
- expressions like “as is”, “with all faults”
- waivers of inspection by buyer or actual inspection
by buyer negates an implied warranty
- course of dealings or course of performance or
usage of trade

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 Step-Saver Data Syst. v. Wyse Technology, computers purchase incompatible with system P.832
F: P purchased D’s computer after conducting a bench test. Computers found to be
incompatible with software used by P.
I: Was there an implied warranty of merchantability or fitness?
H: No, seller did not know buyer’s particular purpose, buyer didn’t rely on seller’s expected
knowledge of buyer’s purpose, buyer performed their own bench test. Product exceeded
ordinary standards of the trade usage of product.

M. Disclaimers of Warranty
Schneider v. Miller, rusty car bought from salesman P. 849
F: P bought car under a clause of “As is” from D.
I: Can P revoke a contract under an implied warranty of merchantability over an “as is”
2-316 clause?
H: No, an integration clause which provides that the entire agreement between the parties is
contained within the four corners of the contract is effective to waive any implied warranty.
R: terms like “as is” in ordinary commercial usage are understood to mean that the buyer
takes the entire risk as to the quality of the goods involved. Implied warranties are default
rules that can be contracted around.

X. BREACH
Court is no longer interested solely in parties’ presumed intentions at time of formation, they are also
concerned with the nature of the breach in jeopardizing the promisee’s confidence in receiving
additional performance in the future.

You don’t have to perform as promised if:

1. contracting partner was supposed to perform first and
2. it materially failed to perform and
3. it did not cure this failure

1. Material breach

§241. Circumstances Significant in Determining Whether a Failure is Material.

In determining whether a failure to render or to offer performance is material, the following
circumstances are significant:
(a) the extent to which the injured party will be deprived of the benefit which he reasonable expected;
(b) the extent to which the injured party can be adequately compensated for the part of that benefit of
which he will be deprived
(c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture;
(d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking
account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the party failing to perform or to offer to perform comports
with standards of good faith & fair dealing

Doctrine of Substantial Performance

• Obligates a party to pay when he has received almost everything he bargained for
• Prevents economic waste
• Prevents parties from getting out of contractual duties whenever something doesn’t conform
perfectly to K

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 o Hard to fulfill perfectly when K is very complicated, like a building
• Does not apply if the breach is MATERIAL (subject to an express, not constructive condition)

2. Breach of Constructive (Implied) Conditions

A breach of a constructive duty can relieve the other party of its duty of performance.

Jacobs & Young v. Kent, stipulation of Reading pipe not followed p.. 883
F: P built a country home for D under a contract that specially called for Reading brand pipes.
A year after the home was completed, D learned that the pipe actually used was Cohoes.
Nothing dissimilar between types of pipes. P sued to recover the unpaid balance on
construction.
H: this was substantial performance. There are two types of damages possible. Cost to
replace makes no sense, because the pipes are installed. Also, the pipes are functional
equivalents - even made it past D’s inspector. Other method is diminution of value, which is
negligible. YES SUB. PERF. BECAUSE DEVIATION MADE IN GOOD FAITH
R1: Factors to consider whether literal fulfillment is to be implied by law as a condition:
1. purpose to be served
2. desire to be gratified
3. excuse for deviation from the letter
4. cruelty of enforced adherence
R2: Classes of Promises: (consideration of justice and presumable intention will decide which class
this promise falls into)
1. independent – never by fair construction be conditions of one another
2. dependant – must always be conditional
3. dependant – conditions when there is departure in point of substance will still be
viewed as independent and collateral when the departure is insignificant
Damages: Not cost of replacement but difference in value. – cost of pipe, difference in value of house
due to pipe difference (minimal assuming no special value held for Reading pipe) and cost of
completion. No cost of performance based on economic waste theory

3. Perfect Tender Rule

-More exacting than Material Breach if taken literally

If a seller delivers nonconforming goods, buyer can (§2-601):

