OUTLINE Case Briefs & Notes - Contracts II

Contracts II, Knapp Book Notes 1 of 72
CONTRACTS II, Prof. Selmi- Knapp BOOK NOTE
THE PAROL EVIDENCE RULE.............................................................................................................3

TWO VIEWS -CORBIN & WILLISTON ON PAROL EVIDENCE RULE.........................................................................3
R.2D § 209 INTEGRATED AGREEMENTS.........................................................................................................3
R.2D § 210 COMPLEXITY AND PARTIALLY INTEGRATED AGREEMENTS..................................................................4
R.2D §211 STANDARDIZED AGREEMENTS......................................................................................................4
*R.2D §213 EFFECT OF INTEGRATED AGREEMENT ON PRIOR AGREEMENTS *PAROL EVIDENCE RULE.......................4
R.2D §214 EVIDENCE OF PRIOR OR CONTEMPORANEOUS AGREEMENTS AND NEGOTIATIONS..................................4
R.2D §215 CONTRADICTION OF INTEGRATED TERMS.......................................................................................5
R.2D §216 CONSISTENT ADDITIONAL TERMS.................................................................................................5
R.2D §217 INTEGRATED AGREEMENT SUBJECT TO ORAL REQUIREMENT OF A CONDITION......................................5
UCC 2-202 - FINAL WRITTEN EXPRESSION: PAROL OR EXTRINSIC EVIDENCE.......................................................5
EXCEPTIONS - PAROL EVIDENCE RULE DOES NOT APPLY IF.................................................................................5
THOMPSON V. LIBBY, MINN. S. CT., (1885) -PAROLE EVIDENCE- 4 CORNERS RULE- WIDELY USED APPROACH-LOGS
CASE, EVIDENCE OF WARRANTY NOT PERMITTED TO ALTER AGREEMENT................................................................6
TAYLOR V. STATE FARM..............................................................................................................................6
SHERROD, INC. V. MORRISON-KNUDSEN CO., S. CT. MONTANA (1991).............................................................7
NANAKULI PAVING & ROCK CO. V. SHELL OIL CO., 664 F.2D 772 (9TH CIR. 1981)............................................7
NANAKULI PAVING & ROCK CO. V. SHELL OIL CO. 1981 - DETERMINING OBLIGATIONS > EXTRINSIC EVIDENCE.........8
PROBLEM 5-1........................................................................................................................................9
CHAPTER 6 - SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD

FAITH, AND WARRANTIES..............................................................................................................10
IMPLIED TERMS..................................................................................................................................10
WOOD V. LUCY DUFF-GORDON, CARDOZO- NY CT. OF APP., 1917.................................................................10
NOTES AFTER LEIBEL V. RAYNOR (P. 445)....................................................................................................11
IMPLIED OBLIGATION OF GOOD FAITH....................................................................................................11
SEIDENBERG V. SUMMIT BANK, SUPERIOR CT. NJ (2002) -FRUITS OF THE CONTRACT APPROACH...........................12
COMMENT: REQUIREMENT & OUTPUT KS....................................................................................................14
LOCKE V. WARNER BROS., INC. (CA. CT. OF APP., 1997)..............................................................................14
DONAHUE V. FEDEX CORP., SUPERIOR COURT OF PA., 2000 -FIRE-AT-WILL EMPLOYEE CAN BE FIRED....................16
IMPLIED TERMS AND UCC.........................................................................................................................17
WARRANTIES (EXPRESS & IMPLIED).......................................................................................................18
CAVEAT EMPTOR="LET THE BUYER BEWARE".................................................................................................18
§ 2-313. EXPRESS WARRANTIES BY AFFIRMATION, PROMISE, DESCRIPTION, SAMPLE..........................................18
§ 2-314. IMPLIED WARRANTY: MERCHANTABILITY; USAGE OF TRADE..............................................................18
§ 2-315. IMPLIED WARRANTY: FITNESS FOR PARTICULAR PURPOSE.................................................................19
BAYLINER MARINE CORP. V. CROW, S. CT. OF VA. 1999- WARRANTIES (IMPLIED V. EXPRESS)..............................19
§ 2-316. EXCLUSION OR MODIFICATION OF WARRANTIES..............................................................................21
CHAPTER 7 - AVOIDANCE OF THE K - DURESS.................................................................................21

DURESS............................................................................................................................................21
TOTEM MARINE TUG & BARGE V ALYESKA PIPELINE CO (AK. 1978)................................................................21

UNDUE INFLUENCE..............................................................................................................................22
ODORIZZI V BLOOMFIELD SCHOOL DISTRICT CA CT OF APP 54, 1954..............................................................23
MISREPRESENTATION AND NON-DISCLOSURE...........................................................................................24
SYESTER V. BANTA (IOWA S. CT. 1965)......................................................................................................24
HILL V. JONES (AZ CT. OF APP., 1986).......................................................................................................26
FRAUD CONTINUED.............................................................................................................................28
PARK 100 INVESTORS V. KARTES, INDIANA CT. APP. 1995- FRAUD/MISREP....................................................28
WILLIAMS V. WALKER-THOMAS FURNITURE CO., FED (DC) CIRCUIT 1965...................................................29
HIGGINS V. SUPERIOR COURT (CAL. CT. APP. 2006).....................................................................................29
ADLER V. FRED LIND MANOR, S. CT. WASH. 2004.......................................................................................30
PUBLIC POLICY...................................................................................................................................33
PROBLEM 7-2.........................................................................................................................................33
VALLEY MEDICAL SPECIALISTS V. FARBER, AZ. S. CT. 1999............................................................................33
R.R. V. M.H., S. CT. MASS, 1998............................................................................................................34
PROBLEM 7-3 - NO NOTES........................................................................................................................35
PROBLEM 7-4.........................................................................................................................................35
CHAPTER 8 - JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE, CHANGED CIRCUMSTANCES,

AND K MODIFICATIONS..................................................................................................................36
CATEGORIES OF RXNS FOR NON-PERFORMANCE..............................................................................................36
MISTAKE...........................................................................................................................................36
LENAWEE CO. BOARD OF HEALTH V. MESSERLY (MICH. 1982) MUTUAL MISTAKE- "AS IS" CLAUSE..................36
WIL-FRED INC. V. METROPOLITAN SANITARY DISTRICT (ILL. APP. 1978) ......................................................37
CHANGED CIRCUMSTANCES: IMPOSSIBILITY, IMPRACTICABILITY, AND FRUSTRATION..........................................39
IMPRACTICABILITY (§261, §2-615)............................................................................................................39
KARL WENDT FARM EQUIPMENT V. INT'L HARVESTOR CO. (6TH CIR. 1991)- IMPRACTICABIITY.............................39
R. 2D 265 DISCHARGE BY SUPERVENING FRUSTRATION..................................................................................41
MEL FRANK TOOL & SUPPLY V. DI-CHEM CO. (IOWA S. CT. 1998).................................................................41
PROBLEM 8-1, P. 711..............................................................................................................................43
CONTRACT MODIFICATIONS - CNS/DURESS ISSUES...................................................................................44
ALASKA PACKER’S ASS’N V. DOMENICO (9TH CIR 1902)- CNS TO MODIFY K (COMMON LAW)- PRE-EXISTING DUTY..44
KELSEY-HAYES CO. V. GALTACO REDLAW CASTINGS CORP. (E.D. MICH 1990) - ECONOMIC DURESS- DO K
MODIFICATIONS REQUIRE NEW CNS?..........................................................................................................45
BROOKSIDE FARMS V. MAMA RIZZO'S, INC. - MUST K MODIFICATION BE IN WRITING? -NOM.............................47
CHAPTER 11- EXPECTATION DAMAGES: PRINCIPLES AND LIMITATIONS .........................................48

EXPECTATION DAMAGES OVERVIEW............................................................................................................48
ROESCH V. BRAY, OHIO 1988...................................................................................................................49
AMERICAN STANDARD, INC. V. SCHECTMAN, (N.Y. 1981). - COST OF COMPLETION............................................50
RESTRICTIONS ON RECOVERY OF EXPECTATION DAMAGES: FOS, CERTAINTY, AND CAUSATION...........................51
HADLEY V. BAXENDALE, COURT OF EXCHEQUER, ENG. (1854)........................................................................51
FLORAFAX INTERNATIONAL, INC. V. GTE MARKET RESOURCES, INC. (OKLA. 1997)- WHEN LOST PROFITS ARE
RECOVERABLE..........................................................................................................................................53
ROCKINGHAM COUNTY V. LUTEN BRIDGE CO., (4TH CIR. 1929) - P'S DUTY TO MITIGATE....................................53
HAVILL V. WOODSTOCK SOAPSTONE CO., INC. (VT, 2004)............................................................................53
JETZ SERVICE CO. V. SALINA PROPERTIES, KAN. 1993- LOSS VOLUME SELLERS....................................................55
PROB 11-1............................................................................................................................................55
CHAPTER 12: ALTERNATIVES TO EXPECTATION DAMAGES: RELIANCE & RESTITUTIONARY

DAMAGES, SPECIFIC PERFORMANCE, AND AGREED REMEDIES......................................................55
WARTZMAN V. HIGHTOWER (MD. APP. 1983)- RELIANCE DAMAGES (DEVELOPMENT COSTS)..............................56
WALSER V. TOYOTA MOTOR SALES (8TH CIR. 1994)- TAKEAWAY.....................................................................57
RESTITUTIONARY DAMAGES..................................................................................................................58
US V. ALGERNON BLAIR (4TH CIR. 1973)- RESTITUTION, QUANTUM MERUIT.....................................................59
VENTURA V. TITAN SPORTS, INC. (8TH CIR. 1995) - QUANTUM MERUIT/UNJUST ENRICHMENT & RESTITUTION......60
PROB. 12-1 CLASS NOTES.........................................................................................................................61
REIER BROADCASTING V. KRAMER (MONT. 2003) -SPECIFIC PERFORM.- ENFORCEMENT OF NEGATIVE COVENANT.....63
AGREED DAMAGES- LIQUIDATED DAMAGES CLAUSES..................................................................................64
WESTHAVEN ASSOC. V. C.C. OF MADISON (WISC. 2002)- LIQUIDATED/STIPULATED DAMAGES- FAILURE TO DO
BUSINESS PROVISION................................................................................................................................64
SEE PROBLEMS 12-2 AND 12-3 ON PAGE 1045............................................................................................66
CHAPTER 10: CONSEQUENCES OF NONPERFORMANCE: EXPRESS CONDITIONS, MATERIAL BREACH, AND ANTICIPATED
REPUDIATION.....................................................................................................................................66
EXPRESS CONDITIONS (CONSEQUENCES OF BREACH)......................................................................................66
OPPENHEIMER & CO. V. OPPENHEIM (NY 1995).........................................................................................66
ANTICIPATORY REPUDIATION (RETRACTION; RXNABLE UNCERTAINTY/ASSURANCES)........................................69
TRUMAN L. FLATT & SONS CO. V. SCHUPF (ILL. APP. 1995) - ANTICIPATORY REPUDIATION & RETRACTION.............69
HORNELL BREWING CO. V. SPRY (NY 1997) -ANTICIP. REPUD. & RXNABLE INSECURITY (DEMAND FOR ASSURANCE). .71
PROBLEM 10-2.......................................................................................................................................72
The Parol Evidence Rule

i) Only used where writing is intended to memorialize the agreement and must be adopted
by both parties; if not and integrated writing parol evidence does not apply
ii) Integrated refers to a writing that is intended to be a final and complete agreement
embraced in writing (partially integrated refers to a writing that is intended to be final
but not complete because it deals with some but not all aspects of the transactions
between the parties
iii) Merger clause - states that the writing is intended to be final and complete
Two Views -Corbin & Williston on Parol Evidence Rule

1. * Corbin - extrinsic evidence should then be admissible to aid in interpretation
2. * Williston – read the four corners of the document. Period.
R.2d § 209 Integrated Agreements

(1) An integrated agreement is a writing or writings constituting a final expression of
one or more terms of an agreement.
(2) Whether there is an integrated agreement is to be determined by the court as a

question preliminary to determination of a question of interpretation or to application
of the parol evidence rule.
(3) Where the parties reduce an agreement to a writing which in view of its
completeness and specificity reasonably appears to be a complete agreement, it is
taken to be an integrated agreement unless it is established by other evidence that the
writing did not constitute a final expression
R.2d § 210 Complexity and Partially Integrated Agreements
(1) A completely integrated agreement is an integrated agreement adopted by the
parties as complete and exclusive statement of the terms of the agreement
(2) a partially integrated agreement is an integrated agreement other than a
completely integrated agreement
(3) Whether an agreement is completely or partially integrated is to be determined by
the court as a question preliminary to the determination of a question of interpretation
or to application of the parol evidence rule
R.2d §211 Standardized Agreements
(1)Except as otherwise 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 of 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 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 assent
would not do so if he knew that the writing contained a particular term, the term is not
part of the agreement
*R.2d §213 Effect of Integrated Agreement on Prior Agreements *Parol Evidence Rule
(1) a binding integrated agreement discharges prior agreements to the extent that it is
inconsistent with them parole evidence cant be used to alter or replace written
agreements
(2) a binding completely integrated agreement discharges prior agreements to the
extent that they are within its scope
(3)An integrated agreement that is not binding or that is voidable and avoided does
not discharge a prior agreement. But an integrated agreement, even though not
binding, may be effective to render inoperative a term which would have been part of
the agreement if it had not been integrated
R.2d §214 Evidence of Prior or Contemporaneous Agreements and Negotiations
Agreements and negotiations prior to or contemporaneous with the adoption of a writing are
admissible in evidence to establish that the writing is or is not an integrated agreement that
the integrated agreement, if any, is completely or partially integrated the meaning or the
writing whether or not integrated illegality, fraud, duress, mistake, lack of consideration, or
other invalidating cause ground for granting or denying recission, reformation, specific
performance, or other remedy
R.2d §215 Contradiction of Integrated Terms

Except as stated in the preceding Section, where there is a binding agreement, either
completely or partially integrated, evidence of prior or contemporaneous agreements or
negotiations is not admissible in evidence to contradict the terms of the writing
R.2d §216 Consistent Additional Terms
(1) Evidence of a consistent additional term is admissible to supplement an integrated
agreement unless the court finds that the agreement was completely integrated
(2)An agreement is not completely integrated if the writing omits a consistent additional term
which is agreed to for separate consideration, or such a term as in the circumstances might
naturally be omitted from the writing
R.2d §217 Integrated Agreement Subject to Oral Requirement of a Condition
Where the parties to a written agreement agree orally that performance of the agreement is
subject to the occurrence of a stated condition, the agreement is not integrated with respect to
the oral condition
UCC 2-202 - Final Written Expression: Parol or Extrinsic Evidence
Terms with respect to which the confirmatory memoranda of the parties agree or which are
otherwise set forth in writing intended by the parties as a final expression of their agreement
with respect to such terms as are included therein may not be contradicted by evidence of any
prior agreement or of a contemporaneous oral agreement but may be explained or
supplemented by course of dealing or usage of trade or by course of performance by evidence
of consistent additional terms unless the court finds the writing to have been intended also as
a complete and exclusive statement of terms of the agreement
1. See attached table
2. Negative rule to keep evidence out
3. Expressed in case law
4. Qualification- May penalize people for being credible - the writing says one thing but
person assures you of something else
Exceptions - Parol Evidence Rule does not apply if
1. the evidence relates to something that comes after the writing was made; still may be
barriers to enforcement
2. evidence is offered to show that effectiveness of the agreement was subject to an oral
precedent (e.g. agent can not bind must check with principal before final approval)
parties have agreed contract will not have an effect until something else occurs
3. evidence to show the agreement is invalid for any reason such as fraud, duress, undue
influence, incapacity, mistake, death, or illegality
4. evidence offered to establish a right to an equitable remedy such as reformation of the
contract (e.g. typographical error for $100 instead of $10,000)
5. evidence to show a collateral agreement between the parties
6. fraud and duress can always be shown by the parol evidence rule
7. Under the classical approach to contract law the Parol Evidence Rule is interpreted
conservatively. Some modern courts continue to use the classical approach. In the
conservative approach introducing evidence to decide if the writing is fully integrated
is not embraced
8. Under the modern view the Parol Evidence Rule is interpreted more liberally and
hence has many exceptions. In this liberal approach, evidence is likely to be
admissible to determine if a writing is completely integrated
Thompson v. Libby, Minn. S. Ct., (1885) -Parole evidence- 4 corners rule- widely used approach-
logs case, evidence of warranty not permitted to alter agreement
A) Facts: Thompson (P) owned logs of poor quality marked ‘H. C. A.’ lying in the Mississippi river
and sold them to Libby (D). The agreement was a brief paragraph reciting the cost and markings
on the logs and provisions for payment. Libby refused to accept the logs and Thompson sued. D
claimed that P breached an oral warranty regarding the quality of the logs. At trial D presented
testimony to prove the warranty over P’s objection. Judgment was entered for D and P
appealed.
B) Claims: -Libby wants to show there was a warranty agreed upon even though it wasn't within
the actual K.
C) Issues: 1) Can parol contemporaneous evidence be used to contradict or vary the terms of a
valid written contract? 2) Under what conditions is the admission of parol evidence admissible?
1) in general: was the oral testimony (which would contradict the terms of the K) admissible
b/c there was a written K?
D) Answers & Rules: 1) No. Parol contemporaneous evidence is inadmissible to contradict or vary
the terms of a valid written contract. 2) To justify the admission of parol evidence, the evidence
must relate to a subject distinct from that to which the writing relates. If a writing contains on its
face a complete expression of the whole agreement, i.e. it includes terms sufficient to render it
legally binding, it is presumed that the parties have introduced into it every material item and
term, and parol evidence cannot be admitted to add additional terms to the agreement even if
that evidence relates to a matter not addressed in the contract. The rule does not apply
however where the writing is incomplete on its face and does not purport to contain the whole
agreement.
E) Holding: For P – new trial granted.
F) Rationales: The parol evidence rule is founded on the inconvenience and injustice that would
result if matters in writing, made with consideration and deliberation and intended to embody
the entire agreement of the parties, were subject to the uncertain testimony of slippery
memory. in this case there was nothing to indicate that the writing was informal and
incomplete. In a sale of personal property a warranty as to quality is an item and term of the
contract, and not a separate and independent collateral contract, and therefore cannot be
added to the written agreement by oral testimony.
G) Notes: Williston: 4-Corners Rule: the question of integration should be determined from the 4-
corners of the writing, without resorting to other evidence of the actual intent of the parties.
H) -collateral agreement: you can admit this evidence (if there is separate agreement, ex. a
separate agreement including a warranty) then that can come in (Ex. if you buy an iPod and
then buy apple care- you can admit evidence of apple care)--
I) in this case court finds that this was not a collateral agreement regarding or including the
warranty
Taylor v. State Farm

A) Bad faith case involving classic excess verdict
B) UM release at issue: trial; thus, parol evidence was admissible at trial
C) State Farm says unambiguous on four corners of document
Sherrod, Inc. v. Morrison-Knudsen Co., S. Ct. Montana (1991)

facts: P is a subcontractor of COP, the subcontractor for general contractor D/Morrison-
Knudsen. Plaintiff’s bid was based on a miscalculation. Allegedly, Plaintiff was told
that compensation for the additional work would be provided.
claims, more facts:
P/Sherrod claims: that D stated that the job would involve excavating 25,000 cubic
yards. P submitted a bid based on this information. COP and P entered into a written
contract based on the price in P's bid. P discovered that the job would involve more
than 25,000 cubic yards, but signed the contract anyway because work had already
been started and COP threatened not to compensate P for the work that had
already been performed. P claims COP stated that P would receive more than the K
price to compensate for the additional work.
COP claims to have only offered to assist Plaintiff with another claim.
*The contract included a provision that it could not be modified by a verbal
agreement.
issue: was evidence of verbal agreemnt properly excluded?
answer: Yes. Evidence of the verbal agreement was properly excluded
rule: Under the parol evidence rule, when an agreement is put into writing, evidence of
terms outside of the written document is barred except where there is a claim of
mistake or imperfection or the validity of the agreement is in question.
rationale: - recognizes there is an exception to the parol evidence for fraud. However,
determines that the exception does not apply under these facts b/c fraud directly
relates to the subject of the contract. Bc alleged fraud contradicts the terms of the
written K it is inadmissible under the parol evidence rule.
Dissent. concerned that parties with greater bargaining power will not be held accountable for
their fraud. expresses several reasons why it does not agree with the majority: 1)
that it rewards the fraudulent party creating injustice.
Nanakuli Paving & Rock Co. v. Shell Oil Co., 664 F.2d 772 (9th Cir. 1981).
A) Facts: Nanakuli Paving (P) entered into two long term contracts to purchase its requirements of
asphalt from Shell Oil (D). The contract was a fully integrated writing and gave the price term as
“Shell’s Posted Price at time of delivery.” For several years Shell Oil charged the same price for
the asphalt despite increasing the cost to other customers. D finally increased to cost to P and P
sued, claiming that under customary trade practice there was an implied requirement for D to
protect prices. P pointed to the routine use of price protection by asphalt suppliers. D claimed
that no such trade practice existed and that the price terms under the contract controlled. The
jury awarded $220,800 to P for D’s failure to price protect. The court set aside the verdict and
entered judgment notwithstanding the verdict for D and P appealed.
B) Issue: Under what circumstances can trade usage and course of performance be implied into
contracts?
C) Holding and Rule (Hoffman): Trade usage and course of performance will be implied into
contracts if there is evidence that it is not inconsistent with the terms of the contract, and they
are so prevalent that the parties would have intended to incorporate them.
1) The manner in which price protection was actually performed in Hawaii was that it only
occurred when prices increased, and only for work committed prior to those increases on
non-escalating contracts. The court’s decision was reinforced by the overwhelming nature of
the evidence that price protection was routinely practiced by all suppliers in the small Oahu
market and was therefore known to D, that it was a realistic necessity to operate in the
market and to get large government contracts. This evidence along with D’s past
performance were sufficient to allow the jury to find that those terms were incorporated
into the contract.
2) There is no clear statement in the UCC of just how many acts are necessary to constitute
course of performance. The court noted that in the only two times that D could have made a
decision related to this contract, D opted for price protection for P.
3) Evidence of usage is always admissible, although the express term controls in the event of
inconsistency, which is a jury question. Under the UCC custom can be used to contradict the
written agreement and usage may be used to qualify the agreement and modify express
terms although not to negate them entirely.
D) Disposition: Reversed.
E) Concurring (Kennedy): Our opinion should not be interpreted to permit juries to import price
protection or a similarly specific contract term from a concept of good faith that is not based on
well-established custom and usage or other objective standards of which the parties had clear
notice. Here, evidence of custom and usage regarding price protection in the asphalt paving
trade was not contradicted in major respects. This is a necessary predicate for interpreting the
contract based on the course of performance or for a finding based on good faith that the seller
was required to price protect.
Nanakuli Paving & Rock Co. v. Shell Oil Co. 1981 - Determining Obligations > Extrinsic Evidence
A) Parties:
1) Π – Asphalt co
2) ∆ - Supplier
B) Procedural History: Judge ruled JNOV for ∆ after jury found for π for $220800
C) Facts:
1) Long term requirements K existed between parties
2) ∆ had provided price protection during 2 previous price spikes per industry custom
3) K Ø mention price protection, but only express terms
D) Issue: Can a price protection custom be enforced if not included in written contract?
E) Holding: Yes. If course of performance and trade usage indicate price protection is understood
then it can be enforced even when not in the express terms.
F) Rules/Rationale:
1) Trade usage & actual performance favored by UCC
i) ∆ argues
(1) Trade usage should be just of Hawaii pavers, not entire industry
(2) Prior price protections were waivers, not course of performance
ii) Ø inconsistent w/ express price term to allow price protection upon closer inspection
iii) Hawaiian market had complete trust b/c biggest Ks were from govt that Ø allow price
increases to be passed through
(1) No K would have included clause
2) Scope of Trade Usage
i) No UCC cases, but 2 commentators
(1) Includes non-members of an industry when actually knew or the other party could
reasonably believe he knew of it
(2) Includes those who regularly deal w/ members of the relevant trade
ii) Applicable trade = asphaltic paving trade in Hawaii
iii) Price protection was universal w/ no prior exceptions
3) Waiver or course of performance
i) 1 act Ø count
ii) 2 acts unclear, but the only 2 possible occurance here
iii) Also ∆ rep acknowledged need to futher bargain for price protection and implied some
current existence
iv) UCC expresses preference for waiver over course of performance
(1) But only when acts are ambiguous
4) Express Terms
i) Course of dealings trumps trade usage
ii) Agreement is broader than written paper
iii) Modifications must be sufficiently definite and widespread to prevent unilateral post-
hoc revision
iv) This modification creates an exception rather than swallowing/negating a term
5) Good Faith
i) ∆ Ø have acted in good faith b/c no notice on increase in price
G) Holding: Reversed and reinstated jury judgment
H) Concurrence
1) This decision Ø give broad license to write in price protection except when custom
mandates
PROBLEM 5-1
- Parol evidence rule excludes evidence because:
o Merger clause
o Express terms
o Talks occurred contemporaneously
- Parol evidence rules does not apply and evidence should be admitted because:
o “Reserves right to adjust percentages” provision in the manual, which is
incorporated into the K
§ Adjust seems ambiguous—conversation said that the percent would only
go up, not down—it is a question of interpretation
§ Reasonably susceptible to the interpretation that percentages will only go
up and not down
o Falls under the “conditional” exception
o Also possibly try a promissory estoppel argument
o The fraud doesn’t relate to the subject of the K—it was inducement
o Why would they punish you for being successful?
Chapter 6 - Supplementing the Agreement: Implied Terms, the Obligation of

Good Faith, and Warranties
Implied Terms
"implied by law"= what we mean when we speak of implied terms- implied in law terms are terms
made part of the agreement by operation of the rules of law rather than by the agreement of the
parties themselves.
Wood v. Lucy Duff-Gordon, Cardozo- NY Ct. of App., 1917