1. Reject goods, within a reasonable time with notification (§2-602)
a. if time of performance has not expired, seller may cure (§2-508(1))
b. if seller had reason to believe goods were acceptable, he may have a further
reasonable time to substitute a conforming tender (§2-508(2)
2. Accept, thereby signifying that he would retain despite non-conformity, by not rejecting or by
acting in a way inconsistent with seller’s ownership (§2-606)
a. buyer can no longer reject (§2-607(2)) but
b. buyer may revoke his acceptance within a reasonable time after discovery of non-
conformity if it substantially impairs its value but goods must have been accepted
(§2-608)
i. on the reasonable assumption that its non-conformity would be cured, and it
has not been seasonally cured or
ii. without discovery of the non-conformity if the acceptance was induced
either by the difficulty of discovery before acceptance or by the seller’s
assurances.
c. revocation must occur within a reasonable time after the buyer discovers or should

42
 have discovered the ground for it and before any substantial change in condition of
the goods which is not cause by their own defects. Not effective until buyer notifies
the seller.
3. Accept some, reject the rest

Ramirez v. Autosport, purchase of camper van with lots of problems P.919

I: Whether a buyer may reject a tender of goods with minor defects that do not conform to
contract and whether a seller may cure the defects:
R1: perfect tender rule – seller has to deliver goods that conform precisely to the contract
R2: seller’s right to cure – within the time set for the performance in the contract, the seller’s
right to cure is unconditional. After expiration of this time, seller has a further reasonable time
to cure if he believed reasonably that the goods would be accepted with or without a money
allowance.
Depends on surrounding circumstances, i.e. amount of inconvenience to buyer, length of time
needed by the seller to correct non-conformity, ability to salvage the goods by resale to
others
R3:
-balance before acceptance – buyer’s right to reject NC goods with a 2nd chance for seller
to conform goods under limited conditions
-balance after acceptance – buyer may revoke acceptance only if the NC substantially
impairs the value of the goods to him.

4. Cost of Completion v. Diminution in Value: Expectation Interest

Revisited
-Non-Material breaches often warrant damages

-Problem with expectation damages is what to do when a straight calculation, i.e. value of complete
performance – defective performance, is less than the cost of remedying the defective product.
• - Cardozo: in most cases, cost of replacement is appropriate, but where cost of completion is
grossly and unfairly out of proportion to the good to be attained, diminution in value is
appropriate
• Reduces excessive economic waste

-In dealing with this problem, courts often look to the intent of the parties. If the contract was centered
around economic concerns, i.e. party looking to make money, courts will award diminution in value. If the
contract was centered around performance, i.e. person looking for personal enjoyment, courts will award
cost of performance.
-Economic intent is presumed in commercial contracts. In commercial contract if the parties want cost
of performance they should write it into the contract, i.e. they can contract around default rules
-In examining intent, if court finds that breach was willful, likely to jam the breacher for cost of
performance. Good/bad faith distinction is an emerging concept in contract law.
-Even if contract placed a premium on performance, courts unlikely to enforce cost of performance if it
involves economic waste, i.e. destruction of what has already been done to remedy something that is
not a material defect.

-Measure of damages for sales contracts is almost always diminution of value, i.e. difference between
contract price and the market price at the time and place of delivery

§348: alternatives to loss in value of performance

(2) if breach results in the defective or unfinished construction and the loss in value of the
injured party is not proved with sufficient certainty, he may recover damages based on:
(a) diminution of the market price of the property (value rule), or

43
 (b) reasonable cost of completing performance or of remedying the defects if that cost is
not disproportionate to the probable loss in value to him (cost of performance rule)

Groves v. John Wunder, lease of land in exchange for removal of gravel and sand p.929
F: P leased land to D for $105,000 for 7 years to remove gravel and sand with provision that
and would be left level. D left land uneven. P sued. P granted $15,000, based on market
value of land ($12,160) plus interest. Cost of performance would have been $60,000.
I: Award cost of performance or diminution in value if D has performed?
H: for P - new trial that could lead to the $60,000, judge applies cost of performance rule to
grading contract despite disproportionate cost. cost of performance even if disproportionate
R1:“where the contractor willfully and fraudulently varies from the terms of a construction
contract, he cannot sue thereon and have the benefit of the equitable doctrine of substantial
performance”
R2 : the goal, given the lack of good faith, should be to give P what he has bargained for,
what has been promised, and what he has been deprived

Peevyhouse v. Garland Coal, strip mine lease, failure to restore land p. 934
F: Ps lease land to D for coal mining purposes, D agreed to perform certain restorative
and remedial work at the end of lease period. P said he never would have contracted
without this provision. D breaches duty to restore land. The cost of removing the holes
would have been $25,000. The implied value of the land, total, was $2,800.
H - for P - limited to the $300 (value diminished from land), but the damages should be
based on “relative economic merit”
R - while the default rule is cost of performance, if application of that rule would result in
grossly disproportionate economic benefit as compared to the cost of performance, then
use the value rule. Basis is that the remedial work was incidental to the primary
purpose of the contract and economic benefit of cost of performance rule would be
grossly disproportionate.
Dissent: bad faith on part of D, should apply CoP regardless of disproportion.