- An implied promise (or a broadly defined) promise may be sufficient to constitute consideration.
A) Facts/Story: D =a 'creator of fashions.' She knew that dresses, other fashions would sell for more if she
put her name on them or endorsed them, so she employed P to help her "turn this vogue into money."
P/agent was to have the exclusive right, subject always to D's approval, to place D's endorsements on the
designs of others. P was also to have the exclusive right to place D's own designs on sale, or to license
others to market them. In return, D supposed to get 50% of 'all profits and revenues' derived from any
contracts P might make. The exclusive right was to last at least 1 yr. The exclusive contract required that
they split all profits from Wood’s sales evenly but there was no express clause that stated that he would
perform.
B) P claims: he kept K on his part, but D broke it by placing her endorsement on fabrics, dresses, and
millinery without his knowledge, and withheld the profits. The acceptance of an exclusive agency created
by an agreement is an assumption of its duties, and a promise by the agent to undertake and perform the
terms of the K may be implied even though it is not expressed in such agreement.
C) D’s Argument: The agreement for employment lacks the element of consideration, as the P is not bound
to anything. (AKA it was an illusory promise)
D) Issue:
i) May a promise to use reasonable efforts be implied from the entire circumstances of a K?
ii) Can an implied promise to use best efforts be considered valuable consideration?
iii) Can the duty of good faith compensate for vagueness in an agreement to avoid invalidation of a
K clearly intended by the parties?.
E) answers: Yes to all. for P/appellant.
F) Procedure: Appeal from S Ct, App Div by P. Appellate Division reversed an order denying D's motion for
judgment on the pleading, and dismissed the complaint.
G) Rules: A promise may be lacking, and yet the whole writing may be 'instinct with an obligation,'
imperfectly expressed. If that is so, there is a contract. A K may lack an explicit promise in order to further
its goals or to further general business efficacy. -In determining the intention of the parties the promise
has a value. It helps to enforce the conclusion that the plaintiff had some duties.
H) Rationales: The implication of a promise here finds support in fact that: 1) D gave an exclusive privilege.
2) P possessed a business he adapted to the placing of endorsements as D has approved. *3) Unless P
gave his efforts, neither he nor D could ever profit. Without an implied promise, the transaction cannot
have such business efficacy, as both parties must have intended that at all events it should have].
i) -Ps promise to pay D one-half of the profits and revenues resulting from the exclusive agency and
to render accounts monthly was a promise to use reasonable efforts to bring profits and
revenues into existence.
I) Notes: This case is an example of the court imposing a duty of good faith on a party to perform an implied
promise. Cardozo dispensed with formalism to enforce a promise that was implied when viewed in the
context of numerous aspects of the agreement.
i) 2) courts continue to follow Wood ideology- UCC 2-306(2) imposes a "best efforts" obligation
in cases where the K for sale calls for "Exclusive dealing"
Notes After Leibel v. Raynor (p. 445)

(1) Gap-filling provisions art 2 UCC.
(a) rationale: gap-fillers may be made on basis that they are fair or just. or economically
efficient.--> makes process less timely if certain terms need not be bargained out. also
allows them to avoid bargaining over situations not likely to occur b/ if off chance they do
occur, UCC will settle it.
(b) SOME UCC "implied-in-law" obligations are mandatory and implied even if parties agree
otherwise
(c) but most often not mandatory and treated as gap-fillers. examples
(i) 2-308 = place of delivery
(ii) 2-310= time of pmt
(iii) 2-509= risk of loss
(iv) 2-513= buyer's right of inspection
(2) implied terms as default rules: implied terms that reflect a "hypothetical bargain"= agrmnt of
parties probably would’ve been made if they bargained over the issue.
(a) when applied?-- some argue should be premised on repeated or long-term
relationships/transactions between parties (relational theory). others argue should be
some form of consent/assent to the implied terms (consent theory).
(3) Enforcing distributorship agrmnts: when agrmnt failed to impose def. obligations on dealer or
was of indefinite duration- at CL could be held unenforceable for lack of CNS or mutuality of
obligation.
(a) today: distributorship agrmnts usually fall w/in scope of UCC and specifically
Art. 2 as transactions in goods
(i) so implied obligations in UCC 2-306 and 2-309 should eliminate most
problems for lack of CNS or mutuality
(ii) still distribution agreements subject to termination at-will upon rxnable
notice
(4) what counts as reasonable notice? (for termination of distrib agreement)
i) determination of rxnbleness may be affected by terms in parties present and prior
agreements and industry stds
(5) effect of express termination?
(a) most modern commercial Ks will specify events of termination
Implied Obligation of Good Faith

1. -issue: when one party to a K claimed to be acting in ways either expressly permitted or at
least not forbidden by Ks terms, but other party claims that conduct was improper and
actionable.
2. -resolution: courts often employ "good faith" to aid decision-
B. -UCC revised 1-304 (formerly 1-203) saus "every K or duty" within its scope
"imposes an obligation of good faith on its performance or enforcement"
1. "good faith"= "honesty in fact and the observations of reasonable
commercial standards of fair dealing"
C. -R.2d §205 - extends "duty of good faith and fair dealing" to every K
1. some states don't use "Good faith" but rather "honesty in fact"
form of bad faith conduct meaning of good faith
1. seller conceals defect disclose all material facts
2. builder willfully fails to perform in full but substantially substantial perf. w/o deviating
performs from specifications
3. contractor openly abusing bargaining power to coerce refraining from abusing power
increasing K price
4. hiring broker/deliberately preventing his consummation of deal acting cooperatively
5. conscious lack of diligence in mitigating other party’s damages acting diligently
6. arbitrarily and capriciously exercising power to terminate a K acting with some reason
7. adopting overarching interpretation of K interpreting K language fairly
8. harassing other party for repeated assurances of performance adopting adequate assurances
3. "fruits of the K" approach= in every K there is implied covenant that neither party shall do
anything to have effect of destroying/injuring right of other party to receive benefits/fruits
of the K (implied obligation of good faith and fair dealing)
B. bad faith- one party attempts to recapture forgone opportunities
4. "reasonable expectations approach"= good faith should protect rxnable expectations
5. "new textualist approach"= gives near absolute priority to express terms and renders
implied futy of good faith irrelevant in many situations
6. ALL AGREE= good faith conduct means not undermining the spirit of the K
Seidenberg v. Summit Bank, Superior Ct. NJ (2002) -fruits of the contract approach
A) Facts/Story: in 1997 Seidenberg and another P sold their insurance brokerage business to
Summit Bank (D) in exchange for 445,000 shares of stock in D's parent corporation. Ps placed
shares in escrow until 2010 to take care of remaining liabilities and agreed to work for Summit
as executives of brokerage firms. The employment agreements acknowledged the joint
obligation to work together, and provided that Ps and D would formulate a joint marketing
program to provide the brokerage firm with access to D’s marketing resources. Said Ps would
take lower salaries but would increase with sales- also said minimum of 5 yr employment and
employed til age 70 unless terminated. Ps didn't get salary increases and D later terminated Ps
in 1999.
B) P's claims: breach of contract, contending that D had failed to honor its obligations regarding
joint marketing, thereby impacting negatively Ps’ expected compensation and future
involvement. Ps claimed that their allegations gave rise to an inference of bad faith and that D
had never been committed to developing the business with Ps, and that D had merely sought to
acquire Ps’ business to operate it themselves.
C) Procedure: All claims except Ps‘ claim of a breach of the implied covenant of good faith and fair
dealing were settled. trial court dismissed remaining claim, holding that the sellers sought to
use parol evidence to prove an oral agreement made beyond the four corners of the written
contract. Also found that Ps were sophisticated enough in business to get the assurances put in
writing. Ps appealed.
D) Issues:
1) Must a court allow parol evidence in determining whether a breach of the covenant of good
faith has occurred?
2) Is a claim under the implied warranty of good faith and fair dealing negated merely because
the claimant had equal bargaining power, had engaged counsel, or was not financially
vulnerable when negotiating the agreement?
E) Answers:
1) Yes.
2) No.
F) RULES:
1) -bargaining power, engaging a lawyer, and financial vulnerability are factors that trier of fact
may consider in weighing the sufficiency of plaintiffs’ claim but they are not the only factors.
2) The covenant of good faith and fair dealing is contained in all contracts and mandates that
neither party do anything which will have the effect of destroying or injuring the right of the
other party to receive the fruits of the contract.
i) -There are limits and the implied covenant of good faith and fair dealing cannot override
an express ,, term in a contract. The implied covenant can require that a contracting
party act in good faith when exercising discretion in performing its contractual
obligations. It may occur that a party will be found to have breached the implied
covenant even if the action complained of does not violate a pertinent express term.
3) test: To determine what is considered a good faith performance, the court must consider
the expectations of the parties and the purposes for which the contract was made.
4) Good faith has three uses:
(1) permits inclusion of terms and conditions not in written contract.
2) Allows for redress of bad faith even if no express term breached
3) permits inquiry into a party's exercise of discretion expressly granted by a
contract's terms.
note: can't override express terms in K w/ good faith
5) parol evidence rule prohibits the introduction of oral promises which tend to alter or vary
an integrated written instrument. A parol agreement which contradicts the express words of
a written contract necessarily is ineffectual and evidence of it inadmissible.
i) -Parol evidence may be admitted in order to provide understanding of the parties’
intentions.
ii) -The parol evidence rule does not come into play until the true intentions of the parties
is determined.
iii) -The rule cannot inhibit the application of the implied covenant of good faith and fair
dealing because that covenant is contained in all contracts made by operation of law.
G) Rationale: In this case Ps do not seek to contradict or alter any express term in their written
contract, but rather question D’s good faith in both its performance and termination of the
contract.
1) It would be difficult, if not impossible, to make that determination without considering
evidence outside the written contract. Therefore, in determining whether a breach of the
covenant has occurred, a court must allow for parol evidence.
2) Ps‘ allegations of bad faith and ill motives are sufficient to survive dismissal.
H) Holding: Reversed and remanded
I) Notes:
i) -Mathis case= intent may matter more than reasonability of conduct (re. standards of
industry) in open price terms K dispute. UCC revised 1-201(b)(20) recognizes obligations
of both subjective honesty in fact and objectively reasonable behavior (courts seemingly
think it should be in that order of importance)
ii) -lender liability= usually cases involving interaction between express terms and
proposed limits derived from implied oblig of good faith,- generally involve an express
grant of authority to lender to terminate credit or demand prompt repayment weighed
against claim by debtor that lender must exercise the discretion in good faith.
Comment: Requirement & Output Ks

a. both- Establish maximum and minimum quantities of goods to be refused or produced.
b. *requirement Ks: buyer's agreement to buy exclusively from seller.
c. criticisms early on: held invalid initially as lacking CNS or mutuality, or being to indefinite or
vague to enforce
d. Prof Corbin: CNS exists b.c of commitment by buyer to either buy from that seller, or not
buy at all R.2d §77
e. UCC even today seems to require that these output Ks be made exclusive so that Corbin's
premise above applies and thus it is not an illusory promise or sham CNS
a. sometimes courts will find implied promise of exclusivity
f. Where contractual limitations are not expressed, UCC 2-306(1) which sets a “good faith”
standard on minimums and maximums except where limited or exceeded based on prior
trade.
a. reduction in buyer's demand usually deemed in good faith IF resulting directly from
reasons/forces beyond buyer's control
g. *output Ks: agreements to sell exclusively to a buyer all the goods that the seller may
product
h. Feld v. Henry S. Levy & Sons, Inc. (1975): contract for purchase of bread crumbs was
breeched when D shut down his bread crumb oven and relied on contract language stating
“all produced” to terminate contract. Court held that this was not in” good faith”.
Locke v. Warner bros., Inc. (CA. Ct. of App., 1997)

A) Facts/Story: P Sandra Locke had been in relationship (1975-1989) w Clint Eastwood after acting
with him. P appellant was given a "pay or play" directing deal. Eastwood secretly told Warner
Bros. it would reimburse them her salary "pay" fee if they agreed not to develop her work. D
paid the compensation of $1.5 million under the agreement and gave her an office on the studio
lot and an administrative assistant BUT did not develop any of Locke's proposed projects or hire
her to direct any films.
1) Eastwood secured development deal for her w/ Warner in exchange for her dropping her
case against him. Contemporaneously w. Locke/Eastwood settlement agreement, Locke
entered into a written agreement with Warner, Nov 27, 1990. Agreement had two basic
components: 1) Locke would receive $250,000 per year for 3 yrs for a “non-exclusive first
look deal.” It required Locke to submit to Warner any picture she was interested in
developing before submitting it to any other studio. Warner then had 30 days either to
approve or reject a submission. 2) a $750,000 “pay or play” directing deal. The provision is
called “pay or play” because it gives the studio a choice: it can either “play” the director by
using the director's services, or pay the director his or her fee.
2) Unbeknownst to P at time, Eastwood had agreed to reimburse Warner for the cost of her K
if she did not succeed in getting projects produced and developed. Early in the second year
of the 3-yr K, Warner charged $975,000 to an Eastwood film, “Unforgiven.”
B) P's claims: development deal was a sham, that D never intended to make any films with her, and
that D's sole motivation in entering into the agreement was to assist Eastwood in settling his
litigation with Locke. Testimony that D's officials told ppl they wouldn't make movie with P.
C) D's arguments: had similar deals with others at same time that had similar lack of success, -odds
are slim a producer can get a project into development and even slimmer director will be hired
to direct film. industry standards gave it a right to reject scripts/proposals outright
D) Procedure: P appeals a judgment following trial ct. grant of summary judgment for D. Rationale
for trial court decision: not place for court- court should not substitute its judgment for studio's
creative decisions/judgment. “Warner had no obligation either to put into development any of
the projects submitted to the studio for its consideration… The implied covenant of good faith
and fair dealing cannot be imposed to create a contract different from the one the parties
negotiated for themselves… Warner had the option to pass on each project Locke submitted
andwas not required to have a good faith or ‘fair’ basis for declining to exercise its right to
develop her material. Such a requirement would be improper and unworkable.
E) Issue: Did D breached its contract with P by failing to evaluate her proposals on their merits?
F) Answer: There is sufficient fact to conclude that D may have acted in bad faith by categorically
rejecting P’s work and refusing to work with her. Part of her agreement was that they would
accept her proposals and consider them (their good faith CNS could be implied)- if they only
intended to pay her, they shouldn't have made the pay or play agreement. trial court erred in
failing to distinguish b/w D's right to make subjective creative decision (not reviewable for
reasonableness) and the requirement the dissatisfaction be bona fide or genuine.
G) holding: REVERSED, FOR P
H) Rules: In every K there is an implied covenant that neither party shall do anything having the
effect of destroying or injuring the right of the other party to receive the frutis of the contract.
-Defining good faith: In contracts providing for one party’s discretion based on a judgment on
the other party or its work, such judgment must be genuine in order to be performed in good
faith
i) -implied covenant of good faith and fair dealing is limited to assuring compliance with
the express terms of the K and cannot be extended to create obligations not
contemplated in the k
ii) -If Ds had been given right to do what they did by express terms of K, there could be no
breach
iii) -Fraudulent intent may be inferred from such circumstances as defendant's failure even
to attempt performance of contract.
iv) -When it is a condition of obligor's contractual duty that he or she be subjectively
satisfied with respect to obligee's performance, subjective standard of honest
satisfaction is applicable.
v) -Where contract involves matters of fancy, taste, or judgment, promisor is the sole
judge of his satisfaction; if he asserts in good faith that he is not satisfied, there can be
no inquiry into reasonableness of his attitude.
I) Rationales: Fact questions existed regarding whether movie studio violated implied covenant of
good faith and fair dealing and breached its film development contract with prospective director
by categorically refusing to work with her, irrespective of the merits of her proposals, thus
precluding summary judgment in favor of studio in prospective director's action for breach of
contract. P had testimony from two witnesses each saying that D never planned to make a
movie with P. Merely because D paid P the guaranteed compensation under the K does not
establish good faith by D. If D acted in bad faith and categorically rejecting all P’s work and
refused to work with her, irrespective of the merits of her work, such conduct is not beyond the
reach of the law.
J) NOTES- R.2d §205:Every contract imposes upon each party a duty of good faith and fair dealing
in its performance and its enforcement.
Donahue v. FedEx Corp., Superior Court of PA., 2000 -fire-at-will employee can be fired
A) Facts/Story: Donahue(P) was a permanent FedEx employee from Nov. 1979 -Jan. 1997. He was a
“whistleblower” --questioned numerous invoices which did not comport with repair orders in his
dept. He also called FedEx's attention to other improprieties, such as FedEx's failure to pay
invoices and Marshall, his boss's, practice of directing auto body work to a Cleveland auto body
shop owned by a person with whom Marshall vacationed. He also said they told him to falsify
documents, etc. Marshall accused Donahue of gross misconduct, specifically that Donahue
made a racial remark in front of another FedEx employee, and was accused of making
derogatory remarks about Marshall to vendors and others. FedEx has a Guaranteed Fair
Treatment Procedure ("GFTP") for employee grievances.
B) P claims: 1) employer had violated the “duty of good faith and fair dealing” which is implied into
all contracts under Pennsylvania law by terminating him in contravention of GFTP and making
sham review of his conduct under GFTP. 2) D violated public policy in firing him based on Penn.
Human relations act. 3) his superior performance at work was sufficient CNS to make him more
than a fire-at-will employee. 4) D violated pub policy by alleging complaints against him in
retaliation, he says.
1) because his employer had a written policy containing a “fair treatment procedure for
employee grievances”, the employer had assumed contractual duties to the employee to
hear his grievances fairly and in good faith
C) Issue: Did the employer breach the implied duty of good faith and fair dealing and did the
grievance procedure impose any separate contractual duties?
D) Answer: No.
E) rationale: P cannot maintain an action for breach of the implied duty of good faith and fair
dealing, insofar as the underlying claim is for termination of an at-will employment relationship.
The GFTP expressly states that "the policies and procedures set forth by the Company provide
guidelines for management and other employees during employment but do not create
contractual rights regarding termination or otherwise."
1) rejects the argument that P furnished sufficient additional consideration to overcome the
presumption that he is an at-will employee simply b/c he alleged that he gave superior work
performance.
2) Somers differed bc in that the P recovered specifically for breach of implied duties
connected to the profit sharing provision- not for the termination per se. (employer
breached duty of good faith by withholding from P compensation that appeared to have
already been earned before termination)
3) Baker- a narrow holding- actually went for D in the end but held that college was
contractually obligated to render sincere and substantial performance of prof's duties by
which he would be evaluated- this was only time this court ever had applied duty of good
faith and fair dealings applies to termination of at-will employment relationship**
4) public policy: Donahue could not prove that Federal Express had violated any statutory law
or public policy, although the conduct might under some circumstances be considered
unscrupulous.
i) -public policy in Pennsylvania favors employers being able to freely discharge their at-
will employees, unless a positive statutory law or other public policy of the
Commonwealth is violated.
ii) **court has routinely rejected claim that it violates pub policy for private employers to
be allowed legally to fire employees for whistleblowing
F) rules: In an at-will employment relationship, the duty of good faith and fair dealing applies to
those contractual terms that exist beyond the at-will employment relationship.
1) When the employee was under no legal duty to report the acts at issue, a private
employer cannot violate public policy by firing an employee for whistle-blowing.
2) -Superior performance is not good enough to be classed differently than an at-will employee
because that is what is expected.- additional CNS exists when an employee affords his
employer a substantial benefit other than the services which the employee is hired to
perform
3) A cause of action for wrongful discharge will only exist where the termination of an at-will
employment relationship is in violation of public policy. e.g. require an employee to commit
a crime, cannot prevent an employee from complying with a statutory duty, and cannot
discharge an employee when a statute specifically prohibits the discharge.
G) procedure: trial court allowed demurrer for D
H) holding; affirmed
I) notes:
1) if the K establishes legally cognizable duration of employment, it can be found not at-will,
but the presumption unless otherwise stated (in the US) is that employees are at will. -
promises of permanent employment often found unenforceable
2) Majority of Js ALLOW public policy exception to at-will doctrine- IF a "Clear mandate" of
public policy founded on constitutional, legislative, admin, or established judicial authority
can be identified. e.g. if fired b/c refused to commit perjury-
3) minority (NY, Ala.) REJECT public policy exception:
4) role of additional cns is to show parties' intent to have relationship beyond at-will K
5) employee handbook: employers can create a duty of good faith on themselves (re: at will
employees) if they put it in their handbook that they wont fire except for good cause- but
NOT ALL courts agree that statements in manuals re: job security are contractually binding
6) promissory estoppel: detrimental reliance of discharged employee may serve as basis for
relief (Ex. employee moved for company to take new post and they fired her after she
moved)- but some courts hold that at will nature of employment makes it unreasonable to
substantially rely on idea that you'll remain employed
Implied Terms and UCC

A) Implied Terms:
1) A contract providing exclusivity of agency implies in fact an obligation on the party receiving
the rights of agency to give his best efforts to perform. This consideration makes the
contract binding, and the other party forfeits agency. (Wood v. Lucy, Lady Duff-Gordon)
B) UCC:
i) Terms not specified in contracts for sale of goods might be filled-in by the UCC
ii) (Leibel v. Raynor Manufacturing Co.)
(a) When termination is not provided for, the UCC permits termination so long as
reasonable notice is given. (Leibel v. Raynor Manufacturing Co. / UCC § 2-309)
Warranties (Express & Implied)

caveat emptor="let the buyer beware"
  17th c. developed concept- seller has no responsibility for quality of product sold unless a
warranty given
o Chandelor= held for D b/c "bare [oral] affirmation that it was a bezar stone without
warranting that it was is no cause of action"
o end of 19th century- gradually reversed rule of caveat emptor- imposed "implied
warranties" by law/statute- not based on agreement b/w parties
 An EXPRESS WARRANTY exists for a product if written or verbal word from the seller
indicates a specific promise regarding the product. (Bayliner Marine Corp. v. Crow / UCC § 2-
313)
§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample.

(1) Express warranties by the seller are created as follows:
 (a) Any affirmation of fact or promise made by the seller to the buyer which relates to the
goods and becomes part of the basis of the bargain creates an express warranty that the
goods shall conform to the affirmation or promise.
 (b) Any description of the goods which is made part of the basis of the bargain creates an
express warranty that the goods shall conform to the description.
 (c) Any sample or model which is made part of the basis of the bargain creates an express
warranty that the whole of the goods shall conform to the sample or model.
(2) It is not necessary to the creation of an express warranty that the seller use formal words such as
"warrant" or "guarantee" or that he have a specific intention to make a warranty, but an affirmation
merely of the value of the goods or a statement purporting to be merely the seller's opinion or
commendation of the goods does not create a warranty.
 An IMPLIED WARRANTY of merchantability exists for a product if consumers have a

standard of expectation regarding the product’s performance (Bayliner Marine Corp. v.
Crow / UCC § 2-314)
o implied warranties often made in non-UCC transactions
 ex. warranty of habitability in leases of dwellings
 most states now recognize implied warranties of habitability
 Uniform Residential Landlord Tenant Act (p 499)
§ 2-314. Implied Warranty: Merchantability; Usage of Trade.

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is
implied in a contract for their sale if the seller is a merchant with respect to goods of that kind.
Under this section the serving for value of food or drink to be consumed either on the premises or
elsewhere is a sale.
(2) Goods to be merchantable must be at least such as
 (a) pass without objection in the trade under the contract description; and
 (b) in the case of fungible goods, are of fair average quality within the description; and
 (c) are fit for the ordinary purposes for which such goods are used; and
 (d) run, within the variations permitted by the agreement, of even kind, quality and quantity
within each unit and among all units involved; and
 (e) are adequately contained, packaged, and labeled as the agreement may require; and
 (f) conform to the promise or affirmations of fact made on the container or label if any.
(3) Unless excluded or modified (Section 2-316) other implied warranties may arise from course of
dealing or usage of trade.
 Am IMPLIED WARRANTY OF FITNESS for a particular purpose exists if the buyer expressed
an intention to the seller before purchase, or the seller otherwise knew of the buyer’s
intended purpose for the product
o (Bayliner Marine Corp. v. Crow / UCC § 2-315)
§ 2-315. Implied Warranty: Fitness for Particular Purpose.

Where the seller at the time of contracting has reason to know any particular purpose for which the
goods are required and that the buyer is relying on the seller's skill or judgment to select or furnish
suitable goods, there is unless excluded or modified under the next section an implied warranty that
the goods shall be fit for such purpose.
Bayliner Marine Corp. v. Crow, S. Ct. of VA. 1999- warranties (implied v. express)
A) Facts
i) In the summer of 1989, John R. Crow was invited by John Atherton, then a sales
representative for Tidewater Yacht Agency, Inc. (Tidewater), to ride on a new model
sport fishing boat known as a 3486 Trophy Convertible, manufactured by Bayline Marine
Corp. Crow piloted the boat for a short period of time, but was not able to determine its
speed. Crow asked Atherton about the maximum speed and Atherton explained that he
had no personal experience with the boat or information concerning the boat's
performance. Atherton gave Crow copies of the "prop matrixes," which listed the
maximum speed for each model. The 3486 Trophy Convertible was listed as having a
maximum speed of 30 miles per hour when equipped with a size "20x20" or "2019"
propeller. The boat Crow purchased did not have either size propeller but, instead, had
a size "20x17" propeller. At the bottom of one of the "prop matrixes" was a disclaimer
stating that the data was for comparative purposes only. In August 1989, Crow entered
into a written contract for the purchase of the 3486 Trophy Convertible in which he had
ridden for $120,000. When Crow took delivery of the boat, he noticed that the boat's
speed measuring equipment, indicated that the boat's maximum speed was 13 mph.
Crow immediately returned to Tidewater to report the problem. In 1992,
B) P's claims:
i) Crow filed a motion for judgment alleging breach of express warranties and implied
warranties of merchantability and fitness for a particular purpose.
(a) -prop matrixes= express warrantee that boat can travel 30mph max.
C) Issue
i) Whether there was sufficient evidence that the boat manufacturer breached an express
warranty and implied warranties of merchantability and fitness for a particular purpose.
D) Answer/Holding
i) No. There was not enough evidence of breach.
2) Rationale
i) no breach of express warranty. = The statements in the "prop matrixes" provided by
Bayliner did not relate to the particular boat purchased by Crow, or to one having
substantially similar characteristics.
(a) -compares this case w/ Daughtrey - statements made by seller were about
specific piece of jewelry sold
(b) -By their plain terms, the figures stated in the "prop matrixes" referred to a
boat with different sized propellers that carried equipment weighing
substantially less than the equipment on Crow's boat.
(c) -brochure statement was not express warranty- -A statement purporting to be
merely the seller's opinion or commendation of the goods does not create a
warranty.
ii) no breach of implied warranty of merchantability= no evidence addressing the
standard of merchantability in the trade or whether Crow's boat failed to meet that
standard.
(a) -no evidence that it wasn't fit to be an offshore fishing boat just b/c it couldn't
travel 30mph
iii) no breach of an implied warranty for a particular purpose= Crow did not prove that he
made known to the seller the particular purpose for which the boat was required.
(a) -boat engines were used for 850 hours without any problems
(b) -implied warranty of fitness is question of fact
E) Rules
1) Express warranties are created by an affirmative promise which becomes part of the basis of
the bargain. -- whether affirmation of fact by seller = express warranty is a question of fact
2) To be merchantable, the goods must be such as would pass without objection in the trade
and as are fit for the ordinary purposes for which such goods are used.
3) To establish an implied warranty of fitness for a particular purpose, the buyer must prove as
a threshold matter that he made known to the seller the particular purpose for which the
goods were required.
F) Procedure
i) -Trial court = for P- on breach of express and implied warranties of merch. and fitness
for particular award: 135K damages plus prejudgment interest
G) Notes:
1) UCC ways to create express warranty= making representation about goods, giving
description, or displaying sample or model
i) pre-code law required buyer to prove reliance
ii) unclear whether reliance required under UCC (See 2-313)
(1) some courts (Ct. App. Cal- Keith case) believe cmnt 3 to 2-313 does not require
reliance
2) implied warranty of merch= involved in vast spectrum of cases- from purchase of epensive
equip. to purchase of hamburger
3) elements required for implied warranty of fitness for particular purpose= 1) liability not
limited to merchant sellers; 2) warranty created only when buyer relies on seller's
skill/judgment to select suitable goods for buyer. and 3) seller has rxn to know buyer relied
4) disclaimers of express warranties= see 2-316 below. may be created orally or by one of
several writings- existence of disclaimer may turn on parol evidence
i) some courts allow parol evidence, others don't
5) disclaimers and implied warranties= see UCC 2-316(2) and (3)- "language must mention
merchantability and in the case of writing must be conspicuous"
i) disclaiming language for fitness warranty= must be in writing (unlike merchantability
warr.) but can be less specific than that for warranty of merchantability
§ 2-316. Exclusion or Modification of Warranties.

(1) Words or conduct relevant to the creation of an express warranty and words or conduct tending
to negate or limit warranty shall be construed wherever reasonable as consistent with each other;
but subject to the provisions of this Article on parol or extrinsic evidence (Section 2-202) negation or
limitation is inoperative to the extent that such construction is unreasonable.
(2) Subject to subsection (3), to exclude or modify the implied warranty of merchantability or any
part of it the language must mention merchantability and in case of a writing must be conspicuous,
and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and
conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states, for
example, that "There are no warranties which extend beyond the description on the face hereof."
(3) Notwithstanding subsection (2)
 (a) unless the circumstances indicate otherwise, all implied warranties are excluded by
expressions like "as is", "with all faults" or other language which in common understanding
calls the buyer's attention to the exclusion of warranties and makes plain that there is no
implied warranty; and
 (b) when the buyer before entering into the contract has examined the goods or the sample
or model as fully as he desired or has refused to examine the goods there is no implied
warranty with regard to defects which an examination ought in the circumstances to have
revealed to him; and
 (c) an implied warranty can also be excluded or modified by course of dealing or course of
performance or usage of trade.
(4) Remedies for breach of warranty can be limited in accordance with the provisions of this
Article on liquidation or limitation of damages and on contractual modification of remedy
(Sections 2-718 and 2-719).
Chapter 7 - Avoidance of the K - Duress

Duress
A contract is voidable if the plaintiff can prove distress by demonstrating 1) that it involuntary
accepted the terms of another party, 2) circumstances permitted no alternative, and 3) such
circumstances were the result of coercive acts of the other party (meaning that duress must result
from defendant’s actions and not just by plaintiff’s necessities)
(Totem marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.)
In most jurisdictions, economic conditions exacerbated by defendant and threatening to bankrupt the
plaintiff qualifies as duress (Totem Marine Tug & Barge, Inc. v. Alyeska Pipeline Service Co.)
Totem Marine Tug & Barge v Alyeska Pipeline Co (AK. 1978)

A) Facts: P, Totem, entered into a K w/ D, Alyeska, to transport pipeline construction materials from TX to
AK. P chartered a barge and a tug to accomplish this.
1) Upon arrival P discovered that D had mislead P about the volume of material.
2) In waiting for assurances and an amendment to the K, P’s second tug was delayed getting through
Panama Canal, the transport dealt w/ a hurricane,
3) and then D unloaded the materials at Long Beach w/o P’s consent which nullified P's insurance.
4) D terminated the K w/o providing a reason and stated payment would be in either 1 day or w/i 6-
8 mos.
5) Totem received a settlement and signed a release for $97,500 when the debt amt was btwn $260K
and $300K.
B) Ps Argument: D deliberately w/h payment knowing that P had no choice but to accept an inadequate sum
in settlement of that debt, thus b/c of necessity P involuntarily accepted an inadequate settlement and
executed a release.
C) D’s Argument: Totem/P, via V.P. Stair, executed a release when P was represented by counsel at the
negotiating settlement conference, fully aware of the legal consequences.
D) Procedure: Sup Ct granted Summary DF; Pl appealed; S. Ct of AK Reversed and remanded
E) Issue: Did any genuine issues of material fact exist relating to whether there had been economic duress
which would permit avoidance of the release precluded summary judgment for defendants?
F) Answer: Yes
G) Rationale:
1) As a matter of law, and upon exam of the materials presented in opposition to Df’ M 4 Summary, P
has made a sufficient showing as to each of the elements of economic D to w/stand motion for sum. J-
but he does need to show more at trial to prove his claim
2) One essential element of economic duress is that the P show that the other party, by wrongful acts or
threats, intentionally caused him to involuntarily enter into a particular transaction.
3) In many cases a threat to breach K, or w/h payment of debt = wrongful act.
4) Some cts require bad faith accompany the wrongful act.
5) Economic D does not exist merely b/c a person has been the victim of a wrongful act, in addition the
victim must have no reasonable alternative choice but to agree to the other party’s terms, or that he had
no adequate remedy if the threat were to be carried out.
6) An available alternative or remedy may not be adequate where the delay involved in pursuing the
remedy would cause immediate and irreparable loss to one’s economic or business interest.
H) Rule:
I) Duress= used to require P to show agreement was entered into for fear of loss of life or limb,
mayhem, or imprisonment. NOW requires only that person of be coerced, need NOT be
(a) economic duress 3 basic elements=
J) one party involuntarily accepted terms of another.
K) circumstances permitted no other alternative.
L) such circumstances were result of coercive acts of other party
(a) additional elements:
1. -this court and Cmnt C to Rest. §175 require: improper threat must induce
making of the K - must "substantially contribute" to manifestation of
assent --subjective std. to determine this
2. -must be causal link between economic hardship and the coercion
(b) econ. duress policies= freedom of K is important, desirability of private resolutions
to be final, but also need to balance fairness- law's role in correcting
disproportionate bargaining power in coercive circumstances
M) notes:
1) void v. voidable Ks: Ks made under econ. duress are deemed voidable rather than void- so they are
binding unless disaffirmed and may be expressly or implicitly ratified by purported victim
2) improper threats= while threats to sue or to refuse to honor a K obligation are not per se improper,
they may be improper if were made in "bad faith"
Undue Influence
i) Defining coercive / threatening acts
(a) In some jurisdictions, the coercive acts committed by defendant must be
unlawful (Odorizzi v. Bloomfield School District / following Restatement
2nd ž 176 (1)(a))
(b) For other actions that would make a threat improper, see Restatement 2 nd ž 176
ii) Undue Influence:
iii) A contract is voidable if the plaintiff can prove undue influence by demonstrating 1) susceptibility
and 2) oppressive persuasion, which is characterized by unusual timing, insistence on haste,
emphasis on consequences if not acting quickly, use of multiple persuaders, and an effort to keep
away advisors or attorneys (Odorizzi v. Bloomfield School District / Restatement 2 nd ž 177(1-2))
Odorizzi v Bloomfield School District CA Ct of App 54, 1954

A) Facts: P Odorizzi was an elementary teacher employed by D under contract to teach the following yr as a
permanent employee. P was arrested for homosexual activity. The principal and superintendent came to his
apartment after his release from jail. They stated he should immediately resign, there was no time to
consult an atty, and if he did not resign immediately the District would suspend and dismiss him and
publize the proceedings, his arrest, and cause him “to suffer extreme embarrassment and humiliation.” He
was cleared of the criminal charges, and then he sought to be reinstated by the school district. They
refused, so he sued to rescind his resignation.
B) Ps Argument: The Pl’s free will was overcome by the tactics used by the Dfs at a time when Pl was under
severe mental and emotional strain. - D deliberately withheld pmt of acknowledged debt knowing P had no
choice but to accept inadequate sum in settlement of that debt; that P was faced w/ impending bankruptcy;
P unable to meet debts other than by accepting immediate cash pmt by D; thus he involuntarily accepted
inadequate settlement and release of all claims.
C) D’s Argument: Pl freely signed the resignation w/o duress, mistake, menance or fraud.
D) Procedure: Sup Ct sustained Df’s demurrer (dismissed case for D); Pl Appealed; Ct of App Reversed
E) Issue: Whether P/teacher suffered duress or undue influence where school officials came to his apartment
and told him he should resign immediately and that if he did not resign immediately he would be suspended
and dismissed and that resultant publicity, where would cause him extreme embarrassment and humiliation
just after he underwent arrest, police questioning, booking and release on bail and had gone 40 hours
without sleep, had no time to consult an attorney,
F) Answer: YES undue influence; No duress (school’s threat to dismiss was “not only their legal right but
their positive duty.”)
G) Rules:
1) Undue influence= consists of (1) undue susceptibility of the vulnerable person and (2) excessive
pressure by the dominant person. It includes taking an unfair advantage of another’s weakness of mind;
or taking a grossly oppressive and unfair advantage of another’s necessities or distress.- In essence it
involves excessive pressure to persuade one vulnerable to such pressure, pressure applied by a
dominant subject to a servient subject.
2) weaknesses determine that a lessened capacity of the object to make a free K exists.
(1) -The application of excessive strength by a dominant over a servient subject is the second
element.
(2) -U I may consist of total weakness of mind, physical condition, emotional anguish/turmoil,
exhaustion, or a combination.
ii) Undue influence usually involves several of the following 7 elements:
3) discussion of the transaction at an unusual or inappropriate time
4) consummation of the transaction in an unusual place
5) insistent demand that the business be finished at once
6) extreme emphasis on untoward consequences of delay
7) the use of multiple persuaders by the dominant side against a single servient party
8) absence of third party advisers to the servient party
9) statements that there is no time to consult financial advisers or attorneys
H) Rationale: The Facts in the amended complaint are insufficient to state a COA for duress, menace, fraud,
or mistake, but they do set out sufficient elements to justify rescission b/c of undue influence.
i) --Odorizzi was extremely vulnerable when the principal and superintendent came to his
apartment. He had undergone arrest, booking, questioning, and had not slept in 40 hours. The
school officials exploited these vulnerabilities when they threatened him with embarrassment
and humiliation and denied him the opportunity to consult an attorney.
ii) -The representatives of the Dist undertook to achieve their objective by overpersuasion and
imposition to secure Pl’s signature, but not his consent to his resignation through high pressure
carrot and stick technique.
2) P was left no time to seek legal advice and excessive pressure was placed on the P to make the hasty
decision.
I) Notes:
1) this court and Rest. 2d. §177(1) do not require special relationship -but it is significant factor in
court's considerations
2) this court- narrower idea of duress than Rest. 177

i) is UI harder or easier to show than duress
3) role of bad faith- huge I think
4) UI and marriage= Barry bonds case- seemed he had UI over wife when he had her sign prenup day
before wedding- CA. legislature changed law afterward making prenups ivalid if a party is not
represented by counsel at time unless waives right to counsel in separate writing
Misrepresentation and Non-Disclosure

A) -Modern law gives victims of "misrepresentation" choice of 2 avenues:
1) tort action for damages OR
2) right to avoid enforceability of K through rescission
B) rescission through defense to action to enforce K
C) or through affirmative action seeking restitution of benefits conferred on other party
D) -When/why to choose rescission?
E) choose rescission only when willing to give up the benefit you've received! (ex. you buy a house, find out
its infested with termites and seller assured you it wasn't, but you love house and don't want to give it
up-- in this case you want to seek damages ($$), not to get your money back through rescission b/c then
you'd have to give up the house!)
F) rescission is sometimes unavailable where: victim of wrongdoing has already conferred the benefit he
received from wrongdoer to a 3rd party and thus the victim cannot return whatever he bought (rest. of
restitution §66)
1) sometimes party CAN rescind K even though misrepresentation not made w fraudulent intent -K is
voidable for either fraudulent or material misrep. - but law may limit remedy in case of no fraudulent
intent
G) Questions to ask in following cases:
1) when is misrep. actionable either through rescission or in tort?
2) when does failure to disclose info amount to misrep?
3) what effect does contractual disclaimer of representations have on injured party's right to rescind a K
or recover dxs for misrep?
Syester v. Banta (Iowa S. Ct. 1965)

A) Story: P Syester is widow- lonely, lives alone. has no family, probably around 70 years old. After husband's
death P worked as "coffee girl" at store- first went to D Aurthur Murray Dance Studio in 1954 as gift from
friend- was interviewed by manager on her 2nd visit and he sold her small course of dance lessons by
May 1955 they sold widow 3222 hours of dance lesson for which she paid $21,020.50 - according to the
dance manager she paid total of $33,500 for 4057 hours of instruction. Instructor Carey testified at length
about what happened (Was former disgruntled employee of D at time of trial, but jury believed him and
its not for appeals court to judge)
1) on May 2, 1955- P bought 1200 hours of instruction for $6K when she had already bought 2022 hours
and had only used 261 hours
2) included in her purchases, based on D's company policy, were 3 lifetime memberships- lifetime
mermberships came with purchase of 1000 or 1200 hours- each of her 3 lifetime memberhsips
entitled her to free attendance to weekly dances for life and 2 hours of instruction or practice per
month- P had attended and says she had fun
3) manager told her at her first lifetime membership purchase that she would be a pro dancer
4) employees at D studio trained on high-powered salesmanship- each ballroom wired for sound so
manager could hear all convos b/w student and teacher
5) P was awarded various increasing medals (bronze. silver, gold) theoretically for advancing proficiency
6) at one point when sold gold star course of 625 hrs for $6250 she had to come back w. a check saying
"well, it took some doing [to get the money] but here it is"
7) instructor of course was "faking it"= had no idea what he was doing- all of instructors students got
gold stars
8) P eventually quit studio and sought to sue b/c instructor Carey was fired
9) **Carey testified that D bribed him with getting his job back if he persuaded P not to sue and to go
back to studio - P dropped suit/went back
10) releases
i) **they got her to sign 2 releases- 1st release didn't involve any lawyer b/c even D's counsel
wouldn't go that far; 2nd release was for $4k but it was never paid- P signed it but D did not!
B) P's claims: P changed mind again- sued alleging fraud and misrep.
C) D's claims: releases should be complete defense, no proof of damage, claim rule was properly stated but
statement of issue including amount prayed for was misleading
1) we were just giving our opinion
2) she left studio b/c instructor left not b/c she was upset about misrepresentation
D) Procedure: jury trial for P- compensatory award of 15K, punitive award of 40K
E) Issue: Was there enough evidence to find misrepresentation? can punitive damages award be upheld?
F) Answer: YES! - evidence of greed was so shocking to sense of justice as to make it rxnable for jury to
award high punitive damages- this award was not beyond scope of evidence
G) Rules:
1) P must prove 6 elements of misrep. to make K voidable
i) D made statements
ii) that were false and
iii) concerned matters material to the K and
iv) party making statements knew they were false but
v) P believed and relied on the claims and
vi) P was damaged by his reliance
2) opinion issue: modern rule- misrepresentation of state of mind is actionable
H) Rationales:
1) to promise P that she could be pro dancer at her age was "ridiculous"- her gullibility doesn't justify
taking $29K of her money
2) people at D studio were "Carefully schooled and supervised" in high-powered salesmanship
3) D gave to employees "8 good rules for interviewing"- which included
i) how to prevent lawyer from consulting his banker, lawyer, wife, or friend.
ii) avoid permitting your prospect to think matter over.
iii) tell prospect that has never danced be4 that its an advantage or who has danced be4 that that is
an advantage
iv) dance w prospect then tell them their rythym is good- natural ability good- will be ballroom
dancer very soon.
v) tell them "did u know you have been graded excellent in all 3 areas: rhythm natural ability and
animation"
vi) use emotional selling
4) P overcharged by almost $21 K if carey/instructor's testimony about P's ability Is correct
5) even D's lawyer hesitated to participate b/c D's conduct seemed so improper
6) even if she left b/c instructor was fired she could not possibly have used 3 lifetime memberships
I) Holding: affirmed for P - compensatory AND punitive damages upheld
J) Notes:
1) R.2d 162(1)(b)- fraudulent misrep. may include statements made recklessly or negligently (so not
intentionally fraudulent, but not known to be true either); material misrep. can include innocent
misrep. as long as it relates to a material element of the K
2) other potential claims?
i) fraud- entered K with no intention of honoring it (no intention to teach her for all of those hours
or make her pro dancer)
ii) bad faith- knew she couldn't be pro dancer- were claiming to evaluate her abilities honestly but
were not- looks like locke v. Warner bros/
3) could she have rescinded? would she want to?

i) probably couldn't have b/c she has already derived at least some benefit- used some of her
dance instruction hours
ii) probably wouldn't want to bring rescission action b/c then she couldn't get punitive award
4) was reliance reasonable??
i) maybe this isn’t as critical as one would think- although its required court's are lenient about it
where other gross inequities exist, this case suggests- misrepresentation can occur even about
something contained in public record (E.g. realtor says it's a duplex, pub records say its suitable
only for single occupant)
Hill v. Jones (AZ Ct. of App., 1986)

A) Key topic: Nondisclosure and action for rescission in context of Real Property
B) Facts:
1) 1982- P agreed to purchase house from D for $72K - seller/D was to pay for and place in escrow a
termite inspection report stating place was free from termites
i) Termite inspection came back clean.
2) central feature of house= teak floor in many rooms/entryway
3) While in the house, P noticed a "ripple" in the floor and asked D if it was from termite damage. D
answered that it was from water damage.
i) no further discussion of this issue
ii) **P wasn't satisfied w. explanation of "Water damage" but felt termite inspection would reveal if
Ds were lying
4) Shortly after the close, P noticed crumbling wood and other signs of termite damage. - heard from
neighbor that there were termites there= estimate to repair wood floor = $5K
5) D knew of prior infestation and termite issues .
i) when sellers bought home originally, they got pamphlet about termite damage- saw diagram of it
and knew it hadn’t been repaired- they did purchase guarantees that termites would be taken
care of and but they knew it wasn't occurring
6) Inspector claimed he should have been told about previous issues. - this was custom
i) said boxes were stacked where termite holes were
C) Procedure
1) P sued D to rescind the contract.
2) trial court= granted summary judgment for D on concealment claim
i) rationale: "so-called integration clause" in parties' agreement
3) Ct. of Appeals- this court= reversed, found for P, new trial.
D) P's claims: statements made subsequent to execution of K were relied upon (statement that there were
no termites upon inspection)
E) D's claims: tries to distinguish b/w past and present presence of termites- says past isn’t a huge issue-
says even if they did have duty to disclose, claims their nondisclosure did not influence buyer
F) Issues:
1) Does seller of property have a duty to advise the buyer of material facts within his knowledge
pertaining to the value of the property?
2) Are termite damage and existence of past infestation material facts?
G) Answers
1) YES A seller of a property must advise the buyer of material facts within his knowledge pertaining
to the value of the property.
2) YES numerous courts have found this to be true
H) RULE
1) integration clause cannot shield sellers from liability if buyers can prove fraud
2) parol evidence always admissible in cases of fraud
3) Materiality: a matter is material if it is one with which a rxnable person would attach importance in
determining his choice of action w regard to transaction in question
i) past vs. present termite presence: cannot draw hard and fast line- "materiality is an elastic
concept not limited by termites' health"
4) reliance: doesn't need to be evidence that they relied for jury to find for P if in fact they might have
relied and bad faith by DA
5) The doctrine of caveat emptor has waned in its influence recently.
6) R.2d §161: modern rule: vendor has an affirmative duty to disclose material facts where:
7) Disclosure is necessary to prevent a pervious assertion from being a misrepresentation or from being
fraudulent or material
8) Disclosure would correct a mistake of the other party as to a basic assumption on which that party is
making the K AND if nondisclosure amounts to a failure to act in good faith and in accordance with
reasonable standards of fair dealing.
9) Disclosure would correct a mistake of the other party as to the contents or effect of a writing,
evidencing or embodying an agreement in whole or in part.
10) The other person is entitled to know the fact because of the relationship of trust and confidence
between them.
11) R. 2d §164(1)- policy of finality rightly gives way to policy of promoting honest dealings b/w parties
where misrepresentation is fraudulent or material
I) Rationale:
1) Although K law favors finality of transactions, it is unjust to strictly enforce the policy favoring finality
in certain circumstances.
2) FL Supreme Court, CA courts, KS courts said the duty to disclose arises "where the seller of a home
knows of facts materially affecting the value of the property which are not readily observable and are
not known to the buyer, the seller is under a duty to disclose them to the buyer."
3) The inquiry by the buyers whether the ripple was termite damage imposed a duty upon sellers to
disclose what information they knew concerning the existence of termite infestation in the residence.
J) Notes:
1) SEE 161(b).
i) Keeton's proposed factors to consider whether fairness requires disclosure of material info:
(1) diff in degree of intelligence b/w parties (community sense of justice)
(2) relation b/w parties
(3) manner in which info is acquired -whether by chance, effort, or by illegal act- this makes a
different in ethical judgment
(4) nature of fact not disclosed- greater duty to disclose known intrinsic defect if its not likely to
be found by rxnable inspection**
(5) termites issue?- isn’t it likely to be found??
(6) general class to which person who is concealing info belongs- seller (êr duty) or purchaser?
(7) nature of K itself- releases and insurance Ks require almost all facts to be disclosed
(8) importance of fact not disclosed
(9) any conduct of non-disclosing person - active concealment? anything that might prevent
purchaser from buying at agreed upon price (aka incurring him additional costs) should be
fraudulent as matter of law
2) Kronman's economic analysis:
i) draws distinction b/w info casually acquires and info obtained thru deliberate and costly inquiry
(1) disclosure of deliberately attained info shouldn't be required- we want incentive for parties
to learn things - protects investment- it cost something to obtain that info!
(2) casually acquired info SHOULD be disclosed if party knows buyer doesn't know it= b/c it
didn't cost him anything to obtain that info!
3) sometimes states have disclosure laws requiring higher std. of "reasonable care" in disclosure- so
even negligent nondisclosure could be a problem- this requires actual damages though- not just
decreased value of home in abstract-exception to damages req.--> treble damages (???) may be
available if there is willful failure to deliver disclosures
4) usually disclaimers don't bar actions in tort- but "Specific disclaimer of representations" might- b/c
might show lack of justified reliance- this specific disclaimer wouldn't apply to rescission though
i) note/exam: False rep. of material fact ALWAYS ground for rescission
5) fiduciary relationships lawyer/client, trustee/beneficiary
Fraud continued..
Park 100 Investors v. Kartes, Indiana Ct. App. 1995- FRAUD/Misrep.
A) takeaway: husband and wife running late and rushed to sign lease w/ personal guaranty
assuming it only contained what had already been discussed; it did not. They didn't pay full amt
of their obligation per the K they signed w. P. P sued them. Held: P not responsible for paying
the $ b/c there was a misrepresentation and fraud
B) Parties: P/Park 100 is suing the D/Kartes in their personal capacity for Monetary damages.
C) P's claims: Park 100 asserts that the D/Kartes signed a personal guaranty on a lease for a term of
years. Even though the Kartes sold their interest to Saffron Associates who failed to make the
loan payments, they remain personally liable under the terms of the guaranty which they
signed.
D) D's defenses: they were fraudulently induced by Scannel’s misrepresentations into signing the personal
guaranty. That fraud under these circumstances negates their assent. That the Kartes, as knowledgeable
business people, were not justified in relying upon Scannell’s statements, and that it was their failure to
read the document that proximately caused their injury.
1) What about the fact that the Kartes did not read the papers before signing them. Was this action
reasonable?  They claim it was because 1. They were on their way to a their daughter’s wedding
rehearsal dinner. 2. The company was to move into the building over the next two days. 3. They
consulted their attorney who said that the lease papers had been approved; Scannell stood by while
this conversation took place. 4. Issue of a personal guaranty had never been raised during contract
negotiations. 5. The document they signed was entitled “Lease Agreement.”
E) Procedure:
i) Trial Court: for D/Kartes- fraud negated D's consent
ii) Appeals court: affirmed, for D/Kartes.
F) Issues: Did trial court err in its conclusion that P/Park 100 used fraudulent means to procure the
signatures of the Ds/Karteses on the guaranty of lease?
G) Answer: No, trial court did NOT err; sufficient evidence to find fraud; affirmed
H) Rationale/Elements of FRAUD:
i) What was the material misrepresentation of past or existing fact in this case?
(a) Scannel said that the papers were lease papers. Did not say that it was a personal
guaranty.)
ii) Was this statement false? Yes.
iii) Was it made with knowledge or in reckless ignorance of the falsity of the statement? It
appears on the facts that Scannell knew the statement was false.
iv) Was the statement relied upon by the Kartes? Yes.
v) Was it reasonably relied upon?? --yes, for factors listed above in D's claims, D/Kartes acted with
ordinary care and diligence.
vi) Did it proximately cause their injury? Kartes say yes. Park 100 say no.
I) Rule:
1) -While a person relying on another’s representations must use ordinary care and diligence to guard
against fraud, the requirement of reasonable prudence in business transactions is not carried to the
extent that the law will ignore an intentional fraud practiced on the unwary.
2) --Fraud is for the trial court to determine. The appellate court is not to reweigh the evidence and
substitute its judgment for that of the trial court. Instead, the appellate court is to decide if there is
sufficient evidence to support the trial court’s finding. Where the trial court’s conclusion is not clearly
erroneous, the trial court’s decision should stand.
Williams v. Walker-Thomas Furniture Co., Fed (DC) Circuit 1965