Example: Price owed to A for building house: $100,000

house
Better for a small Paid to A so far: $40,000
windfall to the party not Cost to complete house when A breaches: $80,000
in breach than
A B Damages calculated: B should not have to pay more than origina 100K
undercompensation ∴ $80,000 - $60,000 = $20,000  damages owed by A for breaching
$100,000,
so far, $40,000 paid
Amt A owes Amt B owes

DEFENSES TO CONTRACTUAL OBLIGATION

XII. Unconscionability
-Fallback position when contract seems “unfair” and no other doctrine gets the unduly burdened party out
from under their obligation
-Not very well defined doctrine, usually arise out of adhesion contracts (one side has all the bargaining
power e.g. take it or leave it offer for a good)

Two elements of unconsionability:

1) Procedural – refers to situations in which one party was induced to enter into the contract without
having any meaningful choice
-Comment d to §208, p1137 lists factors that point to procedural unconscionability

44
 -Belief by the stronger party that there is no reasonable probability that the weaker party
will fully perform the contract
-Knowledge of the stronger party that the weaker party will be unable to receive
substantial benefit from the contract
-Knowledge of the stronger party that the weaker party is unable reasonably to protect his
interests by reason of physical or mental infirmities, ignorance, illiteracy, or inability to
understand the language of the agreement
factors:
-did party know what they were getting into – “unfair surprise”
-fine print, complex convoluted language
-lack of opportunity to study contract
-lack of understanding of particular party
-disparity of sophistication
-language difficulties
-voluntariness of the deal
-are terms negotiable?
-Different kinds of market pressures/timing requirements

2) Substantive – “oppression”, a clause is substantively unconscionable if it is unduly unfair and one-

sided. Most often excessive price, or an unfair modification of either the seller’s or buyer’s remedies.
-an exception to the rule that courts do not look at the adequacy of consideration
factors:
-commercials terms reasonable or one sided
-price/costs  profits to one party
-typical commercial practices

Be aware of the fundamental tension between unconscionability doctrine and the basic principal of freedom
of contract

UCC §2-302 Unconscionability

involves the evaluation of four factors…
o The relative harshness of the term in question, including the importance of the legal right that is
affected
o The manner of presentation of the term in the agreement
o The relative bargaining power of the party against whom the term is asserted
o The commercial justification for the term

Williams v. Walker Furniture I,II, Purchase of furniture on installment plan p. 1131

F: P bought a variety of things from D over time, all on credit that was cross-collateralized.
Payment scheme was such that each payment was prorated to all outstanding goods; result
was that no title passes to P until entire account is flat. P missed a payment, D went for
replevy.
H: repossesion provision on consumer goods purchase agreement is unconscionable, and a
court may refuse to enforce a contract that was unconscionable at the time it was made.
Note: court maneuvered around the recent adoption of § 2-302, which it enforced, and which
was adopted after the acts occurred. Court took the opinion that the code merely codified CL.
R1: “when a party of little bargaining power, and hence of little real choice, signs a
commercially unreasonable contract with little or no knowledge of its terms, it is hardly likely
that his consent, or even an objective manifestation of his consent, was ever given to all the
terms.” Unequal bargaining power – procedural unconscionability
R2: “In determining reasonableness of fairness, the primary concern must be with the terms of
the contract considered in light of the circumstances existing when the contract was made.”
Terms unreasonably favorable to one party – substantive unconscionability

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Willie v. Bell Telephone Co. – yellow pages mistake, guy gets money back but wants damages p. 1033
in this case, the terms and conditions of the contract are clearly legible and are written in common words;
not all one-sided, as some protect the telephone company; he is an experienced businessman and familiar
with printed contracts; no evidence of gross negligence,

In re Realnetworks -- An agreement that is stored digitally, and that cannot be printed or saved in any
readily discernible manner, is a “written agreement” under the FAA; an arbitration clause is not
unconscionable merely because the agreement does not draw attention to it; the mere fact that an arbitration
forum selection clause specifies a forum that is geographically distant from another party does not render
that clause substantively unconscionable.

XIII. FAILURE OF A BASIC ASSUMPTION

breach results when something unexpected happens. Ex. Circumstances change, or someone just turns to
majority or becomes sober or they realize things aren’t quite as they understood them to be at the time
contract was made

1. Mutual Mistake
Contracting party takes the risk of most supervening changes in circumstances, even though they upset
basic assumptions and unexpectedly affect the agreed exchange of performances, unless there is an extreme
hardship as will justify relief on the ground f impracticality of performance or frustration of purpose. From
restatement notes

§151, p.1071: mistake defined

a mistake is a belief that is not in accord with the facts.

§152, p.1072: when mistake of both parties makes a contract voidable (MUTUAL / BI-LATERAL)
(1) if both parties made a faulty assumption which has a material effect on the agreed exchange of
performances, the contract is voidable by the affected party unless he bears the risk of the
mistake under the rule of §154;
(2) to determine whether a mistake has had a material effect on the exchange of performances,
account is taken of any relief by way of reformation, restitution, or otherwise.

§154,p.1072: when a party bears the risk of a mistake

a party bears the risk of a mistake when:
(1) the risk is allocated to him by agreement of the parties;
(2) he is aware, at the time the contract is made, that he has only limited knowledge with
respect to the facts to which the mistake relates but treats his limited knowledge as
sufficient;
(3) the risk is allocated to him by the court on the grounds that it is reasonable to do so.

§157 p.1073 Effect of Fault of Party Seeking Relief

Mistaken party’s fault does not bar him from avoidance or reformation under rules stated,
unless his fault amounts to a failure to act in good faith and accordance with rable standards of fair dealing

Sherwood v. Walker, mistaken breeding cow for barren cow p1051

F: P contracted for a cow from D. The cow was priced at $0.05/pound with the belief that it
was barren, whereas it would have been worth more than 10x that if she could bear. After

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 signing but before delivery, cow was found pregnant. Seller refused delivery.
I: Can this contract be voidable on the grounds that there was a mutual mistake on barrenness
of cow?
H: both parties' belief that cow was barren is a bi-lateral mistake voiding going to the essence
of a thing, voiding contract.
R1: mutual mistake means that both parties are wrong about the same fact.
R2: mistake must go to the essence of the contract, or the very thing that was bargained for to
be voidable.
Dissent: disagreement on fact. Did buyer believe cow was barren or could bear? If the latter,
there was only a disagreement as to the quality of the cow, there ∴ not voidable. It was not a
mistake about the current status of cow, it was a mistake about prediction of future events.

Nester v. Michigan Land & Iron Co. – timber case; Provided the seller has not made a warranty, a
purchaser of goods is not entitled to reformation or rescission of a contract if the quality or
quantity of goods produced does not meet expectations. Here P was a lumberman with 25 years
experience, and had opportunity to investigate the quality before signing.

Wood v. Boynton, uncut diamond sold for $1 P. 1062

F: P sold an uncut diamond to a jeweler for $1, both parties were not sure as to identity of
item and believed it possibly to be a topaz.
I: Is the sale void on the fact that there was a mistake as to the identity of the item and fraud
of D?
H: no fraud, D didn’t act in bad faith, truly didn’t know what item was when he bought it. No
pretense of mistake since the object for sale was presented to both parties before sale was
made and both parties knew they were clueless as to the identity of the stone, both supposed
$1 was an adequate $ at the time.
R: Court will not grant rescission once contract is already performed (unlike Sherwood). In
absence of fraud or warranty, the value of the property sold, as compared with the price paid,
is no ground for a rescission of a sale

2. Unilateral Mistake and the Duty to Disclose

Circumstances where contract is voidable is much narrower, most unilateral cases are subcontracting cases

Unilateral mistake – a seller who simply doesn’t know as much about his property as the well-informed
buyer to whom he sells it
- Seller cant rescind – assumed the risk, etc
- Justifications
o We cannot allow K rules to reduce or eliminate the rewards claimed by those who invest
in information gathering
o A purchaser’s information can be viewed as his property and is entitled to same
protection as seller’s title to property
- How much should you disclose? Rst 161
o From Laidlaw- don’t need to disclose things the other party could have found out for
themselves

§153, p.1077: when mistake of one party makes a contract voidable (UNILATERAL mistake)
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...that is adverse to him, the contract is voidable by him if he
did not bear the risk of the mistake under §154 and:
a. the effect of the mistake is such that enforcement would be unconscionable, or
b. the other party had reason to know of the mistake or his fault caused the mistake.