A) Topics: add-on/cross-collateral clauses; UNCONSCIONABILITY; misrep. and fraud; duty to read
B) Facts: P/Appellant bought furniture from D on credit and the K Ps signed contained a provision which
stated that the balance will remain due on every item purchased until the balance due on all items,
whenever purchases, was liquidated. In case of default of payment, all the furniture on which balance is
due will be taken back by the appellee. (So basically, if you made every payment except the last one, they
took back the furniture, kept the money you paid them, and you got nothing!) The appellants bought
furniture in 1962 and defaulted on payment. They had also purchased furniture from appellee in 1957 on
which they had some payment leftover. D/Walker-Thomas sued to repossess (replevin) all the items
purchased since 1957.
1) Under the terms of the contract, as long as Williams owed $1 on a single item, every single item,
including the ones they'd completely paid for was still repossessable.
2) This is known as an add-on or cross-collateral clause.
i) Under a cross-collateral agreement, if you owe money on any one item, you owe money on all
the items.
C) D's claims: Williams argued that the contract should be considered void because it was so one-sided that
it was unconscionable.
D) Procedure: District level= for D/appellee. Int. App. Court affirmed- found that although the K clearly
favored Walker, there was no fraud or misrepresentation. The Court noted that the fact that Williams had
not even read the contract was irrelevant, since there is always a duty to read.
E) Issues:
1) Did the court have the power to refuse enforcement of Ks that it found to be unconscionable?
2) Were the terms of the contract in the current case so unfair that enforcement should be withheld?
F) Answers/Holding:
1) Yes-- The lower courts stated that the courts do not have the power to deny enforcement of Ks that
are unconscionable. But this court ruled that the courts do enjoy this power.
2) Not decided- case remanded for new trial.-- K in the instant case was unconscionable, but the lower
courts had not made any rulings as a matter of law on this, so the case and the issue had to be
remanded.
G) Rationales/Rules:
1) UCC § 2-302- recently enacted by Congress - specifically provides that a court may refuse to enforce a
K which it finds to be unconscionable at the time it was made.
2) Scott v. United States stated that: “If a K be unreasonable and unconscionable, but not void for fraud,
a court of law will give to the party who sues for its breach damages, not according to its letter, but
only such as he is equitably entitled to…”
i) shows that courts refusing to enforce such Ks is not a novel concept.
3) As far as the K in this case is concerned, a new trial was ordered to determine whether “the terms of
the contract are so unfair that enforcement should be withheld.”
H) Notes:
1) Procedural Unconscionability: manner in which K was made was unconscionable ("take it or leave
it situation, emergency situation, necessity, etc.)
2) Substantive Unconscionability: Terms of the K are unconscionable (b/c so greatly favor one party,
for example)
Higgins v. Superior Court (Cal. Ct. App. 2006)

A) takeaway: Cal. state appeals court would not enforce arbitration agreement because the parties’
obligation to arbitrate was not mutual.
B) facts: 5 siblings in the Higgins family participated in the reality TV program “Extreme Makeover: Home
Edition.” The siblings, who ranged in age from 14 to 21, moved in with acquaintances from church after
their parents died. Producers of the program decided to create an episode in which they renovated the
neighbors' small apartment where the children were living into a 9-bedroom home.
1) release: Two weeks before filming, the producers sent the participants an agreement and release.
On top of page it said "I have read carefully" etc. etc.- but The last section of the agreement was
smaller font than rest, not in bold, was only 4 small paragraphs and contained a provision stating: “I
agree that any and all disputes or controversies arising under this Agreement . . . shall be resolved
by binding arbitration.” One of the homeowners gave the siblings copies of the agreement and
instructed them to “flip through the pages and sign and initial the document where it contained a
signature line or box.” Within a matter of minutes, the siblings signed and returned their copies.
2) After the episode was broadcast, the homeowners allegedly forced the Higgins to leave the newly
renovated home.
C) P's claims: The Higgins sued producers for intentional and negligent misrepresentation, and breach of K.
Their complaint alleged that the producers exploited them, portrayed them in a false light, and breached
promises to provide them with a home.
D) Procedure: trial court enforced the parties’ arbitration agreement (thus helping D).
1) Ps/Higgins appealed, arguing that the arbitration provision was unenforceable because it was
procedurally and substantively unconscionable.
E) holding: the arbitration provision was substantively unconscionable. Trial court was wrong to interpret P's
claims as challenging enforceability of entire agreement- they're just challenging enforceability of release.
F) Rules:
1) arbitration is a two-way street that requires both parties to use arbitration equally to resolve legal
disputes. - in most cases one party cannot have the other sign an agreement binding only that other
party to arbitrate- this gives non-arbitrating an unfair advantage
2) substantive Unconscionability: "The harsh, one-sided nature of the arbitration provision- the
provision required only the Higgins to submit to arbitration because it repeatedly used the phrase “I
agree” and used the phrase “the parties agree” only in referring to the producers’ right to seek
injunctive relief.- take-it-or-leave-it style: said they had to agree or they couldn't participate in
program (given to them only 2 weeks before the home renovation)-
i) under the provision the Ds could compel the Ps to arbitrate but Ds could still go to court against
them
ii) provision barred Ps from seeking appellate review of arbitors decision
3) procedural Unconscionability ... focuses on facotrs of surprise and oppression with surprise being a
function of the disappointed reasonable expectations of the weaker party
i) the terms were complex legal terms that many people wouldn't understand-- the Ds knew the Ps
were young, unsophisticated, and vulnerable
ii) the arbitration portion of the agreement was located under a heading labeled "miscellaneous"
and had no bolded words or special font there like it did in many other sections in the 24-page
document
G) rationales: arbitration provision was substantively unconscionable b/c it was a standard form K that was
unreasonably 1-sided in that it required the Higgins but not the producers to submit their claims to
arbitration; arbitration costs would be prohibitive for the Higgins
H) notes:
1) some courts (not this CA court) say fact that K is adhesive is enough to make it proced. unconsc.
Adler v. Fred Lind Manor, S. Ct. Wash. 2004

A) facts: P/employee, a Polish immigrant, was fired after he was injured on the job. He had signed an
arbitration agreement upon his employment. P alleges disability, age, and national origin discrimination
under the Washington Law Against Discrimination (WLAD); and alleges unlawful discharge for pursuing
industrial insurance benefits in violation of Title 51 RCW;
B) P claims: wrongful discharge in violation of public policy; intentional infliction of emotional distress; and
unlawful hostile work environment discrimination.
C) Ds move: to compel arbitration and stay proceedings under an arbitration agreement that the plaintiff had
signed as a condition of employment.
D) Procedure: trial court which granted D/employer's motion to compel arbitration in the employee's case
that alleged that the employer violated the Washington Law Against Discrimination (WLAD); discharged
him for pursuing workers' benefits; committed wrongful discharge and intentional infliction of emotional
distress; and created a hostile work environment. P/employee appealed.
E) holding: reversed and remanded: (1) the WLAD claim did not entitle the employee to a judicial forum; (2)
substantive unconscionability alone could support a finding of unconscionability; (3) the arbitration
agreement was an adhesion contract because the employees were not free to negotiate the terms; (4)
there was evidence that the employer explained the terms of the agreement, and the terms were not in a
maze of fine print; (5) remand was necessary for additional factual findings on the circumstances
surrounding the agreement; (6) the agreement did not apply unilaterally; (7) the fee-splitting provision of
might be substantively unconscionable (though Adler failed to meet his burden to show the costs to him
would be prohibitive) (8) the attorney fees provision was substantively unconscionable because in stating
that the parties shall bear their own respective costs and attorneys fees, it undermined a P's right to
attorney fees under state statute and helps the party with the better bargaining position and resources (8)
the 180-day limitations provision in the agreement unreasonably favored D and thus was substantively
unconscionable; (9) the unconscionable portions of the agreement were severable.
F) rules:
1) Substantive unconscionability alone can support a finding of unconscionability.
i) WA.: 2 categories of unconscionability: substantive and procedural.
(1) Substantive unconscionability involves those cases where a clause or term in the contract is
alleged to be one-sided or overly harsh. "Shocking to the conscience," "monstrously harsh,"
and "exceedingly calloused" are terms sometimes used to define substantive
unconscionability.
(2) Procedural unconscionability is the lack of a meaningful choice, considering all the
circumstances surrounding the transaction including the manner in which the contract was
entered, whether the party had a reasonable opportunity to understand the terms of the
contract, and whether the important terms were hidden in a maze of fine print. We have
cautioned that these three factors [should] not be applied mechanically without regard to
whether in truth a meaningful choice existed.
2) Adhesion K factors/Procedural Unconscionability:
i) whether the contract is a standard form printed contract
ii) whether it was prepared by one party and submitted to the other on a take it or leave it basis,
and
iii) whether there was no true equality of bargaining power between the parties.
(1) While unequal bargaining power may exist between parties, the mere existence of unequal
bargaining power will not, standing alone, justify a finding of procedural Unconscionability
iv) adhesion K inquiry only valuable in finding possible procedural unconscionability. However, the
fact that an agreement is an adhesion contract does not necessarily render it procedurally
unconscionable.
3) Remedies for Unconscionability
i) 3 options if Unconscionability is found. Court may:
(1) refuse to enforce the K at all
(2) enforce the remainder of the contract without the unconscionable term
(3) so limit the application of any unconscionable term as to avoid any unconscionable result
ii) In cases where Ks concerning leases, sales, real property, and retail installments are found to
contain an unconscionable provision, courts may enforce the remainder of the contract without
the unconscionable clause.
iii) Whether a contract is entire or divisible depends very largely on its terms and on the intention of
the parties disclosed by its terms. As a general rule a contract is entire when by its terms, nature
and purpose, it contemplates and intends that each and all of its parts are interdependent and
common to one another and to the consideration
iv) In instances where an employer engages in an "insidious pattern" of seeking to tip the scales in
its favor in employment disputes by inserting numerous unconscionable provisions in an
arbitration agreement, courts may decline to sever the unconscionable provisions.
4) Interpreting meaning of K's terms
i) context rule. = requires that we determine the intent of the parties by viewing the contract as a
whole, which includes the subject matter and intent of the contract, examination of the
circumstances surrounding its formation, subsequent acts and conduct of the parties, the
reasonableness of the respective interpretations advanced by the parties, and statements made
by the parties during preliminary negotiations, trade usage, and/or course of dealing.
ii) Where a party seeks to invalidate an arbitration agreement on grounds that it would be
prohibitively expensive, that party bears the burden of showing the likelihood of incurring such
costs.
iii) specific terms and exact terms are given greater weight than general language.
5) Statute of limitations: a K's statute of limitations provision will prevail over general statutes of
limitations unless prohibited by statute or public policy, or unless they are unreasonable.
6) 3 factors to determine whether a party waives his right to compel arbitration under the FAA:
i) knowledge of an existing right to compel arbitration,
ii) acts inconsistent with that right,
iii) and prejudice.
7) The Federal Arbitration Act (FAA), applies to all employment Ks except for employment Ks of certain
transportation workers.
8) Section 2 of (FAA) provides that written arbitration agreements shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any K
i) SCOTUS stated that a congressional declaration of a liberal federal policy favoring arbitration
agreements, notwithstanding any state substantive or procedural policies to the contrary. The
effect of the section is to create a body of federal substantive law of arbitrability applicable to
any arbitration agreement within the coverage of the Act. Both state and federal courts must
enforce this body of substantive arbitrability law.
9) PRESUMPTION IN FAVOR OF ARBITRATION: federal and state courts must presume arbitrability,
whether the problem at hand is the construction of the K language itself or an allegation of waiver,
delay, or a like defense to arbitrability.
10) DEFENSES: BUT generally applicable K defenses, such as fraud, duress, or Unconscionability, may be
applied to invalidate arbitration agreements without contravening of the (FAA). However, courts may
not refuse to enforce arbitration agreements under state laws which apply only to such agreements,
or by relying on the uniqueness of an agreement to arbitrate.
11) party opposing arbitration bears the burden of showing that the agreement is not enforceable.
i) In instances where a valid individual employee-employer arbitration agreement exists, the
Federal Arbitration Act (FAA), requires that employees arbitrate federal and state law
discrimination claims. Moreover, the FAA clearly preempts any state law to the contrary
12) It is black letter law of Ks that the parties to a K shall be bound by its terms.
G) Rationales:
1) not procedurally unconscionable b/c: Adler had a meaningful choice- he had a rxnable opportunity to
consider the terms (1 week) and could’ve presumably contacted a laywer or someone to help him
understand terms
i) "arbitration agreement" was written in bold type
2) substantive Unconscionability:
i) unilateral?-- no, b/c said claims brought by "Either employee or employer" had to be arbitrated
ii) attorney fees provision- YES unconscionable b/c provision requiring each party to pay for own
attorney favors richer party AND this is a case (discrimination) when the D would pay if it lost)
iii) 180 days- YES unconscionable bc it could mean that P/employee couldn't do anything if the first
incident of wrongdoing occurred more than 180 days before, even if he was suing on something
else
H) notes:
1) other substantively unconscionable provisions: confidentiality clause (hampers employees ability to

show pattern of wrongdoing by D)
2) in commercial settings: unconsc. rarely found here- merchants expected to know bargaining process
and generally subject to higher duty to read UNLESS there was clear disparity in power and sketchy
behavior by one party (e.g. failing to point out clause on back of paper)
Public Policy
Problem 7-2
A) facts: Ellen Erikson has been employed as genetic researcher by Neogenetics Inc- corp engaged in genetic
research and commercial sale of products developed by research. Erickson has been considering leaving
comp and starting her own business. But part of her employment K states:
1) covenant not to compete: during her employment and for 2 years thereafter she will not "Engage
either directly or indirectly nor will she have any interest, whether as shareholder, creditor, or
otherwise, in any business engaged in genetic research or in marketing of products generated by such
research"
B) Q: Ellen asks me about enforceability of clause.
C) Answer: note: answer this based on Valley Medical case
Valley Medical Specialists v. Farber, AZ. S. Ct. 1999

A) facts/story: Valley Med/a medical group hired Farber/a pulmonologist. 3 years later, he became a
shareholder in the group, and signed an agreement not to compete in the event of his departure.
Specifically, he agreed that for three years after his separation, he would not compete in the practice of
medicine or treat any of the group's patients within a five-mile radius of any of the group's offices. In
1994, he left the group, and commenced a pulmonology practice within the five-mile restrictive area. The
group sued, claiming that he was in violation of his non-compete agreement.
B) procedure:
1) trial court: for D- ruled that the restrictions were unenforceable. -- either b/c it violated public policy
or b/c it was too broad- any covenant over 6 months would be unreasonable- 5 mile radius from
each of the 3 offices was unreasonable b/c it covered 235 square miles and didn't provide exception
for emergency medical aid and wasn't limited to pulmonology
2) Court of Appeals: reversed for P = holding that the agreement was enforceable b/c there were 8
hospitals outside radius that Dr. could practice in and his patients could just travel there if they
wanted him to treat them- court would require it to be modified to exclude emergency treatment
3) D/physician then appealed to the Supreme Court.
C) holding: the agreement was not enforceable.
D) rule:
1) a restriction is unreasonable if:
i) the restraint is greater than necessary to protect employers legitimate interest
ii) OR that interest is outweighed by the hardship to the employee
2) this relationship was more like an employee-employer not that of 2 competing businesses -in cases
involving the professions, public policy concerns must outweigh any protectable interest the
remaining firm members may have
3) court strictly construes restrictive covenants in way most favorable to professional mobility and
access to med. care and facilities
4) its immaterial that Dr. might've have = bargaining power- the hardship to him isn’t the key issue, but
rather the hardship to his patients.
5) The balance between restraint and interest is determined by the scope of the covenant (time period,
geographical reach, scope of prohibited activities
i) employers interest in customer base must be balanced against employee's right to its customers
ii) Public interest includes a patient’s preference to keep the same doctor or other professional
sensitive of client privilege or confidentiality
6) severance power, but not power to rewrite!: AZ courts will only "blue pencil"/sever grammatically
severable, unreasonable provisions of restrictive covenants-- but Court does not have the power to
modify the agreement and enforce it to an extent that would be reasonable, even though the parties
had agreed in the contract that a court could do so.
E) public policy rationale/rule:
1) VMS did have legitimate protectable interest, BUT it took it too far w. this covenant
2) respect for the physician/patient relationship, and for the patient's right to select his or her doctor,
required that it construe non-compete agreements very narrowly in the medical context.
3) 3-year restriction was unreasonable.
4) 5-mile radius was too broad. - the agreement prohibited the physician from practicing medicine at all
within the restrictive area, while his actual practice had been limited to pulmonology
5) did leave open the possibility of enforcing limited restrictions on physicians, it has made it clear that
because of the patient choice issues involved, non-compete agreements will be scrutinized very
carefully before they will be enforced in the medical profession.
F) notes:
1) many courts say non-compete clauses by law firms might are unreasonable and unenforceable b/c of
strong public interest in right to chosen counsel
R.2d § 187 Non-Ancillary Restraints on Competition

-A promise to refrain from competition that imposes a restraint that is not ancillary to an otherwise
valid transaction or relationship is unreasonably in restraint of trade.
R.2d § 188 Ancillary Restraints on Competition

(1) A promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid
transaction or relationship is unreasonably in restraint of trade if
(a) the restraint is greater than is needed to protect the promisee's legitimate interest, or
(b) the promisee's need is outweighed by the hardship to the promisor and the likely injury to the
public.
(2) ancillary promises:
(a) a promise by the seller of a business not to compete with the buyer in such a way as to injure the
value of the business sold;
(b) a promise by an employee or other agent not to compete with his employer or other principal;
(c) a promise by a partner not to compete with the partnership.
R.R. v. M.H., S. Ct. Mass, 1998

A) facts: infertile wife- husband contracts with another woman (mother of 2 and married) to be a surrogate
mother - he is to pay $10K total- $500 initially and then $3500 upon pregnancy, then other amounts, then
a final amount of $3500K at birth. Mother consented in agreement to give up parental rights though she
might visit at some times. After getting about $550 in initial payments, the mother got pregnant and
decided she wanted to keep kid so she got rid of $3500 check by Dad. He sued to see what his rights were
and to get himself parental rights.
1) detailed story: The father and surrogate mother entered into the agreement before the surrogate
mother's pregnancy. Pursuant to the terms of the agreement, the father would pay $10,000, in
periodic installments, to the surrogate mother. The father would be considered the natural father of
the child, and would have the right to take the newborn home from the hospital. The surrogate
mother, however, retained her parental rights to the child. Furthermore, under the agreement, if the
surrogate mother sought custody of the child, she would be required to reimburse the father for all
fees and expenses paid to her. During the sixth month of the surrogate mother's pregnancy, she
changed her mind and decided to keep the child. She returned the third installment payment to the
father uncashed. The father instituted this legal action to establish his paternity, and to seek a
declaration of his rights under the surrogacy agreement.
B) trial court: for P- he has parental rights because she freely consented and b/c of "best interests of child"-
so she ordered the mother to specifically perform by giving kid to dad upon kid's birth
C) issue: did the K b/w the biological father and surrogate mother violate public policy in that it made her
sign-off her parental rights ahead of time?
D) answer: YES- the same standards as used in adoption apply here- they say that mother cannot be taken to
have "freely consented" except after a four-day period after the child's birth -
E) holding: the surrogacy agreement between a surrogate mother and a biological father was NOT
enforceable.
F) rationale: refused to accord validity to the surrogacy agreement. Although this case did not involve
adoption, the court looked to Massachusetts adoption statutes for guidance.
G) rules: a surrogate mother cannot relinquish her custodial rights until the fourth day following the child's
birth.
i) -the payment of money "to influence the mother's custody decision" rendered the entire
agreement void.
ii) -In order for a surrogacy agreement to be enforceable, a father cannot pay any expenses beyond
pregnancy-related costs, and the surrogate mother must be given a period of time following the
child's birth to reflect upon whether she wishes to relinquish custody.
H) other factors that should be considered when considering the validity of a surrogacy agreement include:
whether the parties have received mental health evaluations, advice of respective counsel, the capability
of the father's wife to bear a child, and consent by a surrogate mother's husband to the agreement.
I) notes:
1) other cases:
i) Johnson v. Calvert (Cal)
(1) majority: both surrogate and non-surrogate mother have = right to baby, but the terms of
the K break the tie
(2) dissent: both have = right to baby, but the best interests of the child should break the tie
ii) Baby M. (Mass.)= surrogacy agreements allowing payment going beyond that of payment for
carrying child and requiring mother to sign away her parental rights beforehand are antithetical
to Mass. pub policy and laws b/c they effectively disregard the child's interest, mother's interest,
and fitness of mother (non-fitness sometimes a requirement for adoption)
2) scholarly theories:
i) Posner- surrogacy Ks should be enforceable for same economic reasons as other Ks should be.
ii) Martha Field-- they should be legal but NOT enforceable against the mother.
3) in pari delicto= both parties are equally culpable - courts usually leave parties where they found them
and give no remedy
Problem 7-3 - no notes
Problem 7-4
4) Park 100-- duty to read suspended when 1 uses misrepresentation to induce party's obligation under
aK
5) Odorizzi-
i) over-persuasion-- place or time
ii) unusual player
iii) insisist that biz. be finished at once
iv) emphasis on consequences of delay
v) multiple persuaders
vi) no 3rd party advisers
vii) no time to consult attorney
viii) FRAUD- non-disclosure of material fact; construction
ix) UNDUE INFLUENCE- pressure which works on weaknesses- oppressive and plays on necessities or
distress
Chapter 8 - Justification for Non-Performance: Mistake, changed

circumstances, and K modifications
categories of rxns for non-performance
1) mistake
2) impossibility
3) impracticability
4) frustration
Mistake
A) mutual mistake -- no K  Peerless case (Raffles v. Wickelhaus)
B) mutual mistake-- least knowledgeable party wins  Frigaliment
C) unilateral mistake-- only one party made the mistake
Lenawee Co. Board of Health v. Messerly (Mich. 1982) MUTUAL mistake- "as is" clause
A) takeaway: yes mutual mistake but one party assumed the risk of this by signing an "As is" clause so that
party not entitled to recession  Rescission is an equitable remedy granted at the discretion of the
court-- Parties are not equally innocent here - one party said they would take the land "as is"
1) others Js have also decided not to allow recission when "As is" clause
2) Court's have greater discretion w/ equitable relief remedies- this is the usual remedy for mutual
mistake (plus any necessary compensation for lost earnings in prop. value etc.)- so courts can fashion
who gets what or what K should say b/c of greater discretion
B) Facts:
1) Pickles/appellees buy from Messerlys/appellants a 3-unit apt. building on a 600-sq.-ft piece of land
2) turns out that a previous owner (Bloom) had illegally installed a septic tank in home in 1971 without a
permit, and in violation of a health code. - Messerlys had a working one in there and Bloom replaced
it w/ smaller one- w/o enough drainage field space-
3) Pickles didn't know this- had never asked Ms about the septic tank- but messerlys told them they had
indeed cleaned it once w.o incident- Messerlys didn't live there ever and rarely visited
4) Pickleses inspected property and signed $25,500 K with Messerlys for 600 yrd property/apts with a
clause that says, "Purchaser has examined this property and agrees to accept same in present
condition. there are no other/additional written or oral understandings"
5) 5-6 days after the K, Pickles went to introduce selves to tenants and saw raw sewage seeping out og
ground
6) Lenawee Co. obtained a permanent injunction and condemned the property as uninhabitable by
humans until the defective sewage system is fixed.
C) Procedure:
1) injunction granted and Lenawee co. permitted to withdraw from suit by stipulation of parties
2) Pickles didn't pay so Messerlys filed cross-complaint- Pickles counterclaimed for rescission
3) trial court: Pickles had no cx of action- b/c no fraud or misrepresentation
4) court of Appeals: for Pickles for contract rescission - b/c parties were mistaken as to income-
producing capacity of property
D) CLAIMS
1) appellees/Pickles claim it was mistake in value of property - this is NOT usually grounds for equitable
relief
i) relief sought: P/appellees, the Pickles want to avoid the K on the basis of mutual mistake.
2) appellants claim it was a mistake in nature and character of CNS and pervasive and essential quality
of property- AND no mistake b/c defect in sewage system was learned by both parties after K was
made
E) Issue: Can a K be rescinded due to a mutual mistake as to the nature of the property, when the K
included an "as is" clause.
F) Answer: No.
G) Holding: Judgment for Pickles reversed - Pickles not entitled to K rescission.
H) RULES:
1) A K mistake= a material belief that is not in accord with the facts in existence at the time the contract
is made, with no distinction between the “nature” and “value” of the subject of the contract
2) usual remedy for mutual mistake: court may rescind a K made in mutual mistake (if mistake is
material) at its discretion, based on who should bear the loss (R.2d § 152 (1))
3) exception to usual remedy: this remedy is not available when one of the parties has assumed the
risk, as here with the clause in the K that says the buyer has examined the property and agrees to
accept it in the present condition ("as is" clause).
i) A party bears the risk of a mistake when: (R.2d §154)
(1) the agreement allocates to him the risk,
(2) he is aware when the contract is made that he has limited knowledge regarding the facts, or
(3) the court allocates to him the risk on the ground that it is reasonable to do so.
(a) În applying #i above (§ 154 (a)), a contract for sale allocates a risk to the paying party
when it includes a provision that the party purchases “as is”
I) Rationale:
i) court argues for CASE-BY-CASE factual analysis- so doesn't rely on Sherwood or A&M precedents
(1) Sherwood- famous barren cow case - no one knew cow was pregnant- when seller
discovered it after sale, tried to get K recission and
(a) HELD: court allowed recission
(b) rationale: cow worth only $80 if barren; $750 if pregnant- parties never would’ve made
this K if not for the mistaken belief that she was incapable of breeding and of no use as a
cow= no mistake as to identity of the cow (Same cow they bought) but mistake in very
nature of the thing- mistake affected character of cow for all time-- she was NOT a
barren cow
ii) Yes a mutual mistake-- no one knew of problem w/ septic tanks - and its about nature not just
value
iii) Yes very material!- P's cant remedy it themselves b/c they need 750 sq. ft for proper septic
system and they only have 600 ft
J) Notes
1) court doesn't use A&M or Sherwood as a precedent.
i) Distinction btwn substance and quality is very hard here (as in Sherwood) - Court substitutes this
distinction btwn substance v. quality for essence v. collateral
ii) Court adopts R.2d § 152 (b/c not a statute, by adopting it, it becomes a law in that state) -
2) definitely inconsistent rulings re: mutual mistake throughout and even within diff. Js
3) conscious ignorance exception: if one party e.g. fails to have paintings appraised before selling them
and later learns they were made by Van Gogh not Joe Shmoe, court may refuse to apply mutual
mistake theory b/c its assumed that parties knew they shouldve had appraisals done and consciously
decided not to
4) mistake in written expression: If K simply fails to describe what parol evidence etc. shows that the
parties intended, then usual remedy is to just have that part of K redrafted
Wil-Fred Inc. v. Metropolitan Sanitary District (Ill. App. 1978) 

A) facts: P/GC, Wil-Fred relied on SC/Ciaglo's bid for excavation in a bid for a job from D/Metro; S
1) C underestimated his bid and consequently, P’s bid was more than 20% lower than next-lowest bid -
2) Jan 6- P's bid was $882,600 +100K non-refundable deposit IF it withdraws its bid before Metro has chosen or if
metro chooses it and then it withdraws
i) the actual K that gc had to sign to submit its bid also said that the GC had examined the site and the K and
couldn't cancel or withdraw its bid
ii) the ad soliciting the bids said that Metro San. Dept had estimated the job at 1.26 million!
3) Jan 8- SC discovers mistake (thought they could use heavy equipment to excavate, even though it was dealing
with plastic pipes!) after P’s inquiry and SC withdraws his estimate- so P writes to Metro saying it cant follow
through b/c SC's bid was substantially wrong- but says it had rxn to trust SC b/c it had done good work in past
4) Pres. Luxion of GC Win-Fred says: didn't force SC to hold to its bid b/c Ciaglo couldn't withstand $150K loss/
that GC does 12-13 mil biz/year, and has been in biz for 18 yrs, has never revoked a bid before-
i) *says he was aware of metro's estimate (1.2 million)- but thought that the cheaper part substituted by
Metro in the bid could account for a $200K difference
B) claims: P sues for rescission under mutual mistake theory -but D accepts bid and keeps P's deposit.
C) holding: obviously they cant get back their deposit, but GC/P does not have to perform K b/c of unilateral
mistake - a mixed mistake of judgment AND FACT
1) is sufficient because it related to a material feature of the K; Π exercised reasonable care in relying on
sub-contractor’s quotation; the consequences for Π would be grave; and the Δ suffered no change in
position, since it was able to award the K to the next-lowest bidder.
D) rules:
1) Wil-Fred's must show by clear & positive proof:
i) mistake relates to material aspect of K
ii) occurred notwithstanding exercise of reasonable care
iii) of such grave consequence that enforcement would be unconscionable, provided that
iv) other party can be placed in status quo
2) §2-153: allow avoidance of K b/c of mistake of one party if:
i) mistake makes enforcement of K unconscionable, OR
ii) other party knew or had reason to know of mistake
(1) THIS court says rxn to know if mistake was obvious
3) P must also NOT bear the risk under R.2d §153
4) If there is clear and positive evidence to the effect that {(P) the mistake relates to a material feature of the
contract and (Q) the mistake occurred notwithstanding the exercise of reasonable care and (R) the mistake is
of such grave consequence that enforcement of the contract would be unconscionable and (S) the non-
mistaken party can be put in as good a position as it would have been prior to the promise on which the
mistake was based}, then (VOIDABLE) there can be rescission on the ground of unilateral mistake.
a. Williston Rule: If there is material mistake and such mistake is so palpable that the party not in
error will be put on notice of its existence, then unilateral mistake may afford ground for
rescission. ** Similar §161 if other party actually knows of other’s mistake must disclose
E) rationales:
1) YES unilateral mistake but D couldn't have relied on bid too much b/c aware of mistake immediately and
impact was so severe.
i) Also discrepancy so great and obvious that Sanitary District should have known that there was a mistake.
ii) SC was in biz for 8 yrs- in good standing- checked with other SCs to confirm its bid was OK- so GC wasn't
wrong to rely - GC did exercise due care in preparing its bid
(1) court takes into account experience & prep. of SC, its course of dealings w. GC and past performance
in finding that GC was justified to rely
(2) GC made 2 separate reviews of its bid
(3) **Metro's ad said "std construction equip." could be used
iii) SC cant sustain loss of 150K or it goes bankrupt- so GC lets them off, but if GC sustains that loss, they lose
2-3 million in bonding capacity
iv) District had suffered no change in position- rehabilitation K had NOT been awarded yet!!
2) Basic “fairness should dictate when relief is granted
3) Ct willing to reallocate risk that a mistake would be made in bid to Δ
F) Notes
1) "palpable nature" or unconscionable effect of mistake: early cases required mistake to be palpable- so obvious
that other party KOSHK of error- see R.2d 152
2) mistake of fact VS. mistake of judgment: usually only mistake of fact is allowed as a mistake in GC/SC setting
Cts often will rescind for mistake of fact or clerical error, but not mistake of judgment
i) Wil-Fred’s not so insistent on this^
3) must mistake be non-negligent? - seems like yes in most cases b/c you need to have exercised due care most
courts say
Changed Circumstances: Impossibility, Impracticability, and Frustration

Impracticability (§261, §2-615)
(1) Increased cost alone does not excuse performance unless the rise in cost alters the essential nature of
the performance.
(2) Rise or collapse in the market is not sufficient (though if the market collapses completely there will
usually be an impossibility defense)
(3) Severe shortage of raw materials or supplies due to a contigency such as war, embargo, local crop failure,
or unforeseen shutdown of major sources of supply, which either causes a marked increase in cost or
altogether prevents seller from securing supplies necessary to his performance will usually constitute
impracticability.
(4) Where the K provides for an exclusive means of performance, the impracticability of that means may
release the promisor from his duty. Where the performance is set out in unqualifed terms, the promisor
may be required to perform by alternate means even though more expensive.
1) The claimed impracticability must have arisen from an UNFORESEEN contingency and without the
fault of the party seeking to avoid the contract.
2) The non-occurrence of the contingency must be a basic assumption of the K
3) The parties must not have explicitly or implicitly allocated the risk that the contingency might occur.
(1) Assumption of risk may be determined by examining:
(a) the extent to which the parties allocated other risks.
(b) the circumstances surrounding the contract, including trade usage.
(c) the purpose of the K
(2) FORCE MAJEURE clauses may make a determination of impractibility easier by pointing to
who bears the risk.
(3) Impracticability may only be used to AVOID enforcement (RESCIND) of the K
(4) Impracticability involves a case where change of circumstances is not specifically provided for
in the agreement after agreement is made.
(5) literal impossibility= objective impossibility- no one could do it- not just subjective "I cant do it"
Karl Wendt Farm Equipment v. Int'l Harvestor Co. (6th Cir. 1991)- Impracticabiity
A) takeaway: change in market conditions not sufficient "supervening event" to find impracticability b/c shift
in market is assumed risk when enter into long-term K for supplies (majority approach but not always
followed)
B) Facts-
1) P had a franchise that he obtained from D; Due to a massive market downturn (not in D's control), the
D sold all its assets in farm equipment to a third-party (in D's control- court later says on p 690 that it
had alternative); Third-party did not acquire D’s franchise network, only “access” to D’s dealers; Ps
franchise was in a disputed area, and third-party awarded franchise to other dealer
2) P sues D for breach of K; Δ raises defense of impracticality
C) Holding-
1) No rescission, remanded only on the decision of damages for IH's breach of its Dealer agreement w
Wendt
2) The supervening event in an impracticability defense cannot arise from a change in market
circumstances or from the beneficiary of the doctrine’s financial inability
3) The principal purpose was to establish a dealership, not be “mutually profitable”
D) Rule-
1) Impracticality (§261): Where, after a contract is made, a party’s performance is made impractical
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 to the contrary.
2) Necessary Condition for “impracticability” extracted from comments:
i) Supervening event cannot:
(1) be a change in market circumstances
(2) OR be the benefiting party’s financial inability per Groseth interp of §, P 659
3) 3 Jointly Sufficient Necessary Conditions for “frustration of purpose” from Groseth
i) the party’s principal purpose is frustrated by the supervening event
(1) not enough that he wouldn't have made K if he'd known this- has to be that the mistake was
relevant to the major purpose of the K!
ii) and that frustration is substantial
(1) so grave as to be not within the risks that one assumed through the K-
(2) not enough that its become economically burdensome or not profitable
iii) and the frustrating event was to a basic assumption of K.
(1) not usually a basic assumption that market is totally stably
(2) mutual profitability not implied, or it would need to be implied in every K
4) Frustration of Purpose (§265): Where, after a contract is made, a party’s purpose is substantially
frustrated 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 remaining duties to render performance are
discharged, unless the language or the circumstances indicate to the contrary.
5) Court says NO TERM IS IMPLIED AS TO K duration when K itself specifies termination process!
i) this is in response to IH argument that it was Implied term that k was for limited duration:
implied that dealership would last til manufacturer goes out of biz-
E) Rationale-
1) no impracticability b/c HAD ALTERNATIVE - didn't have to sell farm equip, ould have terminated
dealer agreements through the termination provisions through mutual assent and then shared
proceeds of sale of Case/Tenneco w its dealter
2) principal purpose was establishing a dealership NOT mutual profitability: if they allow mutual
profit. to be implied purpose, then “mutual profitability” will be basically implied in all Ks and none
that don't profit will be practicable or enforceable
3) Section 2 allowed IH to change its product lines and discontinue prod. lines but it was NOT meant to
function as another way for them to terminate K
4) Impracticality and Frustration of Purpose are “equitable doctrine[s] which [are] meant to fairly
apportion risks between the parties in light of unforeseen circumstances. [They are] essentially
implied term[s] which [are] meant to apportion risk as the parties would had the necessity occurred
to them
5) Classical idea of party autonomy and that ct will not reallocate risk for parties
F) Dissent
1) not duty of appeals court to make determination as to possible alternatives if trial didn't find any!
G) Notes-
1) Common rationale for impracticability and frustration/impossibility: Frustration and impracticability
doctrines in Restatement (Second) have basically same elements; suggest “common denominator” of
all the foregrounding-of-risk defeater doctrines, namely, the value of the transaction turns out to be
significantly different than the complaining party believed or expected.
i) compare R.2d 261 (impracticability) vs. 265 frustration of purpose
2) Impracticability based on natural disaster (exam?)

3) impracticability based on terrorism (Exam?)
i) bush- guy couldn't call to change travel b/c of sept. 11- P won and D travel companies who tried
to say p was simply skiddish to travel after sept. 11 lost!
4) death= somewhat more likely ability to claim impracticability
5) majority rule on FOS: NOT required that it wasn't foreseen or was unforeseeable to have
impracticability based on supervening event
6) Posner= impractic. and frustration should be applied to assess riskiness of SUPERIOR RISK BEARER's
behavior- so when K allocates risk, it allocates it to superior risk bearer
R. 2d 261 Discharge by Supervening Impracticability

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.
R. 2d 265 Discharge by Supervening Frustration
Parties' remaining duties to render performance are discharged WHERE:
 a party's principal purpose
 is substantially frustrated
 without his fault
 by the occurrence of an event the non-occurrence of which was a basic assumption on
which the K was made
--unless the language or the circumstances indicate the contrary.
Mel Frank Tool & Supply v. Di-Chem Co. (Iowa S. Ct. 1998)
A) brief summary: P/Lessor brings axn for breach of lease and prop. damage by D/chemical distributor, who
vacated P's premises after city officials informed D that it could not store all of its materials on the leased
premises.
B) takeaway= a K can only be avoided, under the idea of frustration of purpose, when an obligee’s entire
purpose for entering into a K is frustrated
C) Facts=
1) Di-Chem entered into a 3-yr lease K with Mel Frank to lease a storage and distribution facility.
i) LEASE:
(1) requires Di-Chem to "make no unlawful use of the premises and . . . to
comply with all . . . City Ordinances."
(2) also a destruction-of-premises provision that allows either party to terminate
the lease under certain circumstances.
2) Roughly 1 year into the lease, the fire chief, for the City of Council Bluffs, inspected the property and
informed Di-Chem that it was in violation of a city ordinance (enacted AFTER signing of lease)
prohibiting the storage of hazardous materials.
3) Because Di-Chem was a chemical company, Di-Chem felt the ordinance frustrated its business needs
for the facility, and vacated the premises.
4) P/Frank knew that D wanted to sell chemicals, but didn't know chemicals were hazardous
D) claims:
1) P/Mel Frank = breach of lease and property damage,
2) Di-Chem = mutual mistake, impossibility, illegal K, failure to mitigate damages, fraud in inducement
E) procedure = TRIAL for P/Mel Frank- b/c P could not have known that the chemicals were classified as
hazardous
1) P made no representations to D that warehouse was suitable for any specific purpose, nor were any
discussions or representations made concerning the character of the products to be stored by D.
F) Issue= Is a K subject to rescission, under the rationality of frustration of purpose, when only part of the
contractual performance is made unlikely by a supervening cause?
G) answer= No.
H) holding= for P Affirmed.
I) rules:
1) 3 grounds for no duty on obligor:
i) some circumstance has made Oblig's own performance impracticable.
ii) obligor may claim that some circumstance has so destroyed the value to him of the other party's
performance as to frustrate his own purpose in making the K
iii) obligor may claim that he will not receive the agreed exchange for the obligee's duty to render
that agreed exchange, on the ground of either impracticability or frustration.
2) doctrines of impracticability and frustration based on whether the nonoccurrence of the
circumstance was a basic assumption on which the contract was made. The parties need not have
been conscious of alternatives for them to have had a "basic assumption."
3) general rule = obligor assumes risk that k will be less profitable- K liability is strict liability. -one is
liable in damages for breach even if without fault and even if circumstances made the K more
burdensome or less desirable than he had anticipated. -
i) if he doesn't want this obligation, should've put a clause in K reserving a right to cancel it.
4) extraordinary circumstances= Q of law for court= extraordinary circumstance may make
performance so vitally different from what was reasonably to be expected as to alter the essential
nature of that performance. In these circumstances, the court must determine whether justice
requires a departure from the general rule that the obligor bear the risk that the K may become more
burdensome or less desirable.
5) if a "gap" in the K- Ordinarily, obligor's duty is discharged in the case of changed circumstances, or his
duty has never arisen, in the case of existing circumstances-- risk shifts to obligee.
6) 3 parts- substantially frustrated purpose= after a K is made, and
i) not because of fault of complaining party
ii) an event occurs- the nonoccurrence of which was a basic assumption on which K was made
(1) FOS of the event is a factor in that determination, but it's not determinative
iii) and the purpose that is frustrated was a principal purpose of that party in making the K.
(1) purpose/object must be so completely the basis of the K that, as both parties understand,
without it the transaction would make little sense.
(2) the frustration must be substantial. It is not enough that the transaction has become less
profitable for the affected party or even that he will sustain a loss. The frustration must be so
severe that it is not fairly to be regarded as within the risks that he assumed under the
contract.
(a) if there is a serviceable use for which the property is still available consistent with the
limitations of the demise, the tenant is not in a position to assert that it is totally
deprived of the benefit of the tenancy.
(b) tenant is not relieved from the obligation to pay rent if there is a serviceable use still
available consistent with the use provision in the lease. The fact that the use is less
valuable or less profitable or even unprofitable does not mean the tenant's use has
been substantially frustrated.
iv) ^this analysis doesn't apply if language or the circumstances of the K indicate the contrary .
7) specifically w/ regard to police regulations= -parties may stipulate that they can rescind if cant use
property for particular purpose- BUT in the absence of any such stipulation, a valid police regulation
which forbids the use of rented property for certain purposes, but leaves the tenant free to devote
the property to other legal uses not forbidden or restricted by the terms of the lease, does not
invalidate the lease or affect the rights and liabilities of the parties to the lease.
J) rationales:
1) DI-CHEM did NOT meet burden of proof:
i) non-hazardous chemicals could still be stored on the premises - so entire purpose NOT
frustrated
ii) no evidence as to the nature of its inventory and what percentage of the inventory consisted of
hazardous chemicals. = failed to show what its lost profits, if any, would be without the
hazardous chemicals.
2) clause 13 argument: Di-argues: b/c it was not able to store and distribute hazardous chemicals, it was
"not able to conduct its business on the premises," as specified in clause 13(b).
i) clause 13 simply does not apply to the facts of this case. Clause 13 must be read in its entirety
and construed in context  clause 13 deals w/ "Fire and Casualty, Partial Destruction of
Premises,"
3) .here- lease was made for the storage of chemicals; however, the purpose to store hazardous
chemicals was never discussed between the parties.
4) frustration of purpose meant to deal w/ when a change in circumstances makes one party's
performance virtually worthless to the other, not just less valuable
K) notes
1) govt axn much more likely to be deemed sufficient superceding for frustrated purpose defense than is
natural disaster, war, or market change
2) force majeure clauses generally just protect what R.2d and UCC frustrated purpose articles already
protect- but those clauses make it certain that K obligations can be postponed or revoked
Problem 8-1, p. 711

A) facts: I am attorney in Garrett's Landing- small city in southern state. have been consulted by Aurthur
Barlow- owner of florist shop in city-
1) several years ago Arthur went to work as clerk for florist shop owned by Sam and Martha Stewart
2) he was few yrs out of high school- no real skills- had only had odd jobs- took this job thinking he could
learn from them and that they might then take him on as partner in business
3) profits good- he made good salary
4) Martha suddenly died before he could ask them to take him on as partner- so he did most of work b/c
sam was sad
5) offer- March:
i) Sam comes back saying he wants to sell his house and move to another city to be w his daughter
so he offers Arthur the chance to buy the business- A says he will so long as price was right
ii) S tells 8 there are 8 yrs to go on his building lease w/ Mrs. Duval- says he is sue she will let him
assign lease to A- says he'll sell A business for $100K ($80K for fixtures, office equip., and
inventory- GOODS!!) and $20K good will
iii) A accepts- provided that he can pay 20K now and for next 4 years so he could pay him out w
earnings from business
iv) S makes K just like one he signed when he bought shop 30 years earlier- back THEN a lawyer had
helped draft it, but here S drafted it
v) A raised 20K from uncle and took over shop-
6) Hospital has been there for 80 years- shop is called "Good Samaritan flower shop"
7) hospital is merging with another in another part of town- shop is near the hospital that's being torn
down-
i) A says it is in an old part of town and "best part of business" is from ppl who come to visit sick
ppl at hospital- also says that new shopping centers in town (2) have florists and he cant compete
with them for suburban trade, "never dreamed hospital wouldn't be there forever" "mistake"
ii) also says S must have known about the sale- NOT mutual? - S's cousin is doctor and member of
governing board at the hospital -- A says they must have been considering shutting hospital "As
long ago as last march"
8) K says: "seller makes no other representations (beyond that he owns business) or warranties with
respect to this property"- promise by A to pay 20K/yr for 4 yrs is not qualified in any way and makes
no reference to earnings
B) my approach to help Arthur:
1) A vs. S on misrep? (duty to disclose)
2) mistake
3) frustrated purpose  very unlikely- it's not like he cant sell flowers there
4) fraud?? unlikely
5) impracticability??  cannot perform the K? he can't pay, that is true presumably- but has he any
other alternatives?
Contract Modifications - CNS/Duress Issues

Alaska Packer’s Ass’n v. Domenico (9th cir 1902)- CNS to modify K (common law)- Pre-existing
duty
A) Facts-
1) Alaska Packers hired workers (including Domenico) from San Francisco to go up to Alaska and work
on salmon fishing and canning. The workers first signed an agreement to get $50 each for the season
(plus 2 cents per fish). Before they left, they asked for more money and signed another agreement
with Alaska Packers giving them $60 each. Then when they got up to Alaska, they refused to work
unless they were promised $100 each. It was impossible for company to get other men, so they
yielded to demands. Upon return, company refused to pay other than what was in the original K
($60).
2) Company sues to get out of K by pre-existing duty.
3) Fishermen argue that the nets were defective, which is why they asked for more $$$
i) jury did not find that nets were faulty - conflicting testimony on this
B) Holding-
1) no CNS for fishers' demand- the D's forced to assent in exchange for P's rendering the exact services,
and none other, that they were already under K to render
C) Rule-
1) The fishermen had a preexisting duty to perform the work, they couldn't negotiate a second, better
deal to do the same work.
2) If party A agrees to give additional consideration to party B for B’s performance of “the exact
services, and none other, that they were already under contract to render,” then party A’s consent is
“without consideration,” UNLESS there is voluntary rescission or modification supported by addtl
CNS..
i) Defeater of defeater inferred from King v. Railway, which is quoted at length in Alaska Packers.
ii) But, the voluntary rescission must be assented to on both parts
D) Rationale-
1) For pre-existing duty rule: Quoting King It would be a travesty of justice to allow one party to coerce
the other into more pay and then use that as grounds to estopp the other from claiming promise was
w/o CNS.
2) dispute about nets: D's interest required that P's should be provided with every facility necessary to
their success as fishermen- so it is highly improbable that the defendant gave libelants rotten and
unserviceable nets with which to fish.”
3) For allowing mutual rescission: Pre-existing duty rule does not mandate that they go thru w/ that. K
law has no indpndt interest in enforcing where parties voluntarily rescind. Rationale based on agency
and autonomy of parties. Would be helpful to have formality in rescission.
E) Notes-
1) Very close to Restatement §73- in family of rules of CNS, but intersects w/ allocation of risk (wkrs
made mistake of judgment about how hard work would be).
2) Addtl CNS can be very small, e.g. paying rent one day early
3) Selmer by Posner: Undermined the institution of K to allow a threat of breach to force the other party
to incur costs for which eh has no legal remedy. If K protections are illusory, people will be hesitant
to enter Ks. Affording protection enter K and resources allocated efficiently.
4) Other exceptions to pre-existing duty rule:
(1) R §89(a)- unforeseen circumstances; ex solid rock makes excavation 9x more expensive;
promise to pay higher price binding
(2) R §89(c)- reliance on promised modification
(3) §2-209(1)- largely dismisses pre-existing duty rule
5) editors say we ought to uphold modifications in many situations. However, the doctrine of
consideration and the preexisting legal duty rule can cause a lot of problems. The doctrine is highly
technical and often gets in the way of good results. but that’s not to say that there’s nothing to it.
When someone promises a benefit and gets nothing in exchange for it, that ought to make you
sensitive to whether something rotten is going on. Sometimes you’ll conclude that there isn’t and the
modification ought to be upheld as a matter of policy. But the CNS doctrine, while it has its
technicalities and shortcomings and won’t do justice in every case, it is powerful in suggesting that
this is a situation that calls for close scrutiny.
6) How should the fishermen have been advised? If the fishermen had done anything that was
bargained for that they didn’t have a preexisting legal duty to do, they would have made out okay.
The preexisting legal duty rule is an academic doctrine, if you think like a lawyer it’s easy to avoid it.
7) What is a better way to do justice in this case?
i) The court should have thought about it as a duress case. This wouldn’t have gotten the court
into all these technicalities. Was there an improper threat here? Yes! The workers threatened
to break their promise to work. Would the threat have caused actual harm? Sure! They
wouldn’t have been able to get replacement workers. They would have lost out and they
wouldn’t have had a very good remedy against the workers since there’s so many of them and
they may not have much money.
ii) Duress, whether there is consideration or not, makes a better way to get at what’s going on in
this case. So the packers can argue that they were coerced into making this “bonus” promise.
8) bargaining power: When you have K formation in San Francisco when the people are hired, Alaska
Packers have strong bargaining power and they won’t have to pay more than the market rate for
fishermen. The bargaining power situation is changed enormously by the time they get to Pyramid
Harbor. The fishermen are the only ones available there to do work during that season.
Kelsey-Hayes Co. v. Galtaco Redlaw Castings Corp. (E.D. Mich 1990) - Economic Duress- Do K
Modifications require new CNS?
A) overview: P sold K metal tire parts. Formed K with set price in 1987, 1989 decided to discontinue
manufacturing that part. Agreed to keep manufacturing them for several months in exchange for 30%
price increase. Month later raised requirement to another 30%. At some point, P stopped paying for
castings, amt equivalent to price increases. Modification was under duress.
1) Later K supercedes earlier K unless there is duress.
(1) Duress: manifestation of assent is induced by an improper threat by another party that
leaves victim no reasonable alternative.
(2) K-H had no choice but to accept modification.
(a) Couldn’t sue b/c G would have stopped supplying.
B) Facts
1) Kelsey-Hayes makes brake assemblies that it sells to auto manufacturers.
2) Galtaco supplied castings to Kelsey-Hayes which incorporated them into the brake assemblies.
3) In 1987, Galtaco and Kelsey-Hayes signed 3-yr "requirements" contract.
i) Under the K, Galtaco was to be the sole source to Kelsey-Hayes of certain types of castings
through April 1990.
ii) In return, Galtaco was to charge fixed prices for 1987, and scheduled price reductions for 1988
and 1989.
iii) On June 9, 1989, Galtaco informed Kelsey-Hayes it required an additional 30 percent price
increase in order to keep its foundry operations going. Since Kelsey-Hayes had not yet found
another source for castings, it accepted Galtaco's offer to continue providing castings for an
additional 30 percent price increase.
iv) Before Galtaco's foundries closed down, Kelsey-Hayes failed to pay Galtaco for 84 of the
remaining 85 casting shipments. The price for the 84 shipments for which Kelsey-Hayes has not
paid approximates the $2 million price increase to which Kelsey-Hayes agreed under the 1989
agreements.
C) Rule
1) In order to state a claim of economic duress, a buyer coerced into executing a modification to an
existing agreement must at least display some protest against the higher price in order to put the
seller on notice that the modification is not freely entered into.
D) Issue(s): Whether the superseding agreements were executed under economic duress.
E) Answer: Yes.
F) Rationale: The manufacturer did present issues of economic duress. Kelsey-Hayes might reasonably have
feared that if it shunned the 1989 agreements and instead sued for breach of the 1987 contract, then
Galtaco would have stopped supplying it with castings. The record strongly suggests Kelsey-Hayes would
not have been able to locate an alternate supply of castings. As a result, Kelsey-Hayes' business reputation
may have suffered and its major customers may have been forced to shut down its automobile production
lines.
G) Brief Fact Summary. This case involves a requirements contract where the supplier threatened to stop
production if the buyer did not agree to pay a higher price for the product.
H) Takeaway:. A contract is voidable if made under economic duress.
I) Facts. The Plaintiff, Kelsey-Hayes (Plaintiff), entered into a requirements contract for the purchase of
castings, with the Defendant, Galtaco Redlaw Castings Corp. (Defendant). The contract was for a three-
year term and it included fixed price terms. The Defendant then began to suffer financial difficulties and
made an offer to its customers that it would keep operating in exchange for a price increase of thirty
percent. The Plaintiff was not able to find an alternative source of casings so it accepted Defendant’s
offer, although it protested that this offer amounted to a breach of contract. Defendant’s other customers
did find alternate supplies of castings. Therefore, Defendant offered Plaintiff an additional thirty percent
increase in exchange for its remaining in operation solely for Plaintiff’s benefit. Again, Plaintiff felt it had
no choice but to accept, as it still had not found a reasonable alternate source for castings. Plaintiff also
feared that if it did not accept, it w
ould cause its major client, Ford Motor Co., to stop production and destroy Plaintiff’s business reputation.
Plaintiff sued for breach of contract, asking for a declaratory judgment releasing it from paying the
increased prices. Defendant moved for summary judgment, contending that the price modification
invalidated the previous contract.
J) Issue: Must a person be subjected to an unlawful act such as threat of a tort or crime in order to make a
claim of duress?
K) Answer/holding: No. Motion for summary judgment denied. Declaratory judgment granted in favor of
Plaintiff
L) Rule: Michigan courts recognize the doctrine of economic duress and Defendant’s offer to Plaintiff
amounted to economic duress.
Economic duress can exist even in the absence of criminal or tortuous activity, so long as assent is induced
by an improper threat and the victim is left with no reasonable alternative.
M) Rationale/Discussion. The court looked to Michigan law to define economic duress. In the instant case, it
seemed clear that Plaintiff was left with no reasonable alternative and had no choice, but to assent to
Defendant’s offer. Although Plaintiff assented, it also vigorously complained that it viewed Defendant’s
offer to be a breach of contract, giving Defendant notice that Plaintiff did not freely enter into the
modification. The court noted that it would have been inadequate for Plaintiff to accept the breach and
then sue for damages, as Plaintiff would have then been forced to stop production and risk damaging its
business reputation. Finally, the court examined the UCC and found that its language supported the
economic duress doctrine.
1) just b/c other companies could find alternative providers doesn't mean that KH could!!
N) NOTES:
1) NOT a pre-existing duty case- looks more like mutual recession- but it was mutually rescinded b/c of
economic duress
2) UCC 2-209 governs= modification (when mutual) "needs no consideration to be binding"
i) but court notes that UCC does not trump the idea of economic duress- UCC does NOT preclude
application of duress doctrine to sales of goods (Kelsey-Hayes)
3) good faith as limitation on modification under Art 2:
i) LIMIT: comment 2 to 2-209: obligation of good faith bars "extortion" of modifying agreement
without legitimate commercial reason
ii) Roth test for good faith:
(1) was modification procured b/c of unforeseen economic exigency which would prompt
ordinary merchant to seek modification to avoid loss on K
(2) êven if above is met, cannot coerce the modification
Brookside Farms v. Mama Rizzo's, Inc. - Must K modification be in Writing? -NOM