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§ 161 p. 1081 Should disclose when:
o Disclosure of the fact is necessary to prevent a previous assertion from being
misrepresentation, fraudulent, or material
o Disclosure would correct a mistake of the other party as to a basic assumption on which
the K is based
o Disclosure would correct mistake of other party as to contents/effect of a writing,
evidencing or embodying an agreement in whole or in part
o Other person is entitled to know based on relation of trust and confidence

Laidlaw v. Organ, Treaty of Yent, Tobacco investment, S attempts to take tobacco back P. 1078
I: Can Seller claim fraud when Buyer knew price of tobacco would rise due to Treaty of Yent
which was not yet known to other persons? is suppression of information known by buyer
considered fraud?
R: Organ is not bound to communicate information, but each party cannot do anything
tending to deceive another. Case remanded to determine if there was any imposition of Buyer
on Seller. Organ only has to communicate knowledge if the information is not equally
accessable to both parties

XIV. Changed Circumstances

Impossibility/Frustration v. Mistake
These occur at performance stage while mistake cases usually occur at FORMATION
stage.
In all 3 cases (frustration, impracticability, impossibility), court seeks to determine the
INTENT of the parties while negotiating and in forming the contract.
(1) What risks did they foresee/could they foresee?
(2) Were the risks allocated into the contract?

People enter contracts because they expect: benefits of contract > cost of entering into contract
-Enter contracts to insure certainty, but change in circumstances may change into a breaking contract
defense
-Market shifts don’t cut it, only extreme situations, higher costs alone aren’t going to be enough unless they
are well beyond computable range.
-Must see whether an event is one in which parties assumed to be within occurrence when determining
impracticability
-Financial inability to perform is not a basis for a claim of impracticability
-Expected to use reasonable efforts before applying for impracticability claims

-Problems arise in two ways:

1. Manufacturer’s costs shoot up (impossibility/impracticability)
2. Buyer’s benefit may drop below that they thought (frustration of purpose)

1. Impossibility and Impracticality

-Seller’s defense
-Impossibility/impracticality – unforeseen increases in the costs of performance by one party
-Purpose - to allocate risk to the parties

Impossibility General Test

1. Something made performance as agreed impossible (that doesn’t mean impractical. If you are losing
money that isn’t enough.)
2. nonoccurrence of the thing must have been a basic assumption on which the contract was made
(doesn’t have to be a conscious assumption, but must be mutual to both parties)

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 3. impossibility must have resulted w/o the fault of the party seeking to be excused. (including
negligence)
4. Parties must not have assumed a greater risk than the law imposes. (there may be express terms that
allocate risk between the parties. the ct looks to things like that to see where the risk is)

R § 261 Impracticability; UCC 2-613 and 2-615 consistent with the restatement
 Where, 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
 unless the language or the circumstances indicate the contrary.

§2-613, p.1092: Casualty to identified goods

Where contract requires goods identified and such goods suffer casualty without the fault of either
party before risk of loss passes to the buyer, or in a proper case under a “no arrival, no sale” term
then
a. if the loss is total the contract is voided, and
b. if the loss is partial or the goods are deteriorated buyer
may demand inspection and at his option either treat the contract as voided or accept the
goods with due allowance from the contract price for deterioration or the deficiency in
quantity but without further right against the seller.

§2-615, p.1219: excuse for failure of presupposed conditions

(1) there is no breach of duty if performance as agreed has been made impracticable by the
occurrence of a contingency the non-occurrence of which was a basic assumption on which
the contract was made in good faith;
(2) where the above causes effect only part of the seller's capacity to perform, he must allocate
production and deliveries among his customers...in a way that is fair and reasonable.
(3) he must also notify buyer of contingencies made

Taylor v. Caldwell, place of rental burned down before use P. 1087

F: P rented D’s music hall for concerts but music hall burned down before use. P claiming
preparation for concert damages. D argues by expressed terms relieves them of any liability
and trade custom designates that in the event that place was destroyed or damage, contracts
must be rescinded.
I: Whether, because place burned down before use by P, the loss which P sustains needs to
fall upon D.
H: the parties contracted on the continued existence of the particular place, ∴ because the
theater burned down, condition is implied that the impossibility of performance arising from
the perishing of the person or thing shall excuse the performance
R: implied condition in contract for existence of place for contract results in an excuse for
performance however exceptions include N on party in causing fire, foreseeability, or
expressed terms to the contrary. Implied condition can be contracted around. Look for
evidence for assumption of risk. if party’s contract becomes impracticable and not fault of
party and not assumed by parties, then party is no longer under any duty to perform unless
contracted around.

Paradine v. Jane -- if a party creates a charge or duty to himself, he is obligated to perform in the face of
frustration of purpose.

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2. Frustration
-Buyer’s defense
-unanticipated events that reduce the value of performance to the promisee.
-Promisor says “I promise to give you this” but then something happens and promisee doesn’t want it bc it
is worthless to them
-depends on the total or nearly total destruction of the purpose for which, in the contemplation of both
parties, the transaction was entered into.

-Question to ask in these cases is whether the equities of the case, considered in the light of sound public
policy require placing the risk of a disruption or complete destruction of the contract equilibrium on D or P
under the circumstances given.
-Answer depends on whether an unanticipated circumstance, the risk of which should not be fairly
thrown on the promisor, has made performance vitally different from what was reasonably to be
expected.

Remedies:
-if court determines that the promisor is not entitled to relief based on frustration of purpose, than promisee
is liable for damages for breach of contract.
-If successful claim, duty of promisor claiming frustration is discharged. Neither party can recover damages
for breach.
-If either party has partially performed and the contract is divisible, can allow recovery by contract rate
-If either party has performed and contract is not divisible, can collect via restitution.

3 part checklist for frustration:

(1) what was the foundation of contract?
(2) was the performance of the contract prevented?
(3) was the event which prevented performance of the contract of such a character that it
cannot reasonably be said to have been made in contemplation of the parties?

§265, p. 1109 Discharge by supervening frustration

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

Note: not enough that contract is unprofitable, or if contract has alternative purposes

Case 105: Krell v. Henry, rented room to watch coronation of king p. 1099
F: P wants remaining $ on contract, D wants return of money. D rented room to watch coronation
which was cancelled due to illness of king. Because of cancellation of coronation, D breached
contract.
I: Is contract void because the purpose of the contract, to get a good view of coronation, was no
longer present?
H: Yes, contract was based on the basic assumption that D rented to view the coronation. The
value of the room to the promisee has greatly diminished. Lower court: Implied condition that the
coronation would take place, like Taylor v. Caldwell.
R: This is not a mistake case. Only a mistake case if window was facing the wrong way. Not a
impossible/impracticability case because the contract can still be performed, it’s not commercially
impossible or impracticable. The change in event must be the purpose of the contract in order
to claim frustration of purpose. Everything in contract was structured around the coronation.
Three part test: (i) what was foundation of the contract?; (ii) Was the performance of the contract

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 prevented? Take into account surrounding circumstances; (iii) Was the event which prevented the
performance of the contract of such a character that it cannot reasonably be said to have been in
the contemplation of the parties at the date of the contract? If foreseeable, parties could have taken
steps to allocate risk.

XV. Multiparty Transactions

1. Transferring Rights or Duties

UCC 2-210 – Delegations and Assignments

a. Generally, a party may perform his duty through a delegate, with exceptions:
i. Specifically agreed not to in the contract
ii. Other party has a substantial interest in having the original promisor
performing.
b. A contractual right can be assigned unless:
i. Substitution will materially change the duty of the party that needs to perform,
increase the burden or risk on that party, materially impair his chance of
obtaining return performance, or materially reducing the value of performance
to the person performing.
c. The default rule is that a prohibition of assigning “the contract” is construed as barring
only delegation of performance.
d. An assignment of “the contract” or “all my rights under the contract” (or similar terms) is
a delegation of performance of the duties of the assignor.
i. This promise may be enforced either by the assignor or the other party.
e. The other party may treat any assignment which delegates performance as creating
reasonable grounds for insecurity and may demand assurances from the assignee.