A) TAKEAWAY: Where Seller and Buyer had written K for sale of goods, which included “no oral
modification” (NOM) clause, subsequent oral modification under which Seller promised to change goods,
and Buyer agreed to pay more, is enforceable by Seller in suit to collect payment for goods delivered, (as
long as Buyer promised to record oral agreement in writing, even if he failed to do so  ACTUAL
PERFORMANCE CAN OVERCOME A No Oral-Modification Clause
1) Buyer estopped to assert Statute of Frauds defense (see 2-209(3)), under 2-201
2) “No oral modification” clauses can be waived by conduct (2-209(4), 2-209(5)), especially given
reliance by Seller
B) Overview: P sells D basil. There are some oral price modifications, even tho both parties knew there was a
no oral modifications clause in K—D asks P to remove stems from basil, price is increased. D said that
they would change the written K, never did. P stopped payment at some point. K enforceable despite no
oral modifications statute.
1) K falls within dispute of statute of frauds, UCC ž 2-201:
(1) K for sale of goods for price of $500 or more is not enforceable by way of action or defense
unless there is some writing sufficient to indivate that K has been made and signed by party
against whom enforcement is sought.
(a) General rule: oral modifications not enforceable
(2) EXCEPTIONS to written requirement:
(a) When they do not materially alter underlying obligations
(b) Where one party reasonably relies on oral promise of another to reduce oral agreement to
writing
(c) Where payment has been made and accepted (This is a TX law, though)
ii) There was also a No Waiver clause that says that failure to demand full performance doesn’t give
rise to waiver
(1) However, even if there is no waiver, K still falls within rules (and exceptions) of statute of
frauds
C) Facts: October 13, 1993, P/Brookside Farms and D/Mama Rizzo's Inc (MRI) entered into a requirements K
for the sale of fresh basil leaves from Brookside to MRI. Under the contract, MRI agreed to buy a
minimum of 91,000 pounds of fresh basil leaves for a one-year term.
1) K itself: Delivery was to be made daily, five days per week, in lots ranging from a minimum of 350
pounds to a maximum of 800 pounds. MRI agreed to pay for the basil it accepted within fifteen days
of delivery date.
i) K contained a clause forbidding oral modifications of the contract's terms.

2) MRI tries to modify: A vice president at MRI requested to Brookside to remove additional parts of the
stems of the basil leaves, a task not specifically required under the original K.
3) Brookside agreed to do this work in exchange for a $0.50 per pound increase for the remainder of
the K term.
4) claims:
i) P/Brookside claimed MRI breached the executory portion of the contract by refusing to accept
the minimum amount of basil it agreed to and that it was also liable for the 3,041 pounds of basil
it accepted but did not pay for.
ii) D/MRI contended that no payment was due because the seller itself breached the K by raising
prices in violation of the contract's express language.
D) Rules: Oral agreements that materially modify a written agreement within the Statute of Frauds are not
enforceable. However, not all modifications are prohibited. If the oral changes do not materially alter the
underlying obligations, for example, they are not barred. Promissory estoppel is used to forbid reliance on
the Statute of frauds as a defense to the validity of oral agreements.
E) Issue: Did a valid oral modification of the contract occur even though there was a no-oral modification
clause?
F) Answer: YES- The oral modification was valid.
G) holding: A valid oral modification of the contract between MRI and Brookside occurred on both estoppel
and statutory grounds. MRI cannot invoke the no-oral-modification clause of the contract to bar P's claim
that a valid modification occurred in this case.
H) rationale:
1) During each price alteration, MRI issued separate purchase orders and Brookside filled each order
and invoiced MRI on the price. In each case, MRI paid the invoiced price without protest.
i) It is undisputed that MRI's VP assured Brookside that he would make a notation of price changes
on MRI's copy of the K and that this notation would be sufficient.
2) Under the estoppels theory, the promised notation would have constituted a valid written
modification of the contract's terms because a valid writing under the Statute of Frauds requires only
"some writing" signed by the party against whom it is enforced, namely MRI.
3) The modification was valid on statutory grounds as well. MRI is liable to Brookside for $ 20,526.75 in
payment for the 3,041 pounds of basil accepted but not paid for.
4) agreements to settle a liquidated, undisputed claim for less than full amt have traditionally not been
binding on the creditor-- (basically an extension of preexisting duty rule)-- today UCC 1-207(2) says
creditor's cashing of debtor's FULL pmt check even w. reservation of right to sue still constitutes
accord and satisfaction and bars creditor from collecting the unpaid balance unless creditor can show
other circumstance like duress

Chapter 11- Expectation Damages: Principles and limitations
Expectation Damages Overview

A) What remedies should be available for K breach?
1) lawsuits not usually brought just to recover nominal dxs
2) RESTATEMENT 2d FORMULA for Damages:
i) claim for total breach (e.g. P has terminated K and refused to render performance)
(1) May have 4 elements b/c could affect party in 4 ways:
(a) LOSS IN VALUE = if deprived of some performance expected under K
(i) value should've received under K [-] value actually received (if any) = loss
in value
(ii) aka
(iii) value of expected performance [-] what was received = DAMAGES
1. ex. nonconforming goods-- value goods were to have - value of goods

actually delivered
2. ex. real estate -- K price [-] market price at time of breach
3. ex. construction= expected net profit on entire K + builder's
unreimbursed expenses at the time of breach
(b) + OTHER LOSS= "incidental," "consequential damages"
(i) INCIDENTAL= additional costs after the breach in a rxnable attempt to avoid
loss, even if attempt is unsuccessful
(ii) CONSEQUENTIAL= injury to person or property
(c) COST AVOIDED= e.g. builder stops building b.c of breach by other party- builder
avoids cost of whatever he would have spent - This is claim for breach when
someone wants to get out of having to perform further b/c other side hasn't
performed
(d) LOSS AVOIDED= if the injured party terminates and claims dxs for total breach,
breach may have a further beneficial effect by allowing party to avoid some loss
by salvaging and relocating some or all of the resources it would’ve had to
devote if performance were required
ii) claim for partial breach (P has part-performed already)
Roesch v. Bray, Ohio 1988

A) facts= Roesches/Ps/appellants/sellers entered into written K w. Brays/buyers/appellees/Ds (Mr.
Bray is Mrs. R's father) to sell the R's home- then 5 days later the Brays say they cant fulfill it-
cant pay. Prior to breach, Rs entered into K to purchase another home in Huron. Bray
encouraged them to buy the other place. (so rxnable reliance)- in order to pay for other place,
the Ps had to take out loan of 65$K + interest
B) procedure: trial court gives them $9,163 and 10% interest on the $45,000K that was payable to
sellers at closing -(Actual K rate was 16%)- the 9K value is what referee recommended- included
utilities, insurance, real estate, advertising, taxes etc that was payable to Ps at closing date
C) issues: what should damages for sellers be? usually its based on K price - market value of real
estate at time of breach -- but no evidence to show market value at time!
D) Rules: When a buyer does not perform its contract for purchasing real estate, the seller may
recover the difference between the K price and the market value of the property at the time of
breach. Market value (if no evidence of it) may be reasonably deemed to be whatever the K
price was - so if in a subsequent K they get less then the formula is: K price [-] actual resale price
E) generally damages of breach of K are limited to losses that are rxnably to be expected as
probable result of breach - court finds that the damages for utility and maintenance costs for
several months could rise incrimientally and was too speculative- if sellers didn't sell their home
for a long time after breach think about how high and unknown this could get- so court gets rid
of the award for maintenance and utility of the home between breached K and actual resale
1) -formula for an injured seller’s loss in value:
i) K price - market value of property at the time of breach = damages.
ii) (The seller only recovers when the K price is higher than the market value)
2) Formula for an injured buyer
i) Market value – contract price = damages
ii) (The buyer only recovers when the contract price was lower than the market value.- aka
he would’ve made a profit or gotten a "Steal")
F) holding: appellees win- Ps/appellants only get $1500 plus 10% interest b/c the court got rid of
the part of the award that included utility and maintenance of home etc. b/w breach and resale
G) notes:
1) limits on consequential/incidental damages:
i) damages must be rxnably FOS (breaching party had rxn to FOS harm as probable result
at time of K)
ii) prohibition on speculative damages (dxs must be proved w rxnable certainty)
iii) duty to mitigate damages (e.g. buyer can't go sell the home to his friend for half off and
then go recover the rest from the breaching party!)
2) courts usually allow owners to testify about market value of home if cant get a real estate
appraiser - obviously owners may inflate it though!
3) English rule vs. American rule
i) English= real estate buyers can only recover restitution (e.g. get back any pmts made)
unless seller breached in bad faith
ii) American= expectation damages awarded (so not just restitution) to buyer if seller
breached, regardless of whether it was good or bad faith breach
4) UCC damage rules
i) K price [-] market value at time of learning of breach + incidental and consequential
damages
ii) seller's resale= allows seller to recover from breaching buyer K price [-] seller's resale
price
5) interest: prejudgment interest hard to get, but does happen sometimes so long as it is not
"usury"- postjudgment interest accrues from date of judgment or verdict
American Standard, Inc. v. Schectman, (N.Y. 1981). - cost of completion

A) Facts: American Standard, Inc. (P) operated a pig iron manufacturing plant on 26 acres of land
abutting the Niagara River in Tonawanda. On the property were several buildings, a 60-ton blast
furnace, railroad tracks and locomotives, and other heavy machinery. American Standard
decided to close the plant and contracted with Schectman (D) to convey the buildings and
equipment, in exchange for $275,000 and his promise to remove everything. Schectman
promised to remove all foundations etc., including those beneath the surface and not visible,
and grade the property as specified. D failed to perform and P brought suit and was awarded
$90,000. D appealed.
B) Issue: What is the measure of damages for breach of a construction contract?
C) rules:
1) here the court applies cost of completion (cost-to-complete) of job (aka what the guy didn't
perform- what the value of his work was, NOT loss in value to property that resulted)
2) general rule of damages for breach of a construction K= injured party may recover those
damages which are the direct, natural, and immediate consequence of the breach and
which can reasonably be said to have been in the contemplation of the parties when the K
was made.
3) diminution in value measure of damages is only applied when the defects are irremediable
or may not be repaired without substantial tearing down; applied when the cost of
completion measure would be unjustifiably economically wasteful, and grossly out of
proportion to loss suffered by P and good faith defect/mistake by D caused the breach
i) the diminution of value measure may be applied if the breach is only incidental to the
main purpose of the K, and completion would be disproportionately costly.
ii) ***contractor asking for application of diminution of value measure must not have
breached the contract intentionally, and must show substantial performance made in
good faith.
D) rationale: no good faith- D’s completed performance would not have involved undoing what in
good faith was done improperly, but only doing what was promised and left undone. D, instead
of attempting in good faith to complete the removal of the underground structures, contended
that he was not obliged by the K to do so and, thus, cannot claim to be a transgressor whose
default is unintentional and trivial.
1) That the fulfillment of D’s promise would add little or nothing to the sale value of the
property does not excuse the default. The rule that the measure of P’s damage is the cost of
completion is not altered by the mere fact that the burden of performance was heavier than
anticipated, and the cost of completion disproportionate to the end to be obtained.
E) holding: Affirmed.
F) Notes: One of the key features of this case that distinguishes it from other construction
contracts cases is that the court deemed that D’s breach was intentional.
1) justification for cost-to-complete: sometimes idiosynchratic value to P (market value doesn't
show personal value to seller), also b/c the
2) Posner says= cost-to-complete overcompensates owner- if owner wanted it completed he'd
sue for specific performance
3) restatement 2d: damages may be a) diminuition in value OR b) rxnable cost of completing
performance if this cost "is not clearly disproportionate to value lost" (clearly rather than
American std. "grossly" disproportionate std.
4) ordinary defective or unfinished construction work- usually courts use cost-to-complete
damages
Restrictions on Recovery of Expectation Damages: FOS, Certainty, and Causation

Hadley v. Baxendale, Court of Exchequer, Eng. (1854)
A) Facts: A shaft in Hadley’s (P) mill broke rendering the mill inoperable. Hadley hired Baxendale
(D) to transport the broken mill shaft to an engineer in Greenwich so that he could make a
duplicate. Hadley’s servant told Baxendale’s clerk that the shaft must be sent immediately and
Baxendale promised to deliver it the next day. Baxendale did not know that the mill would be
inoperable until the new shaft arrived. Baxendale was negligent and did not transport the shaft
as promised, causing the mill to remain shut down for an additional five days. Hadley had paid 2l
4s to ship the shaft and sued for 300 pounds in damages due to lost profits and wages. The jury
awarded Hadley 25l beyond the amount already paid to the court and Baxendale appealed.
1) more facts detailed- Ps were the owners of a mill whose operation was stopped due to the
breakage of a crank shaft. The shaft had to be sent to engineers of the manufacturer [Joyce
& Co] as a pattern for a new one. Ps used Pickford & Company as carriers. The clerk advised
them that the shaft must be sent immediately, as the mill was stopped. The clerk was
promised delivery in one day and paid 2 pounds 4 shillings for the delivery. However,
Pickford failed to perform as promised and delivery was delayed for several days. As a
result, P lost several days’ profits from the mill that otherwise would have been made if the
shaft had been delivered on time. P sues D for lost profits.
B) history: In the trial case, the jury returned a verdict for the Plaintiffs for 25 pounds, plus the
amount paid into Court. Defendant appeals and a new trial is ordered. Appellate court
reverses.
C) Issue: can an injured party recover lost profits in this case? What is the amount of damages to
which an injured party is entitled for breach of contract?
D) Rules: NO; An injured party may recover those damages reasonably considered to arise naturally
from a breach of K, or those damages within the reasonable contemplation of the parties at the
time of contracting.
1) LIMITATION ON DAMAGES P WOULD NORMALLY BE ABLE TO RECOVER UNDER
"EXPECATION RULE": an aggrieved buyer of services will be unable to recover
consequential losses resulting from breach unless the losses are:
i) a “natural” consequence of breach; OR
ii) the buyer brings the circumstances which would generate the losses expressly to the
seller’s attention.
2) the usual rule was that the amount which would have been received if the K had been kept
is the measure of damages if the contract is broken. -
3) Damages for special circumstances are assessed against a party only when they were
reasonably within the contemplation of both parties as a probable consequence of a
breach and would naturally flow
E) rationale: Although the fact that the mill was closed was communicated, it wasn’t made
completely clear to the Ds that the mill was closed because of the broken shaft and couldn’t re-
open again until it was fixed. For all the Ds knew, the mill was closed for another reason.
1) Baxendale did not know that the mill was shut down and would remain closed until the new
shaft arrived. Loss of profits could not fairly or reasonably have been contemplated by both
parties in case of a breach of this contract without Hadley having communicated the special
circumstances to Baxendale. = the jury should not have taken the loss of profits into
consideration.
F) Disposition: Vacated and remanded for new trial.
G) Notes:
1) General damages= naturally flowing, direct/ vs. / Special damages= "consequential"= e.g.
lost profits from collateral Ks
2) FOS= only type of loss (not manner) needs to be FOS- std. of fos is at least part objective-
breaching party is liable for things it had rxn rto know and loss must be fos as "probable"
resul of breach- so doesn't require that losses be inevitable but doesn't extend to remote
losses
3) tacit liability test= even stricter than Hadley- requires not only that the breaching party
knew of possible loss but that they "assumed consciously" the liability in question- MODERN
REJECTION OF THIS-
4) Epstein says amt of damages should be viewed as K interpretation - should be amt that
parties would've agreed on if they did put the amt in K (aka if they had put in K an amt that
they'd pay for breach)- but isn’t putting that in the K itself valuable?? -> this is Eisenberg's
point- he opposes Epstein and says that costs of Hadley rule are likely to exceed its benefits-
he advocates rule that would aloe recovery of all proximately caused losses (basically a tort
std.) subject to K allocation of risks and principles of fair disclosure subject to K limits on
liability (POLICY ARGUMENT- EXAM)
Florafax International, Inc. v. GTE Market Resources, Inc. (Okla. 1997)- when lost profits are
recoverable
A) takeaway= When GTE screwed up the call center and Florafax lost a big K because of it, court
found that there was certainty that there would be lost profits- up to the jury to determine the
amount. “Too speculative”: refers to whether there will be profits, not the exact number- New
Business rule
B) Facts: axn = P, Florafax International, Inc. (Plaintiff) entered into a K with Bellerose Floral, Inc.
-parties agreed that P would handle a certain amount of floral orders for Bellerose Floral. This K
contained a clause stating that either party could terminate the K upon 60 days written notice.
1) Shortly thereafter, P entered into another K w/ D, GTE Market Resources, stating that the D
was to operate a call answering center on behalf of the P. This K contained a provision
stating “in the event GTE ceases to perform its duties
C) rule: Lost profits are recoverable so long as they are
1) foreseeable when the contract was made;
2) they directly or proximately result from the breach and
3) they are capable of accurate estimation.
Rockingham County v. Luten Bridge Co., (4th Cir. 1929) - P's duty to Mitigate
A) Facts: Rockingham County, North Carolina (D) contracted with Luten (P) to construct a bridge.
Luten had completed very little work on the bridge when Rockingham County provided a notice
of cancellation of the K. The P proceeded to complete the bridge b/c they thought the and
brought suit against the D for breach of K.
1) At trial, the judge instructed a verdict for the full amount of the claim in Luten’s favor
2) Rockingham County appealed.
B) Issue: What damages are appropriate where one party gives notice of breach of contract and
the other party completes their performance anyway?
C) answer/rule:
1) P’s remedy is limited to the amount that it would have been able to recover as of the time
notice of repudiation was given.
2) Luten is entitled to expenses incurred up until notice was given, plus expected profit from
completion of the K, plus any other losses incurred up until the time of breach.
3) A party who receives express notice of breach has a duty to mitigate damages.
D) Reasoning: It is wasteful to complete a bridge when changed circumstances have rendered it
worthless to the party who K'ed for its construction. The law seeks to avoid creating
disincentives for efficient breach.
Havill v. Woodstock Soapstone Co., Inc. (VT, 2004)

A) facts: The employee had worked for the employer for many years, off and on, but developed
problems working with an employee hired specifically to handle a reorganization. Nonetheless,
when she was fired, she was told it was for economic reasons, not given the formal warnings
required under company personnel policies for disciplinary firings, and given a laudatory
reference. The company hired people who did what she had been doing, and she was never able
to find a job with the same pay and benefits.
B) procedure: axn= D employer appealed and P former employee cross-appealed from a judgment
of the trial ct. finding in favor of the employee on her claim of breach. D challenged that finding,
as well as certain aspects of the award of front and back pay. The employee also challenged
certain aspects of the damages award.
C) holding: affirmed in part (on liability issue), reversed in part (Reversed and remanded on
damages- ordering further findings and recalculation of damages)
D) rationales: strong evidence to support trial court's findings that the employer bound itself to an
implied K that firing would be only for just cause, and that the employee's termination was
pretextual.
1) Despite the considerable discretion of the trial court in determining damages for that
breach, certain issues required reconsideration. The fact that the employee might well not
have been allowed to continue working as long past age 65 as she had hoped was one
factor. It was error not to take into account the fact that the employee chose to work fewer
hours after her termination, but it was not error not to include future pay increases in the
award.
E) rules: the rule that employment Ks for indefinite terms are at will is one of construction, not one
of substantive law. Thus, parties can modify the at will relationship according to the usual rules
of contract.
1) DISCRETION re: reward: trial court's only responsibility = front pay award must be limited to
a reasonable time and that is not too speculative when viewing all the evidence in the light
most favorable to P.
i) Trial courts have considerable discretion in calculating awards for lost future income,
because such awards are inherently speculative and are intrinsically insusceptible of
being calculated with mathematical certainty.
ii) BUT trial court's findings must sufficiently demonstrate how it exercised its discretion in
light of the evidence.
iii) factors court must consider for it not to be "too speculative"= evidence that P would
not have remained at job until retirement; length of employment prior to termination
2) a front pay award extending beyond the normal retirement age may be reasonable in a
particular case if it is supported by evidence that the P planned to work beyond the
retirement age, but the law does not compel a trial court to award damages that are co-
extensive with the period that a P intends to work.
3) An employee claiming wrongful discharge has a general duty to mitigate damages.
i) Mitigation requires that the employee make a good faith effort to find suitable
alternative employment. When an employer is claiming that the employee did not
properly attempt to mitigate damages, the burden of proof is on the employer to show
such failure. (must show:
(1) suitable work existed
(2) employee did not make reasonable efforts to obtain it
ii) Suitable employment = substantially equivalent to the position lost and suitable to a
person's background and experience.
4) An employer must clearly state its intent not to be bound by its promulgated policies in
order to avoid creating contractual liability. -employer may bind itself to continue to employ
employee despite that employer is not making a profit, but such a promise must be clearly &
specifically stated.
5) economic circumstances requiring layoffs may constitute good cause for termination. but an
employer cannot use the defense of economic necessity as a pretext for discharges which
would otherwise be subject to a just cause attack by the employee.
i) -For purposes of an action for breach of an employment contract, "pretext" is a false or

weak reason or motive advanced to hide the actual or strong reason or motive.
ii) Pretext is a determination of credibility. Indicia of untruthfulness appear more readily in
person than they do in the cold appellate record; thus, the fact-finder's credibility
determination is due great deference because it is based on the trial court's observation
of the witnesses as they testified.
Jetz Service Co. v. Salina Properties, Kan. 1993- loss volume sellers
A) Facts: Jetz Service supplies and maintains coin-operated laundry equipment. In May of 1987,
Salina Properties' predecessor in title leased 175 square feet of an apartment complex to Jetz
Service for use as a coin-operated laundry facility for a six-year term. In July of 1992, with 16
months remaining on the term of the lease, Salina Properties disconnected all of Jetz Service's
equipment and replaced it with its own laundry equipment. Jetz Service sued Salina Properties
to recover its lost profits for the remaining 16 months of the lease. Salina Properties claimed
Jetz Services had failed to mitigate its damages and should only recover the cost of moving its
equipment.
B) Rule: The mere fact that an injured party can make arrangements for the disposition of the
goods or services that he was to supply under the contract does not necessarily mean that by
doing so he will avoid loss. If he would have entered into both transactions but for the breach,
he has 'lost volume' as a result of the breach.
C) Issue(s): Whether Jetz Service should be treated as a "lost volume" lessee and is entitled to
recover its expected gross receipts for the remaining term of the lease.
D) Holding/rationale: Jetz Service is a "lost volume" lessee because, here, the evidence showed
that Jetz Service is in the business of supplying coin-operated laundry equipment; it has several
warehouses in which it has available for lease about 1,500 used washers and dryers; it
continually looks for new locations in which to install laundry equipment; it would have been
able to fulfill the Kansas City lease without using the machines from Salina Properties; and it is
uncontroverted Jetz Service would have been able to enter into both transactions irrespective of
the breach by Salina Properties. Jetz Service was not required to mitigate damages by using the
equipment in another lease and Salina Properties is not relieved of the liability to pay damages
even though Jetz Service did utilize four of the five sets of laundry equipment six months after
Salina Properties' breach.
Prob 11-1
see classnotes
Tues. Mar. 23 – pp. 965-988 (23 pages)
Chapter 12: Alternatives to expectation damages: reliance &