a. Assignment of Contractual Rights

- an assignment of rights must involve a manifestation of intent to assign such rights

- the assignor must not retain any rights under the obligation assigned

Restatement 317 - Assignments

f. An assignment is a manifestation of the assignor’s intent to transfer the right to
performance to another person.
i. An assignment may be in whole or in part, and the assignee acquires a right to
such performance.
g. A contractual right can be assigned unless:
i. Substitution will materially change the duty of the party that needs to perform,
increase the burden or risk on that party, materially impair his chance of
obtaining return performance, or materially reducing the value of performance
to the person performing.
h. For an assignee to have standing to sue, he must accept a complete transfer of rights in
regard to part of the contract.
i. The assignor cannot retain the right to rescind the assignment.

Kelly Health Care v. Prudential – Nursing service wants chunk of insurance policy p. 542
H2: If a transfer is less than absolute, it is not an assignment; obligee must have intended, at the

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 time of transfer, to dispossess himself of an identified interest, or some part thereof, and to vest
indefeasible title in the transferee. Here, Kelly was simply made an agent with authority to collect
from prudential, a revokeable power terminable at death.
H1:Third party beneficiaries must show that the parties to the contract clearly and definitely
intended it to confer a benefit upon them. Kelly was not so intended.

b. Delegation of Contractual Duties

(see UCC above)

Sally Beauty v. Nexxus Products Sally buys Best, who delivers for Nexxus p. 553
The duty of performance under an exclusive distributorship may not be delegated to a
competitor in the marketplace without the obligee’s consent.

2. Third Part Beneficiaries

a. Intended Beneficiaries

Restatement 302 – Intended and Incidental Beneficiaries

i. Parties can contract around the assumption, but
j. Presumption that a party is an intended beneficiary if recognition of a right to
performance in the beneficiary is appropriate to effectuate the intention of the parties
AND
i. The performance of the promise will satisfy an obligation to pay money to the
beneficiary; OR
ii. The circumstances indicate the promise intends to give the beneficiary the
benefit of the promised performance.
k. An incidental beneficiary is a beneficiary who is not an intended beneficiary.
i. Only intended beneficiaries have standing to sue.
Seaver v. Ransom p. 571
F: contract made between Mrs. Beman and Judge Beman for the Plaintiff to receive the house
upon the Judge Beman’s death binds the estate to perform on that promise.
H: This complies with the general doctrine that any third person, for whose direct benefit a
contract was intended, could sue on it. A donee beneficiary is when a contract is made
expressly for giving a gift to a third party, the third party is known as the donee beneficiary.

**See also Kelly Health Care above

b. Distinguishing Intended from Incidental Beneficiaries

Types of Beneficiary
1. Donee Beneficiaries: Generally, for the plaintiff to be a donee beneficiary it must appear that
the promisee’s intent in obtaining the promisor’s promise to perform was to make a gift to the
plaintiff or to confer a right to performance upon the plaintiff, which performance was not due or
claimed to be due by the promisee to the plaintiff
2. Creditor Beneficiary: for a third party to be considered a creditor beneficiary, the promisor’s
performance due under the contract must satisfy an actual, supposed, or asserted duty that the
promisee owes to the third party (AKA Insurer (promisor) owes settlement to me (promisee) and I
owe money to hospital (third party). Moreover, a 3rd party creditor beneficiary’s right to recover

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 against the promisor is subject to any claim or defense arising from the beneficiary’s own conduct
or agreement
3. Incidental Beneficiary: An incidental beneficiary is someone who indirectly obtains a benefit as
the result of the main purpose of the trust. An incidental beneficiary is a beneficiary who is not an
intended beneficiary. For example, a grandchild might benefit from his/her parent receiving a gift
which could be used by the entire family, or which he/she may inherit from the parent.

Restatement 315 – Effect of a Promise of Incidental Benefit

l. An incidental beneficiary acquires by virtue of the promise no right against the promisor
or the promisee  No standing to sue.

Sisters of St. Joseph v. Russell -- Here, at the time the DCS agreement was signed, the Hospital had given
something of value to Russell and was asserting that Russell had a duty to pay for it
o And, the DCS agreement contains a paragraph suggesting that the parties to the
agreement recognized Russell’s medical expenses were in fact owed, and the
agreement and the circumstances leading thereto suggest that the parties
intended the Hospital to recover payment

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