Restitutionary damages, specific performance, and agreed remedies
Wartzman v. Hightower (Md. App. 1983)- Reliance Damages (development costs)

A) facts: hightower productions (appellees and cross-appellants) created in 1974 as promo.
venture by Adler, Billing, and Quinn- they wanted to employ singer entertainer who would live
in mobile flagpole perch from April '75 til New years- wanted new world record for flagpole
sitting-- in Nov 74 they went to Wartzman's law firm to try to incorporate venture. - said they
needed to sell stock publicly to raise 250K. - got incorped in Nov. -
1) reliance?- said could sell one million shares at par value of 10¢/share- for total of 100K. sold
stock, used own 20K to open corporate acct at Md bank- and an office in a plaza. then began
searching for "woody hightower". - found 23 yr old john Jordan. - sought and obtained
company to construct "perch" w/ bed, toilet, water, fridge, heat. needed hydraulic lift
system on tractor trailer. employed 2 PR people - got proclamation from mayor of b'more
and then he went up. got a few small tv spots, raised 43K thru stock, scheduled stockholder
mtgs
2) problem- w/in few weeks of woody's ascension, Wartzman said couldn't sell any more stock
b/c corp was "Structured wrong" (firm failed to prepare offering memo and to assure corp
made required disclosures to prospective investors per MD Securities Act) and needed 10K-
20K securities attny to correct - hightower had to tell shareholders that its corp wasn't in
compliance w securities laws. woody couldn't go across state lines and no stock could be
collected til problem fixed, so they disabled the venture.
3) jury instructions-damages allowed to consider: economic loss occasioned by increased
costs of construction/financing, atty fees to establish property, capital gains taxes paid for
failure to purchase another property within the time limits prescribed by law, amt of
earned hazard insurance premium appellees were required to purchase
i) summary: Hightower/appellees hired P to help them sell stock in a company eager to
set "world flagpole sitting" record. P law firm screwed up the legal requirements, and
Hightower was out a great deal of money. Court held that where anticipated profits are
too speculative to be determined, P can recover for reliance damages.
ii) Reliance Damages: Damages that plaintiff suffered in reliance on the contract.
B) holding: affirmed (damages stay the same- yes reliance but no prejudgment interest)
C) takeaway rule: if anticipated profits (expectation damages) are too speculative to be
determined, and where breach has prevented anticipated gain and made proof of loss difficult to
ascertain THEN injured party has a right to damages based on reliance interest including what it
spent preparing for performance or part-performing, LESS any loss the breaching party can show
with reasonable certainty that the injured party would have suffered anyway had K been
performed. (p. 968 middle)
1) but limits: P cant escape bad bargain thru reliance damages- where its shown p would’ve
had net loss if K was completed, where it's shown venture was doomed to fail anyway cant
just blame breach
2) only liable for risks rxnably FOS'able to contracting party at time made K (and you take into
account the skill of the professional, here-lawyer- test= what rxnable lawyer should have
known)
3) **cant instruct jury that P must prove it would've succeeded absent breach- burden on D to
show it would not have succeeded- and plus, nature of reliance dxs is you CANT calculate w/
rxnable certainty the future gain they would’ve experienced
4) duty to mitigate: this didn't require hightower to hire a securities specialist at additional 10-
20K at its own expense which it couldn't afford!- AND both parties had same ability to
mitigate- firm could’ve paid the securities specialist themselves (and should have! - exam).
no evidence hightower had enough funds to keep its biz open
5) prejudgment interest: MD law says where claim is for unliquidated damages, they can run
from date of judgment but not before=
D) rationale: when it couldn't sell stock any more, project failed, and "no greater nexus need be
shown"- once this was shown, burden on appellant firm to show otherwise- here, appellants
failed to show that venture was "doomed to fail" before this issue arose-
E) issues: was trial judge right to permit jury to consider "reliance dgs" and to not permit jury to
consider prejudgment interest? answer: yes
F) notes:
1) need for reliance dgs when expectation dgs are too speculative : e.g. contractor allowed to
recover ependitures in part performance where lost profits too speculative b/c cost of
completion not provable with
2) K price as limit on reliance dgs?: should they be "not recoverable in excess of full K price
promised by D"?- R.2d 333- some say distinction should be drawn b/w "essential reliance"
(costs of performance of k) and "incidental reliance" (costs in collateral transactions related
to K)- and that K price should only limit recovery for essential reliance damages- b/c if you
award more than that then you are showing that K would've been losing one and rewarding
party for making a bad deal
3) limitations on recovery for reliance damages: FOS, Causation, certainty, and mitigation also
apply here (as w/ expectation) - need to prove reliance/breach caused the harm with
certainty. "equal opportunity" exception to mitigation applied by some but not all courts
(employed in Wartzman)-
4) losing Ks: D has burden of showing P would've lost anyway if K had been performed
5) precontract reliance: NOT RECOVERABLE!!
6) foregone opportunities as reliance damages; sometimes ct considers gains P would’ve made
if not relied on promises of D. e.g. P permitted to recover franchise fee and amount of lost
salary as a result of quitting his initial job; P could recover overhead expenses that would've
collected had alternative Ks been entered into instead)
Walser v. Toyota Motor Sales (8th cir. 1994)- takeaway

A) facts: 1987 toyota conducted market surveys throughout us to find best market for new lexus
cars. market indicated Twin Cities as 2-dealership market and recommended 2 suburban areas.
April 1988 toyota sent letters of intent to prospective dealerships in 2 locations- dealer in one
area said no, so Toyota (D) searched found Wasler and his co-owner Mclaughlin (Ps) who owned
BMW/Mercury dealership- said they'd be interested in obtaining lexus dealership.
1) Toyota has 3-step process for est. dealerships 1) formal application, plan submitted to
Toyota from dealer. 2) letter of intent signed by head of lexus division and prospective
dealer containing final conditions. 3) former dealership approved by Toyota and again
signed by parties
2) Haag (Toyota division head) told Ps in Oct 1989 that letter of intent was forthcoming, in
Dec. 1989 said "you're our dealer" and that letter had been formally approved. few days
later called Ps and said it had not been formally approved- finally in March told Ps that lexus
wouldn't issue letter of intent
3) P's reliance: in meantime b/w October and December? Wasler's father had agreed to
purchase property for proposed dealership
B) P's claims: 1) breach of statute (thrown out by court) 2) breach of K, 3) Prom. Estop. 4) joint
venture (thrown out by court) 5) fraud, 6) intentional interference with K relations, 7) int'l
interference with prospective business advantage. (thrown out by stipulation)
C) trial court: jury= for Ds on fraud, breach of K. but for Ps on promissory estoppel. -limited
damages to out-of-pocket expenses per judge's instruction
D) P/appellants' claims on appeal: appellants=Wasler and McLaughlin (jury verdict gave them
$232K) on their promissory estoppel claims against Toyota: dist ct erred in instructing jury that
their PE recovery limited to out-of-pocket expenses. they want recovery for lost profits of up to
7.6 million. and spending in attempting to obtain dealership (claimed this totaled over 1 million-
including $677K for land and maintaining it)
E) Rules:
1) R.2d §90: "promise which p'sor should rxnable expect to induce axn or forbearance on part
of p'see or 3rd person which does introduce such axn is binging if injustice can only be
avoided by enforcement. judgment granted for breach may be limited as justice requires.
i) Minn courts have interpreted it to mean may be limited to damages measured by
reliance or out-of-pocket expenses- great discretion given to court b/c it's a policy
decision!
2) calculation for land bought in reliance = amount paid for property [-] actual value  so
here, they paid 677K but it was still useful and worth at least 550K
F) rationales: D gave evidence that dealership was far from a certainty- only relied on getting
dealership, but were still tons of other hoops to go through- only short period b/w when told
they would get it and when Haag backed out. - and no demonstration of lost opportunity by Ps.
G) holding: affirmed for P in same amount (of $232K)- dist court did NOT err in limiting PE recovery
to out-of-pocket expenses and refusing to consider potential lost profits of venture and
unamortized capital investments made in attempting to obtain dealership
H) takeaway: Where appropriate, measure is difference between purchase and resale prices of
things bought in reliance.
I) summary: P approached D with offer to open a dealership. D led P to believe there was a deal,
relying on which the P bought land. P was only able to recover difference in what he paid and
what land was worth. Court held that damages in promissory estoppel actions can be limited as
justice requires.
J) notes:
1) should parties asserting PE claim be able to recover expectation damages that they can
prove w rxnable degree of certainty (would be recoverable under K theory), or only reliance
(b/c this is "only" a PE claim)? (policy question- exam)- Williston says they should be able to
recover expectation b/c §90 says that it is enforceable binding promise- and if promise is
binding it needs to be enforced as made
2) should damages in PE be limited to actual reliance??
3) judge has discretion whether to award expectation or only reliance damages
4) majority approach: allows lost profits and other forms of expectation damages- but only if
expectation damages were rxnably foreseeable to breaching party and can be assessed with
rxnable degree of certainty! (bc those are always the 2 requirements for expectation
damages)
Restitutionary Damages
A) aka: quantum meruit/unjust enrichment/quasi-K
B) 3 applications of restitutionary damages
1) non-breaching party may get restitution rather than expectartion dgs for breach of K-
2) even breaching party may be entitled to restitution b/c of benefit conferred on other party
by performance
3) if performance obliges have been "discharged" for some reason (incapacity, impracticability-
SOF, mistake) either/both parties may get restitution
i) *restitution premised on axn for rescission (not breach) of K
US v. Algernon Blair (4th cir. 1973)- restitution, Quantum meruit

C) Issue: Can a subcontractor, who justifiably ceases work on a K b/c of prime contractor's breach,
recover in quantum meruit the value of labor and equipment already furnished pursuant to the
K irrespective of whether he would have been able to recover in a suit on the K?
D) answer/holding: Yes. reversed and remanded. Quantam meruit damages are permitted
regardless as to whether performing the contract would have resulted in a loss.
E) Procedural History:
1) Trial court finds for π but won't allow quantum meruit
2) this court- reversed and remanded
F) Facts: P/subcontractor, Coastal, starting doing work for D/primary contractor, Blair. D/Blair
refused to make certain payments and P/Coastal stopped work. P/SC brought suit against the
D/primary contractor to recover for the services rendered.
1) shorter version: P contracted to provide steel work for the construction of a naval hospital
for D; P began performance, but ceased when D refused to pay for crane rental
G) Rule: If expectation damages are insufficient to cover Ps losses, P may substitute reliance
damages. damages should be measured by the replacement value of the labor and equipment
provided by Coastal. (remanded to find out exactly what that amt is)
1) Stating reliance damages in the complaint is not required, can be joined later
2) calculating: K price may be evidence of what recovery should be, but is not a limit on
recovery. True measure is how much the services could have been purchased for by P at the
time and place services were rendered
H) rationale: Coastal is entitled to damages for services rendered b/c Blair has benefited from
Coastal’s loss.
1) Susi Contracting Co. case -court allowed the option of forgoing recovery on the K in favor of
the rxnsble value of his performance
2) Unjust enrichment strengthened by the idea that the purpose of justice is the maintenance
of an equilibrium of goods among members of a society
3) “Recovery is undiminished by any loss which would have been incurred by complete
performance” Williston
I) notes:
1) limit on restitution: usually party had right to choose restitution damages over expectation
damages, but not when nonbreaching party has fully performed his obligations under the K
and the breaching party's only remaining duty of performance is the payment of a sum of
money. in this case the nonbreaching party may not elect a restitutionary recovery but is
limited to expectation damages. Restatement (Second) §373(2).
2) market-value restitution rule: policy rationales for allowing recovery for reliance even when
the profit of K wouldn't have been as great as the $ spent on part performance -b/c if p
elects to take restitution damages, the K no longer legally exists so need not consider
further losses P would’ve incurred. but some say its unfair to give P more than P would've
gotten if K went through (and remember no punitive dgs in K law supposedly)
Ventura v. Titan Sports, Inc. (8th cir. 1995) - Quantum Meruit/Unjust Enrichment & Restitution
A) takeaway: Jesse Ventura sued for video tape royalties. Court held that he waived rights to
royalties as a wrestler; not as a commentator- second K that waived all rights to royalties was
unenforceable because it was entered by fraud
B) facts: Pre-Bloom K- P/Ventura worked as wrestler and commentator without Bloom as his agent
at this time- entered into 1st K with D, but videotape sales never mentioned. Post-bloom K:
After P came back to Titan to be commentator with Bloom as his agent, Ds told P about the
videotape but told him th
C) issue: may Ventura/P avoid the express K waiving royalties for commentary and recover those
royalties under quantum meruit (unjust enrichment or restitution)?
D) answer: yes- reversed
E) rules: unjust enrichment does not lie wherever one party benefits from another- only where the
benefitting party benefits "unjustly" (meaning unlawfully or illegally)-
1) elements of fraud= materiality, inducement, justifiable reliance, causation, damages
2) expert witness role/calculation: Expert testimony was admitted to determine the value of
the royalties that should have been paid for using his image and voice in the videos. - in
considering whether expert testimony is reliable, must consider methodology/principles
underlying testimony, not the conclusions they generate- main dispute over royalty rate-
EW says range of royalties is 3.5-7.5%- jury awards about 5%- EW testimony reliable court
says- it is reasonable to determine value of an article (here a videotape license) by looking at
other "substantially similar" licenses- so EW's look at thousands of licensing agreements for
sports/entertainment figures was a reliable method
F) rationale:
1) fraud= Titan told P he was only employed to be commentator in live performance- didn't tell
him it would be on video and never mentioned anything about royalties- so when he made
the commentator K he didn't even consider videotape sales, then when he heard about it
they told him it was impossible to get royalties for it b/c of "company policy".
2) misrep= Titan told P its policy was to pay royalties only to feature performers, when in fact
they were paying some other high-profile commentators like Hulk Hogan etc.). Restitution
for unjust enrichment/quantum meruit is the only proper theory for recovery.-Bloom over
and over asked whether the company policy had changed and co. kept lying about it
3) note: no royalties for wrestling performances b/c WBA agreement governed and precluded
royalties
4) district court did not clearly err in finding that ventura's pre-bloom Ks did not address
videotape royalties and did not err when finding it could award QM and not enforce waiver
provision to compensate P for post-Bloom period
G) procedure: trial ct for P. P not entitled to Quantum meruit/un b/c express K covers subject
matter.
H) holding: jury award affirmed- Jesse Ventura gets a portion of profits received by D’s fraudulent
conduct in inducing Ventura to waive royalties for videos featuring him. IP rights to
commentary CAN be basis for unjust enrichment action-- court discusses only videotape issue
for simplicity, but notes that this analysis applies to other merchandise too
I) dissent: agrees about pre-Bloom K compensation for P, but says P should NOT get post-bloom
compensation and court should enforce the royalty waiver -there was NO unjust enrichment
here. lots of policy arguments-- says not shown to be inequitable violation of natural justice- his
commentary was compensated for- he did NOT perform any additional duties or services- there
is no right to publicity in Minn. in Dissent's view- titan took risks in making these videos, it
should get the benefits -- Ventura made a bad deal in waiving this right, court shouldn't
compensate him for his regret -- even if there were a right to publicity, ambiguity
J) notes:
1) pre-Bloom oral K: all agree this was fraud for not telling P about this and thus that P should
be compensated/ post-bloom written K: dispute over whether there's a right to publicity
and whether there was unjust enrichment of the Ds here
2) restitution damages/interest: may be calculated based on "benefit theory" (value of the
actual extra goods/services) or by the "Enrichment theory" (how much P actually made off
of it)
3) restitutionary reliance? = very little support for this- courts appear to be allowed to engage
in loss-sharing in roundabout way- by measuring damages "as justice requires"- so some
courts may allow reliance damages when a K is discharged for reasons like impracticability-
e.g. Hart v. Arnold Pa. 2005- seller of parcel of land entitled to restitution + reliance after
govt regulations made performance by buyer to build lake impracticable but buyer failed
timely to inform seller of changed circumstances
4) proving restitutionary damages: problem of "certainty"- trial court should invite parties to
offer exert witnesses to show reasonable value of services- should make effort to give relief
to nonbreaching party- "equitable considerations may predominate over a parochial
approach"
Prob. 12-1 class notes

Facts: Big Burger: corp that franchises burger restaurants throughout country
 6/04, Michaels approached BB for franchise

o reviewed literature, visited several BBs and hired lawyer- spent $15K in travel and
legal fees
 8/04, parties signed K in which BB granted Michaels franchise and would construct and lease
restaurant to her
o michaels would pay franchise fee of $100K to lease rest for 10-year term at fixed
rental plus % of sales
 resigned job as manager of local rest ($40K a year) and started purchasing equip from
approved suppliers - cost $50K
 1/05, rest ready for operation
 6 months later, disputes
o michaels objected to quality of products BB sent and to honor commitment to run
ad campaign
o complained income did not meet company's projections
 avg net prof: $75K, avg salary: $50K
 only paid $20K and broke even
 late 2006, michaels gave up rest and tried to negotiate but failed, brought suit
Assume michaels can establish BB committed material breach of franchise K. Damages?
only choose 1 -- expectation damages: $30K for 2 years OR reliance damages: $15K travel, $100K
franchise fee, $50K equip,
Michaels' claim includes count seeking recission and restitution, must elect between claim for
recission or breach of K: which way: recission or damages? Recission can get more here but not
usually proposed jury instruction for damages?
Expectation damages
 extra $10K salary plus profits

 only really getting $20K and no profits
 interest
 10 year K term
 only did for 2 years
 2x$30K =$60K
 total damages minus $40K
 argument against
 no guarantee that there would be a profit
Reliance damages
 $100K franchise fee
 $20K (actual salary v. old salary)x 2 years
 interest
 $50K for supplies
 argument against: unreasonableness
Restitution damages
 $100K franchise fee
 K price with market value
 maybe fraud
Notes
 Expectation damages
o $125K x 10?
o for 2 years, she made $40K ($20K x 2)
o $50K for equip, she had to spend that to make $125K
 can maybe sell the equip
 equip will not come in
o arguments against
 avg profile doesnt mean that it will be the salary
 hard to calculate
 speculative
 must calculate present value (opposite of interest)
 get money 10 years out, will get less today
 reasonable expectation of profits and salary
 mitigation
 EXAM: duty to mitigate will complicate calculation
 may not be able to find comparable job
 how long it takes
 would have to find a job for the next 8 years
 amount would have to be subtracted out
o counter
 she entered into agreement based on this
 Reliance damages
o $100K franchise fee (maybe only entitled to $80K cause worked for 2 years
o $50K equip (change if she sold it)
o $40K x 2 (- $20K x 2)=$40K
 can she get more?

 no, too speculative
 maybe not entitled for full 2 years bc didn't know that she would have kept
job for 2 years and she could not have found another job
 tough to get additional years
 try to ask though
o interest
o hadley consequential damages applies to all theories
 Restitution damages
o $100K franchise fee (should get all that back)
o may have claim to profits earned while working
o arg why she would not get
 portion of sales and rental were part of $20K earned
 no unjust enrichment because paid $20K to generate profit
o equipment and mitigation
 prob just give them the equip
o interest
 want to pursue expectations
Reier Broadcasting v. Kramer (Mont. 2003) -Specific perform.- enforcement of negative covenant
A) takeaway: court will not grant an injunction to prohibit a person's breach of a K where the
performance of the K otself would not be specifically enforced- generally personal service Ks are
not specifically enforceable, and this one to be a commentator for Reier and not to engage in
any other performance without approval/consent from Reier was not specifically enforceable,
so court would not grant injunction (actually removed temporary restraining order) to restrain D
from violating the K by doing other commentary of sorts- this was NOT enforceable (not in
Montana or in CA. and AZ. where they get precedent) - underlying K IS valid, BUT the K cannot
be specifically enforced by means of an injunction
B) rationale: to grant the injunction to prohibit him from doing other commentary would amount
to forcing him to do commentary only for this one station which is "indirect specific
enforcement of the K" the majority claims
C) facts: P/broadcast company owned several radio stations and had exclusive rights to broadcast
athletic events at the local university. The head football coach at the university entered into an
employment contract, whereby the broadcast company agreed to pay the football coach $
10,020 per year in exchange for exclusive broadcast rights with the coach. A breach of K issue
arose.
D) issue: (raised by P/broadcast co.) - within the context of a personal services K, did Mont. statute
prohibit the use of injunctive relief to prevent one of the contracting parties from performing
services elsewhere during the life of the contract?
E) held: statute prohibited the use of injunctive relief to enforce negative covenants contained in
personal services Ks. -so broadcast company not entitled to enjoin the football coach from
performing services elsewhere during the life of the K
F) rules:
1) Injunctions rarely used to enforce K rights or prevent breaches, and applicable court
decisions concerning the propriety of this tactic are scarce. but legislature has set forth
statutory guidelines for the use of injunctions. An applicable guideline is found in Mont.
code. an injunction cannot be obtained to prevent breach of a K, the performance of which

would not be specifically enforced. A list of obligations which cannot be specifically enforced
is found in Code.
2) In light of the unambiguous language of the statute, a court cannot interfere by injunction
to prevent the violation of an agreement of which, from the nature of the contract, there
could be no decree of specific enforcement
3) Montana statute, like its California and Arizona counterparts, prohibits the use of injunctive
relief to prevent a party to a personal services contract from performing services elsewhere
during the life of the contract.
G) dissent: preventing someone from doing something is very different than making them do it- P
didn't have to be commentator for anyone- its way diff saying he cant do it for other ppl and
that if he does choose to do it he must do it for Reier than it is saying he MUST do it and do it for
reier and giving him no choice to abstain- the former, which is what we have here, gives him
choice, the dissent says
H) notes:
1) Lumley v. Wagner (1872 eng.)- Lumley/P was an opera house owner who contracted with
Wagner/D to get her to appear in several operas in his theater- she promised not to appear
in any other opera during that time- but she later agreed to work for higher salary for
competitor and thus breached- P sought injunction restraining Wagner from singing for his
competitor - COURT allows injunction- DOES ENFORCE NEGATIVE COVENANT- despite that
court would not have required her to sing for P thru specific performance.
2) unique services requirement: personal services must be unique for courts to consider
granting specific performance- unique= "special, unusual, or unique character of services
which give a particular value"- e.g. athletes, artists, media personalities is where specific
perfomance may be granted
3) court may require specific performance in employment context only where employee was
wrongfully discharged under statutory provision preventing discrimination (e.g. Title VII)
Agreed Damages- Liquidated damages clauses

A) high deference to parties in settlements: absent claim of fraud, duress, mistake, settlements are
final-
B) much less deference in liq. dx provisions: not favored as much- subject to judicial scrutiny and
traditional tests- term aimed at compensation usually OK- if aimed at penalizing party- NOT OK
Westhaven Assoc. v. C.C. of Madison (Wisc. 2002)- liquidated/stipulated damages- failure to do

business provision
C) takeaway:
D) facts: lease issue- -LO (mall) and tenant (store) had K lease- lease rate per day was $50 at time D
breached by closing its store in Oct. 1999- before the lease the occupancy rate was 71%- after
parties signed lease, it fluctuated b/w 50% and 72%-- after Feb 1, 2000, CC did not pay rent. P
attempted to fing new tenant to lease the space- space remained vacant til Dec. 1 2000 when
West found a subletter- so P/shopping center wants attorneys fees (cant get this), rent, and K
damages for 13 months when it wasn't occupied. In the K, there was stipulated damage
provision (called "Default by Tenant")- said (1) if Tenant/CC defaults in performance of any of its
K obligations and doesn't remedy them within 10 days, that LL/Westhaven can reenter and
recover any rent leading up to date or reentry and liquidated damages- or (2) LL can choose not
to terminate lease and attempt to relet in its own name for remainder of term and then recover
from CC any deficiency b.w amount of lease and new lease, less any expense of reletting,
including all necessary repairs and alterations and rxnable attn fees and rent provided
hereunder. P exercised option 2- no dispute that P entitled to rent at 50$/day b/w October 1999
when D vacated and subletting in Dec 2000 -- key stipulated provision in dispute = CC must pay
it $20/day if CC fails to keep its premises open for business during "normal biz hours"- aka a
failure to do business clause- store vacates premises- shopping center wants to enforce this.
E) issue: were the stipulated damages provisions in the parties' K reasonable and thus enforceable
liquidated damages provisions or unreasonable and thus unenforceable penalty provisions? (this
court deems "stipulate damages" as damages mentioned in lease and "liquidated' as meaning
reasonable and enforceable) - Westhaven wants to enforce stipulated provisions against D
(Costcutters) -
F) answer: yes- reasonable- Reversed and remanded (trial court found they were unreasonable
penalty provisions)
G) rules:
1) burden on D here b/c no unequal bargaining power: general assumption is that bargains
are enforceable so party asking court to invalidate bargain bears burden of production and
persuasion- must demonstrate justice of his position- especially where neither party
complains of inequitable bargaining power
2) stipulated damages provisions enforced if rxnable under totality of the circumstances.
-court's considers 3 things, great discretion to judge as to how to weigh each:
i) did parties intend to provide for damages or for a penalty?
(1) provisions don't become penalties just b/c 2 of them address same conduct- 2 form
provisions prohibiting same conduct NOT punitive necessarily-
(2) probably rxnable if damages amt is set at amount tied to base rent, as here
(3) neither provision required LL to mitigate- court says this doesn't matter b/c
elsewhere in lease LL's duty to mitigate existed
ii) rxnableness test 1= retrospective: were damages ascertainable at time of K?- or is injury
caused by breach one that is difficult or incapable of accurate estimation at the time of
the K?
(1)
iii) rxnableness test 2= prospective= and, are stipulated damages a reasonable forecast of
actual harm caused by breach?
3) minor breach cannot automatically trigger the stipulated damages- breaching party must
have opportunity to cure minor breach- court says 10 day provision and requirement of
written notice by LL to Tenant made sure that minor breach would NOT trigger the
provisions- in Mayfield court objected to provision that "even a minor default" entitled the
lessor to declare breach-- b/c this goes against rules of K law! -must be material breach
H) rationale: Altho rent not tied to CC's sales, West did have an interest in their being open b/c it
upped foot traffic- even CC's president acknowledged that when nearby stores close it hurts
business. Just b/c occupancy rate of mall went up after CC left does NOT mean that LL/mall
suffered no harm as a result of breach- court says loss of significant tenant still may cause harm
b/c not only may fewer customers come but also other tenants lose faith in the mall
I) notes: may be upheld as rxnable forecast of uncertain damages- seems counterintuitive, but
actually the harder it is to calculate what damages should be, the more reasonable the
stipulated damages may seem. many courts have also put burden on party seeking not to
enforce stipulated provisions where the parties had equal bargaining power. note: equal is
pretty relative- need not be exactly equal, but if both are businesses then that should be
enough. -
1) not enforced if: damages clause appears to have no relationship to anticipated harm -
"grossly disproportionate to actual harm"- this may occur even if the agreed upon damages
were reasonable at the time the K was made. courts usually deny enforcement of them b/c
of their "in-terrorem" effect- may force a party to perform instead of breaching
2) but note: even if they have punitive aspect, may be upheld- liquidated dg in employment K
or covenant not to compete wont preclude court from granting injunctive relief IF FACTS
WARRANT
3) late fees=usually NOT upheld- b/c they look punitive
4) earnest fees= parts of real estate Ks requiring purchasers to make earnest $ deposits- may
require rentention of deposit if party breaches- courts divided on whether to uphold these
or not- some allow them and say breaching party cant recover any portion of amt paid,
others scrutinize them as liquidated dgs provisions
5) courts divided as to whether liquidated dgs clause prevents ct from granting specific
performance- again its based on facts and intent of parties- also issue as to whether
mitigation recovery should be deducted from stipulated amount- Posner said it shouldn't
6) under-liquidated damages: what ab rare case where it seems liq d undercompensates the
P?- r.2d says "limitation-of-damages" clause may be unenforceable as "unconscionable" but
does NOT specifically talk about low liquidated damages amounts - courts may not subject
these to reasonableness std. b/c maybe this reallocation of risks was bargained for- freedom
of K idea
7) some argue that penalty effect of liquidated damages should be OK- b/c parties are often
undercompensated (no atty fees, emotional distress, etc.- so why not let them contract to
get compensation for that on their own w/o needing courts- b/c courts wont allow
punitive/pain and suffering damages for breach)
see problems 12-2 and 12-3 on page 1045
Chapter 10: Consequences of Nonperformance: Express conditions, material breach, and

anticipated repudiation
Express Conditions (Consequences of Breach)
A) parties=
1) party who must perform condition= obligor
2) party for whom it must be performed= obligee
B) goal: to protect a party from having to perform if one or more specified events do/do not occur
C) examples: B will buy real estate conditioned upon ability to obtain a favorable zoning variance,
w/o which the property is less useful to it- insurance Ks often involve condition that one party
must provide notice to another of info in particular form or by stated times
Oppenheimer & Co. v. Oppenheim (NY 1995)

A) Summary: Parties entered into a letter agreement setting forth certain conditions precedent to
the formation and existence of a sublease between them. The agreement provided that there
would be no sublease between the parties “unless and until” P delivered to D the prime
landlord’s written consent to certain “tenant work” on or before a specified deadline. If the
condition did not occur, the sublease would be null and void. P provided only oral notice on the
specified date. Therefore substantial performance does not apply to this case.
B) Facts: In 1986 P moved to WFC in NYC with 3 years remaining on current lease. O&Y
(constructor of bldg) had agreed to make the rental payments If P was unable to sublease
current space, as an incentive to get P to move there. In Dec. 1986, P entered into a conditional
letter agreement with D that D would sublease current space of P. Proposed sublease was
attached to the letter agreement. The letter agreement provided that the proposed sublease
would be executed only upon the satisfaction of certain conditions:
1) P was required to obtain “the Prime Landlord’s written notice of confirmation, substantially
to the effect that D is a subtenant of the premises reasonably acceptable to Landlord.”
Without the written notice received by or on, Dec. 30, 1986, then this letter agreement and
sublease shall be deemed null and void.
2) With satisfaction of the condition, D was required to submit to P on or before Jan 2, 1987,
its plans for “tenant work” for phone linkage between their two floors.
3) Then written consent was needed of the landlord for the tenant work on or before Jan 30,
1987, without which, both the agreement and sublease were to be null and voided.
4) Parties extended the letter agreement’s deadlines in writing and P timely satisfied the first
condition, but did not deliver the second condition. P’s attorney phoned D and informed
them that the landlord’s consent had not been secured. The next day, D informed P that
the agreement and sublease were invalid for failure to deliver the prime LL’s written consent
and that it would not agree to an extension of time. P eventually received LL’s consent.
C) P: D waived and/or was estopped by virtue of its conduct from insisting on physical delivery of
the landlord’s written consent by the deadline. Also alleges in its complaint that it had
substantially performed the conditions set forth in the agreement.
D) D: no sublease or contractual relationship ever arose because P failed to satisfy the conditions.
E) Procedure: The trial court barred reference to substantial performance of the terms of the
letter agreement, but then let the jury consider the theory anyway. Jury answered that yes the
P did substantially perform the conditions set forth in the letter and awarded 1.2 million. D
moved for judgment notwithstanding the verdict. Supreme Court granted the motion, ruling as
a matter of law, the doctrine did not apply. Appellate court reversed, and reinstated the jury
verdict. This court reverses.
F) Issue: (1) does the doctrine of substantial performance apply to the facts of this case?
G) Holding: (1) No. Furthermore, the issue of substantial performance is not for the jury to
decided, but rather by the “judges of the law.”
H) Rule: A condition precedent is “an act or event, other than a lapse of time, which, unless the
condition is excused, must occur before a duty to perform a promise in the agreement arises.
1) express vs. implied conditions:
i) Express conditions =those agreed to and imposed by the parties themselves. must be
literally performed,
ii) Implied or constructive conditions are those “imposed by the law to do justice.” -
ordinarily arise from language of promise-- are subject to the precept that substantial
compliance is sufficient. When doubtful, and the language is not clear, a court will
interpret language as a promise or constructive condition.
I) Rationale: Given the language of the first “condition”, it is obvious that it is an actual condition
give the language. This court sees no justifiable basis for applying the doctrine of substantial
performance to the facts of this case. The requirements of s/p are strict. And because the
critical concern of forfeiture or unjust enrichment (O&Y agreed to indemnify P for damages
resulting from failure to sublease) is simply not present in this case, we are not presented with
an occasion to consider whether s/p is applicable. Furthermore, there is no reason to relieve

them of their bargaining. If they are dissatisfied with the consequences of their agreement, “the
time to say so was at the bargaining table.”-- court does NOT want to frustrate intent of parties
J) notes:
1) language sufficient to create express K: in this case language was unambiguous- "if" "unless
and until" "no further force and effect" etc.
2) express conditions vs. promises: no principled rxn why K term cant be interpreted as BOTH
a condition and a promise- if an event is a "promissory condition" then failure of the event
to occur justifies obligor in treating her obligations as discharged and subjects obligee to
damages - e.g. Internatio-Rotterdam, 2d 1958- buyer's promise to give shipping instructions
to seller at least 2 wks prior to shipment was promissory condition.
3) #6: majority modern rule= classical rule of strict interpretation of express conditions- they
MUST be performed fully, absent risk of forfeiture or injustice
4) technical conditions (not related in substance to real rxn for the D's nonperformance but
asserted solely to defeat P's attempt to enforce the K) are often excused by courts
5) waiver or estoppel= effective without either cns or reliance, ONLY IF the condition waived
wasn't either a material part of performance that obligor was to receive in exchange or a
material part of the risk assumed
6) prevention of condition: obligor may be under an obligation to cooperate with obligee in
causing the condition to occur, or at very least cannot frustrate it- meaning obligor cant just
say, oh I couldn't get it done when it could have, just to get out of the k
J.N.A. Realty Corp. v. Cross Bay Chelsea, Inc. (NY 1977)

A) Summary: J commenced this proceeding to recover possession of the premises claiming that the lease has
expired. The lease grants the tenant an option to renew and although the notice was sent, it was not sent
within the time prescribed in the lease.
B) Facts: J originally leased the property, having a 10-year lease agreement, to Foro, a restaurant. The
agreement provided that Tenant/Foro restaurant shall notify the landlord/JNA in writing by registered or
certified mail 6 months prior to the last day of the term of the lease that tenant desires renewal. After
leasing from 1964-1968, Foro closed it down and offered if for sale or lease.
1) In March, 1968 Foro entered into a K with Chelsea, to sell the restaurant and assign the lease. As a
condition of the sale, Foro was required to obtain a modification of the option to renew so that Chelsea
would have the right to renew the lease for an addition term of 24 years. The closing took place in
June of ’68. First JNA modified the option and consented to the assignment.
2) The modification, states: “the tenant shall have a right to renew this lease for further period of 24
years, instead of 10, from the expiration of the original term of the lease. All other provisions in the
lease shall remain in full force and effect…” (Including the 6-month requirement for renewal). Foro
then assigned the lease and sold its interest in the restaurant to Chelsea for 155k. At the time of the
sale, 5 ½ years remained on the lease.
3) J regularly interacted with Chelsea about various issues regarding the property. One interaction
occurred, two weeks prior to the expiration of the lease, in regards to the property taxes, however, J
failed to mention the renewal condition in the lease. Arena, J’s president, admitted that throughout the
time of the tenancy he was “most assuredly” aware of the time limitations on the option. (NOTE: there
is evidence that J has used this technique to attempt to evict prior tenants.) Finally, in Nov ’73 J
took action to inform the tenant that the option had lapsed, that the option was to run in Jan ’74.
Chelsea responded with a letter dated Nov ’73 and J refused to honor it.
C) D/Chelsea: Claimed that they were not aware of the time limitation because they had never received a copy
of it. However, it was later revealed that Chelsea did have knowledge… Also claims they spend a 15k on
improvements recently, and 40k at the beginning of the lease.
D) Procedure: trial ct- tenant was entitled to equitable relief. Appellate affirmed, appellate divisions, after
granting leave, reversed and granted the petition. Tenant appeals.
E) Issue: (1) will the tenant suffer a forfeiture if the landlord is permitted to enforce the letter of the
agreement? (2) if there will be a forfeiture, may a court of equity grant the tenant relief when the forfeiture
would result from the tenant’s own neglect or inadvertence
F) Holding: Yes the tenant will suffer a forfeiture because of the investments made on the property. And
Tenant is entitled to equitable relief.
G) Rule: Notice exercising an option is ineffective if it is not given within the time specified. The tenant is
entitled to the benefit of equity, which relieves against such forfeitures contract of valuable lease terms
when default in notice has not prejudiced the landlord, and has resulted from an honest mistake, or similar
excusable fault. Fountain
1) A tenant should not be denied equitable relief from the consequences of his own neglect or
inadvertence if a forfeiture would result. The rule applies even though the tenant, by his inadvertence,
has neglected to perform an affirmative duty and thus breached a covenant in the agreement. (Unless
there is willful or gross negligence.)
H) Rationale: court notes that Default on an option usually does NOT result in a forfeiture. Because the
option itself doesn’t create any interest in the property (lessor has no property interests), and no rights
accrue until the condition precedent has been met by giving notice within the time specified. But when a
tenant in possession under an existing lease has neglected to exercise an option to renew, he might suffer a
forfeiture if he has made valuable improvements on the property (because now he has an interest in the
property, his improvements). Because the tenant made a considerable investment in improvements (55k
total) and would loss a serious amount of business due to location change, and despite the failure to renew
was at the tenant’s fault (although not culpable) the tenant would be entitled to equitable relief if there is no
prejudice to the landlord (so breach non-material). However, that issue was not submitted at trial (due to
the trial court not allowing J to submit such evidence), therefore, this matter must be resolved at a new trial.
I) dissent: says tenant should have to show fraud, mistake, accident, or other no-fault excuse to get out of a
condition precedent- fact that tenant has made investment is not alone sufficient to warrant equitable relief-
concerned with issues of fraud by the tenant! how do we know they just forgot- maybe they were waiting to
see what would happen- didn't want to give notice that they'd stay- not persuasive to say tenant couldn't get
copy of lease agreement when tenant HAD a lawyer!
J) Note: §229, the Restatement (2nd) states as a general proposition that a court may excuse the
nonoccurrence of a condition where forfeiture would otherwise result, unless the conditioning event was a
matter of the parties’ exchange.
1) no brightline rule- becomes a moral decision by individual judge
Anticipatory Repudiation (Retraction; Rxnable Uncertainty/Assurances)
Truman L. Flatt & Sons Co. v. Schupf (Ill. App. 1995) - anticipatory repudiation & retraction
A) Synopsis of Rule of Law. A party may retract their repudiation unless the other party materially
changed position in reliance on this repudiation or the other party indicates that he considers
the repudiation to be final.
B) Facts. Truman L. Flatt & Sons Co. (P/buyer), entered into a K to purchase land from Lee Schupf
(D) for $160,000. K provided that it was contingent upon the buyer/P obtaining zoning
permission from the City Counsel to construct and operate an asphalt plant. May 21P's lawyer
sent a letter to the D stating that it was withdrawing its zoning request because it seemed clear
that the City Counsel would not approve it. Letter said "bottom line is we are still interested in
the property" but that Ps felt it was worth less w/ diff. zoning (and were certain it was "virtually
impossible" for anyone to secure plant-building zoning) so offered $142,500 and asked if "that
revision in the K is acceptable." June 9 D rejected this offer. June 14 P responded that it
planned to proceed with the purchase in accordance with the original terms of the K (aka would
pay the $160K). Sale was originally supposed to close by June 30, so Ps lawyer asked D about its
status and if it was ready to sell at end of June and early July. On July 8 D finally replied,
arguing that P's failure to waive the zoning requirement and to elect to proceed under the K
when the rezoning was denied, along with P's modified offer, voided the contract.
C) trial ct: P/buyer sued for specific performance. D moved for summary judgment, which was
granted on the ground that the Plaintiff effectively repudiated the contract.
D) Issues: Did the buyer repudiate the K? If so, did buyer have a right to "timely retract" the
repudiation and did buyer do so?
E) Answers: no, not clearly repudiation, and yes, even if repudiated, was timely retracted- buyer
DID have a right to and DID timely retract its potential repudiation by retracting it before
D/seller had notified P of any intent to treat P's actions as a final repudiation and termination of
K and before D/seller had changed position or brought suit.
F) Held: reversed and remanded
G) Rules:
1) totality of language test: look at all the language and see if it looks like repudiation-
2) usually repudiation must be written/orally communicated- mere conduct can ONLY
constitute repudiation if it indicates that performance is a practical impossibility (so mere
insolvency not enough, but filing for bankruptcy might be)
3) Illinois C/L: repudiation must be a clear, definite, and unequivocal threat of
nonperformance or other manifestation of intent not to perform.
4) UCC/R.2d: a bit lower std. - if "Fair reading of language" shows "intent not to perform
except on conditions that go beyond the contract."
5) by all standards, ambiguous, doubtful, unclear statements/actions requests are insufficient
to constitute repudiation. Seeking to modify a price term in the K is NOT usually treated as
repudiation.
6) R.2d, UCC, commentators, and Ill. law all allow retraction of repudiation before the
aggrieved party gave notice that it would treat K as rescinded or before party materially
changed position (or sued) in reliance on the repudiation.
7) exam pointer If it's at all ambiguous whether the other party's action amounted to
repudiation, ask you client if they want to treat it that way, and if they do, have your
(aggrieved-party) client give notice to that other party that it's been considered a
repudiation (K is expired, other party will be sued for breach) - -this prevents retraction by
other party and assures that if client does something else (E.g. finds new buyer), he wont be
sued for breach.
H) Rationale: language of P's offer to pay $142.5K did not amount to repudiation because the offer
did not clearly threaten nonperformance. (see facts). Even if P had repudiated the K, P
successfully retracted that repudiation because it did so prior to the aggrieved party’s changing
position in reliance on the repudiation and prior to aggrieved party's indication to repudiating
party that it considered the repudiation to be final.
I) Policy: repudiation exists to allow non-repudiating party to not have to wait to collect damages
and more importantly to not have to perform or wait and see if it will have to perform its end of
deal, where it is clear that other party cant perform. Right to timely retract the repudiation
exists to preserve the K-- we don't want any party getting out too easily.
J) notes:
1) not repudiation: request to alter price term (e.g. Truman Flatt, case of employee asking for
more severance pay (was not repudiation of severance K with employer))
2) yes repudiation: when contractor tells developer he's broke and cant work without advance
payments but developer declines advance payments b/c weren’t in the K and decides to find
someone else-- the developer is NOT liable for breach, b/c the contractor is seen to have
repudiated
Hornell Brewing Co. v. Spry (NY 1997) -anticip. repud. & rxnable insecurity (demand for assurance)
A) facts: P Hornell Brewing Co. is a supplier and marketer of alcoholic and nonalcoholic beverages.
D Stephen Spry approached Hornell about becoming a distributor of Hornell's Arizona beverages
in Canada. Hornell in early 1993 granted Spry the exclusive right to purchase Arizona products
for distribution in Canada, and Spry formed a Canadian corporation, Arizona Iced Tea Ltd., for
that express purpose. Between November and December 1993, and February 1994, Ds' unpaid
invoices grew from $20,000 to over $100,000. In May 1994, after an increasingly problematic
course of business dealings, Hornell de facto terminated its relationship with Ds and
permanently ceased selling its products to them. Hornell learned from several sources that
Spry's warehouse was empty, that he had no managerial, sales or office staff, and he had no
trucks. P seeks declaratory J that D has no further rights to sell its products in Canada and that
the agreement b/w them has been terminated by D's failure to respond to P's request for a
documented line of credit.
B) rules: UCC 2-609 authorizes one party upon reasonable grounds for insecurity to demand
adequate assurance of due performance and until he receives such assurance, if commercially
reasonable, suspend any performance for which he has not already received the agreed return.
C) issues: 1) did P have reasonable grounds for insecurity based on the facts? 2) If so, was P's
demand for assurance a reasonable demand? 3) did D comply with request by paying
outstanding sum and having creditor call the P and having P send creditor a letter?
D) answers: 1) YES- rxnable grounds for insecurity b/c D had no financing in place before, had
bounced checks and failed to $100K and failed to sell even a small fraction of the product he
originally projected to sell. 2) YES- the request(s) were rxnable b/c of D's course of performance.
3) NO- D didn't satisfy the demand for adequate assurance b/c actually P made 2 requests, and
had a right to do so (one before the repayment of the outstanding amount, and one after it)
E) rules:
1) commercial reasonableness (Fact-dependent) test factors for considering if a party's
uncertainty is rxnable: 1) look to buyer's exact words or conduct; 2) course of dealing or
performance b/w them. 3) nature of sales K and industry overall.
2) when a party has rxnable uncertainty about other party's ability to perform, the concerned
party may demand an adequate assurance (commercial rxnableness test) of due
performance from the other party. If the other party does not comply, the party demanding
the assurance may suspend its performance until it gets its assurance. (thinking ab this with
the anticipatory repudiation doctrine- so if P knew D couldn't get the assurance it needed-
knew D had no way of obtaining secure line of credit for that amount, could it consider the K
repudiated, based on above doctrine?)
3) rxnable uncertainty can arise from other party's failure to stay up to date in payments, even
if those payments are for another K, b/c this "impairs seller's expectation of due
performance" (?? for Selmi- is this true even if the K wasn't b/w the same parties?)
4) -usually parties must look to statements/conduct by other party- rarely but sometimes
market fluctuations MAY be sufficient, but "unreliable rumors of insignificant risks" are
never enough
5) uncertainty must be based on circumstances that arose after the K was formed- not on
anything known when it was formed (that's just bad deal-making)
6) adequate assurances that may be demanded: "facts & circumstances" test of
reasonableness- ct. found it unrxnable when seller refused to deliver windows b/c buyer
said she'd withhold some of purchase price b/c of late delivery - UCC & R.2d require that
demand be made in good faith
7) rule is generally that demands must be in writing, though this is sometimes eased
8) whether demand is permissive or compulsory?- in some circumstances, demand is
compulsory- party cant just get out of K b/c it says other party made it uncertain-
9) time period: UCC says parties making demand must wait a reasonable time not to exceed 30
days to see it completed before other party can is in "total breach"- sometimes less than 30
days - party can specify how long other party has to comply
F) rationale:
1) -D had no financing in place before, had bounced checks and failed to $100K and failed to
sell even a small fraction of the product he originally projected to sell.
2) -D was untruthful, had failed to pay tons of creditors, used improper/deceptive business
practices
3) -P had authorized a $300K amount of product to be sold to D w/ payment at 14-day periods
so as to check that D was in fact capable of making payments- so when D immediately
ordered 390-450K of products, this caused concern for P and didn't allow them to assess the
situation as they wanted to  court construes this limit on purchasing only $300K as a
trial period of sorts, amounting to another "assurance demand"
4) -letter from Metro at best was vague
5) -D failed to respond to request for a documented line of credit
Problem 10-2

OUTLINE Case Briefs & Notes - Contracts II

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Contracts II, Knapp Book Notes 1 of 72

CONTRACTS II, Prof. Selmi- Knapp BOOK NOTE

THE PAROL EVIDENCE RULE.............................................................................................................3

CHAPTER 6 - SUPPLEMENTING THE AGREEMENT: IMPLIED TERMS, THE OBLIGATION OF GOOD

CHAPTER 7 - AVOIDANCE OF THE K - DURESS.................................................................................21

TOTEM MARINE TUG & BARGE V ALYESKA PIPELINE CO (AK. 1978)................................................................21

CHAPTER 8 - JUSTIFICATION FOR NON-PERFORMANCE: MISTAKE, CHANGED CIRCUMSTANCES,

CHAPTER 11- EXPECTATION DAMAGES: PRINCIPLES AND LIMITATIONS .........................................48

CHAPTER 12: ALTERNATIVES TO EXPECTATION DAMAGES: RELIANCE & RESTITUTIONARY

The Parol Evidence Rule

Two Views -Corbin & Williston on Parol Evidence Rule

R.2d § 209 Integrated Agreements

(2) Whether there is an integrated agreement is to be determined by the court as a

R.2d §215 Contradiction of Integrated Terms

Taylor v. State Farm

C) State Farm says unambiguous on four corners of document

Sherrod, Inc. v. Morrison-Knudsen Co., S. Ct. Montana (1991)

Chapter 6 - Supplementing the Agreement: Implied Terms, the Obligation of

Wood v. Lucy Duff-Gordon, Cardozo- NY Ct. of App., 1917

Notes After Leibel v. Raynor (p. 445)

Implied Obligation of Good Faith

4. hiring broker/deliberately preventing his consummation of deal acting cooperatively

5. conscious lack of diligence in mitigating other party’s damages acting diligently

7. adopting overarching interpretation of K interpreting K language fairly

Comment: Requirement & Output Ks

Locke v. Warner bros., Inc. (CA. Ct. of App., 1997)

Implied Terms and UCC

Warranties (Express & Implied)

§ 2-313. Express Warranties by Affirmation, Promise, Description, Sample.

 An IMPLIED WARRANTY of merchantability exists for a product if consumers have a

o implied warranties often made in non-UCC transactions

 ex. warranty of habitability in leases of dwellings

 most states now recognize implied warranties of habitability

 Uniform Residential Landlord Tenant Act (p 499)

§ 2-314. Implied Warranty: Merchantability; Usage of Trade.

§ 2-315. Implied Warranty: Fitness for Particular Purpose.

§ 2-316. Exclusion or Modification of Warranties.

Chapter 7 - Avoidance of the K - Duress

Totem Marine Tug & Barge v Alyeska Pipeline Co (AK. 1978)

Odorizzi v Bloomfield School District CA Ct of App 54, 1954

2) this court- narrower idea of duress than Rest. 177

Misrepresentation and Non-Disclosure

Syester v. Banta (Iowa S. Ct. 1965)

3) could she have rescinded? would she want to?

Hill v. Jones (AZ Ct. of App., 1986)

Williams v. Walker-Thomas Furniture Co., Fed (DC) Circuit 1965

Higgins v. Superior Court (Cal. Ct. App. 2006)

Adler v. Fred Lind Manor, S. Ct. Wash. 2004

1) other substantively unconscionable provisions: confidentiality clause (hampers employees ability to

Valley Medical Specialists v. Farber, AZ. S. Ct. 1999

R.2d § 187 Non-Ancillary Restraints on Competition

R.2d § 188 Ancillary Restraints on Competition

R.R. v. M.H., S. Ct. Mass, 1998

Problem 7-3 - no notes

Chapter 8 - Justification for Non-Performance: Mistake, changed

Wil-Fred Inc. v. Metropolitan Sanitary District (Ill. App. 1978) 

Changed Circumstances: Impossibility, Impracticability, and Frustration

2) Impracticability based on natural disaster (exam?)

R. 2d 261 Discharge by Supervening Impracticability

Problem 8-1, p. 711

Contract Modifications - CNS/Duress Issues

Brookside Farms v. Mama Rizzo's, Inc. - Must K modification be in Writing? -NOM